Regulator accountability

Recommendation 27

Create a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates.

Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.

Description

Government should create a new Assessment Board to provide it with ex post, annual reports on the performance of APRA, ASIC and the payment systems regulation function of the RBA. They would be assessed against their statutory mandates as well as against the priorities identified in Statements of Intent (SOIs).12

The reports would consider how the regulators have balanced the different components of their mandates as well as how they are allocating resources and responding to strategic challenges. Reports should include the views of regulators and be made public once Government has had the opportunity to consider a response. The Assessment Board need not be established as a separate agency and could be supported by a separate secretariat housed in Treasury. This would separate the provision of support to the Assessment Board from Treasury's ongoing policy role as a CFR agency.

It is not intended that the Assessment Board should direct the regulators — it would report to Government. It would also be precluded from examining individual complaints against regulators or the merits of particular regulatory or enforcement decisions. However, it would be asked to assess how regulators have used the powers and discretions available to them. In the case of ASIC, a significant issue would be its use of the temporary product intervention power recommended in Chapter 4: Consumer outcomes.

The Assessment Board would replace the current Financial Sector Advisory Council (FSAC). It would consist of between five and seven part-time members with industry and regulatory expertise. It would not include current employees of regulated entities. However, members would be expected to consult extensively with industry and consumer stakeholders. Diversity of membership should act as a safeguard against the Assessment Board being unduly influenced by the views of one particular group or industry sector.13

Government should also set out more clearly how regulators should interpret their mandates in Statements of Expectation (SOEs). SOEs should also set out:

  • A statement of the strategic direction Government expects regulators to take, including in response to changing circumstances.
  • A broad outline of Government's tolerance for financial sector risk.

Regulators should increase their use of outcomes-focused performance indicators. These could be included in SOIs, as per the practice of New Zealand regulators, or in annual reports.14,15 Performance indicators should cover core regulatory objectives as well as competition and compliance cost objectives.

Regulators should more clearly explain in their annual reports how they have balanced the different parts of their mandates, particularly the effect of their decisions on competition and compliance costs. This information would be an important input into the Assessment Board's annual reviews, along with other relevant reports produced by regulators.16

These recommendations are intended to be consistent with, and not duplicate, Government's Regulator Performance Framework (see Implementation considerations).

Objectives

  • Create a formal mechanism for Government to receive annual independent advice on regulator performance.
  • Strengthen the accountability framework governing Australia's financial sector regulators.

Discussion

Problems the recommendation seeks to address

Australia's financial regulators operate within complex accountability frameworks. A range of bodies carry out narrow rather than overall performance assessments. For example, the Australian National Audit Office (ANAO) conducts performance audits in relation to particular programs or activities, and the Office of Best Practice Regulation reviews Regulation Impact Statements (RISs) on proposed regulatory changes, while the courts and other quasi-judicial bodies review specific decisions.

The main problem with the current arrangements is Government lacks a regular mechanism to assess the overall performance of its financial regulators. Parliament has mechanisms to do this, including review of annual reports. However, parliamentary scrutiny tends to be episodic and focus on particular issues or decisions. The complexity of regulator mandates presents a challenge to effective monitoring, especially as Parliament is not supported in this role through regular independent assessments of annual reports.

The core mandates of the regulators are generally clear. APRA is responsible for maintaining financial stability; protecting the claims of authorised deposit-taking institution depositors and insurance policy-holders; and promoting prudent management of non-SMSF superannuation funds. ASIC is responsible for consumer protection and market integrity. The RBA and Payments System Board (PSB) are responsible for financial stability and controlling risk in the financial system. Each regulator is required to balance these core responsibilities against other objectives, including promoting competition and efficiency, maximising business certainty and minimising compliance costs. However, there is some inconsistency in how these other objectives are framed in relation to APRA and ASIC, including whether or not they apply at all.17

Regulators currently receive little guidance about how they should balance the different objectives in their respective mandates. At present, SOEs typically list each regulator's objectives, without guidance from Government on its tolerance for risk, or how it expects the regulators to balance the different components of their mandates, especially where there may be a trade-off between objectives.18 Similarly, annual reports by regulators provide scant information on how they have balanced their different objectives. As the Inquiry noted in its Interim Report, regulators' annual reports lack performance indicators.

The FSAC, created as a recommendation of the Wallis Inquiry, is currently the main formal mechanism for industry stakeholders to provide advice to Government. Although FSAC has attracted high-calibre members, and has performed a useful role in relation to some issues, it has been hampered by the lack of a clear mandate and regular work program. This means that its influence has varied over time.

Rationale

A more effective review mechanism that provides Government with regular formal advice on the overall performance of regulators will improve regulator accountability.

Options considered

The Interim Report proposed improving SOEs, SOIs and annual reports. It identified two options to strengthen external oversight of financial regulators: an Inspector-General of Regulation and a ‘unified oversight authority'. Second round submissions also suggest the CFR could play a larger role in monitoring the performance of regulators.

  1. Recommended: Create a new Assessment Board to advise Government annually on how regulators have implemented their mandates, based on regulator self-assessments, periodic capability reviews and industry consultation.
  2. Recommended: Provide clearer guidance to regulators in SOEs, and increase the use of performance indicators to strengthen regulator reporting.
  3. Appoint an Inspector-General of Regulation or unified oversight authority for financial system regulators.
  4. Formalise the CFR and task it to hold regulators accountable for performance against their mandates.
  5. Place APRA and ASIC under the control of boards comprising executive and non-executive directors.

Options costs and benefits

Submissions generally support improved accountability mechanisms for regulators.

Annual reviews of performance by a new Assessment Board

Establishing a new Assessment Board has the potential to provide more focused oversight of regulator performance. However, the success of the Assessment Board will depend on how it approaches its task. Some of the risks associated with this recommendation are that the Board simply becomes another accountability process that adds to costs without adding value, or that it attempts to intervene directly in the work of the regulators. Another risk is that it undermines Treasury's relationship with the other CFR agencies.

The Inquiry has sought to address these risks by making it clear that the Assessment Board should have a diverse membership to avoid being unduly influenced by a particular group; limiting the Board's mandate to ex post overall assessments of regulator performance; ensuring the Board bases its assessments on existing outputs where possible; and suggesting that the Board be supported by a separate secretariat within Treasury. A diverse membership would also help ensure a balance of views and deal with potential conflicts involving individual members.

Improve SOEs and increase use of performance indicators

There appears to be widespread support for improving SOEs and SOIs, and increasing the use of performance indicators as a means of enhancing regulator accountability. The main issues are the extent to which Government is willing to be more explicit about trade-offs in regulatory policy (especially its risk appetite) and the capacity of regulators to devise performance indicators that adequately capture the complexity of their work. While Government may be reluctant to set out views, and developing performance indicators is a difficult exercise, the Inquiry believes that increased efforts in these areas would enhance regulator accountability.

Inspector-General of Regulation or unified oversight authority

The Inquiry does not support the Inspector-General model because it would involve creating a new agency. The Assessment Board would replace the existing FSAC. The Inspector-General model would place considerable reliance on a single person, while the Assessment Board can include members with expertise across the regulators. Finally, the Inquiry considers an Assessment Board is more suited to undertaking an overall review of regulator performance, while the Inspector-General model is better suited to undertaking more detailed assessments of administrative processes of the type currently performed by the ANAO and the Inspector-General of Taxation (in relation to the ATO).

Formalise the CFR as oversight body

The Inquiry does not support creating a separate body with an overarching oversight or review role because it would fundamentally change the current regulatory system. If the CFR was to perform this role, as some submissions suggest, it would be transformed from a mechanism to facilitate cooperation between regulators into a separate agency in its own right. This would result in overlapping responsibilities and weaken accountability.

Place APRA and ASIC under the control of boards

This option was raised by the Senate Economics References Committee in its report on the performance of ASIC.19 It has also been identified as an option for the ACCC in the Draft Report of the Competition Policy Review.20

The non-executive board model was used by APRA when it was established. However, the Royal Commission into the collapse of HIH concluded that this arrangement had blurred accountability for regulatory outcomes between the board and the chief executive officer, and that APRA would be better headed by a small full-time executive, with the capacity to establish an advisory board if necessary.21

Conclusion

The Inquiry believes that creating a new Assessment Board to review regulator performance is the best way to address the gap it has identified in the current accountability framework. This option would facilitate improved scrutiny of regulator performance without creating new agencies or compromising existing accountability relationships. This recommendation is not intended to reduce the independence of regulators in executing their statutory mandates.

Implementation considerations

Interaction with Government's new Regulator Performance Framework

Under the new Regulator Performance Framework, regulators will have to undertake an annual externally-validated self-assessment of their performance to minimise the burden on their regulated populations. Selected regulators will also have their performance assessed externally by a review panel every three years, with the option of an annual review for major regulators.

Annual reviews by the Assessment Board would be broader than the process envisaged under the Regulator Performance Framework. Although they would encompass compliance cost issues, this would be only one element of overall performance. To avoid duplication, the Assessment Board could act as the validation body for each regulator's annual self-assessment, and this assessment could be used in the Board's deliberations. This would remove the need for two separate processes.

Other issues

Government should consider whether agencies outside the Treasury portfolio that have a significant effect on the financial system, such as AUSTRAC, should be assessed by the Assessment Board.

The remit of the Assessment Board should be narrow and specifically exclude:

  • Assessments of the merits of relief for particular transactions, enforcement actions and individual complaints against the regulators.
  • Matters of financial system regulation policy, such as whether the mandates of regulators are appropriate.

12 The Assessment Board would not review the mandates of regulators or the frameworks they administer.

13 A code of conduct for members could also be used to address this issue.

14 See, for example, Reserve Bank of New Zealand (RBNZ), 2014, Statement of Intent, RBNZ, Wellington, page 11.

15 Increased use of performance indicators in annual reports is likely to be consistent with the new performance reporting requirements that will apply under the Public Governance, Performance and Accountability Act 2013, these requirements would be broader than the Regulator Performance Framework that Government has already announced.

16 For example, ASIC publishes a Strategic Outlook as well as periodic reports on relief decisions and enforcement outcomes. APRA and ASIC both publish periodic stakeholder surveys.

17 The Australian Prudential Regulation Authority Act 1998 requires APRA to consider efficiency, competition, contestability and competitive neutrality alongside financial safety and stability. The objects clauses in the Banking Act 1959 and Superannuation (Industry) Supervision Act 1993 do not mention competition or efficiency. The objects clauses in the Insurance Act 1973 and Life Insurance Act 1995 identify competition and innovation as objectives (subject to industry viability). There is no reference to reducing compliance costs. The Australian Securities and Investments Commission Act 2001 (ASIC Act) requires ASIC to promote commercial certainty and economic development and efficiency while reducing business costs. However, there is no explicit reference to competition in the ASIC Act (or the objects clause for Chapter 7 of the Corporations Act 2001).

18 For example, lowering barriers to entry may benefit consumers by strengthening competition but also increase risks for end-users. Likewise, higher barriers to entry can have the opposite effect.

19 Senate Economics References Committee 2014, Performance of the Australian Securities and Investments Commission, Commonwealth of Australia, Canberra, Recommendation 55, page 433.

20 Commonwealth of Australia 2014, Competition Policy Review, Draft Report, Canberra, Draft Recommendation 47, page 63.

21 HIH Royal Commission 2003, The Failure of HIH Insurance Volume 1 of 3, Part Three, Commonwealth of Australia, Canberra, Recommendations 18 and 19.