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Regulating for the future: can you prepare for the unknown?

Regulation needs to be constantly reviewed and flexible enough to cope with a fast-changing world, argues Maddocks regulatory expert Dariel DeSousa. DeSousa believes agencies too often regulate for the “here and now”, rather than the future.

“We deal with current political and practical problems, but at the same time we should be thinking about the future and trying to ensure that our regulatory frameworks are capable of responding to the bigger issues that may arise down the track,” she said.

With the myriad of potential social, economic and environmental influences, combined with constant change in technology, industry practices, communications and innovations, it is clear there are challenges to setting deregulation frameworks beyond a current, reactionary approach.

Dariel DeSousa
Dariel DeSousa

Policy departments traditionally set the regulatory policy and regulators administer the rules, but the regulators are typically articulate advocates for changes when given the opportunity.

DeSousa says policymakers need to take into account mega-trends, such as declining resources, Australia’s ageing population and the degradation of natural habitats.

“While the deregulation agenda provides a good opportunity at the Commonwealth level to review legislation and determine the extent to which it is effective at dealing with the problems that the regulatory framework was designed to address, I am not sure whether or not that agenda really encompasses this issue of regulating for the future. There is a heavy emphasis in that context on reducing compliance burden,” she said.

DeSousa says, ideally, this focus needs to shift.

“While this is clearly a time consuming and costly exercise, my view is that regular review of regulatory frameworks, as embedded within regulatory practice, might be a much more effective way of ensuring that the frameworks are capable of dealing with future problems, rather than waiting for a crisis to occur and having to overhaul the whole regulatory framework to respond to that crisis,” she said.

[pullquote] “… you have to go through a cost-benefit analysis, and if the benefits are hypothetical, that equation may not yield positive results.” [/pullquote]

DeSousa says a good example of a regulatory framework that needs to be considered with the future in mind is the approach to storm water.

“Obviously,” she explained, “we are moving into an era where we are much more concerned about our water resources, and our resources more generally … Storm water has been historically dealt with as a pollutant. However, in the context of the major water reform that is underway in Victoria … there are proposals to try and address the past treatment of storm water and give it a new status as a resource rather than a pollutant.

“So assuming the bill [before the Victorian parliament] gets passed, there will be new statutory rights regarding storm water and the water licensing regime will be extended to water contained in local council storm water works … this is a big shift. This involves major regulatory change.”

De Sousa acknowledges it is hard to get a regulation framework designed and legislated for situations that are hypothetical and uncertain.

“When you sign off on a new regulatory package, you have to go through a cost-benefit analysis, and if the benefits are hypothetical, that equation may not yield positive results,” she said. “That is potentially why the emphasis really is on the here and now. ‘Now’ is something that is tangible and it can be measured.”

Signs of change, ‘living’ legislation

There are some areas where regulators are starting to plan ahead, DeSousa explains. A bill before the Victorian parliament regarding critical infrastructure is a good example. It deals with a range of risks to infrastructure, which include terrorism and climate change.

“Because the degree of uncertainty is high as to whether or not these risks will actually eventuate, the model that has been incorporated in the bill is basically a risk management model, where the owners and operators of critical infrastructure annually determine what the risks are to that infrastructure, and how they are responding to it.

“So the proposed model can respond to the context – the risks today may be different to the risks tomorrow – but the model is capable of ensuring that the owners and operators of critical infrastructure take stock of what the risks are at any point in time at which the risk assessment is undertaken, and ensure that the responses are commensurate with the prevailing level of risk.”

Bronwyn Weir
Bronwyn Weir

Bronwyn Weir, Maddocks partner and specialist in regulation law, agrees with DeSousa that regulation must increasingly prepare for the future. Weir thinks there needs to be a “genuine commitment to legislation living and breathing and moving”.

“If you look at things like tax and corporate law — that is constantly reviewed … It is important to have genuine and regular reviews of legislation in place, as it is very hard to account for all the practicalities of an industry that it is to be regulated inthe words of statue. There needs to be feedback loops in place which lead to amendment and enhancement of the statue,” she said.

Weir says some regulatory legislation is constantly under review while other legislation becomes stagnant and unresponsive to changes in the regulated sector.

“I recall one client who said in four or five years as head of statutory authority, there were around 40 amendments to her legislation, and she said how difficult it was to keep up … At the other end of the spectrum I am aware of another regulator who has had very few amendments in 15 years, making the regulatory regime very out of date,” she said.

Like DeSousa, Weir agrees that regulators can be caught in a reactionary cycle, “bogged down by complaints and industry groups or consumer groups that hijack the agenda”.

“They spend all their time trying to manage that noise, and they don’t have time to sit back and take control of what is happening in their sector, and be more strategic,” she said.

“Because of all that noise the amendments can be skewed towards consumer-focused regulation, rather than improving regulation at the front end by asking, ‘how did consumers get in this situation, how can we improve that relationship with consumers, or the effectiveness of the regulated sector so that consumers are not having these problems at the back end of the transaction?'”

This “noise”, Weir suggests, can translate into reform that tries to “remedy consequences” rather than look at causes. Weir believes that regulators who have the space and resources to focus on audits and proactive regulation can have a more effective regulatory impact than those that have an over emphasis on reactive regulatory activities.

“If you have your regulated entities behaving in a more professional way, and being held to account over that, then you are less likely to have the fall out at the back end of the transaction,” she said.

Confidence in new approaches

Looking ahead, Weir has a degree of confidence that all the work being done into approaches to regulation agendas will culminate in better practice.

“The initiatives from government are to be commended,” she said. “The guidance material is helpful, but it is a fairly high level, and the regulators will need to be able to make the jump to actually ‘doing’ what the guidance material provides for.”

Weir also thinks a key to better future regulation is having a system of “regulating the regulators” which is clear, effective and measurable.

“There is some good work being done in Victoria in acknowledging that regulation is a skill that requires certain expertise,” she said. “There has been a real lack of identification in the skills of a regulator as a vocation. This work will hopefully lead to more specialised training and skill development for those working as regulators.”

To see continual improvement, Weir says the emphasis must be on visibility between government departments.

[pullquote] “I do think the standards of regulation are improving and moving in the right direction and I am quite optimistic about that.” [/pullquote]

“I’ve seen over the past few years communities of practice created, with government departments interested in each other and what the community of regulators are doing. I do think the standards of regulation are improving and moving in the right direction and I am quite optimistic about that.

“Conversations will lead to change, but there is still a question about how quickly and how well regulators implement the guidelines for better regulation.”

DeSousa also has optimism, and thinks that some standardisation could be useful. “I’ve looked at lots of different regulatory frameworks and you start to see patterns emerging,” she said.

“One thing that weighs on my mind is whether the diversity in regulatory frameworks that we see in practice is really necessary. Do we really need to have a very specific tailored regime for every issue that crops up that warrants a regulatory response?

“Obviously there are issues that require specificity and particularities, but I wonder if we should be taking a step back and asking ourselves if there is a standard suite of tools, decision-making paradigms, etc, that could be applied in different contexts, and of course complemented with tailored elements to suit the particular context?”

She says at the Commonwealth level, a bill has been recently passed to standardise compliance and enforcement powers (the Regulatory Powers (Standard Provisions) Bill 2014). DeSousa explains that such standardisation provides a certain degree of predictability and consistency in terms of what you can expect from different regulators, regardless of the context in which they are operating.

Written by Melinda Oliver

More at The Mandarin: The conundrum between deregulation and risk: expert insights

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