Redefining regulators: cutting red tape and risk management

By Stephen Easton

Thursday November 6, 2014

Amid the federal government’s efforts to make obeying regulations easier on businesses, the role of the regulators is being redefined through the shift to a risk-based approach and a performance framework that demands a progressively lighter touch.

In the new framework, which takes effect at the start of next financial year following a six-month transition process, strictly maintaining compliance comes second to keeping costs to business at a minimum. It makes cutting red tape an ongoing task for regulators, which must keep looking for new ways to lighten the load, particularly based on feedback received through “co-operative and collaborative relationships” with the businesses they oversee.

The government wants more industry self-regulation, and efforts to monitor and ensure compliance — like inspections and information requests — are to be minimised. At the same time, regulators must be more transparent about how they work. The framework notes concerns that being more open could make it easier to game the system, but states resolutely that in the new light-touch approach “risk-based frameworks are made public unless it can be clearly demonstrated this would lead to a failure of the regulatory system”.

But decisions inevitably need to be made “on a case-by-case basis”, as Tony Abbott’s red-tape lieutenant Josh Frydenberg repeatedly told a group of public servants who got the chance to question him at a recent public sector forum on better regulation. As always, “it’s about getting the balance right”.

“… we, as the public service and as the government, don’t want the default position to be a big tick for new regulation.”

The Prime Minister’s parliamentary secretary kept going back to these well-worn truisms as he faced a few curly questions, including one from a Department of the Environment staff member who informed Frydenberg that, in her area, “a number of industry stakeholders” actually wanted to see more regulation.

He conceded that in some cases more regulation is the answer, but chose a more convenient example than federal environmental regulation, which the Coalition is trying to roll back through bilateral “one-stop shop” agreements with the states and territories, and finding the legislation to enable this blocked in the Senate. Instead he looked to the financial sector.

“Trying to stop money laundering has led to increases in regulation for our banking sector … but the point I want to get across is we, as the public service and as the government, don’t want the default position to be a big tick for new regulation,” said Frydenberg.

In the case of requiring internet providers to store metadata on customers for two years, the additional cost was justified by a heightened security risk, he said later.

The risks of a risk-based approach

Just like legislators, regulators have to make decisions on a case-by-case basis. The new framework insists they take action that is “proportionate to the risk being managed”, which promotes efficiency by focusing resources on areas where the risk of non-compliance is highest, and the consequences most severe.

Regulation and administrative law consultant Dariel De Sousa from Maddocks Lawyers sees a tension between a risk-based approach and the aim to cut red tape. “They actually pull in different directions and dictate different outcomes,” she told The Mandarin. De Sousa suggests regulation is already broadly risk-based, explaining that most of the compliance burden the government wants to reduce is already found in “high-risk” areas.

According to De Sousa, the framework’s encouragement of both deregulation and a risk-based approach means “the tension between the two needs to be acknowledged, recognised and, potentially, reconciled”: “I think the most important thing to do is to recognise that deregulation and risk-based approaches to regulation don’t strive to do the same thing.”

At the forum, the chair of the Clean Energy Regulator, Chloe Munro, told Frydenberg that the organisation had taken a risk-based approach all along, but said it was not clear whether or not the government’s own “risk appetite” had increased, saying she felt it has avoided explicitly telling the public service whether it accepted more risk in return for boosting productivity.

“It seems to me that the events that could cause risk aversion are still there potentially,” she said. “Can the government be more overt in expressing its own risk appetite and provide more transparent guidance to the public service about where the tolerances actually are?”

Frydenberg suggested looking at the government’s deregulatory actions: “If you talk about our risk aversion, or our position on some of these issues — the one-stop shops [for environmental approvals], the fact that we’ve made some significant amendments to the Future of Financial Advice [legislation] — these are obviously controversial in some quarters but we’re making clear where we want to put the priority … on a more streamlined process which takes into account the impact of costs on stakeholders and ultimately the community.”

Frydenberg credited Gary Banks, the former Productivity Commission chair (and Mandarin editorial board member) who now leads the Australia and New Zealand School of Government, for influencing his views that perverse incentives exist for public servants.

“The incentive for a public servant, or a politician, is to ensure we don’t have a scandal on our watch, so we have therefore moved to more and more regulation without understanding what the impacts are,” he said.

Speaking later at the same event, after Frydenberg had left, Australian Pesticides and Veterinary Medicines Authority CEO Kareena Arthy observed that “setting a consistent risk appetite is actually quite difficult” in a federation: “How much risk does the community really want us to take? Regulation only works until something goes wrong, and particularly something with chemicals when you’ve got human health and environmental health at stake, how far do you really want us to deregulate?”

Later, Arthy contended that, in her experience, managing risk in government includes managing public outrage. “So it depends on how big the public outrage is, as to what your risk appetite really is,” she said. “The bigger the public outrage, the more conservative you get.”

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David Briggs
David Briggs
7 years ago

I agree with Chloe Munro and Kareena Arthy. It’s no trivial matter to establish Governments risk appetite, and consequently operationalising a ‘risk based’ approach is not easy. Rather than trying to complicate regulation with a new and ambiguous metric, why not simply adopt a disciplined and forensic approach to establishing the likely costs and benefits of regulation that takes into account all the complexities of risk/probability weightings of possible outcomes, behavioural problems that beset regulation, and a careful appraisal of the alleged market failure. As we have seen recently with innovations like Uber, market failure in the firm of information asymmetry can be largely overcome via information sharing.

It’s certainly true that regulation tends to become entrenched and enlarges with time, so a push for deregulation is desirable, but don’t try to sex the task up…. Application of some good public policy principle is what is necessary, not trying to unravel the entrails of Tony Abbotts brain to understand his risk appetite

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