FIRST PUBLISHED: Australian Financial Review, 08 Nov 2012
When I was in kindergarten in the 1960s, if one child misbehaved and did not own up to their behaviour, the whole class would be kept in as punishment; inevitably, a new rule would be introduced as a result of the errant actions of one individual. Little did I know that this would be my introduction to regulation in today’s financial markets.
While much has been said of the need for Australia to increase its productivity and international competitiveness, not enough has been said of how the regulatory framework within which Australian business operates will be crucial in working towards this aim.
In a nation where the costs of doing business are becoming a distinct competitive disadvantage, Australia must do more to build and maintain competitive advantages, especially in the area within direct control of the government: regulation.
Instead, in our apparent quest to be internationalised in our regulation, we find ourselves influenced by economies with fractured governance systems; namely, the United States and UK. After the global financial crisis, it is not surprising that such economies are attempting to overcorrect with regulation, but this should be their problem to deal with – not ours.
Of course, today’s global market and the prevalence of multinational companies and activities means that no issue can occur in isolation; as we have seen with the sub-prime mortgage disaster in the US, for example, its effects are hardly endemic in the US. However, if Australia follows blindly the regulatory examples of Europe and the US and ignores the strengths and achievements being of our shores we risk losing any competitive advantage we may have.
Take one of the proposed reforms from the financial markets regulator, the Australian Securities and Investments Commission: a new national exam for all financial planners (to be regulated by another body). This proposal seems to be based on requirements in the US financial planning industry, but considering it was this industry that created some of the most toxic products that contributed to the sub-prime mortgage crisis, this is hardly a model to follow. Additional regulation that arguably adds no benefit and which results in higher transaction costs for business is hardly a competitive business advantage for Australia.
The proposal to regulate small business credit advice is another example. It seems Treasury is focused on regulating such advice despite a lack of debate on any evidence supporting the need for such regulation, and the potential negative consequences on the cost and availability of credit to small business. This is consistent with a trend towards regulate first, ask questions later. The mindset of our policymakers must change if the government is serious about reducing red tape.
Take the post-GFC European Commission green paper on audit (and the ensuing proposals). The paper included various recommendations, such as forced audit firm rotation (whereby audit firms would have a limited tenure with companies) and audit-only firms (where major audit firms would be restricted to providing audit services only).
While the aim is to increase audit quality and independence, the auditor’s role is to provide an opinion on the presentation of financials, and this opinion on its own won’t warn of a collapse, let alone a financial crisis. Even though Australia’s Treasury paper on audit quality in 2010 found no systemic issues, there are already signs there will be the inevitable pressure to conform to the legislative developments of the Northern Hemisphere – whatever these may be. This is hardly the panacea we need for a problem we don’t have.
Of course, there will always be an issue that demands a cross-border approach and that is when we should consider what works for the Australian context and attempt to influence international developments. The latest focus on high frequency trading, and the potential risk it creates for capital markets, is one example where an international contemporaneous solution may be sought.
Whether in kindergarten, or in today’s financial markets, creating a new rule every time someone misbehaves, particularly when the misbehaviour is a consequence of non-compliance with existing rules, is unnecessary and burdens the rest. Australia’s regulators need to ensure the business environment is not flooded with unnecessary regulation as part of the presumption that all risk can be mitigated. Given Australia’s challenges with productivity and competitiveness, it is critical that our governments work towards a balanced regulatory framework before Australia is left behind, resulting not in a two-speed economy, but in a no-speed economy.