Regulatory burden

Stakeholders have told the Inquiry that Australia has a strong regulatory framework. However, many stakeholders argue that complying with regulation is costly, the pace of change has increased costs and practices for introducing new regulation could be improved.

Following the GFC, the considerable international policy response included new and strengthened regulation for financial system entities. In this context, a number of submissions are concerned about implementing new regulation.

Other chapters address a number of specific issues relating to the burden of regulation. The main issues raised by stakeholders in the context of this chapter relate to:

  • The general need to weigh the costs and benefits of new regulation adequately, the need to look for other solutions before applying regulation, or the possibility that, because these processes are not being applied adequately, Australia is potentially over-regulated.1
    • A related concern was a lack of time taken for industry consultation or implementation or, in some cases, inadequate consultation processes more generally.
  • Regulation potentially having a disproportionate impact on smaller players.2
  • Concerns about the impost of foreign regulation and international standards since the GFC, especially prudential regulation, including that it should be implemented with more Government policy input/oversight or that it has not supported Australia’s needs.3, 4
    • Foreign regulation and international standards are discussed in more detail in the International integration chapter.
    • An analysis of Australia’s prudential regulatory framework is discussed in the Stability chapter. Further information is sought on costs of prudential regulation.
  • A blurring of the distinction between the role of boards and management, especially through the application of prudential regulation.5
    • This issue is discussed in more detail in the Stability chapter.
  • Blurring of the distinction between prudential and non-prudential regulation, and potential overlap between the Australian Prudential Regulation Authority (APRA) and ASIC.6
    • This is considered in the Regulatory perimeter section of this chapter.

Preliminary assessment

Costs and benefits of regulation

Measuring whether the benefits of regulation outweigh the costs is challenging, since regulation imposes both direct and indirect costs and benefits. Even where respondents express frustration with the costs of regulation in Australia, they acknowledge that the cost of excessive or unnecessary regulation can be difficult to measure.7 Aside from direct costs incurred by businesses in complying with regulatory change, regulation also has hidden costs.8 For example, regulatory costs and complexity can create barriers to entry for new participants or innovations.

Benefits can also be difficult to measure. As APRA points out in its submission: “Many of the specific benefits of prudential regulation and supervision, such as lower losses and increased trust within the financial system, are [difficult] to isolate”.9

Despite these difficulties, it is essential that the costs and benefits of Government intervention are assessed to the extent possible.10 Many stakeholders suggest current processes for doing so are inadequate, potentially leading to over-regulation.

Currently, the Inquiry lacks evidence on both the costs and benefits of reforms to support firm conclusions on this issue, although some information is available around costs. The Australian Bankers’ Association (ABA) estimates the four major banks have spent $1.67 billion on implementation costs for the following projects: Foreign Account Tax Compliance Act (FATCA),11 Future of Financial Advice (FOFA) law reform, anti-money laundering (AML) from 2005–06, privacy (including credit reporting), e-payments, the Financial Claims Scheme (FCS), over-the-counter (OTC) derivative reforms and National Consumer Credit Protection.

In 2012, the International Monetary Fund (IMF) studied the relative costs and benefits of post-GFC regulatory reform for Europe, the United States and Japan. The report found: “the benefits in terms of less frequent and less costly financial crisis would indeed outweigh the costs of regulatory reforms in the long run”.12 Importantly, the IMF assessment assumed the way regulation was implemented did not create unnecessary costs. However, this assumption is unlikely to hold in practice. Costs and benefits go beyond the content of the regulation: how it is implemented also matters.

Stakeholders suggest that, in some areas, implementation has been poor in cases where otherwise the reform is supported; for example, very short consultation periods.13

Stakeholders report the main drivers of the implementation costs include:

  • IT system changes
  • Staff costs (i.e. employing specialists to implement regulations)
  • Legal advice

In addition, implementation costs can be increased by:

  • Poor timing around the start of regulation, particularly when there are changing or uncertain compliance dates or unrealistic timelines for compliance, or where compliance dates are set for resource-constrained periods. Examples raised by the ABA included implementing AML and the OTC reforms.
  • Poor domestic/ international regulatory coordination. For example, the ABA highlighted problems around coordination in the OTC reforms.
  • Inadequate consultation processes with industry, or insufficient weight given to industry information, resulting in higher-cost, less effective regulatory solutions being selected and implemented.
  • Overly prescriptive legislation, which both adds to cost and complicates delivery, particularly if it makes no allowance for variations in process and systems capability.

To help assess the costs and benefits of regulation more generally, the Inquiry has commissioned further work on the burden of regulation resulting from both domestic and international reforms. As part of the Government’s deregulation process, Treasury is also managing a substantial ‘stocktake’ and analysis of regulation in the Australian financial system.

The World Bank Doing Business 2014 ranked Australia 11th on its ‘Ease of Doing Business’ category, behind the United Kingdom (10), the United States (4), Hong Kong (2) and Singapore (1). In the ‘Getting Credit’ category Australia ranked 3rd, with the United Kingdom and Malaysia ahead, while in the ‘Starting a Business’ category it ranked equal 4th. Yet, for ‘Protecting Investors’, Australia ranked much lower — at 68th.14 In that category, the World Bank “measured the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain,” and gave Australia a relatively low ranking.15

In summary, this source suggests that, compared to the rest of the world, Australia may not have a regulatory burden problem. Conversely, QBE estimates the total cost stemming from over-regulation at an average of over $100 per policy, or in the range of 10 to 15 per cent.16

Deregulation and improving policy development processes

Concurrent with this Inquiry, the Government has a deregulation process in place that is consistent with many of the suggestions made by submissions. This includes improved guidance for Regulation Impact Statements and a clear policy statement that the default position of policy makers and regulators should be ‘no new regulation’.

Further, in March 2014, the Productivity Commission developed a Regulator Audit Framework that could be used for auditing the performance of regulators, in regard to the compliance costs they impose on business and other regulated entities. Based on this report, the Government is preparing a framework for assessing the performance of regulatory agencies, such as ASIC, APRA, the Australian Competition and Consumer Commission (ACCC) and the Australian Taxation Office (ATO). The International integration chapter considers options for further process improvement to have regard to international regulation.

As part of the deregulation process, the Government is undertaking a stocktake and audit of all regulation. This will provide a baseline for measuring the Government’s progress in reducing red tape and assist in identifying useful areas for future reductions.

Impact on competitive neutrality

As noted, implementing many post-GFC regulations has created substantial costs. Although large institutions have faced the biggest absolute costs, their smaller competitors may face a higher relative burden, particularly where change imposes fixed costs of implementation. Larger firms may also have more capacity to influence the direction of regulatory change.

On the other hand, smaller firms do not generally want to be subject to different regulatory frameworks than their larger competitors if they consider this will change customer preferences or their access to funding. For this reason, concessional licensing regimes or frameworks can be problematic.

This raises the issue of whether Government and regulators need to take more account of the potential implications of regulatory change on competitive neutrality. This applies to both the design of regulation and the volume of regulatory change to which industry segments are subject.

Volume of regulation

Typically, defining regulation that imposes a burden on industry takes into account any standards, codes, rules, data requirements and guidance material produced by regulators, whether domestic or international.17 However, some of this material, such as guidance material, helps the regulated population comply with regulation.

The volume of regulation will depend on a range of factors, including the approach of the regulator and, to some extent, the approach taken by the regulated population.

Seeking to address real or perceived gaps in the regulatory regime can lead to increasingly complex or voluminous regulation. Instead, it may be possible to close perceived gaps or improve poor outcomes without necessarily changing the law.

In some instances, regulators may be able to address issues by reducing the overarching volume of rules and regulations placed on industry, but directing more resources towards supervising high-risk participants, taking stronger or more frequent enforcement action, or both. Increasing the intensity of supervision or enhancing enforcement may require either additional resources or re-prioritising existing activities.

Financial system data

Financial system data is useful for policy makers, regulators, industry, academics and others. In conducting the first stage of the Inquiry, data gaps had an impact on the Inquiry’s deliberations. For example, there are gaps in data for infrastructure financing and small business lending. On the other hand, stakeholders have told the Inquiry it can be costly and time consuming to provide data and, in some instances, multiple agencies have duplicate requests.

If new data is to be provided to address gaps, it will be important to look for ways to reduce the reporting burden of data that is either not used or is less useful. Changes in data requirements should also weigh the benefits of collecting it against the potential costs of changing systems and processes to comply with new requirements.

Policy options for consultation

The Inquiry has commissioned further work on the costs and benefits of financial system regulation in Australia and welcomes empirical evidence on this point.

The Inquiry seeks further information on the following areas:

  • Is there evidence to support conclusions that the regulatory burden is relatively high in Australia when considered against comparable jurisdictions?
  • Are there examples where it can be demonstrated that the costs of regulation affecting the financial system are outweighing the benefits?
  • Are there examples where a more tailored approach could be taken to regulation; for example, for smaller ADIs?
  • Are there regulatory outcomes that could be improved, without adding to the complexity or volume of existing rules?
  • Could data collection processes be streamlined?
  • If new data is required, is there existing data reporting that could be dropped?
  • Instead of collecting new data, could more be made of existing data, including making more of it publicly available?

1 For example: First round submissions to the Financial System Inquiry by the Australian Bankers’ Association, major banks and QBE.

2 Customer Owned Banking Association 2014, First round submission to the Financial System Inquiry, page 53.

3 ANZ 2014, First round submission to the Financial System Inquiry, page 49.

4 Westpac 2014, First round submission to the Financial System Inquiry, page 31.

5 ANZ 2014, First round submission to the Financial System Inquiry, page 49.

6 Treasury 2014, First round submission to the Financial System Inquiry.

7 QBE 2014, First round submission to the Financial System Inquiry.

8 Some organisations provided confidential estimates of the costs of complying with recent regulatory changes to the Inquiry.

9 Australian Prudential Regulation Authority 2014, First round submission to the Financial System Inquiry, page 63.

10 It should be noted that to date the RBA, APRA and ASIC have been fully compliant with Regulatory Impact Statement requirements as set out by the Office of Best Practice Regulation.

11 Note: FATCA is US legislation but must be implemented by Australian companies in certain circumstances. According to the ABA, FATCA contribution to costs is approximately 14 per cent.

12 Elliot, D, Salloy, S and Santos, A 2012, Assessing the Cost of Financial Regulation, IMF Working Paper, IMF, page 68.

13 CBA, First round submission to the Financial System Inquiry, page 124.

14 World Bank Doing Business 2014.

15 The indicators used by the World Bank assess “3 dimensions of investor protections: transparency of related-party transactions (extent of disclosure index), liability for self-dealing (extent of director liability index) and shareholders’ ability to sue officers and directors for misconduct (ease of shareholder suits index). The data come from a questionnaire administered to corporate and securities lawyers and are based on securities regulations, company laws, civil procedure codes and court rules of evidence. The ranking on the strength of investor protection index is the simple average of the percentile rankings on its component indicators.” For further information see Doing Buiness 2014.

16 QBE 2014, First round submission to the Financial System Inquiry, page 41.

17 The Office of Best Practice Regulation defines regulation as “any ‘rule’ endorsed by government where there is an expectation of compliance”. Also see the ABA submission, which defines regulation as ‘all legislation, codes, rules, (prudential) standards and guidance material produced by any government department or agency that imposes limitations on, or otherwise seeks to modify the behaviour of, individuals or companies”.