​Do enforceable undertakings actually work?

by BN18 Sep 2014
Lucinda McCannWhen ASIC takes big institutions to task, it usually uses enforceable undertakings. Henry Davis York partner Lucinda McCann examines whether EUs are making a difference

Enforceable Undertakings (EUs) are a well-established regulatory tool used by the Australian Securities and Investments Commission (ASIC), but recent government reviews have raised concerns about the effectiveness of their use.

EUs are a form of negotiated settlement which ASIC enters into with many individuals and organisations, including financial planners, dealer groups and mortgage brokers. They are often used by ASIC as alternatives to other regulatory actions, such as court proceedings.

Before entering into an EU, ASIC must first consider alternative enforcement action, the seriousness of the alleged breach and the regulated party’s compliance history. It must stand to reason that an EU will provide the most effective regulatory outcome and there are some circumstances where negotiated settlements can’t be accepted at all, such as criminal conduct cases.

ASIC tends to use EUs because they present a cooperative approach to regulation without directly involving the courts, and can arguably resolve matters more efficiently and cost effectively. However, there is a public perception that EUs are too heavily relied upon as an enforcement tool against large organisations and that the process lacks transparency.

Submissions to the Senate Economics References Committee investigation into ASIC’s performance raised concerns that EUs are often heavily negotiated in private between ASIC and the relevant organisations’ lawyers. Accordingly, the committee recognised there would be benefits in a more transparent process.

A number of submissions also highlighted ASIC’s reluctance to take on complex court cases or difficult targets. And when it does pursue enforcement action against large firms, the outcome is generally the imposition of less severe remedies, such as EUs. Ultimately, the committee’s view is that it would be of great public benefit for ASIC to increase its willingness to litigate complex matters involving large entities.

The senate inquiry gave rise to real questions about whether EUs allow a regulated party to negotiate an outcome with ASIC that may have few deterrent effects, particularly when contrasted with alternative courses of regulatory action, such as court, civil, administrative or infringement action.

While ASIC strongly defended its use of EUs at the senate inquiry, the commission’s chairman, Greg Medcraft, did call for tougher penalties to deter bad behaviour.

Critical to the efficacy of an EU is a regulated party that is cooperative and genuinely concerned about its reputation and the effect of its conduct on its clients and business.

Accordingly, EUs can be a very effective regulatory tool when ASIC is dealing with alleged breaches by reputable institutions, who view an EU, or the prospect of an EU, as a serious matter.

By contrast, EUs will be of limited effect and utility where they are used to deal with the behaviour of less reputable individuals or organisations less concerned with their public reputation.

Moreover, it can be difficult for ASIC to enforce the terms of an EU through the court, meaning enforcement can be problematic where a regulated party is not prepared to comply with the EU’s terms.

There are many examples where ASIC has been forced to undertake court action against individuals or organisations who have failed to comply with the terms of an EU. ASIC has previously launched action against Ludgates Chartered Accountants and Empower Invest Pty Ltd and Newcastle Palais Holdings Pty Ltd. In these examples, the lack of cooperation and disregard for reputation made the EUs a very ineffective tool for achieving the desired regulatory outcomes.

In its final report tabled in June, the senate committee clearly recognised some of these limitations and made several recommendations including a performance review of ASIC’s use of EUs.

The committee also recommended ASIC appoint an independent expert to supervise implementation of the terms of EUs and that the regulator consider ways to make the monitoring of EU compliance more transparent, such as the introduction of public progress reports.

Overall, EUs produce significant and positive compliance outcomes and deterrent effects for reputable financial institutions that genuinely seek to comply with their statutory and licence obligations.

However, when dealing with uncooperative individuals and organisations, EUs can have serious limitations. These limitations demonstrate a need for stricter recourse in responding to non-compliance.

Additionally, improving transparency will promote public confidence and shine a light on the individuals and entities proposing the EUs. These changes would improve the ability of EUs to appropriately deal with instances of non-compliance and allow EUs to continue to be an effective regulatory tool for ASIC.

This article is from Australian Broker issue #11.15. Download the issue to read more.