Ex-ASIC chair James Shipton proposes a new performance framework for our regulators

Former ASIC chairman James Shipton. Picture: Aaron Francis

I wrote recently that the Australian Securities & Investments Commission’s deficient accountability arrangements was a structural fault.

In large part, this is due to the absence of a consistent performance framework applied by both ASIC itself and its oversight bodies. This is common to many regulators, domestic and international.

Unfortunately, there is no universally recognised assessment framework for regulators. Instead, different models are applied at different times.

These ad hoc frameworks do not afford regulators a consistent tool for long-term performance assessment and strategy setting. These ad hoc reviews are also often subjective to the experience of the person(s) conducting them, without reference to a stand-alone, objective methodology.

Moreover, the absence of a consistent framework inhibits meaningful comparisons of regulatory effectiveness across agencies. Instead, comparisons are often just snapshots.

What’s more, many performance reports (especially from regulators themselves) focus on outputs, instead of outcomes.

On this point, the banking royal commission noted that “the number of proceedings filed, or infringement notices issued, will say little about ASIC’s enforcement culture”. These statistics, alone, say little about the deterrence impact they have.

Achieving and maintaining effectiveness is fundamental to a regulator’s deterrence and regulatory credibility, and its legitimacy in the eyes of the community that it serves. An objective assessment performance framework is urgently needed.

Again, there is no universally accepted regulatory effectiveness methodology.

In Australia, the standard assessment used is a capability review. Capability reviews, originally developed for policy agencies, are designed to be a “forward-looking … (assessment of) an agency’s ability to meet future objectives”. Nevertheless, capability reviews have a limitation as they “do not explicitly make an assessment of an agency’s past performance … instead (they) focus on … the ­anticipated future operating ­environment”.

Not assessing past performance is an unfortunate omission, particularly for action-oriented regulators. Past performance is a key input for determining current effectiveness and to inform strategic planning. The “anticipated future operating environment” is also extremely difficult to identify with precision.

I suggest that a regulator’s effectiveness is a function of its capability, capacity and coverage to achieve its regulatory objectives. Regulatory objectives are the benchmark because, as the royal commission said, regulators are “defined by statute and the tasks entrusted to each regulator by its statute must be the foundation of any assessment”.

Given this, I developed the regulatory objectives: capability/capacity/coverage (ROCCC) assessment model with the assistance of several former heads of regulatory agencies, and my colleagues at the Melbourne School of Government.

The framework can be adapted to different regulators and sectors. Accordingly, the approach could be of use to key economic regulators like ACCC, ASIC, APRA and Austrac, among others.

The framework also enables the creation of a regulatory performance “language”. Too often words like “capability” are used interchangeably with “capacity”, “coverage” and “effectiveness”; confusion results. Accordingly, the framework adopts the following regulatory language:

● Regulatory objectives are the regulator’s statutory objectives set by parliament. They also include the government’s statement of expectations.

● Capability is the extent to which the regulator possesses the means and skill to achieve its objectives. Means are the actions or systems by which the regulator pursues its objectives (such as regulatory tools, technology, and posture). Skill is the regulator’s ability, talent, or proficiency (such as people).

● Capacity is the maximum capability that the regulator can apply. Capacity identifies the internal and external constraints impacting the agency.

● Coverage is the extent to which the regulator’s capability and capacity covers its jurisdiction. This is the depth and breadth of the regulator’s actions.

By way of simple explanation, a highly capable regulator with limited resources will be capacity-constrained when regulating a large jurisdiction. Its effectiveness would be further reduced if it could only cover a fraction of its perimeter. Only when capability, capacity and coverage to achieve regulatory objectives are considered can we accurately assess ­effectiveness.

The framework analyses each ROCCC component separately before assessing them together. Understanding each component identifies whether the regulator is deficient in capacity, capacity or coverage. It also provides a tool for strategy planning, by determining if existing goals are being met. This understanding also identifies possible ‘trade-offs’ of choosing different priorities over others that are effective – the regulator’s dilemma.

The analysis of each ROCCC element is strategically useful itself, particularly:

● Regulatory objectives to identify whether the agency’s goals are still fit for purpose.

● Capability to improve regulator’s skill and means (such as organisation, tools and technology).

● Capacity to identify budget and resource constraints.

● Coverage to assess how the regulator covers its perimeter, and guard against mission creep or failure.

Whether or not the ROCCC methodology is adopted, our regulators urgently need a consistent and objective performance model to be effective and credible. Our community and economy depend on it.

James Shipton is a former chairman of ASIC.