House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

Chapter 3 - Regulation Impact Statement

3.1 In line with the Government's regulatory burden reporting requirements, a full Regulation Impact Statement - including final costings - will be released when the regulations to implement the proposed ASIC industry funding model are finalised.

3.2 The industry funding model, as currently developed, will increase regulatory compliance costs by $21.1 million per annum. However, this amount is subject to change as the Government continues to consult with industry and further refine the levy mechanisms for each industry subsector.

Policy objective

3.3 The Australian Securities and Investments Commission (ASIC) is Australia's corporate, markets, consumer credit and financial services regulator. Under the Australian Securities and Investments Commission Act 2001, ASIC is charged with:

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maintaining, facilitating and improving the performance of the financial system and entities in it;

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promoting confident and informed participation by investors and consumers in the financial system;

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receiving, processing and storing, efficiently and quickly, the information given to ASIC under the law;

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ensuring that information is available as soon as practicable for access by the public;

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administering the law effectively and with minimal procedural requirements; and

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enforcing and giving effect to the law.

3.4 Consistent with these responsibilities, ASIC regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation funds, insurance providers and deposit taking and credit providers. It is also responsible for the supervision of trading on Australia's domestic licensed equity, derivatives and futures markets. Further, as the consumer credit regulator, ASIC licenses and regulates businesses engaged in consumer credit activities (including banks, credit unions, finance companies, and mortgage and finance brokers).

3.5 In addition to its regulatory functions, ASIC maintains a number of business registries.

3.6 ASIC currently receives Budget appropriation for its regulatory and registry activities. Only a small proportion of ASIC's funding (around 15 per cent of its departmental appropriation) is collected directly from industry participants (through the Financial Institutions Supervisory Levies administered by the Australian Prudential Regulation Authority and fees for market supervision, as well as fees for certain services provided by ASIC).

3.7 In addition, ASIC collects revenue on behalf of the Government under the Corporations (Fees) Act 2001 and the Corporations (Review Fees) Act 2003. Under these acts, ASIC collects fees for matters such as the lodgement and registration of documents, the inspection or search of a register, and annual fees payable by companies and registered schemes. These fees are imposed as taxes and the revenue collected is paid into the consolidated revenue fund.

3.8 Accordingly, under ASIC's existing funding model there is a limited relationship between the costs of ASIC's regulatory activities and the fees paid by industry participants who create the need for these activities, especially in relation to the financial services and markets sectors. This can lead to inequitable and inefficient outcomes with stakeholders not recognising the full cost of their actions.

3.9 The existing model for funding ASIC is also inconsistent with the Government's cost recovery guidelines that state that 'where appropriate, non-government recipients of specific government activities should be charged some or all of the costs of these activities.' That is, where appropriate, those entities that create the need for regulation should bear the cost of that regulation.

3.10 In response, both the Financial System Inquiry (Murray Inquiry) and the Senate Economics Committee have recommended that ASIC be industry funded.

3.11 Industry funding has the potential to give ASIC more predictable funding, as well as strengthen engagement between ASIC and industry on the costs of conduct and market regulation.

Implementation options

3.12 The Government is investigating three options to address the disconnect between the costs of ASIC's regulatory activities and the general charges paid by industry participants who engage in and benefit from these activities. These are to:

1.

maintain the status quo;

2.

recover the costs of ASIC's regulatory activities through a combination of cost recovery levies, fees-for-service, and statutory levies; or

3.

require ASIC to adopt additional transparency and accountability measures around how it employs its resources to deliver its activities so that industry can monitor the cost of ASIC's regulatory activities.

Assessment of impacts

Option 1: Maintain the Status Quo

3.13 Option 1 would not address the problems identified. However, it would not require any of the entities regulated by ASIC that currently do not pay fees or charges to ASIC on an annual basis to adjust their systems and processes to do so in the future and would not require ASIC to collect additional information from industry.

3.14 As this option would maintain the status quo and require no regulatory or legislative changes, there are no regulatory costs or savings associated with this option.

Option 2: Recover the costs of ASIC's regulatory activities

3.15 The primary benefits of cost recovery, as outlined by the Government's Charging Framework are:

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that it promotes equity as the recipients of a government activity bear its costs;

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that it can influence demand for government activities;

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that it can improve the efficiency, productivity and responsiveness of Government activities and accountability for those activities; and

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that it can increase cost consciousness for all stakeholders by raising awareness of how much a government activity costs.

Economy and Industry

3.16 The efficiency of the economy and the use of regulatory resources may improve if the Government adopted cost recovery for ASIC's regulatory activities. This is because direct price signals would influence and shape the industry behaviours that drive the need for regulatory oversight.

3.17 For example, industry subsectors that present a high risk to consumers and have enforcement action taken against them at higher rates will pay substantially higher annual levies than subsectors that present limited risks to consumers and the broader economy. This not only effectively rewards industry subsectors that are doing the right thing, but also creates additional incentives for regulated entities to foster a culture of compliance and ensure that they are meeting their legal obligations. This is because doing so should, over time, reduce regulatory costs for that sector.

3.18 Economic efficiency may also increase as a result of ASIC's increased accountability to its regulated population. This is because the higher level of transparency required under the Charging Framework should act as an impetus for a more effective and efficient allocation of ASIC's resources that better reflects market risk and better ensure that ASIC's regulatory services are provided at efficient cost. Under the Government's Charging Framework cost recovery charges must be closely linked to the specific activity and set to recover the efficient costs of the specific activity. This is designed to ensure that regulated entities receive value for money on cost recovered Government services. This is not necessarily occurring under ASIC's existing funding model.

3.19 An increase in the levies and fees payable by regulated entities could pose a barrier to entry in some markets. This could not only curtail competition, but also limit Australians' access to some essential financial services - particularly in regional areas where large financial service providers may not be available. This is particularly critical when considering the costs of acquiring and maintaining a license. Potential impacts on competition and innovation would be a focus during industry consultation to identify areas where cost recovery may not be appropriate.

3.20 It is also important to consider who will bear the incidence of any cost recovery charge and whether this could negatively affect competition. For example, if large entities can afford for the incidence of the charge to be borne by equity holders, this could allow them to price their services more competitively than smaller organisations that must pass the incidence of any new charges on to their consumers through higher prices.

3.21 For these reasons any cost recovery levies would be calculated in a manner that not only ensured that those creating the most need for regulation paid a levy commensurate with the cost of providing this regulation, but also took account of broader competition issues. This would be analogous with the cost recovery model used by the Australian Prudential Regulation Authority.

3.22 While the collection of additional data will allow levies to be set more accurately, it will impose a regulatory cost on industry participants that must comply with the regime. It will be important to balance the benefits of additional specificity in determining the appropriate levy against the additional costs associated with obtaining more granular data from a larger number of entities. This will be considered as part of the development of any cost recovery model for ASIC, with a view to using metrics used for other reporting purposes to minimise the regulatory burden.

ASIC

3.23 The primary benefit to ASIC is that additional data collected from regulated entities to support accurate cost apportionment will improve its ability to identify, mitigate, and respond to emerging risks. This will improve outcomes for consumers.

3.24 Under an industry funding model, ASIC's budgetary stability should also increase. This increased stability in ASIC's funding would allow ASIC to better plan their future regulatory activities, which could deliver better outcomes for market integrity and consumer confidence. The International Monetary Fund (IMF) and the International Organization of Securities Commissions (IOSCO) support industry funding for financial market regulators for these reasons.

3.25 The government may still wish to apply efficiency dividends to ASIC to ensure that ASIC is using their resources as efficiently as possible.

Commonwealth Government

3.26 The primary benefit for the Government in moving from a budget funded model to a cost recovery model is that funds currently directed to ASIC (approximately $250 million per annum) would be able to redirected for the benefit of all taxpayers, whether through increased spending on priority programmes or through deficit and debt reduction aimed at reducing Australia's future tax burden.

Option 3: Increase ASIC's transparency and accountability to industry

3.27 Under Option 3, the problems identified would only be partially addressed. Additional transparency and accountability measures would provide the market and government with greater information on how ASIC employs its resources and enable them to better assess whether ASIC is using its resources efficiently and in the most effective manner. However, the absence of any cost recovery charges would mean that the incentive to take full advantage of these reporting tools to effectively monitor ASIC's performance would be diminished.

3.28 Similarly, the absence of any cost recovery charges would reduce industry's incentive to change its behaviour in order to reduce demand for government services and to improve the efficiency, productivity and responsiveness of Government activities. This is because the cost of ASIC's activities will not be borne directly by those who create the need for the activity.

3.29 Under this option ASIC would also remain budget funded and so would not have any greater budgetary stability than exists currently.

3.30 However , this option would not require any of the entities regulated by ASIC that currently do not pay fees or charges to ASIC on an annual basis to adjust their systems and processes to do so in the future. It would also not require ASIC to collect additional information from the entities that ASIC regulates.

3.31 No regulatory or legislative changes would be required and there would be no regulatory costs associated with this option.

Impact group identification

3.32 Under Option 2 regulatory costs will arise primarily for two reasons:

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around 7,500 entities (based on the model consulted on in October 2016) will have to establish new reporting processes to provide ASIC with data not currently collected; and

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around 55,000 entities (based on the model consulted on in October 2016) will have to report either new data to ASIC, or data already provided to ASIC more frequently.

3.33 Table 1 details the approximate number of entities that ASIC regulates in each industry subsector identified in the October 2016 consultation paper on the Industry Funding Model.

Consultation

3.34 Stakeholder consultation is critical to ensuring that an ASIC industry funding model is understood by the community and does not generate any unintended consequences.

3.35 To inform the development of this proposal, the Government released a consultation paper detailing a possible cost recovery methodology and accountability framework in mid-2015. This was followed by a number of industry roundtables in Sydney, Melbourne and Brisbane. Through this process, the Government received 79 submissions from members of industry and the broader community.

3.36 The outcomes of this first round of consultation assisted in the refinement of the proposed ASIC industry funding model. These refinements were reflected in the Government's October 2016 proposals paper. Formal submissions on this proposals paper, as well as views put forward at industry roundtables held in November 2016, have assisted the Government in finalising the design of the industry funding model.

3.37 The Government conducted public consultation on draft legislation, and explanatory materials between 22 February and 10 March 2017. Feedback was critical to the finalisation of the Bills to introduce the industry funding model.

3.38 Finally, the Government will consult on draft regulations to implement the industry funding model later in the first half of 2017. All of the draft materials required to introduce the ASIC industry funding model would be uploaded to the Treasury website with, ideally, at least four weeks provided for public consultation. Opening submissions to the public will ensure that all stakeholders have the opportunity to comment on legislation that may affect them.

3.39 These consultation processes to support the development of the final model will be supplemented by a range of additional reporting and consultation processes as cost recovery is introduced. This includes consultation on ASIC's strategic risk outlook and the publication of a Cost Recovery Implementation Statement in 2017.

Conclusion and recommended option

3.40 Option 2 (that is, introduce an industry funding model and additional accountability mechanisms for ASIC) is the preferred option. This is because:

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it promotes equity as the recipients of a government activity bear its costs;

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it can improve the efficiency, productivity and responsiveness of Government activities and accountability for those activities;

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it can increase cost consciousness for all stakeholders by raising awareness of how much a government activity costs; and

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it allows for the redirection of hundreds of millions of taxpayer dollars towards activities that benefit all taxpayers.

3.41 While Option 2 does have the largest regulatory burden of all options considered ($21.1 million per annum), this is small relative to industry funding's benefits and will decline over time as processes to support additional data collection requirements become business as usual. Enhanced data collection, in particular, will not only support better apportionment of ASIC's costs (reducing the chance of cross-subsidisation), it will also enable ASIC to better identify and respond to emerging risks in its regulated population. This regulatory costing is also subject to change as the Industry Funding Model is further refined in response to stakeholder feedback on draft regulations scheduled to be released in early-April 2017.

3.42 Option 1, to maintain the status quo, was not considered a viable alternative to Option 2. Option 1 does not address the underlying problem, which is that there is a limited relationship between the costs of ASIC's regulatory activities and the fees paid by industry participants that create the need for these activities.

3.43 Additionally, while Option 1 does have the advantage of not imposing any regulatory costs on industry, it also offers no benefits to taxpayers or the broader community.

3.44 Option 3 was not considered to be a viable alternative to Option 2 for similar reasons. While increased accountability would likely improve ASIC's efficiency and productivity, it would not increase cost consciousness, create further incentives for industry to improve its conduct, improve ASIC's understanding of market risks, or allow for the redirection of government funds towards activities that benefit a broader suite of taxpayers.