Commonsense Regulation

I’m delighted to once again address the ASIC Summer School.

The theme of this Summer School is very much about regulation. Over the past week, you have heard from a broad spectrum of those at the sharp end.

At the strategic level, since I joined the Treasury ministry 15 months ago, I have been doing a lot of thinking on what needs to be done about regulation.

Today, there is a constant and growing demand on law-makers to devise new rules to stop unacceptable behaviour. And this demand is often directed at creating ever-more specific rules designed to micro-manage virtually every type of activity.

New rules and regulations seem to be viewed as the definitive solution to each and every problem.

It is clear to me that, instead of creating yet more rules and regulations, we need to step back and look at our current body of legislation as a whole.

As a community, we need to be able to judge whether all our rules are really necessary when we look at them in the context of the broader system.

Those of you who have met with me, or heard me speak before, will know that reducing the regulatory burden, and improving regulatory efficiency, are major preoccupations of mine.

I’m sure you will agree with me when I say that, over the last ten years or so, law-making has become somewhat of a growth industry in Australia!

In 2003, there were no fewer than 1,800 Commonwealth Acts of Parliament, 170 of which had been passed during the previous year. Legislation — in all its guises — is growing at over ten per cent a year.

Not only do we have a dizzying plethora of laws, but they have evolved in a largely reactive way to community concerns.

Adding to this complexity, administrative action often supplements or even supplants legislative decision-making. This has given us elaborate rules which often produce consequences the legislators didn’t intend or foresee.

A complex regulatory system — whether or not it achieves its goals — will only hinder business innovation and productivity growth.

But at the same time, we don’t want to throw the baby out with the bath water. Australia’s regulatory system is highly regarded internationally, and has the broad support of both the business and wider communities.

Clearly, we need to strike the right balance between the government needing to get on with the job of providing a fair regulatory environment, and the concerns of the business community that there’s too much regulatory interference.

A Simpler Regulatory System

This morning, I would like to outline my approach to simplifying and streamlining the rules that govern our corporate and financial services sectors.

And how we can get some good old-fashioned commonsense into this process.

I like to call my approach to tackling this task “A Simpler Regulatory System”.

I believe that an effective framework regulating financial services and corporations is the first step for the market to function efficiently. To build market confidence. And to achieve future productivity growth.

This has been the basis for the Australian Government’s ongoing reforms of financial sector regulation.

Our nation’s impressive economic growth proves that this approach works.

Australia’s economy continues to grow with low inflation, low unemployment, a very sound fiscal position and rising living standards.

The Australian Government has set its sights on sustaining our impressive productivity growth of the last ten years well into the future.

I see A Simpler Regulatory System as a key component in securing that future productivity growth.

Way Ahead

As I see it, implementing A Simpler Regulatory System will require a multi-pronged approach.

Firstly, we need a rigorous assessment of the need for regulation.

Our starting point for new calls for new regulation must be scepticism.

We must place the onus squarely on those who call for a new rule to demonstrate why their solution is needed. And to clearly demonstrate that the benefits outweigh the costs to the community as a whole.

Regulation advocates also need to show that they have considered other options. And to demonstrate how their proposed rule is compatible with the existing stock of regulation.

When considering regulation, we have to adopt the attitude of “The Simpler the Better”.

Leonardo Da Vinci put it a bit more eloquently when he said, “Simplicity is the ultimate sophistication”.

You could apply this maxim to many areas of life — to art, to ideas - or in our case, to streamlining our tangled regulatory web.

Just as we need to approach calls for yet more regulation with scepticism, we need to be highly critical of complex regulatory solutions to problems.

We can use community reaction to proposed new regulation as a litmus test. If there’s consensus that the new rules are hard to understand, then they’re probably a far from perfect solution.

This gets back to my point about commonsense. The simpler we can make a solution to a problem, the more likely it is to make sense to the community — and be accepted.

A very important part of achieving a Simpler Regulatory System is consultation. I’m on the record as saying that I’m a strong believer in productive partnerships. Partnerships that include close consultation in an atmosphere of openness and trust.

In this spirit, I believe that consultation is the key to getting the regulatory balance right.

I want to assure you of my commitment to continue working in partnerships to further improve the regulation for which I am responsible.

This means that, at every step of the way, my department and I will consult with the business community to ensure that the changes we make do what they are intended to do.

And by the same token, the regulators need to engage in consultative dialogue with affected parties to ensure that laws are implemented in a commonsense way.

I would now like to turn to the concrete steps I am taking towards a Simpler Regulatory System.

We need to — not only look at how new regulation is created — but think critically about how existing regulation is working. And how proposed regulation interacts with existing regulation.

I am committed to optimising and simplifying the body of existing regulation for which I am responsible. I will examine it to see how it can be made to operate more efficiently on the ground.

It is my firm belief that we cannot deliver the best results for the Australian corporate and financial services sectors — and the broader community — unless we have a truly unified and cohesive body of laws and regulations.

I have already made progress in optimising regulation in a practical way with the refinements to financial services regulation, which were completed in December last year.

My two key objectives were firstly, to reduce the compliance burden on industry. And secondly, to clarify the intent of the legislation.

It is important to understand that the work on refinements clearly distinguished between maintaining the framework to meet broad policy objectives, and the need to address practical operational issues.

At this point, I would like to state on the record that ASIC made an excellent contribution to the refinements project. I was very pleased with the open and consultative approach that ASIC took in implementing the FSR refinements.

This was just a first step. There is more work to be done.

Going forward, I intend, in the future, to reach a view based on stakeholder consultations on possible new measures to address regulatory concerns, to improve the operation of corporate and financial services regulation.

An important objective of consultations will be to collect information on the costs and benefits of making changes in order to develop firm proposals that will also be put out for further comment before being finalised.

Importance of the regulator in making regulation work

Up to this point, I have been talking about how we can bring about a Simpler Regulatory System at the strategic policy level.

But it’s equally important to me to provide the leadership and guidance to ASIC, and the other economic regulators that I work with, to help in the task of interpreting the law to make regulation work as intended.

Regulatory institutions, with clear mandates from Government, and the resources and powers to carry out their roles and responsibilities, are crucial to the success of the financial sector.

Over the last ten years, the Howard Government has increased ASIC funding by 74 per cent to $223 million. I am committed to maintaining the high level of funding for ASIC which enables it to be recognised internationally as a leading financial sector regulator.

After the Government has created an appropriate regulatory framework, it’s the job of the regulators to implement the law. And make sure that the framework achieves its goals.

However, decisions made by the regulators in discharging their duties can, as you would expect, greatly affect the costs of business.

It’s important, especially with principles based legislation, that there is alignment between the intentions of the lawmakers and how those at the regulatory frontline apply the law.

An open and appropriate dialogue can only help the regulators understand what Government and the Parliament expects of them.

As well, the Government relies on feedback from the regulators, which deal with business on a day-to-day basis, to understand how regulation is operating in practice and whether improvements can be made.

I think it’s fair to say that those of you from ASIC may feel “on your own” when Parliament hands over a newly-minted law. It’s one of my roles to make sure that ASIC gets the policy guidance it needs to make the law work in practice the way it was intended – ensuring always that ASIC operates as an independent regulator without fear or favour.

My position gives me a unique opportunity for dialogue with regulators, including ASIC, which allows me to communicate community expectations.

The strong reputation which ASIC enjoys is based in no small part on the professionalism and dedication of its staff. I greatly value the relationship I have forged with ASIC, in particular with the Commissioners.

Whilst travelling around the country I have taken the opportunity to visit several of the ASIC regional offices. In all cases, I found my discussions with staff to be highly instructive and informative.

I look forward to my ongoing collaboration and discussions with ASIC, as I very much want to hear directly from them of their views and ideas.

As I mentioned earlier, I’m a strong believer in consultation in the spirit of openness and trust.

Beyond my personal role in communicating community expectations, it is my very strong view that the best way that regulators can ensure they undertake their role as efficiently as possible is to maintain open communication with all relevant stakeholders.

Likewise, it’s important that each regulator within the financial sector cooperates and coordinates their activities.

To achieve our goals — as well as a close and trusting relationship between Government and the regulators — we also need the same spirit of openness and trust between the regulators and the business community.

While regulators must enforce the law, Government also expects them to cooperate with business. This Summer School is a fine example of this working in practice.

ASIC has the tough mandate of, not only enforcing the law, but also working with the business community to help them understand their obligations to comply with regulatory requirements.

I think it’s critical that our financial services regulator pursues a commonsense approach to regulation. And to continue to balance — on one hand — the need to assist the business community to comply with the law with — on the other hand — the need to punish those who intentionally defy the law.

Conclusion

In conclusion, I would like to say that you people in this room are all important stakeholders in achieving A Simpler Regulatory System.

I would also like to stress the importance of ongoing consultation and dialogue between all of us who want to make the regulatory system work as efficiently as possible.

For my part, I will continue to provide leadership and guidance so that we can align community expectations about regulation with its implementation.

Streamlining and simplifying our regulatory system is in all our interests. And it’s something we can achieve together.

As we work towards this goal, we would do well to remember the words of Leonardo Da Vinci — that simplicity is the ultimate sophistication.

Thank you and I hope you enjoy the rest of your time at the Summer School.