Study confirms the deterrence power of enforceable undertakings

A recent study has found that enforceable undertakings (EUs) play a vital role in the Australian Securities and Investments Commission’s (ASIC) armoury against corporate misconduct.

Indeed, many of the respondents to the pilot study conducted by the Law Faculty of the University of New South Wales (UNSW) on peer financial services and credit providers saw EUs as a deterrent to poor corporate behaviour.

In the study’s report, UNSW Law’s Professor Dimity Kingsford-Smith notes: ‘Most respondents were quick to point out that EUs are not ‘soft’ in terms of expense, management time and the resources of management in driving compliance change or customer remediation. Some respondents even described EUs as ‘penalties’ or having penal effects.

‘The perception of a majority of respondents was that EUs can be very severe in terms of loss of reputation and flow on loss of customers, revenue and standing amongst peers in the industry. Some respondents stated their perception that EUs had contributed to decisions by providers to discontinue certain products or even to leave the industry.’

Kingsford-Smith notes that ASIC’s publication and distribution strategies, aided by media dissemination, results in widespread awareness of EUs in the financial sector and accurate understanding of their general purposes.

However, she adds that perceptions of the study’s participants highlight the importance of mixed and co-ordinated regulatory action at the top and lower down the enforcement pyramid.

This, she says, is confirmed in other studies where researchers have found that the deterrent effects of regulatory policies are strengthened if combined with multiple interventions and enforcement methods.

The study’s finding are interesting given Kenneth Hayne’s comments in his interim report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

In that report, he observes: ‘Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct.

‘Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.’

Hayne questions whether different enforcement is needed.

The UNSW Law Faculty team were commissioned in June 2017 to undertake the pilot study in response to a recommendation of the Australian National Audit Office (ANAO) that ASIC should periodically assess the effectiveness of EUs.


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