Why not litigate? ASIC enforcement after the Banking Royal Commission
Michael Legg is a professor, UNSW Law. Stephen Speirs is an associate at Jones Day. Both teach the UNSW Law course, Corporate Misconduct and White Collar Crime*.
BY MICHAEL LEGG AND STEPHEN SPEIRS*
T he Australian Securities and Investments Commission’s (‘ ASIC ’) approach to enforce- ment prior to the Royal Com- mission drew on the enforcement pyra- mid which is derived from the responsive regulation theory. This approach seeks to conduct most regulatory activity by persuasion and education, which takes place at the base of the pyramid. More punitive actions are available at the peak of the pyramid, but are only called upon when the lower levels of the enforcement pyramid are unsuccessful. The strategic concept of the enforcement pyramid is that a regulator, with access to a hierar- chy of sanctions, is able to ‘speak softly’ and secure compliance, when it is known that they carry ‘big sticks’, such as crimi- nal prosecution and cancellation of the li- cence needed to operate. The enforcement
The Enforcement Pyramid Responsive Regulation by Ian Ayers and John Braithwaite was published in 1992. It has since become the model of regu- latory enforcement in many jurisdictions and is used by many regulators, including ASIC. Indeed, the Final Report identified that ASIC’s statements of enforcement policies, and its processes and procedures as they stood at the time of the events described in the course of the Royal Commission, were entirely consistent with the enforcement pyramid. Responsive regulation was motivated by a desire to overcome the ‘barren disputa- tion’ over whether compliance or deter- rence better achieved obedience to the law. Instead responsive regulation sought to combine compliance and deterrence,
• The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has
recommended that whenever ASIC is considering any contravention of the law it must start with the
question: ‘Why not litigate?’. • ASIC has established a new internal Office of Enforcement which focusses on deterrence, public denunciation and punishment of wrongdoing by way of litigation. • The Royal Commission’s recommendations and ASIC’s response embody a reconsideration of previous regulatory enforcement practice, in particular, the use of an enforcement pyramid.
or persuasion and punishment, through the enforcement pyr- amid. The base of the pyramid, where most regulatory action occurred, encompassed the use of persuasion to coax compli- ance through education and/or guidance. Above the base, sit various enforcement tools which are aimed at deterring mis- conduct through various forms of sanction. The responsive regulation thesis is that regulatory agencies are best able to secure compliance at the bottom of the pyr- amid when they are ‘benign big guns’, that is, regulators will be more able to speak softly when they carry big sticks and have access to a hierarchy of lesser sanctions. The severity of the sanction ranges from enforceable undertakings and in- fringement notices (these are administrative tools in the mid- dle levels of the pyramid), to civil actions, civil penalties, and then towards the top of the pyramid, banning orders, licence suspension or disqualification and criminal prosecutions. The enforcement pyramid from Responsive Regulation is depicted in figure 1, opposite.
pyramid recognises that litigation is costly and time consum- ing, and that regulators typically do not have the resources to litigate every contravention. The Royal Commission’s recommendation is that ASIC should take as its 'starting point' the question of 'whether a court should determine the consequences of a contravention' (Final Report p 446). This has given rise to the catchcry ‘Why not litigate?’ Although provocative, what this refrain is calling for is not entirely clear. On the one hand, an approach that begins with litigation would appear to start towards the top, or in relation to criminal prosecution, at the peak of the pyramid. If this is so, it may be argued that an enforcement approach that gives primacy to litigation 'up-ends’ the enforcement pyramid, or abandons it altogether. On the other hand, the Royal Com- mission’s intention may be less drastic, and intended only to ‘re-boot’ the enforcement pyramid by addressing weaknesses it identified in how responsive regulation has been implemented by the regulator. This article explores this change in approach.