Execution of mandate

Recommendation 28

Provide regulators with more stable funding by adopting a three-year funding model based on periodic funding reviews, increase their capacity to pay competitive remuneration, boost flexibility in respect of staffing and funding, and require them to undertake periodic capability reviews.

Description

Government should continue to determine the level of funding for APRA and ASIC. However, APRA and ASIC should be given greater year-to-year certainty in their funding profiles as well as more flexibility in how they spend their budgets, including their remuneration policies. Adopting a more rigorous funding model would provide the regulators with more certainty, while enhancing transparency and efficiency. As part of this model:

  • Regulator funding should be set by Government based on the recommendation of three-yearly funding reviews. These reviews should include consultation with industry and consumer stakeholders.
  • Once determined, funding would remain stable between reviews, subject to appropriate indexation and efficiency arrangements.22 Changes would only be made if there were a significant change in the scope of a regulator's mandate, or an emergency event such as a financial crisis.

Regulators should be funded at a level that enables them to offer remuneration that is competitive with the private sector. Effective regulation depends on effective human capital, and more effective regulators are likely to require higher salaries. Regulators currently target average remuneration at the 25th percentile of the market rate for like work in the financial sector; however, the Inquiry is concerned they currently find it difficult to meet this target.

The Inquiry is also concerned this target may be too low, preventing regulators from offering market-median or higher remuneration to attract more specialised and senior staff with strong market experience without median pay for other staff falling well below the 25th percentile.

ASIC staff should be removed from coverage by the Public Service Act 1999 (Public Service Act) to bring it into line with APRA and the RBA. APRA and ASIC should be able to opt out of public sector–wide employment, staffing, and other whole-of-Government policies and procedures that unnecessarily constrain their flexibility to deliver their regulatory mandate.

APRA, ASIC and the payments system regulation function of the RBA should each conduct six-yearly forward-looking capability reviews to ensure they remain fit for purpose and have the capabilities to address future regulatory challenges.

Objective

  • Ensure Australia's regulators are fit for purpose and have the funding, staff and regulatory tools to deliver effectively on their mandates.

Discussion

Problems the recommendation seeks to address

Funding for APRA and ASIC

The Interim Report set out the following principles for funding the regulators:23

  • Funding should have a high degree of stability and certainty.
  • Total funding should be proportionate to the task.
  • Regulatory costs should be borne by those contributing to the need for regulation.
  • Funding should promote the independence and accountability of the regulators.

The funding arrangements currently applying to APRA and ASIC do not reflect these principles. Regulators lack stable funding. They are subject to unpredictable budget reductions and unexpected efficiency dividends that limit their capacity to plan how they will dedicate resources beyond the short term. ASIC funding was reduced in the 2014–15 Budget. At the same time, APRA and ASIC were subject to additional whole-of-Government efficiency dividends in the 2014–15 Budget, the 2013–14 Economic Statement and the 2011–12 Budget. Submissions support the view that financial regulator funding should have a high degree of stability and certainty.

The Inquiry has not carried out its own assessment of the adequacy of regulator funding. However, submissions from both industry and consumer stakeholders argue that ASIC is not adequately funded to carry out its current consumer protection mandate in relation to the financial services industry, let alone the more proactive role the Inquiry recommends ASIC should adopt in the future.24 ASIC has also relied heavily on specific-purpose funding. Periodic funding reviews would allow Government to determine whether the regulators have sufficient funding to execute their mandates. The Inquiry recognises that funding reviews are not simple tasks. However, it believes there should be more consideration of the resources that regulators require to deliver effectively on their mandates.

APRA's industry funding arrangements mean its costs are generally borne by prudentially regulated entities. This is not currently the case with ASIC. The next recommendation in this chapter—that industry funding should also be adopted for ASIC—will address this issue.

Current funding arrangements do not promote regulator independence and accountability. These would improve if funding levels were based on periodic funding reviews rather than annual Government decisions, and if regulators had more discretion in determining how funding is used. Funding reviews would ensure sufficient resources to support other recommendations in this report, such as ensuring regulators can offer remuneration that allows them to compete effectively with the private sector for talent.

Operational flexibility

APRA and ASIC are both subject to policies that limit their capacity to attract and retain staff from the private sector. In particular, public sector–wide industrial relations policies are a poor fit for APRA and ASIC, whose employees are typically recruited from the private sector.25 Second round submissions agree with the proposition that APRA and ASIC should have more flexibility over staffing and be able to offer competitive remuneration. Indeed, industry participants recognise the value of competent and experienced regulators.26

Unlike APRA and the RBA, ASIC is subject to the Public Service Act. Yet there is no clear rationale for which agencies are included in the Act and which are not. ASIC notes in its submission that the application of the Public Service Act has unnecessarily limited ASIC's ability to recruit and utilise external staff.27 Although the Inquiry recognises the need for regulators to maintain a culture of 'public service', this does not depend on coverage by the Public Service Act and can be achieved through tailored codes of conduct and statements of values. Removing ASIC from coverage by the Public Service Act would allow it to tailor management and staffing arrangements to suit its needs.

Capability

There is no formal process for keeping regulators fit for purpose by ensuring they have the skills, resources and powers to meet future challenges. At present, regulators are subject to regular review through the five-yearly International Monetary Fund Financial Sector Assessment Program. However, this has a strong focus on compliance with international standards and codes. Capability reviews are only undertaken on an ad hoc basis; for example, the Palmer Review into the role of APRA in the collapse of HIH. This is in contrast to the recent requirement for major Government agencies, including the ATO and the Australian Bureau of Statistics, to undertake periodic capability reviews. For APRA and ASIC, a six-yearly cycle would allow capability reviews to be aligned with every second funding review, allowing the two to take place concurrently.

Conclusion

Moving ASIC and APRA to a three-year budget model, giving them more operational autonomy and introducing six-yearly capability reviews would enhance the operation of the current regulatory framework. This is a particularly important issue for ASIC given the breadth of its responsibilities.

Given the extent of the changes the Inquiry has proposed for ASIC in this report, ASIC should be the first to undergo a capability review in 2015. This would help to ensure it has the skills and culture to carry out its enhanced role effectively.


22 The efficiency measure may be a fixed efficiency dividend, or some other tailored efficiency measure. It should be applied upfront as part of the funding review process to ensure regulator funding remains stable over the estimates period.

23 Commonwealth of Australia 2014, Financial System Inquiry Interim Report, Canberra, pages 3-110 to 3-111.

24 See also: Senate Economics References Committee 2014, , Report on the Performance of the Australian Securities and Investments Commission, Commonwealth of Australia, Canberra, pages 407–415; International Monetary Fund (IMF) 2012, Australia: Financial System Stability Assessment, IMF Country Report No.12/308, IMF, Washington, DC, page 26.

25 Over the last five years, less than 5 per cent of APRA staff members were recruited from the public service. APRA, Second round submission to the Financial System Inquiry, page 78.

26 Australian Financial Markets Association 2014, Second round submission to the Financial System Inquiry, page 52.

27 Australian Securities and Investments Commission 2014, Second round submission to the Financial System Inquiry, pages 75–77.