An old friend or foe? ASIC updates court enforceable undertaking guidance

In this article, we look at how ASIC is reacquainting itself with one of the oldest tools in its enforcement toolkit: the court enforceable undertaking (CEU).

ASIC’s new Chair Joe Longo has long signalled since commencing with the regulator in June that the “why not litigate?” enforcement mantra of predecessor James Shipton is a thing of the past. Indeed, Longo’s speech during Monday’s 2021 AFR Super & Wealth Summit[1] timely coincided with new regulatory guidance that indicates the return of the controversial CEU.

This follows a recent announcement by APRA last week that it would accept a CEU from AMP Superannuation Limited and N.M. Superannuation Proprietary Limited (together AMP Super) to rectify governance and risk management deficiencies.[2]

What is a court enforceable undertaking (CEU)?

CEUs are used by ASIC as an alternative to civil or administrative action. ASIC can accept a CEU from a person, company or responsible entity of a registered scheme that has contravened the Corporations Act[3] or from a trustee of a super fund that has contravened the SIS Act.[4] CEUs are not confidential and ASIC publishes them on a register on their website.

What’s new?

There are a few changes in the updated Regulatory Guide 100 Court enforceable undertakings[5] that are worth noting.

When ASIC may accept a CEU

The first is those circumstances where ASIC may accept a CEU. Most notably is the changed requirement for admission of guilt. ASIC will now generally require that a CEU contains an admission that the entity contravened specific legislative provisions.[6] That is a change from previous ASIC practice which generally was to the effect of an acknowledgement of ASIC’s concerns and that those concerns were reasonable. It remains to be seen if parties are willing to make these admissions with potential implications for class action risk. Further, ASIC will usually only accept a CEU in certain circumstances and will not usually accept them for criminal conduct; in cases of deliberate misconduct; or for conduct involving a high degree of recklessness.[7]

Two key examples of when ASIC may accept a CEU are introduced. The first is remediation, providing the entity follows the steps ASIC identifies in Regulatory Guide 256 Client review and remediation conducted by advice licensees. An early example was the undertaking given by GoGetta Equipment Funding, which was combined with court action by ASIC.[8]

The second is systemic compliance or systems errors. This seems to be aligned with APRA’s CEU with AMP Super as it was recognised that rectification and remediation of members would be an appropriate outcome.

Public Interest

The second is the introduction of the “public interest” requirement. ASIC may accept a CEU if it “provides an effective and appropriate regulatory outcome that is in the public interest.” This is distinct from previous guidance which required a CEU to be “the most effective and appropriate” regulatory outcome.

Early engagement and resolution

An important distinction to the post-Royal Commission era where outcomes such as CEUs would not be negotiated or agreed upon until the end of a formal investigation, ASIC’s new guidance signals a return to ASIC’s past tack of looking to resolve disputes early. Previous guidance suggested that ASIC would only consider an EU once an investigation was underway, but this requirement has been removed.

The pendulum swings: how did we get here?

ASIC’s enforcement approach has evolved substantially over the past few years as the regulator navigated the murky waters of recalibrating priorities both after the Hayne Royal Commission and COVID-19. Here, we take a quick look at the turbulent past of CEUs in particular.

Pre-Royal Commission

Prior to the Royal Commission, CEUs (or then just ‘EUs’) were used by ASIC for breaches of cornerstone obligations such as that of acting efficiently, honestly and fairly. In the wake of being appointed as ASIC Chair in 2018, James Shipton recognised that enforcement was “intrusive, adversarial and expensive” and that “in ASIC’s experience securing compensation for consumers [was] usually more efficiently obtained without going to court.”[9]

Post-Royal Commission

ASIC’s reliance on CEUs was heavily criticised by Commissioner Hayne in the Royal Commission. As a result, ASIC overhauled its enforcement strategy and it was infamously hailed as the “why not litigate?” mantra. This saw CEUs fall by the wayside in pursuit of increased civil penalties through the court system. This was accompanied by a tougher rhetoric from ASIC’s leadership, with the then Deputy Chair Daniel Crennan QC heading up the newly formed Office of Enforcement. Crennan in particular was known for his tough ‘bouncer turned corporate cop’ stance and publicly warned ASIC was to be feared and taken seriously.[10]

Post-Covid to now

The post-Covid era under Longo’s leadership signals a clear shift in ASIC’s strategic priorities with ASIC dropping its “why not litigate?” mantra to better align with economic recovery as framed in its Corporate Plan for 2021-25. Many were quick to tag the new era as “why litigate?” but Longo has made clear that no mantra will ever really capture the intricacy or the complexity of ASIC’s approach to enforcement. What might be said as stating the obvious and reminding the Senate Committee that ASIC will never be able to investigate everything and has to make prudent choices, Longo said this new era translates to “active, credible and targeted law enforcement.”[11]

What can entities expect of ASIC’s future enforcement action?

So what exactly is active, credible and targeted law enforcement?

Longo made clear at the AFR Super & Wealth Summit that ASIC would seek to use enforcement tools that deliver quicker outcomes, in more targeted cases, following more timely investigations. This represents a more pragmatic approach for the regulator and considering the updated regulatory guidance, will no doubt see ASIC reaching into its toolkit for quicker enforcement actions such as CEUs.

However, ASIC has made clear that litigation (and in particular civil penalty proceedings) will still be reserved for those cases that demonstrate material harm to consumers or market integrity, or cases that demonstrate deliberate or reckless misconduct. As will its other regulatory tools such as product intervention powers. CEUs in Longo’s words are, after all, only “one of the options”[12] available in ASIC’s toolkit to take targeted, proportionate action.

As a result, we expect that we will see less civil penalty litigation initiated over proactive and/or fully remediated consumer losses; rectified system or compliance breaches; and inadvertent misconduct. Further, we expect that there will be greater scope to proactively engage with ASIC during investigations as they explore the different regulatory tools available to them. It is notable that in the GoGetta matter, ASIC considered “the level of cooperation by GoGetta since the commencement of ASIC’s investigation and during these proceedings has been exemplary”.[13] In that case, Court action was combined with a CEU. Going forward, ASIC may adopt that combined approach, or may wish to position CEU’s as the carrot, while retaining Court action as the stick.

HSF has had substantial involvement in dealing with CEUs both in the ASIC and APRA domains, with the HSF Team bringing a wealth of experience and strategic thinking from a powerful combination of front end and back end practice leaders in our Corporate and Disputes teams. The HSF Team has not only assisted many clients successfully navigate and implement CEU solutions as an alternative to court enforcement action, we have also assisted many clients with regulatory enquiries, which at the conclusion of the enquiry have not resulted in regulatory follow up action. Get in touch with one of our experts below.

[1] https://asic.gov.au/about-asic/news-centre/speeches/responsibility-amid-change/.

[2] https://www.apra.gov.au/news-and-publications/apra-agrees-to-court-enforceable-undertaking-from-amp-super-over-compliance.

[3] ss93AA(1) and s93A(1) of the ASIC Act.

[4] s262A(1) of the SIS Act.

[5] https://download.asic.gov.au/media/eayf2j05/rg100-published-22-november-2021.pdf.

[6] RG 100.22.

[7] RG 100.19.

[8] Australian Securities and Investments Commission v GoGetta Equipment Funding Pty Ltd [2021] FCA 420; https://download.asic.gov.au/media/5737132/eu-siv-capital-gogetta-equipment-august-2020.pdf

[9] https://download.asic.gov.au/media/4700034/james-shipton-thomson-reuters-australian-regulatory-summit-speech-11-april-2018.pdf.

[10] Sarah Danckert, ''We should be feared': Former bouncer turned corporate cop wants justice', Sydney Morning Herald, 23 March 2019.

[11] Joint Committee on Corporations and Financial Services, 'Oversight of the Australian Securities and Investments Commission, the Takeovers Panel and the Corporations Legislation' (18 June 2021) 49.

[12] (emphasis in original).

[13] Australian Securities and Investments Commission v GoGetta Equipment Funding Pty Ltd [2021] FCA 420 at [38].