By Michael Legg and Stephen Speirs -
Snapshot
- 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.
The Australian Securities and Investments Commission’s (‘ASIC’) approach to enforcement prior to the Royal Commission drew on the enforcement pyramid 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 hierarchy of sanctions, is able to ‘speak softly’ and secure compliance, when it is known that they carry ‘big sticks’, such as criminal prosecution and cancellation of the licence needed to operate. The enforcement pyramid recognises that litigation is costly and time consuming, 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 Commission’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.
