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How effective have enforceable undertakings been as a deterrent?

October 31, 2018

 

 

With the revelations coming out of the Royal Commission there has been some debate that it is not enough of a deterrent to stop financial services from breaching the Corporations Act.

 

Last week, The General Deterrence Effects of Enforceable Undertakings on Financial services and Credit Providers was released. This based on a pilot study commissioned by the Australian Securities and Investments Commission (ASIC).

 

ASIC said that the UNSW Law Faculty team that conducted the report found that EUs are generally perceived to have a deterrent effect.

 

This study was a recommendation of the Australian National Audit Office (ANAO).

 

“Deterrence was motivated by a number of factors: avoiding the perceived penal effects of harsher sanctions and intrusion of outsiders; avoiding financial and time costs and distraction from the business; and critically, avoiding reputational damage or loss,” ASIC said.

 

Peter Whyntie from Peter Whyntie & Associates told the GRC Professional earlier this year that EUS can be effective tool since in the long run, they can cost an organisation more than penalty would, but the conduct regulator may not have been utilising them in the best way.

 

The report supports the Whyntie’s position to an extent saying that the cost of the EU begins even before it has been accepted by ASIC.

 

More room for more research

While the researchers said that they have found have found EUs to act as deterrents they said that they have also found room for further research.

 

The researchers  said that the existing literature around deterrence was limited in the sense that they have been ‘highly contextual’, while the entrance into an EU agreement can have different purposes.

 

Costs would include legal advice or advice from ‘professional consultants’. A respondent said that in some cases it is possible for the company to have remedied the challenge even before the EU has been completely negotiated.

 

In addition to reputation risk, there is there is also the prospect for the company can see the

“A further complicating factor in financial services is the presence of corporate providers alongside individual license holders and authorised representatives. Individuals may engage in corporate crime to benefit an organisation, or solely for personal benefit-or a combination for both,” the researchers write.

 

The research report identifies EUs as a general deterrent, and they indicated that targeted research suggested that general deterrence ‘have consistently demonstrated weak effects.’

 

This is, of course, raising questions about the EU acting as a deterrence to the financial services and the credit industry.

 

In their pilot research, the majority respondents defined the EUs as timely and cost-effective.

 

Barriers 

Issues that the research paper does identify the is that the because the EU involves ‘no involuntary of civil status of the sort involved with the loss of office so it is not considered as punitive.

 

“Further, it is not obvious that community benefits agreed by parties to EUs would be considered penal as it is at least arguable that they are restorative in nature,” they write.

 

The researchers have the identified the issues with effectiveness or what they call the barriers to effectiveness.

Barriers to effectiveness:

 

•    overconfidence in peer providers, peer influence and provider rationalisation;

•    absence of celerity; and

•    little evidence of capability or motivation to change poor compliance practices

•    low volume and inconsistency in using EUs

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