Costs and benefits to regulation

Regulation and red tape are often held up as barriers to productivity and and innovation. Yet the benefits of good regulation that afford protection for consumers are many.  Gerard Brody, CEO of Consumer Action Law Centre, explores the implications of the Federal Government's commitment to reduce the "regulatory burden" on business by $1 billion each year.

Governments of all persuasions regularly go to war on “red tape”. It’s an enticing promise: to abolish the regulatory burden that is holding business and the community back from innovating, building productivity and getting ahead. But any assessment of regulation cannot just consider compliance costs for business; it must also consider the benefits to consumers and the community.

All regulations are intended to promote a desirable economic and social purpose. That some may do so ineffectively or inefficiently is worth knowing, but the wholesale elimination of regulation in the name of reducing costs on business alone is neither desirable nor feasible.

Bureaucrats and governments should not develop amnesia about recent history, and particularly the benefits of regulation. Australia has weathered remarkably well from the global financial crisis. Despite significant consumer losses in high-risk property investments and collapses of poorly-regulated “shadow banks”, our strong prudential framework has meant the financial system has demonstrated resilience.

Timely reforms to consumer credit laws meant that irresponsible lending encouraged by broker spruiking and mortgage securitisation has not been the problem here it has been in the United States. Politicians of all flavours have trumpeted that a key reason we have not suffered the way that the US or parts of Europe has, is due tothe strength of our regulatory frameworks.

This underscores the potentially positive role that strong regulations can play in stimulating economic growth and a well-functioning economic system.

In 2010, amid calls of regulatory over-reach, the Federal Government issued a ban on mortgage exit fees. Mortgage exit fees made it difficult for borrowers to compare the true cost of home loans. Given that most consumers switched mortgages within five years, they were necessarily charged these fees. But the fees were not included in headline interest rates, hindering product comparability.

It was argued that the ban disproportionately cost smaller lenders.  Nothing could be further from the truth—exit fees simply allowed lenders to hide the real costs of the loan. Data from the Reserve Bank has shown that bank fees have declined on mortgages since the ban on exit fees was introduced, despite an increase in mortgage lending. This confirms that the regulation has not hampered business growth, but has enabled consumers to exercise competitive pressure.

The Federal Government appears intent on not only stopping the development of new regulation, but winding it back. Before the Government launched its Financial System Inquiry, headed by ex-CBA chief David Murray, it said there would be a 'moratorium on significant new financial regulation'.

There are dangers in governments sitting on their hands. Over recent years, consumer advocates have witnessed a growth in for-profit financial difficulty businesses. These businesses market themselves as helping consumers experiencing financial difficulty, but impose very large fees to provide their services. In many cases the businesses fail to put the consumer on a sustainable path, and divert people away from government-funded assistance, such as free financial counselling. The business types vary—debt negotiation, budgeting services, credit repair. What is particularly concerning about them, however, is that they largely fall outside existing consumer credit and financial services regulations. This means that regulators such as ASIC are unable to monitor the businesses, or ensure they comply with standards of honesty and fairness. A moratorium on regulation will likely result in significant costs for the financially-stressed families targeted by these businesses.

To coincide with "Repeal Day" earlier this year, the Federal Government released its New Guide to Regulation. The questions contained in this document to guide policy makers developing regulatory impact statements make a lot of sense, and are about ensuring regulation produces a net benefit to the community. However, it is the accompanying policies that actually limit reforms that can produce that community benefit: the Government's target to reduce regulatory burden by $1 billion every year; the creation of deregulatory units in each department and public service bonuses for achieving deregulatory targets; and the requirement that every Cabinet submission quantifies compliance costs to business and how these costs will be matched by compliance cuts to business.

This overt focus on costs to business and cutting regulatory burden will necessarily inhibit the development of policies and regulation that produce public benefit, especially in new markets or areas of social or economic concern. If a particular area is not regulated already, how is the policy maker to find regulatory cuts?

Some regulations are ineffective and unnecessary. Complying with them costs businesses time and money, and can unnecessarily restrict business activity. Ineffective regulation can also be costly for the community. After all, every unread disclosure form that a bank or finance company is required to produce, is ultimately paid for by consumers through higher prices.

However, sensible and necessary discussion regarding the impact of regulation is at risk of being hijacked by a mantra that regulation is always “red tape” and must be cut to reduce compliance costs for business.

The language of deregulation indicates a dangerous direction. Focusing on compliance costs for business, it appears to overlook the purpose of such statements which is to assess regulatory impact from a community wide perspective.

Business lobby groups and policy makers are quick to ‘count’ the compliance costs of regulation—the staff hours and input costs required to comply. Assessing the benefits of regulation is more difficult, but no less essential. For regulation to play its role—that is, deliver community wide benefit and allow industry to innovate productively without imposing costs elsewhere on the economy—we need to also learn to ‘count’ regulatory benefits by ascribing to them a meaningful value.