Traditional mechanisms used by both government and private enterprises seeking to increase compliance focus on penalties as disincentives. Penalties take a variety of forms, including fines, loss of licence, and enforceable undertakings. In this post, we examine an alternative- focused on behavioural psychology and ‘nudge theory.’
Penalties as a compliance tool
The belief that greater penalties will result in greater compliance assumes that regulated entities operate under a decision-making model which perfectly takes into account both the costs and benefits of each decision made and that resources required to ensure compliance are not limited. Neither assumption is safe. The public’s responses to COVID-19 public health measures provide a perfect case study for the need for more sophisticated responses to encourage compliance. With fines in NSW increasing, have we seen greater compliance or has non-compliance resulted for other reasons?
Alternatives to penalties are provided by the behavioural sciences, including command and control and economic instruments such as ‘nudging.’ The underlying concept is to create an environment in which individuals make choices based on nudges towards the desired state. This area is well-developed thanks to the advertising industry and, in the context of compliance, is considered to be ‘at the forefront of regulatory policy and governance.’
Examples of nudges as a compliance tool
Nudges seek to encourage compliance without forbidding any options or significantly changing their economic incentives.
There is a range of examples of the use of nudges in compliance. These include: automated enrolments in superannuation plans (encouraging savings), default enrolment of individuals into organ donation, and statements by the tax office on the percentage of people who submit returns on time (normalising compliance). Each of these examples ‘take advantage of default human behaviours’ i.e. ‘They utilise, for example: people’s inertia, their susceptibility to social influence, or their responsiveness to more salient events or objects.’
How can your business use this?
Your business can use this technique to encourage compliance. To develop nudges, you will first need to understand the mechanisms that are driving the decisions your employees and contractors make. You should then consider if you can make ‘compliance the default’ or the easiest option for example, by removing physical or mental barriers in processes or situations required to be passed for someone to comply. One way to do this would be to build compliance controls into systems and processes. Making it easier for your employees and contractors to find information by the use of the Compliance HUB would be another such example.
Compliance can be encouraged by celebrating success. For example, within an energy retailer, compliance with obligations relating to hardship could be encouraged by celebrating the identification and successful management of accounts managed by the hardship program.
While there is no single methodology that should be employed to ensure compliance, it is clear that penalties alone do not work. The adoption of methodologies with their genesis in behavioural sciences, including command and control and economic instruments such as ‘nudging,’ is an avenue that all businesses and government entities should explore.
 Lourenço, Joana Sousa, Emanuele Ciriolo, Sara Rafael Almeida, and Francois J. Dessart. 2016. ‘Behavioural Insights Applied to Policy – Country Overviews 2016’. No. JRC100547.
 Sokol, D. Daniel; Rooij, Benjamin van. The Cambridge Handbook of Compliance (Cambridge Law Handbooks) (p. 552). Cambridge University Press. Kindle Edition.
 Reisch, L. A., and C. R. Sunstein. 2016. ‘Do Europeans Like Nudges?’ Judgement and Decision Making 11( 4): 310– 25.
 Sokol, D. Daniel; Rooij, Benjamin van. The Cambridge Handbook of Compliance (Cambridge Law Handbooks) (p. 567). Cambridge University Press. Kindle Edition.