Regulating at whose cost and benefit?

It has now been more than a decade since the HIH Royal Commission but delegates to last week’s Financial Services Council Leaders’ Summit in Melbourne were reminded of the outcome by the man who headed up that inquiry – Judge Neville Owen.

And what those delegates also heard from Justice Owen was that while Governments inevitably seek to address issues such as the collapse of HIH Insurance with “regulation, more regulation and yet more regulation” such an approach rarely works as effectively as adopting a values-based approach.

But when scandals arise and systems fail, Governments must be seen to be doing something and writing new regulations, further empowering the corporate watchdogs, represents their almost inevitable Pavlovian Response.

Of course, what the HIH Royal Commission pointed to was regulatory failure, particularly on the part of the Australian Prudential Regulation Authority (APRA). Perhaps ironically, the outcome of the latest Royal Commission – the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – is already resulting in more power and funding being handed to the regulators.

All of which points to the reality contained in our Regulatory Cost feature on page 14 of this edition of Money Management, which reports that the companies operating in the financial services industry have seen their regulatory compliance bills rise by a factor of around 20 per cent over the past half-decade.

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As is pointed out in that feature, those cost increases were driven by a range of factors evolving out of the Future of Financial Advice (FoFA) processes and the scandals surrounding Commonwealth Financial Planning, but then further evolved to encompass the Government’s actions in seeking to avoid calling the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

As we have pointed out in the feature, the following factors have contributed to the regulatory cost burden now needing to be funded.

• The Financial Adviser Standards and Ethics Authority (FASEA)
• The Life Insurance Framework (LIF)
• Industry funding of the Australian Securities and Investment Commission (ASIC)
• The Australian Financial Complaints Authority (AFCA)
• The Bank Executive Accountability Regime (BEAR)
• The Productivity Commission inquiry into Competition in the Australian Financial System
• The Productivity Commission inquiry into Superannuation Competitiveness and Efficiency; and
• ASIC’s product intervention power.

Both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) have consistently reminded the Government and Treasury about the mounting cost of regulation and the inevitability that these costs will be passed through to clients, but there is precious little indication that this has actually resonated with the Government.

Added to the problems being encountered by the industry is that amid the cascade of legislation pouring forth from the Treasury, it is clear there is a danger of unintended consequences and therefore more cost to industry.

Any review of submissions to the Senate Economics Legislation Committee’s review of the Government’s Budget changes to superannuation around low balance accounts and making insurance inside superannuation ‘opt-in’ for those aged under 25 reveals a myriad of costly loose ends which need to be addressed before anything is passed into law.

There exists a real danger that in its anxiety to be seen to be doing something, the Government risks turning bad into worse.