Disclosure ineffective deterrent for law breakers: ASIC

The chair of the Australian Securities and Investments Commission (ASIC) Greg Medcraft said the regulator and the public were frustrated that penalties for poor corporate behaviour were often less than the gains made by that behaviour. 

“It is frustrating - both for us and the public - when the penalty available to respond to misconduct is much less than the profit someone made in the process. 

“If this is so, unscrupulous players in the market may quite rationally decide to make the trade by looking at the risk versus reward. And in doing so, break the law,” he said. 

“We’ve got to have penalties that inject fear and overcome the urge someone may experience to break the law when driven by greed.” 

Medcraft stated that behavioural science may be a better way to understand how to penalise law-breaking investors instead of disclosure regimes. 

Speaking at the ASIC Forum 2014, Medcraft said regulators need to look at the “fear versus greed” equation when it comes to setting penalties, he believes. 

To this end, behavioural insights could provide a window into what makes people break the law, and such insights should be leveraged to achieve smarter, not more regulation, he said. 

Appropriate sanctions at the lower end of the scale might be better. For example, infringement notices might be more useful and timely, especially for those who purposefully break the law, Medcraft said. 

He said behavioural research had shown over and over again that investors were biased towards default options, would rather opt for a small reward now instead of a bigger reward later, and tend to turn off when there are too many and complex options. 

“We have witnessed the harm caused by regulations that assume all investors and financial consumers will act rationally,” Medcraft said. 

“Disclosure, the way it has been done in the past, is not the disinfectant it was once thought to be.”