Administration of enforceable undertakings

2 Jun 2015

The audit assessed the effectiveness of the Australian Securities and Investments Commission’s administration of enforceable undertakings.

Audit objective and criteria

The objective of the audit was to assess the effectiveness of the Australian Securities and Investments Commission’s administration of enforceable undertakings.

To form a conclusion against this objective, the Australian National Audit Office (ANAO) adopted the following high level criteria:

  • management arrangements are in place that support the effective, consistent and transparent administration of EUs;
  • offers of an EU are administered consistently, transparently and in accordance with ASIC's policies and procedures; and
  • EUs accepted by ASIC are monitored to ensure compliance with those undertakings, action is undertaken where non‑compliance is identified and the effectiveness of EUs as a regulatory tool is assessed.

Overall conclusion

As one of ASIC’s suite of regulatory responses, enforceable undertakings (EUs) have a valuable role in ASIC’s overall enforcement approach. EUs are particularly useful in addressing less serious misconduct where the promisor is co-operative. A potential benefit of EUs is in driving changes in a promisor’s compliance culture and systems, whereas an administrative penalty (or even a civil sanction) may not lead to behavioural change. Since their introduction in 1998, ASIC has accepted an average of 24 EUs per year, and from January 2012 to June 2014, 53 of ASIC’s 1711 enforcement actions (three per cent) were EUs.

In general, ASIC has effectively administered the EUs it has negotiated and accepted. It has sound processes for each major step of the EU process: accepting EUs as the most appropriate regulatory tool; including terms in the undertaking that appropriately address the misconduct; and monitoring adherence to those terms and addressing any identified non‑compliance. However, there is considerable scope to improve the record keeping processes supporting EU decisions and compliance monitoring, as documentation was inconsistent, dispersed across multiple systems and not always readily available. In addition, ASIC does not measure or report on the effectiveness of EUs in achieving intended regulatory outcomes, including greater levels of voluntary compliance. Improved performance measurement and reporting would better inform key stakeholders, including Parliament, of the effectiveness of ASIC’s regulation.

In relation to entering into EUs, ASIC has accepted offers of EUs consistently, transparently and in accordance with its policies and procedures. For most EUs reviewed by the ANAO (83 per cent), there was sufficient documentation to demonstrate that accepting an EU would provide an effective regulatory outcome and no instances were identified where promisors were treated differently based on the size of their business.

ASIC also had a sound basis for including particular terms in each EU, with the terms generally aligning with the non‑compliance at which the EU was directed. However, ASIC could ensure that EUs are clearer about the misconduct that was the subject of ASIC’s concerns. ASIC could also strengthen its capacity to assess compliance with, and the effectiveness of, EUs by more consistently including in the terms of an EU the requirement that the promisor report back to ASIC demonstrating their compliance with EU obligations. This information will better inform ASIC’s monitoring of the promisor’s compliance with the EU and, where necessary, its response to non‑compliance.

Where the EU required an independent expert to assess the promisor’s compliance with EU obligations, ASIC was generally involved with the review process, and the reports provided by the expert were satisfactory. However, there were inconsistencies in ASIC’s approach to approving the appointment of experts and their terms of reference. In February 2015, ASIC released new public guidance that is expected to help improve processes relating to the appointment of independent experts.

The ANAO has made two recommendations aimed at improving ASIC’s measurement and reporting of the effectiveness of EUs, and its documentation of key decisions relating to EUs.

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