Compliance costs and policy processes

Recommendation 31

Increase the time available for industry to implement complex regulatory change.

Conduct post-implementation reviews of major regulatory changes more frequently.


Except in exceptional circumstances, Government and regulators should give industry participants at least six months to begin implementing regulatory changes once they are finalised. Additional transitional periods of 12–24 months will also generally be appropriate. Grouping commencements at fixed dates during the year — for example, 1 July and 1 January — would help industry participants to accommodate overlaps between related changes, rather than having to make multiple system changes.

Government and regulators should also carry out more post-implementation reviews of major changes to analyse their cost effectiveness and help develop better processes for future interventions.

This proposal is consistent with Government's recently announced Regulator Performance Framework, which requires post-implementation reviews for regulatory changes that have a major economic effect. The Inquiry's recommendations on accountability and competition are also expected to improve policy processes and focus policy makers and regulators on considering compliance costs and efficiency implications.


  • Reduce costs, complexity and unanticipated negative implications associated with implementing regulatory change.


Problem the recommendation seeks to address

Most industry submissions identified the scope and pace of domestic regulatory change in the post-GFC environment as a major issue. This is partly due to factors beyond Australia's direct control, including the proliferation of global standard-setting under the auspices of the Financial Stability Board in the wake of the crisis. Another factor is the wave of domestic regulatory change in countries that were at the epicentre of the crisis, substantially affecting Australian firms with an international presence. However, these developments have occurred at the same time as major domestically driven changes to the regulation of credit, financial advice, general and life insurance, and superannuation.

The Inquiry has not sought to examine all regulation with a view to identifying deregulation opportunities. However, the Inquiry commissioned Ernst & Young (EY) to assess the cost effectiveness of regulatory processes for three initiatives: changes to the presentation of credit card terms and conditions; the 'know your customer' (KYC) requirements of Australia's anti-money laundering (AML) framework; and the three-day balance transfer requirement for superannuation funds included in the SuperStream reforms.

EY's conclusion was that Government can, "… improve medium-term outcomes of regulatory intervention through incremental changes in how it designs and implements additional measures and how it monitors the impact (including unintended effects) of regulation that has been implemented".45 Although overall policy settings may be appropriate, the report identified some shortcomings in how policies are operationalised, including:

  • In some cases, it is not clear that detailed costs and benefits of changes have been considered.
  • There are gaps in industry consultation processes; for example, they may occur too late to allow for efficient planning.
  • Implementation deadlines can be optimistic.

The EY report highlighted the difficulties associated with undertaking cost-benefit analysis of regulatory interventions. In particular, it noted that governments undertake interventions for a mix of short- and long-term objectives and that assessing benefits is more difficult than assessing direct costs. Timing issues are also relevant in that costs may be readily apparent in the short-term, yet benefits may only emerge over a longer period. For this reason, EY suggested that better upfront cost effectiveness analysis would be an appropriate alternative to a full cost-benefit analysis, particularly where timeframes are short.

Improved cost effectiveness analysis could include up-front projections of the expected effects, early consultation on costs, and then post-implementation monitoring of actual effect and costs, with review points triggered where changes have materially lower effects or materially higher costs. Specific findings related to the three initiatives studied by EY are set out in Box 13: EY cost effectiveness analysis of regulatory interventions.

Box 13: EY cost effectiveness analysis of regulatory interventions

Reforms to the presentation of credit card terms and conditions are estimated to have involved total implementation costs of between $40 million and $120 million across the industry. EY found some changes to consumer behaviour and associated savings did follow the reforms; however, it could not conclude with certainty that the changed behaviour was the result of the reforms. EY noted it was not clear whether the Commonwealth had undertaken detailed consideration "… of how to best target different consumer segments through the overall dispersion of additional information on credit card terms".46 This example highlights the importance of a transparent cost-benefit or cost effectiveness process.

KYC requirements are estimated to have cost between $647 million and $1 billion to implement, with ongoing annual costs of between $299 million and $435 million. The changes are driven by the need to comply with international regulatory standards. Although participants agreed AML legislation is essential, consultations highlighted, "… earlier consultation on coverage and structure would have produced more efficient regulation".47

The three-day balance transfer requirement introduced as part of SuperStream was estimated to have cost industry between $560 million and $1.2 billion. EY noted that regulation in this area was a response to industry's failure to adopt effective electronic payment protocols. However, the industry view was that Government's approach generated some additional costs. In particular, consultation did not start early enough and implementation deadlines were optimistic. Tight deadlines meant that solutions were implemented in a less than optimal way to ensure timelines were met. A more risk-based approach from the Commonwealth, with more time for industry to develop data requirements and format standards, would have produced a more efficient outcome.

The EY work reinforced some of the main points in industry submissions, where industry participants asked for better regulatory design and more realistic implementation time frames.48 In general, better processes for the future are a higher priority in the short term than efforts to reduce the current stock of regulation.

Despite concerns related to processes arising from this work, the Inquiry has found limited evidence to suggest the compliance burden is higher in Australia than in comparable peer countries. The Australian Bankers' Association submission highlighted that, according to the World Economic Forum's Global Competitiveness Report 2013–14, Australia ranks 128th out of 148 countries for "Burden of government regulation".49 However, in addition to the evidence set out in the Interim Report, cost of compliance survey data provided by Thomson Reuters Accelus suggests that, although compliance costs for the financial sector have risen in Australia recently, Australia is not out of step with other jurisdictions.

Chart 7: Financial services firm compliance teams spending more than 10 hours per week tracking finance sector regulatory developments

This chart shows that the percentage of respondants whose cost of compliance teams spent more than 10 hours per week tracking and analysing regulatory developments in Australia is lower than most of the rest of the world in 2013 and 2014. For 2013, the Australian figure is 11 per cent, and for 2013, 13 per cent. For the UK &EU the corresponding figures are 31 per cent and 21 per cent, for norther america, 13 per cent and 25 per cent, and for Asia, 21 per cent and 29 per cent.

Source: Thomson Reuters Accelus.50


Regardless of Australia's relative position, unnecessary compliance costs and poor policy processes are a concern. The Inquiry notes that Government has already implemented a range of initiatives in this area, including more stringent requirements relating to RISs, sunsetting provisions for existing regulations, portfolio targets for reducing compliance costs and the Regulator Performance Framework.

Combined with Government's existing initiatives to reduce 'red tape' and a slowing in the pace of international regulation, the Inquiry's recommendations should address many of the concerns raised in industry submissions.

45 EY 2014, Financial System Regulation, data provided to the Financial System Inquiry, October 2014, page 2.

46 EY 2014, Financial System Regulation, data provided to the Financial System Inquiry, October 2014, page 26.

47 EY 2014, Financial System Regulation, data provided to the Financial System Inquiry, October 2014, page 33.

48 Australian Bankers' Association 2014, Second round submission to the Financial System Inquiry, pages 63–68, ANZ 2014, Second round submission to the Financial System Inquiry, page 28.

49 Australian Bankers' Association 2014, Second round submission to the Financial System Inquiry, page 63.

50 Thomson Reuters Accelus 2014, data provided to the Financial System Inquiry, 7 October 2014.