What is an ASIC Court Enforceable Undertaking?

When the Australian Securities and Investments Commission (ASIC) identifies that an Australian Financial Service Licence holder has contravened legislation, the organisation may offer ASIC a court enforceable undertaking as a response to ASIC’s concerns about their behaviour. Generally called “court enforceable undertakings” or “CEUs” (formerly known as Enforceable Undertakings or EUs) these actions are intended to address the specific activities that led to a compliance breach.

Court enforceable undertakings occur in many forms and can impact how an Australian Financial Services Licence (AFSL) holder does business. For this reason and many more, AFS licensees must understand this kind of legal action and how to respond.

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Defining a Court Enforceable Undertaking

Regulatory Guide 100 (RG 100) defines a court enforceable undertaking as “an administrative remedy for contraventions of legislation administered by ASIC”. These undertakings can be entered by a person, company, responsible entity of a registered scheme or trustee of a superannuation fund. After ASIC accepts the CEU, it can be enacted through court proceedings.

The process includes four basic steps:

  1. Proposed court enforceable undertaking: After ASIC has identified contraventions of regulations, either ASIC or a representative party can initiate a CEU. While both can begin the process, neither can compel the other to do so.
  2. Terms: Both ASIC and the representative party negotiate terms. ASIC’s Commission or a delegate will finalise the undertaking, which will not take effect until formally accepted by ASIC.
  3. Records: Each party keeps a signed original of the CEU. These records are publicly available through ASIC’s court enforceable undertakings register.
  4. Action: As a legally binding agreement, the CEU lays out compliance expectations. If the applicable party doesn’t comply, ASIC may seek court action, including fines and fees.

ASIC won’t accept a court enforceable undertaking in cases of criminal conduct, deliberate misconduct or anything involving “a high level of recklessness.” Furthermore, it will only accept a CEU when the organisation believes “it will achieve an effective and appropriate regulatory outcome that is in the public interest.” To establish this, ASIC considers multiple factors, including:

  • Likelihood of compliance, including the party’s compliance history.
  • Likely impact on the relevant party’s future behaviour.
  • Public interest, including compensation for affected consumers.
  • Market and community significance.
  • Nature and seriousness of alleged contravention.

Because CEUs are just one of multiple enforcement remedies ASIC uses, the organisation may weigh the effectiveness of other options before offering a court enforceable undertaking. ASIC may even combine multiple actions depending on the nature and relevance of the alleged breach.

Finally, ASIC notes that CEUs are accepted on a case-by-case basis. Accepting a proposed undertaking doesn’t guarantee that ASIC will agree to similar terms for another party with a similar contravention or even the same party in a different scenario.

Compliance Authorities: ASIC and MDP

Whether you’re managing a current court enforceable undertaking or learning more about the process, it’s important to understand two key compliance authorities: ASIC and the Markets Disciplinary Panel (MDP).

ASIC

ASIC creates and enforces much of the legislation surrounding Australia’s financial services industry. It operates under the Corporations Act and protects consumers, investors and the community at large. When a business or individual breaches an ASIC law, ASIC itself is generally the responding authority, taking enforcement action like a CEU to request anything from corrective notices to organisational reform.

MDP

The MDP is a peer review panel of industry experts responsible for making decisions on ASIC’s behalf, specifically against brokers who are participants of a licenced market operator. This panel is set up under the Corporations Act and administered by ASIC, but it makes decisions independently of ASIC “as far as practicable.” (See RG 216 for more information.)

Because its main responsibility is to make decisions regarding infringement notices for alleged breaches of the market integrity rules, the MDP is also involved in court enforceable undertakings. If ASIC’s Markets group considers a CEU, it may consult an MDP member about specific terms.

Independent Experts for Court Enforceable Undertaking Requirements

A court enforceable undertaking may require an independent expert to review and report on a specific action or outcome taken by the AFSL holder. In most cases, the party that proposed the CEU selects the expert; ASIC assesses the independent expert’s services for “objective and impartial judgement” before consenting to the appointment. More rarely, ASIC may appoint an independent expert and require the AFSL holder to accept the appointment. In most cases, the AFSL holder must pay for the expert services as part of the CEU.

To meet all of ASIC’s requirements, an expert must:

  • Display competence and independent judgement.
  • Provide a solid arrangement for managing conflicts of interest.
  • Have adequate resources and access to appropriate specialists.
  • Present necessary qualifications, experience and technical expertise, including relevant industry codes.

The expert may recommend a variety of measures to ensure corrective action is aligned with the CEU. This could include recommended improvements such as remediation plans, improved regulatory change management or policy governance and implementing technological solutions that act as a more flexible framework for these updates.

The independent expert will provide a report on its findings and activities, providing this document to both ASIC and the impacted party. ASIC may then publish an update on the report or a summary of the final report on its court enforceable undertakings register, thereby publicising both the CEU and its outcomes.

Case Study: Independent Expert Report

MIntegrity prepared this Summary Report following an Independent Expert Licensee Review for a global investment bank (the “IB”). The appointment of MIntegrity as the Independent Compliance Expert and the relevant terms of engagement were approved by ASIC.

On 15 June 2020, ASIC imposed conditions on the IB’s licence to ensure compliance with client money regulations. This came after the IB reported depositing client money into unauthorised bank accounts. MIntegrity acted as an Independent Expert to perform multiple tasks, including:

  • Assessing and testing the adequacy of the IB’s controls, systems and processes.
  • Testing the effectiveness of the IB’s breach reporting.
  • Identifying any deficiencies present.

The report summarises MIntegrity’s independent expert opinion, findings and methodology, including identified deficiencies (if any) and several potential improvements as part of normal business processes, which amounted to no recommended remediation.

Need Help With a Court Enforceable Undertaking?

If your organisation is facing a court enforceable undertaking, you may need expert support. The MIntegrity team has extensive experience in compliance, licence requirements, regulatory change management, policy governance and more, making us an effective partner every step of the way.

Additionally, MIntegrity can perform an independent review of any aspect of your regulated business on a proactive basis and before any ASIC action is contemplated. Such a review can help identify and remediate any deficiencies, thereby potentially alleviating the need for a CEU. You can also appoint us as an independent expert to help implement remediation steps recommended by another expert or regulatory body.

Contact us today for all the support you need.

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