ASIC and other regulators need more than just a funding boost

Current ASIC chairman Joe Longo. Picture: David Geraghty

The federal budget’s funding boost for Australia’s key economic regulators is positive news. Nevertheless, Australia’s economic regulators, particularly the Aus­tralian Securities & Investments Commission, have been chronically underfunded by successive governments for more than a decade. Key institutions that support Australia’s economy and protect financial consumers have rarely been a government funding priority. Unfortunately, one budget boost will not solve this decade-long funding deficit, especially in a high-inflation environment.

And while the extra funding is a good start, the need to review the governance arrangements and remit of Australia’s economic regulators remains. The vast, complicated remit of ASIC needs to be reconsidered. Even with the extra funding, ASIC is still being asked to do too much with too little.

Our economic regulators also need updated statements of expectations from the government.

ASIC’s is almost two years old and was issued by the last government in very different economic circumstances. If these expectation statements are to be issued, then they need to be updated regularly so that they remain relevant. It is difficult for a regulator to do its work within a system that provides for government guidance when the government does not guide. The recent Reserve Bank review could be a useful appraisal framework to apply to ASIC and other agencies. That review made important corporate governance findings that may well apply to ASIC and others.

Significantly, the RBA review highlighted that the consensus of “what constitutes best practice (for government institutions) corporate governance has evolved significantly”.

The review further highlighted that best practice for public institutions is to move “away from reliance on a single individual towards group-based decision making”. It said that “best practice corporate governance today emphasises the role of boards with non-executive directors setting the strategic objectives and overseeing management’s implementation of those objectives. In the private sector, the board chair is generally not the same individual as the CEO.”

To corporate readers, this is stating the obvious. Unfortunately, it has not been obvious to some (not all) key Commonwealth institutions whose thinking has not kept pace with the governance evolution in corporate Australia. The RBA review found the bank’s corporate governance “falls short of contemporary best practice”. To be fair, this is parliament’s responsibility as it sets the corporate governance arrangements for public institutions.

Former ASIC chairman James Shipton. Picture: Aaron Francis

Importantly, the RBA review warned against a concentration of management responsibility “(perhaps unfairly) on one individual”. This management concentration needs to be reviewed where it exists in other public institutions. This is to avoid, as the RBA review observed, creating “conditions where debate and challenge are less likely to flourish”.

These are important observations. They reinforce the need (as I wrote last year) for a review into ASIC’s governance arrangements to clarify the respective roles of its chair, commission and executive team. Put simply, the corporate governance structure of Australia’s corporate governance regulator also “falls short of contemporary best practice”. This is a stark conclusion for the parliament that designed it. It is also a conclusion that has not gone unnoticed by the director-community that ASIC regulates.

Australia’s economic regulators also need better reporting benchmarks for the community to judge their effectiveness. These benchmarks also need to catch up to the private sector.

In 2021, a new performance framework for Commonwealth regulators was introduced by the Department of Finance.

While better assessments for regulators are urgently needed, these initiatives only seem to add another (one-size-fits-all) layer of reporting about generic matters (like “collaboration”). They also require reporting against the government’s statement of expectations (even though they have not been issued to key economic regulators for nearly two years). They do not emphasise reporting against core statutory objectives.

What gets reported, gets done. Not requiring specific reporting on a regulator’s legal objectives runs the risk of those foundational goals being missed or de­prioritised.

The statutory objectives of a regulator are its principal aims. They are the reason why the regulator exists. Despite this, my work at the Melbourne School of Government has revealed that it is rare for regulators to report on the achievement of these foundational objectives. Instead, it is more common for regulators to report on the achievement of strategic goals that they themselves define. It is also common for regulators to report on operational data (e.g., the number of enforcement actions). Unfortunately, these statistics say more about levels of activity than they do about overall effectiveness.

Accordingly, I have called for improved assessment and oversight of Australia’s economic regulators, particularly by parliamentary committees. Someone in authority needs to ensure that regulators are doing exactly what law mandates them to do.

Often these legislated objectives are complex, and in ASIC’s case, contradictory. They can pull regulators in different directions. Nevertheless, regulators have no choice – their objectives are set by law, and they should report on whether they have been achieved.

Just as companies do not define the accounting rules by which they report, neither should regulators avoid reporting on the achievement of what they were established by law to do.

This transparency would usefully highlight the significant structural complexity (and contradictions) that parliament endowed many of Australia’s key regulators. Hopefully, this could catalyse much needed reform. These contradictions should not be swept under the carpet, nor hidden by generic reporting.

Australia’s key economic regulators, and parliament, have much to catch up on: decade-long under-funding by successive governments; an evolution (if not revolution) in corporate governance; and meaningful reporting.

James Shipton is a senior fellow at the University of Melbourne’s School of Government.