By: Lucinda McCann and Amanda Velonis
A Senate Inquiry into the performance of the Australian Securities and Investments Commission (ASIC) has been prompted by concerns about ASIC's handling of certain potential risk and compliance management issues arising in relation to Commonwealth Financial Planning Limited (CFP).
Whilst the terms of reference of the Inquiry were wide, the two main issues that arose in relation to CFP were:
- the lengthy delay between ASIC becoming aware of the potential issues and taking enforcement action
- the appropriateness of enforceable undertakings (EUs) as a regulatory tool in all circumstances: that is, whether EUs allow a regulated party to negotiate an outcome with ASIC that may have few specific or general deterrent effects, when contrasted with alternative courses of regulatory action such as court, civil, administrative or infringement action.
At the Senate Inquiry, ASIC strongly defended its use of EUs in relation to CFP and other major financial institutions including Macquarie. However, in his opening statement to the Senate Committee Greg Medcraft, the Chairman of ASIC, called for tougher penalties and stated: "There is an expectation among the public that we will take strong action against wrongdoers - and doing this will send a message that shapes future behaviour. However, one of the barriers we face to achieving this is the inadequacy of penalties... we need penalties that create a fear that overcomes any desire to take risks and break the law."
RELATIVE PROS AND CONS OF EUS AS A REGULATORY TOOL
Where ASIC uses an EU - taking a co-operative approach1 - then this can be a highly effective and appropriate way of creating the desired compliance and regulatory outcomes. This is because EUs can have the benefit of:
- giving the regulated party an opportunity to remedy the alleged breach in accordance with a mutually agreed approach
- providing ASIC with a more flexible and efficient tool to influence the conduct of a regulated party.
Of course, critical to the efficacy of an EU is a regulated party who is 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 financial services institutions, who view an EU, or the prospect of an EU, as a matter to be taken very seriously.
By contrast, EUs will be less effective where they are used to deal with the behaviour of less reputable individuals or organisations that are unconcerned about reputation and compliance with regulatory obligations. An EU will only be effective if a regulated party is concerned about an EU's potential stigma.
Moreover, it can be difficult for ASIC to enforce the terms of an EU through the court and so enforcement can be problematic where a regulated party is not prepared to comply with the terms of an EU. There are many examples of this in the context of managed investment schemes which have been established, operated and marketed by various individuals and organisations in breach of the Corporations Act requirements and where these individuals and/ or organisations have then deliberately failed to comply with the terms of the EUs they have entered into with ASIC2.
ASIC's policy for exercising its discretion to accept EUs under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) is set out in ASIC Regulatory Guide 100 (RG 100). According to RG 100, ASIC will use EUs where it has first considered alternative enforcement action, the seriousness of the alleged breach and the regulated party's compliance history. ASIC needs to form the view that an EU will provide a more effective regulatory outcome than commencing alternative action: that is, promoting specific and general deterrence, improved compliance, and the integrity of and public confidence in the financial markets.
Negotiated settlements cannot be accepted in relation to criminal conduct (namely, fraud or deliberate misconduct). ASIC will not accept EUs for trivial matters, or for matters already referred to a specialist body. Also, ASIC will not accept an EU where the regulated party seeks to conceal its identity, seeks to include an 'unacceptable term' (for example, denial of liability or the inclusion of a possible defence for non-compliance with the EU) or omits details about the misconduct. Once accepted, EUs can be withdrawn or varied by mutual consent and in the event of non-compliance with an EU, ASIC can seek to have the EU enforced by the court.
The drivers for the use of EUs include that the content of an EU is determined by agreement between ASIC and the regulated party and is only limited by the statutory requirement that it must relate to a matter connected to ASIC's power or function. ASIC's powers in this regard are widely interpreted because the court is not directly involved in the EU process. Therefore, EUs arguably assist ASIC to resolve matters more efficiently and less expensively than court proceedings.
THE BOTTOM LINE
EUs can be a flexible, timely and relatively cost effective regulatory tool compared to civil or administrative proceedings. They can be used by ASIC to respond to a wide range of breaches, can be tailored to the individual circumstances of the regulated party, and may be less stigmatising than other action.
1 ASIC's approach to enforcement and
co-operation are set out in Information Sheets 151 and 172.
2For example, EU No.017029160 (Jennifer Martine Sisson) and EU No. 008 547 416 (Ludgates Chartered Accountants and Ludgates Corporate and Investment Advisory Services Pty Ltd); see also EU Nos 017029217, 017029218, 017029219 (Empower Invest Pty Ltd, Newcastle Palais Holdings Pty Ltd, Kenneth Watson and Brien Ernest Cornwell) and subsequent proceedings in Australian Securities and Investments Commission v Empower Invest Pty Ltd  NSWSC 105
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