UNSW research finds ASIC contracts with financial services deter misconduct

Effectiveness of Enforceable Undertakings in the financial services industry has been studied for the first time.

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Enforceable Undertakings are contracts between the regulator ASIC and a financial service or credit provider. Image from Shutterstock

A UNSW study has found that financial services and credit providers fear being sanctioned by Enforceable Undertakings (EUs), despite speculation that the regulatory contracts are ineffective.

The Australian Securities and Investments Commission (ASIC) today released the pilot study on the deterrent effect of EUs, which are contracts between the regulator ASIC and a financial service or credit provider. 

The study was led by Professor Dimity Kingsford-Smith, who holds the Minter Ellison Chair of Risk and Regulation and is the Director of the UNSW Centre for Law Markets and Regulation (CLMR).

“The clear finding of the study which we did not anticipate, is that a majority of interviewees reported their organisation being deterred by EUs with their competitors,” Professor Kingsford Smith said. 

Besides ASIC, EUs are used by more than 20 other Australian regulators, to improve failing compliance.

The contracts are supervised by an external expert and provide for compensation where required.

“There has been controversy about the effectiveness of EUs in deterring competitors of financial services and credit providers in the financial sector which accept an EU,” Professor Kingsford Smith said. 

“Most of the discussion around this has been anecdotal and speculative.”

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UNSW Centre for Law Markets and Regulation (CLMR) Director, Professor Dimity Kingsford Smith

But Professor Kingsford Smith said the study found that financial services and credit providers wanted to avoid the perceived effects of harsher sanctions, such as civil penalties.

Interviewees also wanted to avoid the financial and time costs in discharging the terms of EUs to effect change in the business. 

“The critical mechanisms of deterrence referred to by many interviewees were the costs of EUs and avoiding reputational damage and loss,” Professor Kingsford Smith said.

Businesses were also motivated by EUs to avoid the intrusion of outsiders, such as supervising experts, in the operation of the business, she said.

The small pilot study is the first to gather empirical evidence from interviews with competitors of parties to EUs.   

The team conducting the research included: 

  • Dr Marina Nehme, a well published expert on EUs also from UNSW Law and a CLMR member;
  • Dr Olivia Dixon, a scholar experienced in empirical research and in criminal law aspects of financial regulation from the University of Sydney Law School; and 
  • Ms Jessica Anderson, an experienced criminologist associated with the University of Sydney Institute of Criminology. 

The CLMR team were engaged by ASIC in June last year (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.

ASIC said it will proceed with a scoping study on potential options for further research into the impact of EUs and other regulatory actions and will discuss with other regulators the potential to work collaboratively on future research.

A full copy of the report can be found here: https://download.asic.gov.au/media/4916053/18-325mr-deterrence-effects-of-enforceable-undertakings-on-financial-services-and-credit-providers.pdf