'Testing the Regulator's Priorities: To Sanction Wrongdoers or Compensate Victims?' by Lachlan Peake in (2020) 39(2) University of Queensland Law Journal comments
As Australian corporate conduct came under intense and highly publicised scrutiny during the banking Royal Commission, so too did the conduct of the conduct regulator: the Australian Securities and Investments Commission (‘ASIC’). Following the Royal Commission, the regulator has adopted what it describes as ‘“Why not litigate?” operational discipline’ — a concept elaborated and recommended by Commissioner Hayne which is now the central tenet of ASIC’s updated enforcement model. This article discusses the hierarchy of strategic priorities evident in that enforcement model and asks: should the regulator focus its resources on compensating those harmed by regulatory contraventions rather than sanctioning those who have broken the law?
Peake states
In the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘Final Report’ and ‘Royal Commission’, respectively), Commissioner Kenneth Hayne said:
The Australian community expects, and is entitled to expect, that if an entity breaks the law and causes damage to customers, it will compensate those affected customers. But the community also expects that financial services entities that break the law will be held to account. The community recognises, and the community expects its regulators to recognise, that these are two different steps: having a wrongdoer compensate those harmed is one thing; holding wrongdoers to account is another.
In response to the Royal Commission, and specifically the ‘Why not litigate?’ mantra elaborated and recommended by Commissioner Hayne, the Australian Securities and Investments Commission (‘ASIC’) has significantly reshaped its enforcement model. It is quite clear that this model prioritises the sanctioning of wrongdoers over the delivery of redress to victims. The aim of this article is to test the theoretical and practical justification for such a preference. The central question — should the regulator focus its resources on compensating those harmed by regulatory contraventions rather than sanctioning those who have broken the law? — arises because, while it will sometimes be possible to achieve both goals simultaneously, the prudent allocation of finite resources usually dictates that the enforcement strategy be tailored to the regulator’s priority. As Commissioner Hayne put it, the ‘regulator must approach [its] work ... with a clear view of what kinds of outcome’ it wants to achieve; those desired outcomes — especially the most desired outcome — will guide the regulator’s choice of enforcement tools.
Part II of this article demonstrates, as a preliminary factual matter, that ASIC’s current enforcement model does not prioritise the delivery of redress to victims of misconduct. Part III examines whether, if such a priority were adopted, it would be theoretically justified, evaluating insights from regulatory scholarship, social psychology and sociology. The discussion commences with an analysis of the breadth of the regime that ASIC is required to enforce and the considerable discretion it is given to calibrate its enforcement style and determine its priorities when regulatory objectives conflict. The Part concludes that regulatory and interdisciplinary theory does not provide a secure foundation for either a punitive or a compensatory priority where those aims are in tension. As such, the article turns to resolve the question by reference to two key practical issues: whether regulatory mechanisms are more effective than others at achieving compensation, considered in Part IV; and whether, assuming a compensatory priority were adopted, this would unduly hinder the fulfilment of other regulatory objectives, considered in Part V.
Part IV commences with the recognition that the regulator ought properly to be mindful of both the availability and efficacy of alternative avenues for victims to obtain redress before determining its strategic priorities and resource allocation in response to a particular contravention or class of contravention. Interestingly, however, the analysis finds that regulatory mechanisms are among the most available and effective in delivering compensation when compared with private litigation, alternative dispute resolution (‘ADR’) and external dispute resolution (‘EDR’). Despite this, Part V argues that a compensatory priority would unduly impede both the regulator’s ability to achieve deterrence through enforcement and to improve compliance through its softer activities of persuasion, education and policy advice. The article therefore endorses ASIC’s updated enforcement model to the extent that it conceives the agency’s statutory role as best fulfilled where it prioritises the punishment or censure of regulated entities who contravene the law.
Peake concludes
As Australian corporate conduct came under intense and highly publicised scrutiny during the Royal Commission, so too did the conduct of the conduct regulator. ASIC has fully embraced the recommendations made by Commissioner Hayne that deal with its own approach to enforcement. In updating its enforcement model, ASIC has been and will continue to be supported by legislative reform, both to its own powers and to the scheme of duties and penalties that apply to regulated entities. The central change to ASIC’s enforcement approach is its adoption of the ‘Why not litigate?’ operational discipline. That mantra effects a renewed strategic prioritisation of the need to ensure appropriate punishment or censure of those who break the law, above and beyond other goals that the regulator may be interested in achieving, such as the delivery of adequate redress to victims of misconduct. The purpose of this article has been to interrogate that prioritisation and consider whether it would be preferable for the regulator to adopt the opposite position, and more readily focus its resources on the delivery of compensation to victims of misconduct.
The central argument advanced in this article — that a regulator compensatory priority would be an effective way to deliver redress to victims but would unduly impede other desirable regulatory objectives — used the assumptions and logic of responsive regulation as its yardstick. It was beyond the scope of the article to engage in a substantive critique of that theory or its symbolic manifestation in the enforcement pyramid. However, given the extensive adoption of responsible regulation, including by ASIC, it is logical to discuss the merits of a compensatory priority, or indeed any shift in regulator focus, from that perspective. The article began by considering the underlying theoretical question: whom or what does the regulator serve? This discussion was approached broadly, evaluating insights from diverse sources: conventional regulatory scholarship, social psychology, and sociology. The answer was the amorphous ‘public interest’, which leaves little secure theoretical footing for a compensatory priority. As such, the practical implications of such a shift were taken to be the most important considerations. There is sufficient evidence, in my view, for concluding that regulatory mechanisms are among the most effective at delivering compensation. However, a regulator’s choices are complex and its resources must be deployed to ends other than compensation alone, particularly deterrence and compliance. My analysis suggests there is a credible risk that substantial violence would be done to the fulfilment of those goals if the interests of victims were to be preferred in a case of conflicting regulatory objectives. Such a priority should not be adopted.
