What it really means when the regulator comes knocking

By Matthew Pringle - November 20, 2018

There’s no such thing as an innocuous enquiry from a regulator.

One of the biggest mistakes I see Australian businesses make is assuming that an enquiry from the regulator is innocuous.

There are no innocent questions when they come from a regulator. Many requests look innocent at the outset - “can you please explain this” or “something seems to be missing here”. However behind this ‘simple’ enquiry there is almost always a deeper reason.

An “innocent” letter can turn into a crisis very quickly

How you respond to the initial enquiry from a regulator can turn an innocent sounding question into a crisis very quickly.

That’s because the letter you’ve received is probably the last stage in the regulator’s process. Most regulators have absolute power so you can be guaranteed that the letter you receive is not their first enquiry - they typically have already collected an enormous amount of information from other sources.

For example, the regulator may have been prompted by an article in the AFR. Perhaps a short seller is promoting an argument that the business is distorting its financial results and, in their opinion, something is perhaps not being represented appropriately. They may even directly engage with ASIC to encourage them to follow up the matter.

As a response, ASIC will typically send a letter to the company and ask them for clarification. The company might see it as an innocent question without understanding that there is already a storm brewing.

The worst thing a company can do when it receives one of these enquiries is to not respond at all or to respond flippantly. While most CFOs wouldn’t deliberately give a half-baked response, their response may perhaps be disingenuous. It won't appear to be transparent, open and informative and it may seem defensive. If the regulator receives a disingenuous response they always come back harder.

The company is usually the last to know

Most regulators have absolute power. Even before a company becomes aware that there’s an issue the regulator may have already been fully briefed by investors and other parties in the market. They've probably reviewed the auditor’s files and done some digging. That’s why that simple letter that a company receives is rarely the last.

In some cases we’ve seen the regulator may have been working on this issue for months. They have an incredible amount of power to get information from an enormous number of sources even before they approach a company. And once they approach you they've got absolute power to get whatever they need.

These enquiries can really restrict a business and cause grief for months or even years. While most don’t hear how these issues are resolved, you can guarantee that millions of dollars are spent behind-the-scenes trying to de-escalate these ‘simple’ or ‘innocuous’ questions.

So what to do if the regulator comes knocking

If you receive a letter from the regulator, the first thing to do is to inform the board through your chair. More often than not the board and management aren't ready for the enquiry, so it’s important to give them the opportunity to get on the front foot.

Next, it’s best to seek outside counsel before responding to the letter. Speak to your financial advisors, or if they’re involved, seek out an independent third-party. Unfortunately, most business won’t call in someone to help them through the issue until it’s turned into a crisis. Seeking out help early can lead to a completely different outcome. Even if the advice only affirms the approach you’re already taking, it can give you substantial comfort.

It’s also important to try and understand the context of the letter. How could this possibly open a can of worms? What is the worst possible scenario? It’s important to consider where the enquiry is coming from and the possible background. This then sets the context for how you respond.

Even the simplest letter can have serious ramifications if it’s not handled appropriately. That’s why, no matter how innocuous a letter from a regulator looks, it’s always the safe approach to assume it’s the first stage in a major enquiry.


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