Getting regulatory value for money

For the chief executives of financial services companies struggling to fund the cost of compliance in an ever-changing regulatory environment, the 2013-14 annual report of the Australian Securities and Investments Commission (ASIC) would have made sobering reading. 

Within that report, ASIC chairman, Greg Medcraft, pointed to the reduced level of Government funding being directed towards his organisation and the desirability of moving to a user-pays model. 

Medcraft had, of course, expounded the virtues of a user-pays model in evidence given to a number of Parlia­mentary committees and in ASIC's submission to the Financial Systems Inquiry, but its inclusion in the ASIC annual report has served to make it a definitive policy push by the regulator. 

And the financial dimensions of that push can be clearly seen in Medcraft's analysis of what the Government's funding cuts have cost ASIC.  

The ASIC chairman said regulator's budget has been reduced by around $120 million over four years and that this was in addition to the increased efficiency dividend of around $47 million over four years, and other savings measures.  

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"In 2014-15, our operating budget will reduce by $44 million or around 12 per cent. Our average staffing levels will fall by 209." he said. 

Medcraft said ASIC had anticipated the effect of the cuts and had been proactive in conducting a voluntary redundancy campaign, adding that it would "continue to adjust its resource allocation to reflect the available funding, and our statutory role. One trade-off is that our proactive surveillance will substantially reduce". 

The ASIC chairman's reference to substantially reducing the regulator's proactive surveillance should be read as a very thinly-veiled warning to his political masters that if another Storm Financial or Astarra were to occur in the next few years, then the Government will need to be ready to accept a portion of the blame. 

The reference should also be interpreted as being intended to reinforce Medcraft's desire to to see ASIC funded under a user-pays model - something which is undoubtedly attractive to any Government seeking to transfer costs out of the Budget and onto the private sector. 

However any switch to a user-pays model for financial services regulation needs to be carefully thought through not least because there will be a need to ensure that the underlying funding model will actually be fit for purpose and will not have the unintended consequence of compromising the ability of ASIC to quickly meet challenges as they arise. 

Any reading of the Federal Budget outlays directed towards ASIC over the past decade will reflect the fact that its funding has ebbed and flowed according to the legislative and regulatory program being pursued by the Government of the day and according to major workload issues such as dealing with the collapse of Storm Financial or the Trio/Astarra collapse. 

It is worth, then, remembering that while funding to ASIC has been reduced over the past two Federal Budgets it is from levels which reflected the workloads which were generated by issues such as the global financial crisis and Storm Financial. 

Nor should it be forgotten that there is already an element of user-pays in the funding of ASIC and, indeed, the other financial services regulators via the Financial Services levy collected by the Australian Prudential Regulation Authority and that this is already seen as a significant burden by many in the industry. 

Medcraft's push for a user-pays approach to ASIC funding is not without merit, but nor is it something that should be implemented without making sure that all the unintended consequences have been identified.