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Deterrence in Enforceable Undertakings: ASIC Study

A study commissioned by ASIC has found that enforceable undertakings are effective in deterring financial services and credit providers from engaging in unlawful activities, while also encouraging the sector to improve general compliance activities.

ASIC has recently released a report on a pilot study it commissioned in June 2017 into the impact of enforceable undertakings (“EUs”). The study, conducted by the University of New South Wales Centre for Law, Markets and Regulation, indicates that there is a general deterrent effect on the wider credit and financial services industries when an enforceable undertaking is entered into by another member of that sector. The report follows 2014 and 2015 inquiries by both the Senate Economics References Committee and Australian National Audit Office on ASIC’s use of EUs.

Enforceable Undertakings: Background

EUs are considered one of the more flexible enforcement mechanisms that AISC can apply to address alleged misconduct and breaches of legal obligations by a regulated entity. An EU is a negotiated instrument between that entity and ASIC, which ASIC may accept under the Australian Securities and Investments Act 2001 (Cth) as an alternative to civil court action or other administrative action.

The report records that between 2010 and 2017 ASIC accepted 165 EUs.

An EU typically includes undertakings by a company not to engage in unlawful conduct and rectify prior unlawful or non-compliant behaviours, and a commitment to institute certain programs or activities to improve compliance.

The Study

The study aimed to investigate whether EUs change, or have the potential to change, the way in which financial services and credit entities operate following their peers entering into EUs. The primary focus of the study was on the general deterrent effect of EUs, and the efficiency and effectiveness of EUs as a deterrent.

The study generally found that providers operating in competition with entities which have entered into EUs with ASIC (“peer providers”) were deterred from engaging in certain activities as a consequence of EUs being entered into. The existence of EUs was found to increase compliance efforts by peer providers in an attempt at avoiding perceived penal effects and external intrusion into business operations, the costs associated with implementing and complying with EUs, and the reputational damage that accompanies publically acknowledging potentially unlawful activities and implementing compliance measures.

The study also found that there were positive effects of EUs as many peer providers were found to be looking to EUs as a way of clarifying their obligations at law, confirm business practices, and act as a guide for what corporate behaviours are appropriate. Based on these findings, the study indicated that EUs act as a deterrent, triggering behaviour changes through both apprehension of prosecution and active compliance responses.

Despite the overarching finding that EUs act as a general deterrent, the study does acknowledge that the impact varies between sectors and business sizes. In certain instances, the study recognises that the deterrent impact of EUs may be limited by the approach of peer providers, with regulatory self-confidence, compliance speeds, low levels of motivation to ensure regulatory compliance, and perceived sparse use of EUs all impacting on the overall deterrents of EUs. The most significant factor recognised by the study is the need for the EU to be publicly known as well as the circumstances which led to the EU. The study recognises that ASIC endeavours to make peer providers aware of EUs and the circumstances that led to them.

The study also acknowledged the limitations of the study, including that, as a pilot study, the small sample size makes generalised observations difficult and that the respondents to the study were self-selecting.

Conclusion

The study concludes by recognising that EUs are generally effective at making the financial services and credit sectors aware of activities that are a breach of regulatory obligations. The study also found that there are broader benefits to the use of EUs, beyond enforcing the relevant legislation.

If you would like more information on EUs, require assistance with correspondence with ASIC or require assistance with your regulatory compliance generally, please contact Hillary Ray or Richard Hopkin of our Financial Services Team.

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