By Scott Donald, UNSW

SYDNEY: 25 OCTOBER 2013 - Until five years ago APRA’s regulatory powers included the power under s120A of the Superannuation Industry (Supervision) Act to disqualify individuals from holding a senior role in a supervised entity such as a bank, insurance company or super fund trustee.  This was in addition to its ability to deem an individual not ‘fit and proper’ to play a role in a licenced entity, such as an RSE.

APRA’s Disqualification Register highlights that disqualification grew to became a popular enforcement strategy for APRA.  Table 1 below shows the number of disqualifications imposed by APRA in each calendar year from 2000 to 2008. 

Source: APRA

In July 2008 APRA lost its disqualification power. The decision by then-Treasurer Peter Costello to initiate the necessary legislative changes followed prolonged pressure by AXA and others in the industry to address what was perceived to be regulatory over-reach by APRA. 

APRA now has to apply to the Federal Court of Australia to have individuals disqualified from acting as a director or responsible officer of a company acting as a superannuation fund trustee or an insurance company.  It is a more time-consuming and costly process for both APRA and the individual involved.

Enter the enforceable undertaking.  In general terms an Enforceable Undertaking is a binding commitment between the regulator to desist from specified regulatory actions in exchange for which the regulated person agrees to desist from or undertake specified activities.  They are widely used by a range of agencies, including ASIC and the ACCC.

It is perhaps not surprising that APRA was happy to accept enforceable undertakings from many of those associated with the Trio collapse.  Going down the enforceable undertaking route was cheaper than pursuing the matter through the courts.  It also relieved APRA of the need to establish its case in respect of each of the individuals to a level that would satisfy a court.  And APRA could still issue press releases to attract the publicity it needs to establish its enforcement credentials and deter future potential transgressors.

But there is a flipside to that flexibility.  Unlike disqualification proceedings and the various punitive sanctions available to APRA, the enforceable undertakings process is cast as a purely consensual process.  At one level it is.  The individual (or organisation) cannot be forced to accept an enforceable undertaking.  The reality of course is somewhat different.  For one thing there is a tremendous disparity in the power, resources and risk faced by the two ‘consenting’ parties.  The ‘negotiations’ also occur behind closed doors, as it were.  There is no requirement for procedural justice, nor transparency, because in theory the individual with whom APRA is negotiating can walk away from the negotiations and take his or her chances in court.

Of course it is true that enforceable undertakings do potentially allow a regulator such as APRA to work with the individual to craft an outcome tailored to the circumstances of the case. So although all 21 undertakings have resulted in periods of exclusion from the industry for the individual involved, most also involve a requirement for the individual to undertake specific forms of training. Some impose additional duties, for instance to cooperate in APRA’s further investigations.

The terms disclosed to the public can also be carefully crafted.  APRA has accepted undertakings from 21 individuals over the past seven and a half years.  Close attention to the terms of the statements of contrition contained within those undertakings shows a range of subtle variations, spanning the gamut from ‘acceptance’ of APRA’s concerns to regret at the losses caused by the conduct identified by APRA.  Notably these apologies and statements of contrition are not admissible in court as admissions of guilt.  The apologies do however appear to mark a trend towards greater ‘corrective’ justice in the resolution of what the popular press likes to characterise as market scandals.  Moreover anecdotal evidence from the industry suggests that the nuances of phrasing in particular do matter to those involved, especially those against whom there is no allegation of dishonest or fraudulent conduct.

There are however also several broader questions to consider. 

The first is the familiar one of how to curb regulatory over-reach.  The potential for coercive behaviour by regulators in respect of enforceable undertakings (not just APRA) is clearly very great.  That is not to suggest that APRA has in fact acted that way in the past, but it remains a risk to which we should remain alive.  APRA’s licensing and regulatory powers have expanded greatly in recent years.  Ensuring that they are used responsibly and accountably will be vital for the future well-being of the industry.

The second issue is whether it is appropriate that APRA be permitted to negotiate away its right to more formal regulatory approaches in favour of less transparent decision processes.   The potential for erosion of both public confidence and regulatory efficacy flowing from perceived regulatory capture cannot be underestimated.

There is no doubt that enforceable undertakings can be an effective tool in the regulator’s arsenal.  They permit a regulatory response more sympathetically tailored to the precise circumstances of each individual case.  However they are capable of abuse, just like any form of regulatory activity, so it will be interesting to watch this space over coming years. 

Scott Donald is an external consultant to Herbert Smith Freehills.  The views expressed in this article are his alone.