FoFA Fearmongering A Blow To Deregulation

Never has so little been met with so much panic.

Alan Kohler has described the Abbott Government’s amendments to Labor’s Future of Financial Advice (known as FoFA) reforms as unseemly, suspicious and like blessing union corruption. Bernard Keane believes the Government’s plans are “a big blow to consumers’ rights”. Ian Verrender, at The Drum, says the changes will be “enormous”.

The Abbott Government intends to cut regulation across the board. But the hysteria about these FoFA amendments demonstrates how hard it is to get even minor deregulation done.

The original FoFA reforms were in response to a corporate collapse: that of Storm Financial and Opes Prime in October 2008, at the beginning of the Global Financial Crisis.

In 2010 the Labor government introduced a huge package of new regulations, new powers for regulators, and new obligations on firms that offer financial advice.

For our purposes, the key ones were a ban on financial advisors earning commissions from recommending investment products, and another one that required financial advisors to act in the “best interest” of their clients. The bulk of FoFA came into effect in 2012.

Now in 2014 it’s being amended.

That’s amended, not repealed. A casual reading of the press would suggest that Arthur Sinodinos, the Assistant Treasurer, plans to rip away every vestige of FoFA.

Instead, the Government intends to distinguish the regulation of personal financial advice – that given by an advisor who works closely with you, understands your specific goals and needs – from the regulation of “general” advice – that given over a bank counter, over the phone, or through promotions, investor newsletters, or advertisements.

For personal advice, everything important in Labor’s FoFA remains. Commission-driven advice is still banned. Advisors still have to act in their clients’ best interests.

The first controversial change is that the best interest rule is being modified to remove an ambiguous and all-encompassing “catch-all” provision.

There are nearly a dozen criteria that are used to determine if an advisor is acting in the best interest of their client. Things like: does the client understand the product? Is the advisor qualified to give the advice? These remain.

The catch-all provision (Section 961B(2(G)) of the Corporations Act if you’re playing along) is basically a “anything we haven’t thought of” step. It’s absurdly broad.

How – without scrutinising everything about a client’s life and finances, scrutiny which would cost thousands of dollars – could you be sure you knew absolutely everything a court might decide constituted the client’s best interests?

Would you want to give financial advice under that sort of legal uncertainty?

Simply put, FoFA’s best interest, know-your-client rule is massively, dangerously overwritten. The Government wants to slightly relax it. Not remove it.

The second change concerns general advice. This covers things like bank tellers making recommendations about travel insurance. Here, commissions, now banned, are to be made lawful once more. Sounds terrible? Hardly.

Commissions are a completely legitimate form of employee remuneration. FoFA describes commissions as “conflicted remuneration”. This is nonsense. A commission, in practice, is not so different from a sales target, or (for higher paid professions) a key performance indicator, or (for higher paid again) an annual bonus. It’s just a different way to slice the salary pie.

If you go into a bank and ask for recommendations about financial products, you ought to expect that they will try to sell you one of their products. Just like if you ask a Telstra store employee what mobile phone plan they recommend they’re probably going to recommend a Telstra plan. Regardless of whether they’re being paid a commission.

Banning commissions in these circumstances achieves no policy goal. Remember, all advisors, including general advisors, are still required to work in their clients’ best interests. Removing the ban on commissions just cleans up a little regulatory ludicrousness.

Perhaps you disagree with the Coalition’s FoFA changes.

But it is true that Labor’s original FoFA remains – in letter and spirit. It is not being gutted. The Coalition’s changes are not radical. They do not deserve the extreme hyperbole they have received.

More fundamentally, it is not the Government’s responsibility to restore the reputation of an industry.

Voluntary industry charters or private ratings agencies are common solutions to the reputation problem. Personal financial advisors had been reducing their reliance on commissions in the years before the FoFA reforms.

Regulation suppresses innovation, raises consumer prices, ties the sector down in compliance costs, and opens up opportunities for rent-seeking.

Indeed, rent-seeking is the real story of the FoFA reforms.

The battle here is between the super funds and the banks. Australia’s superannuation system has created a titanic financial industry based entirely on the compulsory acquisition of a portion of our salary. Super funds – particularly the union-managed industry super funds – lobbied hard for a crackdown on avenues of financial advice outside the superannuation system. With FoFA they got it.

Industry Super Australia is now predicting these minor FoFA adjustments will bring a wave of financial collapses. Sure they will. Storm Financial did not collapse because bank tellers were selling travel insurance on commission.

Where commentators fall on these changes is usually determined by their pre-existing attitudes towards the super funds and the banks.

Most of the debate has been a loose proxy for bigger questions about Australia’s financial system.

But minor tinkering of FoFA isn’t much to hang these questions on.

The backlash against the Government’s plans demonstrates just how hard deregulation really is – held back by a mire of special interests and an unfortunate natural human tendency for doomsaying and fearmongering.

Everyone Promises Less Red Tape, But Very Few Succeed

It pays to be sceptical about the promises of oppositions.

Kevin Rudd said he would take a “meat-axe” to the bloated public service, and that the reckless spending would stop. In his 1996 campaign, John Howard promised to halve the regulation that was “enveloping small business” during his first three years of government.

Now Tony Abbott says his government will reduce “red tape” too.

Labor partisans like to bang on about whether the Coalition’s policies are “fully costed”. This is a traditional election ploy. Oppositions can’t win that game. They don’t have the policy development resources enjoyed by the incumbents, and errors can be devastating.

So more interesting are the big, bold statements about chopping down the bloated public service and reducing red tape. They’re obviously appealing. Who could support bloated bureaucracies? Who likes red tape? But they’re always light on specifics. And, in government, they’re never achieved.

It is these sorts of promises that oppositions need to be questioned about.

This is Tony Abbott’s exact promise, which appears in the Coalition’s November 2012 Deregulation Reform Discussion Paper:

The Coalition will reduce the regulatory and red tape burden for individuals, businesses and society as a whole by at least $1 billion a year.

That one billion dollar number is nonsense. (But the “at least” is a nice touch.)

There’s a rich academic literature on estimating the costs of regulation. The upshot? It’s very, very hard. And, more importantly, any estimate will be very, very debatable.

Part of the reason is that regulation imposes two different “costs”.

There’s the paper-burden cost – that is, the time spent filling out government forms, or the money spent on lawyers to make sure you’re compliant with the regulations, or the direct cost of license and application fees. This is usually what people mean when they talk about red tape.

But more significant are the costs imposed on the regulations themselves – that is, what the regulations are actually designed to do. The firms that aren’t started. The projects which never happen. The business decisions for regulatory compliance reasons rather than the efficient production of goods and services.

Paper-burden costs aren’t easy to estimate, but we have some strategies. We can survey managers about how long they spend on regulatory compliance, for instance. The answer will be wishy-washy and inexact, but at least it’s something.

Calculating the second types of costs is much more problematic. Businesses have many reasons they delay or cancel projects. Tony Abbott discovered this when he tried to blame BHP’s decision to shelve its Olympic Dam project on the carbon tax. Regulations are often a factor in cancelled projects, but try putting a dollar figure on it.

Ultimately, the Coalition’s one billion dollar promise is an illusion. It’s just a big, magical round number. There will be no way for voters to see whether they have achieved the promise or not.

Still, if our political parties want to reduce the regulatory burden, then they’ll need to do something.

The Coalition’s discussion paper offers up a few ideas. It proposes a couple of new bureaucratic requirements – cabinet submissions for new policies will have to include regulatory impact statements, for instance – and a system of audits and reviews. (Hopefully they recall John Howard’s regulation taskforce, which did as much good for deregulation as a wet sock.) The most interesting idea is two dedicated parliamentary sitting days every year for repealing existing legislation.

These clever little ideas miss the broader issue.

The greatest success at reducing regulation in recent history occurred in the Netherlands last decade. In 2003, a new Dutch Coalition government set itself 25 per cent reduction target in the paper-burden costs of regulation. Using a model of regulatory costs that they developed specially for the task, the Netherlands achieved that goal in 2007. (Here’s an OECD overview of the Dutch program.)

They did this in a number of ways, including setting up two new bureaucratic institutions – one inside the Ministry of Economic Affairs, and an independent advisory watchdog.

But most of all, the success of the Dutch experiment was driven by overwhelming political and institutional support from the Prime Minister on down. Regulatory reduction wasn’t just a throwaway election promise. It was a sustained, aggressive, and universal program. It had to be: the political backbone needed to be stronger than government’s natural inclination for increased regulation.

It’s trivially easy for politicians, especially in opposition, to talk in big broad strokes. There is too much regulation, in general. We’re spending too much, in general. There are too many public servants, in general.

But when it comes to actually reducing those unwanted things, it gets complicated very quickly. Particularly when a minister is confronted with specific, individual regulations, whose effectiveness is usually unknown, whose cost is debatable, and upon whom layers of special interests have come to rely.

If Tony Abbott’s Coalition government isn’t single-mindedly, obsessively, neurotically dedicated to lighting a regulatory bonfire, it simply won’t happen.

Micromanagement In The Regulatory State

Another year, another 6,369 pages of law. Spread over 150 acts, that was the Commonwealth’s total new legislation in 2010.
Not a bad effort considering their usual legislative binge was interrupted by an election.
The received wisdom about Australia’s political and economic history over the last few decades is wrong.
Think we’ve been living in an era of deregulation? In an era of small, timid, “neo-liberal” government?
The data suggests otherwise.
The Australian Government has been massively, overwhelmingly, and comprehensively expanding its intervention into all aspects of the economy.
Compare 2010’s 6,369 pages to the 1980s, when the parliament only passed around 2,000 pages of law every year. Twenty years before that parliament would pass even less: just 500.
The first few Commonwealth parliaments were lucky to pass more than 100 pages a year. In 1907 the Governor-General ticked off on a paltry 17 pages of new law.
It took just a few hundred pages of legislation to set up the Commonwealth. But 110 years later it apparently takes more than 6,000 new pages to just keep it running.
Admittedly, these figures come with a lot of caveats. In 2010, Australians didn’t have to obey 150 more laws: some legislation is passed to alter or repeal existing legislation. Not all of it, by any means, but some.
And the figures don’t factor in the immense volumes of statutory legislation implemented by the Commonwealth last year, usually hovering around 2,500 to 3,000 pages. Or the pages of legislation passed by state governments, which varies between 1,000 and 4,000 depending where you live. The states implement statutory legislation too.
Yet with all its caveats, looking at the number of pages of law passed each year illustrates two things.
First: the more laws a government passes, the busier it is. We have increasingly busy governments. Australia’s legal and regulatory system is being continuously shuffled around. Continuous change has its consequences. To take one of the more prominent examples, in the last few years businesses have had to get up to speed with niceties of Workplace Agreements, then the complexities of WorkChoices, and now the nuances of Fair Work.
Second: the regulatory framework which governs the economy is increasingly complex. Longer laws are more complex laws. The WorkChoices act was 762 pages. The Fair Work act was 651. People (not just lawyers) have to read and understand those tomes.
Regulation spawns more regulation. Not all regulation works to achieve its goals, so regulators and politicians just pile more and more rules on top. And a great deal of regulation is imposed just for its symbolic benefit – the need to “do something” in response to public demand. The OECD calls all this “regulatory inflation”.
Condemning the “volume and complexity of federal laws”, the Chief Justice of the Federal Court of Australia Patrick Keane told the Australian Financial Review Friday that “opening the tax act is like entering the door to a parallel universe”.
This growth in government control over the economy is hard to reconcile with Kevin Rudd’s view that a “particular brand of free-market fundamentalism, extreme capitalism and excessive greed” has dominated the last decades.
Take the now-orthodox view the global financial crisis was caused by a lack of regulation. This view seems to ignore the abundance of regulation governing the banking and finance sector in the United States, and, indeed, globally.
Certainly, in the aftermath of the crisis, a batch of new international banking regulations have been implemented, most notably the Basel III accords. But rarely is it pointed out there was a Basel I and a Basel II. Each were substantial regulatory frameworks themselves.
Indeed, the perverse incentives created by Basel II’s capital requirements (which encouraged banks to hoard AAA-rated mortgage backed securities) were one of the major causes of the crisis in the first place.
Other regulations administered by the American Securities and Exchange Commission protected the private ratings agencies – which granted the AAA grades – from competition. It gets worse. Jeffrey Friedman convincingly argued in Cato Policy Journal last year that not even the SEC knew about this latter regulation, which it itself had imposed in 1975.
If there are too many regulations for even the regulators to keep track, then our problem isn’t too little regulation.
The expansion of regulation is a bipartisan project. The Howard government was just as enthusiastic about regulating as the Rudd and Gillard Government has been.
With 6,369 pages of legislation, 2010 was unfortunately an unexceptional year.
So it’s time we recognised our political system for what it is. It’s not neoliberal. Nor is it social democratic. Australia is a regulatory state – one in which three levels of government have wrapped society with a complex and confused mesh of rules and laws which micromanage everything we do.

The Impact and Cost of Health Sector Regulation

With Mikayla Novak and Tim Wilson

Executive Summary

  • The demands on Australia’s health care sector will increase considerably as the Australian population ages.
  • The regulatory burden on health care professionals is increasing and is coming at the expense of fulfilling their primary purpose of providing health care services.
  • Health care providers may be required to liaise with up to 100 health care regulators with nearly 80 commonwealth regulators and between 15 and 20 in each state.
  • There are now more than 22,600 pages of combined state and federal legislation across 305 different Acts of Parliament covering the health sector.
  • There are unnecessary disparities in regulation for health care providers between States which cause confusion and increase the barriers to establishing new health care facilities.
  • The cost of regulation is rising rapidly. For example, the estimated compliance burden on general practice for enhanced primary care has grown by nearly 900 per cent between 2002-02 and 2007-08.
  • General Practitioners are becoming the interface for approval for Australians to access other government services such as welfare and support services draining their time to provide health care.
  • Licensing arrangements for different health care facilities from state to state add confusion to the capacity for new and existing health care providers to operate across the country.
  • The pharmaceuticals industry is one of the most heavily regulated industries in Australia and faces annual costs of at least $89 million to receive regulatory approval for sale. Much of this cost is duplicating work to seek regulatory approval already commenced or resolved overseas.
  • The average time frame for regulatory approval for a new medicine can be as high as 160 days resulting in the slower introduction of life saving or extending medicines.
  • The most effective way to decrease private health insurance premiums is not government regulation, but competition in health insurance products.
    Australia’s health care needs significant regulatory reform to ensure it can deliver the services expected of it with an ageing population.

Available in PDF here.

Regulation And The Regulatory Burden

 

IN MANY AREAS of government policy, the fingerprints of the prime minister are clearly visible. When we consider the highest-profile issues of the John Howard years-foreign policy, immigration, federalism and the culture wars, just to name a few-the influence of senior Coalition ministers on the government’s policies are obvious.

However, this is not necessarily the case when we look at regulation, changes in the regulatory burden, or developments in the structure of economic management. Certainly, individual regulatory reforms can be identified and attributed to individual policy actors. The Howard government oversaw a vast array of regulatory changes, as well as the extensive inquiries and reports which accompany them.

But it is less interesting to debate who initiated what regulatory inquiry than to step back from the policy minutiae and consider how the federal government interacts with the economy, and how it has changed over the last decade.

This approach allows us to properly attribute blame or credit where it is due. After all, assessing the Howard government’s record in the field of regulation poses slightly counter-intuitive challenges. For instance, we have to decide how much influence we are willing to grant the government over the operation of its own bureaucracy. We have to ask how inevitable regulatory increases are and how much the pattern of regulatory growth is a function of the historical circumstances faced by individual governments.

LIBERALISATION and privatisation have been a feature of almost all Western democracies since the early 1980s. Australia’s reform movement had been one of the more ambitious projects around the world, joining the United Kingdom and New Zealand as the most extensive. By 1996, the Australian state which John Howard inherited had undergone more than a decade of nearly continuous economic reform.

The contemporary Australian state is a radically different beast from Australia’s mid-century welfare state. W.K. Hancock’s “vast public utility” is no more, having shed its own vast state enterprises. State and Commonwealth governments have systematically privatised a list of small and large scale enterprises traditionally operated by government – banks, airports, telecommunications and energy utilities, laboratories, even radio stations. Labour market reform, in a general direction of liberalisation, has been a recurrent feature of the last two decades.

In Australia, to the extent that this ambitious program of liberalisation and privatisation has been carried out, it has been largely successful in reversing the slow economic decline of the second half of the twentieth century. But contrary to the belief held by many on both the left and right of the political spectrum, this dramatic change in systems of political economy has not been as didactic as a shift from the welfare state to a liberal – or “neo-liberal” – model of the political economy. Leviathan has certainly not faded away-instead, amongst the reforms, liberalisations and privatisations of the last few decades, government has increased its expenditure and taxation.

But for our purposes, the most striking attribute of the last few decades is how Australian governments have matched privatisations and liberalisations with regulatory expansion, rather than retreat. Governments have shifted away from the direct provision of services, to the regulation of those services.

When public utilities have been sold to the private sector, they have been placed under the jurisdiction of specialised statutory authorities whose role it is to direct and regulate those industries for public, rather than private, purposes. Often these measures have been matched by the development of regulatory mechanisms designed to introduce competition into industries where the cost of entry is seen to be prohibitively high – the mandatory third-party access provisions of the Trade Practices Act and allied legislation allow firms to access the infrastructure of their competitor. Part of the reason that newly privatised enterprises have been highly regulated is the political controversy which accompanies privatisations. When supporters of public ownership complain that the “social benefits” of public ownership are not possible in the private sector, governments respond by forcing those benefits by regulatory design. Retail price controls in telecommunications, which have limited pricing flexibility, are an example of how this occurs.

The old protectionist or “infant industry” legal structures which applied to specific sectors of the economy, such as monopoly marketing boards and government cartelisation, have now yielded to economy-wide competition regulation. Indeed, competition regulation has developed into its modem form parallel to the reform period.

A great deal of the growth in regulation under the modern regulatory state is social, rather than economic. Environmental regulation has a long history – Solon the Great proposed in the sixth century that Greek agriculture be banned from steep slopes to prevent soil erosion – but its marked rise from the early 1970s was encouraged by the 1972 Stockholm Conference on the Human Environment. This resulted in the establishment of national environmental agencies in many developed nations, including Australia. During the Howard years, environmental regulation was an area of particular growth, despite the solemn pronouncements of the Coalition’s green critics. The Natural Heritage Trust, the Australian Greenhouse Office and the Environmental Protection and Biodiversity Conservation Act all represent significant increases in government intervention for environmental purposes. Consumer product safety, particularly in the transport sector, and occupational health and safety regulations have also seen significant increases.

Financial regulation has followed an uneven path, but here too recent decades have seen significant regulatory expansion. The “four revolutions” of financial deregulation in the early I980s-the end of official control of the exchange rate, and of exchange control over capital flows, the entry of foreign banks, and interest rate deregulation-precipitated the broader reform movement in Australia, and resulted in far greater Australian participation in global financial markets. Certainly, these reforms rapidly changed Australia’s banking sector from one of the most regulated in the world to one of the least. But this deregulation was closely followed by an increase in financial and securities regulation after a number of corporate failures, loans crises and much public criticism of the perceived excesses of the “corporate cowboys” of the time.

In the late 1990s, the Wallis Inquiry into the financial system increased the regulatory burden across many sectors, and a number of prominent corporate collapses in the first years of the twenty-first century provided the impetus for more again. Furthermore, participation in global financial markets has been accompanied by participation in global regulatory regimes, such as the GIO’s Basel II Framework.

It is perhaps not too much of a stretch to say that, at least for those industries which before the reform period were relatively free of government intervention, many of the developments under the aegis of the regulatory state consist of an encroachment of government into the private sphere, rather than the other way around. Writing about the parallel developments in the United Kingdom in regulation and privatisation, the regulatory analyst Michael Moran has characterised the last two decades as a period of “hyper-innovation”. This characterisation is just as apt for Australia. The institutional certainty of Australia’s mid-twentieth-century political economy has been replaced by a continuous process of regulatory and legislative reform.

As we could expect, this remarkable increase in government regulation has had a significant impact on the efficiency of the Australian economy and general levels of prosperity. However, the focus on the economic and social impact of regulation masks its full significance: there has been a fundamental shift in the relationship between government and society; in the mechanisms by which policy is conducted; and the institutions where political power resides. As we shall see, during the Howard era regulatory agencies expanded and consolidated to match this enormous regulatory growth. The power these independent agencies have over the Australian economy warrants their considerable scrutiny; and to a large degree their growth is attributable to economic reforms under the Howard government.

Indeed, this is the central story of regulation under the Coalition.

THE COALITION GOVERNMENT may not have initiated the growth of the regulatory state, but the period in which it governed saw the largest regulatory expansion in history. For our purposes, regulation is the attempt to define the boundaries of economic activity for economic, social or environmental reasons. Regulation is designed to modify or limit economic behaviour, but not to outlaw it. It can be produced by explicit legislation, by subordinate legislation, by a wide variety of class orders, instruments, codes of conduct or guidelines. Where the government restricts economic or social activity, regulation can be found.

Legislation is wider in scope and content than regulation, but it can serve as a useful proxy. The growth in Commonwealth legislation since Federation, measured by the number of pages of Acts of Parliament passed per year, clearly illustrates a dramatic increase in legislative activity over the past few decades. For instance, if we mark the year 1980 as the beginning of the reform period in Australia, through to 2006, there was more than five times the number of pages of legislation passed than there had been in the eight decades before this period.

It is striking how little legislative activity was required at the time of Federation to unify the country – 358 pages, spread over two years – compared with how much it took to manage the Commonwealth in 2006 – a massive 6786 pages. Certainly, the changing nature of Australia’s federal structure has expanded the jurisdiction of the Commonwealth legislature, but there have been similar increases in state legislative activity – not decreases, as would be expected if there had simply been a shift in responsibility from the states to the federal government. Indeed, state legislation has been marked by significant growth.

And what data is available indicates that subordinate legislation-which is commonly described as “regulation”-is growing at a similar pace as legislation. Subordinate legislation in the Commonwealth and the states parallels the increase in total legislation over the last four decades. Changes in government have little effect on the relative increase in legislative activity. As a consequence, John Howard’s government was the highest legislating government in Australia’s history. Based on his performance so far, it is not hard to guess that Kevin Rudd’s government might be even more active.

A similar analysis is possible by looking at the data on regulation: the Howard government oversaw the largest regulatory expansion since Federation. Certainly, simply counting the pages of regulation and legislation is a highly imperfect method of assessing total regulatory burden, but in the absence of a superior alternative it has been widely recognised as the most effective. Other factors can increase the number of pages without increasing the regulatory burden. For instance, one potential cause of the increase in pages of legislation is the move during the 1980s to plain English drafting-as opposed to the traditional legislative language inherited from England in the nineteenth century-as well as the use of double-spacing. Formatting changes can also alter the words-to-page ratio.

Nevertheless, there is little to suggest that the plain English drafting reform or formatting changes are the sole, or even primary, cause of increasing pages of legislation – page increases both preceded these changes and continued after they had filtered through the various tiers of government. Technical changes in the manner in which legislation is drafted cannot explain modem legislative and regulatory excess.

For the firms and individuals affected by regulatory and legislative increases, the impact is cumulative. Individuals not only have to act in accordance with the legislation and subordinate legislation passed in any given year-they also have to contend with the entire body of law as amended. Some of this legislation and regulation replaces existent law; but it is clear that it is growing – if not at the same heady pace that legislation and regulation in general is being passed.

And anecdotal evidence supports the empirical evidence for the growth in regulation. The 2006 taskforce on Reducing the Regulatory Burden on Business noted that a particularly striking example of the level of regulation was the 24,000 different types of licences administered by three levels of government. Telstra notes that the amount of regulatory instruments applicable to its business has grown since 1997 from twenty to 348, and that the number of reports required by the Australian Competition and Consumer Commission has been increasing by two or three per year. This is particularly striking because the regulatory framework governing telecommunications has been relatively stable during that time.

MUCH OF THE INCREASED regulatory burden is not sector-specific, but is related to workplace law. The Australian Construction Industry Forum has argued that the Howard government’s changes to industrial relations and changes to state and federal occupational health and safety law are a significant addition to the regulation facing their industry, as well as taxation changes. Indeed, the Income Tax Assessment Act, often used as a barometer of legislative and regulatory growth, has grown from 120 pages in 1936 to a bookshelf-crushing 7000 pages.

The Insurance Council of Australia attempted to describe the level of regulation affecting its industry by noting its effects on business structure and practice. Regulatory compliance now compromises between 10 and 25 per cent of board and senior management workload. One large insurer estimated a much higher work load, at least 40 per cent of senior executive time, and up to 60 per cent of board time. One small insurer estimated that this had grown five times above the amount five years ago, and ten times over the last decade. Another insurer estimated that compliance expenses as a percentage of operating income had more than doubled in the last five years. Another estimated that the staff numbers in regulatory compliance committees had grown 20 to 30 per cent in the two years up to 2005. A PricewaterhouseCoopers analyst has noted that for the insurance industry over the last five years the cost of complying with the prudential regulatory framework has increased significantly.

The Credit Union Industry Association notes that the burden on both their credit union membership and other banks and building societies has increased since the Wallis Inquiry in 1997, and attributes this to the mandatory implementation of Basel II, recent financial services reforms, changes to prudential standards, and the adoption of international accounting standards. A practical example of this increase is provided by the Business Council of Australia: a total of 227 pages of documentation needs to be given to a customer before they can open a simple cheque account with an overdraft limit and a home loan, roughly five times the amount in 1985. The Australian Bankers Association reports that one bank has doubled its annual compliance expenditure levels every five years since 1994-95, with a similar growth in staff dedicated to regulatory compliance.

There has been little quantification of the extent of local government regulatory activity, but, there are indications that it is increasing. The Australian Chamber of Commerce and Industry writes that there was a marked upswing of local government regulation as a constraint to investment between 2003 and 2005.

MANY ANECDOTAL IMPRESSIONS of the regulatory burden understate the economic impact of regulation by focusing inordinately on-the paper-burden cost rather than the total regulatory cost. The paper-burden cost includes the cost of employees dedicated to regulatory compliance, and external legal, economic and financial consultants, and they typically constitute one-third of the total cost of regulation.

Thus, the contemporary political focus on “red tape” presents the problem of over-regulation in a narrow light. The structure of regulation is so central to the business models and profitability of some’ firms that regulatory governance and compliance is an “all-of-firm” question. For these firms, it is not necessarily possible to separate regulatory compliance costs from business costs. The anecdotal estimates above, which focus predominantly on easily measured paper-burden costs, are, for many industries, likely to be dramatic underestimations.

The full cost of regulation is much greater than the visible cost of compliance. Certainly, the distribution of costs caused by regulation varies by industry. In the food sector, the primary cost of regulation is a paperburden cost. But for much of the economy, the paperburden cost is dwarfed by the restrictions imposed by the regulations. For instance, the “chilling’ effect” of access regulation dwarfs the paper-burden cost of those regulations by holding back infrastructure investment.

As Gary Banks has argued, “regulations not only create paperwork, they can distort decisions about inputs, stifle entrepreneurship and innovation, divert managers from their core business, prolong decisionmaking and reduce flexibility”. These effects are, on average, far more significant than the red tape which is required by regulators to assess compliance. Focusing only on paper-burden costs is like focusing on the time spent filling out a tax return rather than the amount of tax paid. Political platitudes to lower the red-tape burden offer little promise if they are not part of a general push to decrease overall regulatory intervention in the economy. And like its predecessor, this is a point that seems unfortunately lost on the new Labor government.

Firms now operate in a much more uncertain regulatory environment than before the reform period. This is particularly concerning because investment decisions are contingent not only on the regulatory environment in which they are made, but also on an estimate of the regulatory environment of the future. If that future environment is plagued by uncertainty – investors do not know what “reform” their industry can look forward to in the future – it will be factored into the decision to invest or not.

Firms can delay investments and, through political activity, try to influence future regulatory frameworks in which that investment might be more profitable. Where investments are irreversible, investors face two options: invest now, or defer investment until the uncertainty is resolved.

This is not merely a consequence of uncertainty about what actions legislators may take in the future – it can also be because of uncertainty about the actions of regulators. For instance, ambiguous statements about the manner in which, or extent to which, regulations will be applied can exacerbate this uncertainty.

A 2001 study into the relationship between American anti-trust law and investment found strong links between levels of regulatory uncertainty and lower levels of investment-the much-cited measures of “business confidence” may be partly proxies for regulatory certainty. A local example was recently given by the CEO of Pipe Networks, a telecommunications backhaul provider, when he argued in April 2007 that regulatory uncertainty in the telecommunications industry meant that investment in backhaul had been, at least for the moment, effectively shut down. Indeed, many submissions to the Howard government’s Taskforce on Reducing the Regulatory Burden on Business cited uncertainty about future regulations-and uncertainty about how recently-imposed laws and regulations would be interpreted by the judiciary as a major impediment to business operation.

Political regimes which have broad uncertainty about potential government intervention across the economy experience concrete effects. And uncertainty scales with dramatic effect. The historian Robert Higgs has found that “regime uncertainty” – of which uncertainty about possible future regulatory decisions was a key part – was the major factor in prolonging the Great Depression in the USA. The anti-business rhetoric of President Roosevelt and his supporters concerned investors enough to withhold investment, even when the actual investment climate was not particularly punitive.

Regulatory hyper-innovation, regardless of the character or nature of the regulatory change, can, in and of itself, discourage productive activity. Recognition of this effect should compel caution before pursuing continuous rapid economic reform-particularly if the economic reform in question is of a reregulatory rather than deregulatory nature. Regulatory uncertainty in economy-wide areas like corporate governance has the potential to massively disrupt economic growth. The effect of uncertainty on economic activity is even more concerning when the nature of what is considered proper compliance to those regulations is vague.

THE HOWARD YEARS also saw major expansion in regulatory agencies. This trend is a reflection of the regulatory increase, but it is also a significant change in the structure of government and economic management, indicative of a rise of a sector of government that is both independent and non-democratic. One of the biggest, and yet least appreciated changes to government under the Coalition has been the elevation of regulatory agencies to the centre of the political and economic system. With their new-found role, they have found themselves in possession of a significant amount of political power relative to the executive and legislative branches of government. If we are to understand the Howard government’s performance in the regulatory sphere, we have to look at how institutional and legislative reforms have changed the power structure and activities of these regulatory agencies.

There are approximately sixty Commonwealth regulators and national standard-setting bodies. There are a further forty federal ministerial councils setting and administering regulations. While hard to estimate, the federal regulatory agencies employ over 34,000 people, with a combined budget of well over $4.5 billion.

The Victorian Competition and Efficiency Commission identified sixty-nine regulatory bodies in that state, with a combined budget (excluding the Metropolitan Fire Brigade, Country Fire Authority and Parks Victoria) of over one billion, and a staff of 6895. The Productivity Commission extrapolates these figures to come up with an estimation of 600 regulatory agencies across the country. Taking into account government departments with regulatory functions, ministerial councils, inter-governmental bodies, and the range of quasi-official agencies and boards, it is easy to imagine that at the end of the Howard years, at least $10 billion was spent annually on regulating the Australian economy.

Using numbers of staff as a proxy of agency size, many agencies have seen significant recent growth: For instance, the Australian Fisheries Management Authority has nearly doubled in size in the last decade, from a staff of 100 to 186. Food Standards Australia New Zealand has increased from 100 in June 2000 to 146 in 2006. The Australian Pesticides and Veterinary Medicines Authority has increased in that same period from 113 to 133. There is a large variety of regulatory agencies dedicated to regulating specific industries, like the federal Civil Aviation and Safety Authority or the Australian Fisheries Management Authority.

But occupying a central role in Australia’s regulatory system are a few key economic regulators with economy-wide scope. Rather than being confined to narrow jurisdictions, these agencies typically do not only regulate a wide variety of industries, but are also multi-dimensional in scope. That is, Australia’s major economic regulators regulate for both economic and social outcomes, as well as technical regulation like standards-setting.

These regulators are not built around the institutions that they administer, but are rather built around “functional’ lines. The Australian Securities and Investment Commission (ASIC) is responsible for consumer and investor protection, the Australian Prudential Regulatory Authority (APRA) is responsible for prudential regulation, that is, market failure associated with information asymmetries in financial contracts; and the Australian Competition and Consumer Commission (ACCC) is responsible for policing anti-competitive behaviour economy-wide. The financial services sector powerfully illustrates how reform to regulatory institutions under the Howard government has led to significant increases in the regulatory burden.

The 1997 Financial System Inquiry (the Wallis Inquiry) was only the third major inquiry into the Australian financial system since Federation, after the 1936 Royal Commission and the Campbell Inquiry in 1981. After the “four revolutions” which followed the Campbell Inquiry, the financial market and its structure went through a dramatic overhaul, with the introduction of new institutions such as foreign exchange firms, recognised bond dealers and new types of trusts and management funds, as well as entrance into foreign exchange markets and new secondary mortgage markets. In the decade between 1985 and 1995, the number of commercial banks in Australia increased from thirteen to forty-nine.

THE PURPOSE of the Wallis Inquiry was to assess the appropriateness of the regulatory framework which had been constructed during the period of financial deregulation in the light of these changes. The “modest trend” towards agency consolidation internationally was noted in the inquiry’s discussion paper – the inquiry predated the now prototypical example of an “all-in-one” regulator, or “mega-regulator”, the United Kingdom’s Financial Services Authority (FSA).

Governance and power concentration were factors for the participants of the inquiry when recommending the ideal regulatory structure. The inquiry rejected an FSA-style mega-regulator due to the need for efficiency and specialisation. And the inquiry was concerned with regulatory governance, noting that the single regulator may become “excessively powerful”.

But nevertheless, the Wallis Inquiry’s final recommendations as adopted by the government consisted of major agency consolidation into two main organisations, the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investment Commission {ASIC). This model was popularly known as the “twin peaks” model, from a 1995 article which recommended delineating financial regulation according to function-prudential (APRA) and disclosure (ASIC). Advocating this agency consolidation, Treasurer Peter Costello said before the Wallis Inquiry:

The regulatory framework is hopelessly out of date. You have superannuation funds that are now in home lending and are essentially running banks and you have banks coming into superannuation – you have got different institutions offering the same product, different regulators regulating the same product because they are offered by different institutions. Why do not we cut all that away and say whatever the nature of the financial institution we will have a regulator covering prudential and a regulator covering consumer protection and we can sweep a whole lot of that away?

While the “twin peaks” model amalgamates regulatory functions in a less extreme manner “than the United Kingdom’s FSA, it was nevertheless a significant consolidation. By drawing the vast bulk of regulatory functions away from the Reserve Bank of Australia (the bank did gain some roles of the Australian Payments System Council), the new model eclipsed the international consolidations described in the inquiry’s discussion paper. It is not inaccurate to refer to the new tri-regulator model as a system of “mega-regulators”, even if the FSA provides a more “pure” example of such an institution. In both the Australian and international context, the result of the Wallis Inquiry’ was the creation of two functionally-structured mega-regulators with economy-wide jurisdiction.

APRA, as a functional regulatory agency, has assumed prudential regulation of finance-based industries. It required eleven pieces of legislation, which constituted over 4000 pages, including four new acts and two omnibus acts. In total, APRA’s foundation amended and repealed more than seventy existing acts. APRA absorbed the entire Insurance and Superannuation Commission (ISC), as well as roughly seventy staff from the RBA who had bank regulation roles. The prudential regulator has since experienced rapid growth, from a staff of roughly 400 at the time of transition to 570 in 2006. The annual federal appropriation for APRA has grown 55 per cent in that time. On top of the legislation which founded APRA, the prudential regulator has overseen more than sixty-six major regulatory changes since 2000.

For the insurance industry, the creation of APRA represented a significant increase in regulatory activity covering the sector. Under the ISC, the insurance industry had been regulated relatively lightly. In the view of the new consolidated regulator, this light-handed regulation was unsatisfactory. APRA’s Executive General Manager of Policy, Chris Littrell, argued: “Until 2001 the Australian general insurance industry was characterised by an unsatisfactory culture of reluctant regulatory
compliance by some entities, even among our largest companies.”

Indeed, following the HIH insurance collapse, Littrell argued that eliminating this cultural clash was one of the early tasks that the regulator faced:

As an integrated supervisor, APRA is in a position to observe the managerial differences between our regulated sectors. Banks in general are run by people who are or have been risk managers, and by people who understand that regulation has its good points. In Australia at any rate, many insurance companies have been dominated by salesmen, who ‘often viewed regulation as something to be avoided. Having come up the career ladder by dealing with actuarial restrictions, they tended to treat regulatory requirements as another annoyance to overcome, rather than a guide to good practice.

While HIH’s collapse and the subsequent royal commission heralded the beginning of a major wave of regulatory increases in the insurance industry, its genesis was the foundation of APRA itself, which coupled the insurance industry with the much more highly regulated banking industry. Indeed, plans to increase regulation of the general insurance industry preceded the 2001 collapse of HIH. The Financial Services Reform Act 2001 classified most insurance as a “financial service” – with the notable exceptions of reinsurance, health insurance and government insurance-and therefore required an Australian financial services licence. Financial product advice, dispensed by intermediaries not directly providing insurance, also required licences under the 2001 Act to do so. The Act also imposed significantly increased product disclosure requirements, and capital and corporate governance requirements.

The Association of Superannuation Funds of Australia, in its submission to the Reducing Regulation Taskforce, stated that since the establishment of ASIC and APRA, supervisory levies paid by superannuation funds had increased dramatically. Indeed, APRA’s expenses relating to superannuation have grown, even though the number of superannuation funds has decreased significantly.

For the banking sector, a great deal of the regulatory change after the foundation of APRA was concerned with the transfer of regulatory authority from the still-existent RBA towards the new prudential regulator. But the most significant regulatory change has been adopting the Basel II Capital accords.

The implementation of Basel II under the auspices of a mega prudential regulator has, for many organisations, had the effect of a dramatic increase in regulatory burdens. Basel II constructs an internationally consistent framework for banking capital requirements and accounting standards. For large, internationally active banks, implementing Basel II has much important significance. However, for smaller domestically-based authorised deposit-taking institutions, Basel II provides little benefit. For credit unions, whose involvement in international markets is low, the cost of implementing the framework is precipitously high. Similarly questionable benefits have accompanied APRA’s uniform adoption of the International Financial Reporting Standards, which affects major, internationally active Australian banks and small domestic co-operatives like the St Mary’s Swan Hill Co-operative Credit Society alike.

APRA’s activities illustrate clearly the perils of uniformly applying regulations that are designed for a specific class of institution.

UNDER THE TWIN PEAKS model of financial regulation, ASIC regulates company and financial services law for consumer, investor and creditor protection. Where APRA regulates for the viability of financial institutions, ASIC’s many briefs include regulating conduct and disclosure, administering corporations law and consumer protection. To do so, it administers eight separate laws, including the
Corporations Act 2001, Australian Securities and Investments Commission Act 2001, and the Insurance Contracts Act 1984.

ASIC was drawn from the Australian Securities Commission, and in 1998 absorbed the consumer protection responsibilities in insurance and superannuation of the ISC. It also drew consumer protection responsibilities in finance from the Australian Competition and Consumer Commission, replicating Section 52 of the Trade Practices Act in the ASIC Act. Further, ASIC absorbed the consumer protection responsibilities of the Australian Payments Systems Council and financial sector industry codes of conduct. In 2005-06, ASIC had regulatory responsibility for 1.5 million corporations and 4415 financial services businesses.

ASIC’s growth has been the most marked of the economic regulators. Since 1999, the regulator’s annual real appropriations have increased by 76 per cent. Its staff has grown from 1221 to 1471.

ASIC has overseen a rapid and comprehensive overhaul of corporate governance law under the Corporate Law Economic Reform Program (CLERP). The rapid, comprehensive change in corporate law under the continuous process of CLERP, as well as the Wallis Inquiry-era reforms which inaugurated ASIC, have been matched by the regulators use of legal instruments to modify the Corporations Act 2001. Since 2002, ASIC has issued more than 380 class orders, which materially alter the terrain of corporate law. Indeed, the Association of Superannuation Funds of Australia argues that ASIC’s reliance on instruments like class orders has been a major cause of the increased complexity of corporate regulation in the last decade.

The gains from the expanding reach of regulatory intervention in the structure of the firm are uncertain. Prominent corporate collapses have been a regular feature of Australian economic history since before Federation. There is, however, little evidence to suggest that the dramatic increase in corporate, securities, financial and banking regulation that followed the wave of corporate collapses in the late 1980s has had any significant impact on subsequent collapses.

There is a very real likelihood that the excessive restraints placed upon corporate form and function, particularly at the executive and upper management level, can have a detrimental effect on entrepreneurial activity. Regulatory micromanagement places a significant burden upon innovative practices and structures. It also induces substantial costs upon firms. For instance, regulatory measures which attempt to foster “compliance culture” by imposing personal legal liability for business decisions upon executives reduce the incentive to take up those senior management positions, and raise the salaries of those who do.

As with all tax and regulatory burdens, firms try as far as possible to pass these costs on to the consumer. It is indicative that an August 2006 CPA Australia survey found a strong perception that the overwhelming beneficiaries of CLERP 9 auditing processes reforms were regulators and auditors.

The other major federal economic regulator is the Australian Competition and Consumer Commission, which has also seen significant growth in staff and resources. However, compared to ASIC and APRA, the ACCC’s regulatory regime was relatively stable during the period of the Howard government, further reinforcing the view that regulatory agencies and bureaucracies grow regardless of any obvious “need’ to do so. Telecommunications and media regulation saw a major change in 2003 when the Australian Communications Authority and the Australian Broadcasting Authority merged to form the Australian Communications and Media Authority. Furthermore, the Reserve Bank, the Australian Taxation Office, and the Australian Customs Service all exit the Howard decade with substantial regulatory powers.

HOW MUCH of the blame for this remarkable increase in the regulatory burden and high levels of regulatory uncertainty can be laid at the door of the prime minister’s office? The phenomenon described above is, unlike some other ways we can measure government activity, diffuse. It is not a phenomenon that is subject to system-wide review by the senior ministry, unlike, for instance, government spending, which is constantly subject to the scrutiny of the budget process. For this reason, one of the perennial tasks of regulatory watchdogs like the Productivity Commission and VCEC is simply to estimate the size of the regulatory state. Given the paucity of published information, these agencies can only guess at how many regulatory agencies there are across the country, let alone determine how much we spend on them.

The origins of regulation vary significantly. Some do, unquestionably, originate in cabinet-level policy decisions. Populist regulations which cover issues like pornography on the internet or teen drinking are just as much political strategy as regulating, and are consequently of interest to senior government ministers. But these regulations are only a small portion of the total regulatory burden-internet filtering may be a high profile regulation, but is ultimately a drop in the pool compared to the gigantic array of rules which the government administers.

Furthermore, the prime minister’s office is not directly responsible for minor changes to the finer points of financial service regulation, consumer product regulation, or occupational health and safety laws. Indeed, even those regulatory frameworks which are high-profile are ultimately defined by individuals well down the chain of government delegation from the cabinet. For example, while the WorkChoices reform program may have had its origins in the senior ministry, the complexity of its regulatory and legislative framework is largely attributable to thousands of minor decisions made by a diverse array of lawyers, regulators and advisers who actually drafted the nearly 2000 pages of regulation and legislation. The government may have signed off on the final WorkChoices bill, but they did so because their more informed and technocratic subordinates convinced them that deregulation meant re-regulation.

Similarly, it is not fair to blame the Howard government for the substantial regulatory burden emanating from the states, or for the petty regulations imposed by local government, both of which constitute a substantial part of the regulatory landscape. The federal government can exert a degree of pressure on the other levels of government to reduce regulation, as it did under periodically during the Howard era, but doing so rarely does more than continue to erode our crippled federalism.

If we are to discover a major source of much of the regulatory increase over the past few decades, it is also necessary to cast our eye over the regulatory agencies themselves. Regulators are delegated substantial amounts of discretionary power to make decisions regarding the structure of their jurisdiction’s regulatory framework, which gives them significant political power. These regulators are systematically biased towards an ever more expansive interpretation of their proper role in the economy and, compounding this, the “cat-and-mouse” nature of regulatory negotiation and compliance leads regulators to lobby for legislative enhancements to their coercive powers. The powers and independence with which regulators have been vested means that they operate in a substantially separate sphere to the executive branch of government. To a surprising degree, regulatory agencies are autonomous actors in Australia’s political system. The capacity for the government to restrain their decisions, and therefore the degree to which we should consider the government responsible for their excesses, is limited.

Nevertheless, it would be easy to conclude, on the basis of the growth of regulation and the extremely modest efforts made to reduce the regulatory burden, that the Howard government’s performance in this field was a failure. But we cannot measure governments against our ideal visions of free market economies-the economic study of politics which has developed over the last half-century has repeatedly emphasised the structural barriers to free market reform, and it is an all-too-common intellectual failure of right-of-centre politics to ignore these in debate. As Adam Smith noted in The Theory of Moral Sentiments, perfection is rarely the correct yardstick:

When a critic examines the work of any of the great masters in poetry or painting, he may sometimes examine it by an idea of perfection, in his own mind, which neither that nor any other human work will ever come up to; and as long as he compares it with this standard, he can see nothing in it but faults and imperfections. But when he comes to consider the rank which it ought to hold among other works of the same kind, he necessarily compares it with a very different standard, the common degree of excellence which is usually attained in this particular art; and when he judges of it by this new measure, it may often appear to deserve the highest applause, upon account of its approaching much nearer to perfection than the greater part of those works which can be brought into competition with it.

Following Smith, if we acknowledge the structural impediments to regulatory reform, we must ask how successful the Howard government was relative to other governments. It is easier to be sympathetic to the Coalition when we recognise that no Australian government has ever passed less legislation than its predecessor- regulation appears inevitably to escalate over time.

But that does not mean regulation cannot be restrained. One of the great successes of the Reagan administration was to slow the rate of legislative and regulatory expansion significantly, particularly after the excesses of the Carter years. Data from the Federal Register – which records rules, proposed rules and notices of the federal government – shows clearly that unlike in Australia, during the 1980s the United States saw a notable slowdown in the rate of regulatory growth.

Certainly, slower regulatory growth is not deregulation. There were more pages in the Federal Register at the end of the Reagan administration than at the start. But the US experience does seem to indicate that growth can be restrained, if not entirely resisted.

So what are the lessons of the Howard era? John Howard was always a passionate supporter of the reform agenda, if not always a passionate reformer. But there is little to suggest that his government was aware of the significance of regulation as a restraint on economic growth, at least until its last few years, when its deregulatory rhetoric became louder. When the Prime Minister’s Taskforce on Reducing the Regulatory Burden reported its findings, the government provided in-principle support for its recommendations but little action.

It is easy for a government to profess its distaste for over-regulation – after all, is there anybody who actually likes “red tape”? – but it is much harder for governments to nominate specific regulations which they have the political will to cull. The regulatory burden is more than the sum of its parts. Individual regulations still have to be removed individually. And when governments try, they come up against the institutional and political interests which have formed around those regulations. For this reason, a program for economy-wide deregulation has to be piecemeal, but systematic.

So if our wishes for deregulation are ever to be indulged, advocates of a free economy and free society have to hope for a political movement that shares our goals. Ronald Reagan may be our closest contemporary who worked to slow, if not reduce, regulation, but history does provide one example of a grand regulatory purge. The English Whigs and early Liberals are one of those rare examples in history that conducted a wide scale regulatory and legislative purge. The English had a long history of mercantilism and state power to recant. It has been estimated that, of the 18,110 Acts which had been passed between Henry III and 1873, four out of five were fully or partly repealed. Both the Reagan administration and the great English liberalisation shows us that deregulation is possible, but doing so requires a formidable dedication to reducing the power and size of government.

This was a dedication the Howard government lacked. In its absence, there was no institutional or philosophical bulwark against regulatory growth, whatever the origins of those regulations. The eleven years of Coalition rule merely illustrates the enormous challenge of reducing the regulatory burden.

The Growth Of Australia’s Regulatory State: Ideology, Accountability And The Mega-Regulators

Institute of Public Affairs, 2008

Regulation is a political activity. It sets the framework for the market economy by defining the boundaries between private action and government action. Yet those boundaries are not fixed. Australian governments are growing the body of regulation — and the resources dedicated to regulating — at an ever increasing pace.

As Chris Berg argues, this growth in regulation has more than just economic consequences. It has significant political implications, as regulatory agencies are increasing their power and influence. Furthermore, those agencies are animated by a new regulatory ideology which favours interventionism and ‘arm-twisting’, adding to the powers of regulatory agencies.

Available in PDF here.

Strangled By Regulation

It is unfortunate that the first act of the new minister for deregulation was to enact the latest tranche of the federal anti-money laundering and counter-terrorism financing laws – a major regulatory increase for the financial sector.

To be fair, the legislation’s origins lie in the halcyon days of the Howard Government. But it illustrates just how big the job of finance and deregulation minister Lindsay Tanner is going to be. The Labor government inherits an Australian economy which is rife with Byzantine and often unnecessary regulations.

Federal and state governments have been legislating and regulating at an ever increasing pace. Where less than 30,000 pages of Commonwealth legislation were passed during the 1980s, we are on track to pass nearly 80,000 pages this decade.

Regulation has accelerated similarly – the Howard Government has the record for the most enthusiastic regulators and legislators in history.

It is hard to get a concrete grip on the consequences of such increasing regulation on the economy, but it is certainly having an effect. The Business Council of Australia recently identified one example of this increase: a total of 227 pages of documentation need to be given to a customer to open a simple cheque account with an overdraft limit and home loan, roughly five times the number of pages in 1985.

The Rudd government has rightly acknowledged high regulatory burdens as a major economic problem. However, the fixation that the Labor Party had during the 2007 campaign on reducing “red-tape” – that is, the paper-burden cost of regulation – may prove to be a distraction from the real effects that regulation has on the economy.

Certainly, the significance of the paper-burden cost varies by sector – in the food industry, most regulatory costs can be attributed to the paper-burden. But for much of the economy, that paper-burden cost is dwarfed by the restrictions on economic activity imposed by the regulations.

For instance, the “chilling effect” of mandatory third-party access regulation far outweighs the paper-burden cost of those regulations by holding back infrastructure investment. Focusing only on “red tape” in these cases is like focusing on the time spent filling out a tax return rather than the amount of tax paid.

If Tanner is to fulfil the promises of a minister for deregulation, it will be necessary not only to tackle excessive “red tape” but to seriously cut back the regulations which distort investment, divert entrepreneurial and innovative activity, and inhibit business flexibility. His recent reaffirmation of the election promise of adopting a “one-in, one-out” approach to regulation is a positive sign, but his uncritical support for the Australian Competition and Consumer Commission is less so.

Tanner will be continually pressured by his fellow lawmakers, regulators and bureaucrats, activist groups and the community, and too often businesses to increase regulation. Cropping back the regulations which restrain the Australian economy will require challenging nearly everyone with a political voice.

Policy without Parliament: the growth of regulation in Australia

Introduction: Regulation is a political activity. It sets the framework for the market economy by defining the boundaries between private action and government action. It is, since the failure of overtly socialist models of political economy, the primary method by which the government relates to individuals and communities.

Regulations, and the regulatory agencies which administer them, cast an increasingly large shadow over the freedom to interact, both economically and socially, in Australia.

The first part of this IPA Backgrounder looks at the rapid growth in regulation-making, and the recent institutional changes in Australia’s regulatory agencies. It charts the consolidation and expansion of the three major economic regulators — the Australian Competition and Consumer Commission (ACCC), the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investment Commission (ASIC)—and examines the theoretical justifications for constructing such ‘mega-regulators’.

The second part attempts to explain how these mega-regulators are themselves able to encourage their own growth. It looks at the internal pressures towards regulatory and institutional expansion, as well as the political pressures which the agencies themselves are able to exert upon directly elected politicians.

Available here.

Telco Industry’s ‘Red Tape’ Burden Unfair

The telecommunications industry has never been as politicised as it is in 2007.

As a result of the ongoing fight between the Federal Government and Telstra over broadband regulation, there are few of Telstra’s business decisions that aren’t immediately pounced upon by politicians trying to gather potential votes.

One new target in this seemingly eternal stoush is Telstra’s migration of its rural customers off its CDMA mobile telephone network, and onto the highly publicised Next G service.

Next G was launched in November 2005, and provides customers with a far superior service than the ageing CDMA network due to be switched off in January next year.

But doing so isn’t that simple.

Communications Minister Helen Coonan and the Attorney General Philip Ruddock have argued that Telstra should be prevented from making the switch until the Next G network provides at least the equivalent coverage of the existing CDMA network.

The Government has imposed an additional licence condition upon Telstra to that effect.

However, Telstra argues that that level of coverage will be achieved later this month and therefore the new licence condition is redundant.

With so many marginal seats in rural areas, that the Federal Government would be paying attention to a new mobile network in the bush is not surprising. But, by imposing a new condition on Telstra’s CDMA licence, it indicates a willingness to intervene opportunistically in the affairs of a private sector company for political gain.

The Government has preached at length about the need to cut ‘red tape’, but its continued regulation-making demonstrates that it is merely rhetoric.

The telecommunications industry has one of the highest regulatory burdens in the Australian economy. The pages of legislation governing the sector has grown from 1,600 ten years ago to over 10,000 today.

For Telstra, this constitutes nearly 500 regulatory reports to government agencies a year. The Australian Competition and Consumer Commission, which manages much of this regulation, has itself doubled in size since 1999.

Regulation diverts firms away from productive activity. And the telecommunications industry is awash with regulatory affairs managers, communications and policy directors, consultants and lobbyists.

There are few sectors of the economy that require more innovation and flexibility than the technology sector. But instead, the future of Australian telecommunications services is vested with governments and regulators, who operate at glacial speed.

When they do finally act, they frequently misunderstand the nature of what they are regulating, or act only to please political constituencies, or even act just to justify their own existence.

It is hard enough for the industry to keep up with Australian consumers’ insatiable demand for new technologies. So when it is deeply intertwined with politics and regulation, it is doubly unable keep up.

But taking a long-term view, this episode illustrates a major policy issue that the telecommunications sector has to grapple with.

The radio-frequency spectrum licences that are necessary to operate a mobile network like Next G or CDMA are ultimately controlled by regulators and the Government, not the firms which actually operate the networks.

This government control of spectrum licences leaves telecommunications firms susceptible to political manipulation. Spectrum management has, since its last major reform in 1992, been overhauled to allow for greater flexibility and ‘ownership’ of spectrum licences by firms.

As Senator Coonan has bluntly shown, these licences still have a long way to go until they can be free of arbitrary government intervention.

Governments need only to follow due process – Telstra alleges that the Communications Minister in this case has not – and they can alter the terms of those licences at their whim.

Licence holders are exposed to the political calculations of the government of the day.

Ideally, firms which held spectrum licences would be able to use those licences as they saw fit and make business decisions about how best to serve their customers.

But in an election year, and in an industry that is highly politicised and highly regulated, that ideal is still far away.

The Regulatory State’s democracy problem

Let’s briefly grant critics of ‘neo-liberalism’ their preferred terminology. Are Australia’s governments entranced by dreams of a neoliberal utopia?

‘Neo-liberalism’ has become commentariat dogma on both the left and the right. As any number of opinion pieces describe, Margaret Thatcher and Ronald Reagan engaged in privatisation and deregulation on a massive scale, fuelled by ideological zealotry. In Australia, Prime Ministers Hawke and Keating did the same, but in contrast to their Atlantic allies, they exhibited the measured and reasonable approach that could only be grounded in Treasury advice.

By the late 1990s, after a decade of continuous economic reform across the country, Australian governments had, sometimes reluctantly, handed their role in the provision of services to the private sector. Neo-liberalism, we read, rules the day.

But this reading of the form and function of Australia’s system of government is deeply incomplete. Instead, in 2007, the best characterisation of Australia’s political system is not a neo-liberal, ‘nightwatchman’ state, nor is it the social-democratic welfare state which dominated the twentieth century. Rather, it is a ‘Regulatory State’.

The Regulatory State shares elements of these traditional political models. Like the former, it has an economy relatively open to foreign capital and products. It has privatised most of its publicly-owned monopolies. And like the latter, Australia has a large welfare state, as well as extensive government provision of health and education services.

Australia is not, however, merely at a mid-point between liberalism and socialism. The phrase ‘Regulatory State’ indicates a separate alternative — the regulation of our economic and social life has come to be the primary activity of government, and the primary means by which government interacts with the economy and the individuals who comprise it.

In a Regulatory State, not only is regulating the first priority of the state, but regulation defines the state. It is a revealing way of analyzing Australian democracy.

Regulation governs our commercial interactions. It governs the work environment, the social environment — reflect for a moment on how many regulations there are by which you are suddenly administered the moment you walk into a bar — and the home environment.

From a historical perspective, regulation acts as a substitute for public ownership. The privatisations which critics of neoliberalism have fixed upon as indicative of a laissez-faire economy have been matched with a correspondingly dramatic increase in legislation and subordinate legislation to control these newly private entities. The Regulatory State has found that its social, environmental and economic purposes can still be achieved by the use of regulation, while avoiding the burden of actually owning, and being responsible for, the public utilities themselves.

The modern left’s primary criticism of privatisation is that private ownership will not deliver the social benefits that public ownership had (or could have). And yet no state business has been privatised without being saddled with an extensive regulatory programme aimed at trying to keep those benefits?

One exception to this is the padded workforces of the former state government trading entities. Privatisation — and its diluted form, corporatisation — has been fundamentally about forcing efficiencies by shedding labour. This willingness to jettison excessive, unionised jobs itself says much about the ideological progress of social-democratic parties. But job shedding in these former state entreprises has been accompanied by the creation of jobs in production management, as well as regulatory and governance jobs.

Almost all of the growth in regulation under the modern Regulatory State is social, rather than economic.

Environmental regulation has a long history, but its marked rise in the last quarter of a century was inaugurated by the 1972 Stockholm Conference on the Human Environment and the subsequent establishment in many nations, including Australia, of national environmental agencies. Consumer product safety, particularly in the transport sector, and Occupational Health and Safety regulations have also increased rapidly. Corporate and financial regulation has also displayed particular growth, often mandated by parallel international trends, but also propelled by what former British Prime Minister Tony Blair has described as an increasingly risk-averse population.

Charts 1 and 2 show just how dramatic this increase in regulatory and legislative activity has been. The impact of these regulations is cumulative — firms and individuals have to comply with the total body of law, not merely the law that has been passed in the most recent session of parliament. Certainly, much law is passed to override or amend existing legislation, but that in itself constitutes a further cost.

Furthermore, these charts do not include the web of quasi-regulations, codes of conduct, guidelines and other ‘voluntary’ self-regulations, which are often policed by regulators, or developed by the government, or instituted to ward off potential legislation. It would be a mistake to ignore these much-harder-to-quantify interventions when trying to ascertain just how significant regulation is in Australia.

Using the direct tools of legislation, or the indirect tools of subordinate legislation and quasi-regulation, government intervention in the economy is expanding, rather than, as left-wing critics would describe it, receding. Furthermore, regulation has assumed a sort of entrepreneurial role for government intervention—a mechanism to search out new areas of the economy just begging to be regulated.

This casts Australian governments’ enthusiastic regulatory activity in a new light. The development of regulation is unambiguously a political activity whose direction is determined by political imperatives, and which has just as many political consequences as it has economic and social consequences.

Independent Regulatory Agencies

The direction of regulation may be determined by elected legislators, but its administration is delegated to the central institution of the Regulatory State — the independent regulatory agency.

These institutions are deemed ‘independent’ because they exist outside the normal bureaucratic chain of accountability — ministers and other elected representatives are not directly responsible for the agencies’ actions.

Independent regulators are accountable through such indirect means as procedural norms, requirements to be ‘transparent’, jurisdictional limitations and, as a last resort, the right of aggrieved firms and individuals to judicial review of the regulators’ decision-making processes. Nevertheless, within the confines of these mechanisms of accountability, regulators have significant discretionary power.

While the United Kingdom had inspectors policing factories for violations of the Factory Act from 1833, the independent regulatory agency is largely an American invention. The socialist fetish for public ownership never took strong hold in the United States, but, pioneering the now familiar pattern, regulation administered by independent regulatory agencies provided a substitute. In 1887, the Interstate Commerce Commission was formed, followed quickly by the Food and Drug Administration (1906) and the Fair Trade Commission (1913).

Then, as now, independence was intended to protect objectivity — the regulators would be friendly to business, but neutral in their application of the law.

But this balanced objectivity has also been under-mined historically by the bureaucratic impulses of the independent regulator to expand its jurisdiction, its powers and its discretionary budget. Regulators lobby governments for increased regulations, increased powers to administer them and, of course, increased budgets and staff. Regulators involve themselves more deeply in the activities of the firms they regulate, trying to discern the levels of compliance while, at the same time, trying to expand their jurisdiction into other industries and sectors.

For instance, having decided that the free-for-all internet is littered with bottlenecks to genuine competition, the ACCC is using the migration of media content online to explore new opportunities for regulation — a textbook example of regulatory creep.

In Australia, there are approximately 60 federal regulatory agencies, and 40 federal ministerial councils. We know that there are approximately 70 agencies in Victoria (the only state which publishes this data publicly), but extrapolating that figure, the Productivity Commission estimates that there are up to 600 regulators across the country.

Doing a similar extrapolation for the budgets of those agencies, and taking into account government departments with regulatory functions, inter-governmental bodies, and the range of quasi-official agencies and boards, it is easy to imagine that at least $10 billion is spent on regulating our activities.

Reigning over this web of institutions that is the Regulatory State are three ‘mega-regulators’ — the Australian Prudential Regulation Authority (APRA), the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investment Commission (ASIC) — the results of a concerted effort over the last decade-and-a-half to consolidate federal and state regulatory agencies into single, one-stop-shop regulators.

Rather than having their jurisdictions delineated by the industries they regulate, instead they are delineated by the regulator’s ‘function’. ASIC is responsible for consumer and investment protection in cases of market manipulations such as insider trading. APRA is responsible for the regulation of information asymmetries in financial services, and the ACCC is responsible for anti-competitive conduct and consumer protection economy-wide. Old industry-based regulators, such as the Insurance and Superannuation Commission, had their functions divvyed up into the new functional bodies.

Just as the volume of regulation is growing, so are the three ‘mega-regulators’. We can see, since the turn of the twenty-first century, a significant increase in government spending and staff. We see increased media profiles and public relations activities. (The ACCC’s activism in the media was the subject of much criticism during the 2003 Dawson Inquiry into the Trade Practices Act — chastened, it decreased those activities immediately following the Dawson report, but has been steadily returning to its former levels.)

These agencies preside over the most intense period of regulatory and legislative activity in Australian history. This gives them enormous political power and influence — for which they are largely seperate from the traditional chains of democratic accountability.

Distracted by ‘red tape’

Regulation, admittedly, doesn’t get much good press. But the criticisms that regulations do receive are revealingly narrow.

Overbearing business regulation stifles incentives to take risks and to innovate’, wrote Labor’s Small Business spokesman Craig Emerson in The Australian earlier this year, ‘crucial to the efficient functioning of a market economy and productivity growth’. Undeniably true.

But the content of ALP policy focuses on reducing ‘red tape’ — only a small part of the total regulatory burden. Eliminating ‘duplication’ or regulatory confusion, which constitutes the bulk of ‘deregulatory’ proposals by both the ALP and the Coalition Government, does not address the real issue — regulations which discourage investment and entrepreneurial activity, and divert firms away from profit-making opportunities.

For example, Telstra estimates that it has to provide the government with 486 compliance reports annually — a significant red tape, or ‘paperburden’ cost. But the real cost of regulation of the telecommunications sector, however, is much higher, constituting the forsaken investment in infrastructure, the cost of universal service obligations, and the cost of delayed innovation across the economy. Similarly, the tomes of compliance reports required by ASIC dwarf the less tangible costs of diminished entrepreneurship and reduced corporate flexibility.

Focusing only on the paperburden cost of regulations is like focusing on the time spent filling out a tax return rather than the amount of tax paid.

In fact, the anti-red tape movement is reminiscent of regular movements throughout the twentieth century for more ‘efficient’ government. An efficient government is not a virtue if it is just as large as an inefficient one — indeed, efficiency can help it dominate the economy even more.

The bipartisan red tape proposals do nothing to reduce the size of government and its impact on the economy. Promises to reduce the red-tape burden offer little if they are not a constituent part of a promise to decrease the scope or extent of regulatory interventions.

A reduction in the volume of regu-lations and the extent of regulatory intervention in the economy will not only have economic benefits, it will have democratic benefits as well.

The dominance of the indepen-dent regulatory agencies in political and economic life is dependent upon this enormous pool of legislation and regulation — the problems of accountability and discretionary power will be resolved only when that pool is drained.

Regulation is the defining feature of the modern Australian state, and the regulatory problem requires a political solution.