User-pays ASIC model shift costs, but is bad for the public interest

The discussion paper released by Assistant Treasurer Josh Frydenberg suggests that businesses be “levied” to pay for a large part of the costs incurred by the Australian Securities and Investment Commission.

At present ASIC is largely funded from consolidated revenue. The new proposal is that industry should pay a much larger share. In essence costs would be shifted from government onto business.

The arguments made in the discussion paper in support of this increase in business taxes are:

• the Financial System Inquiry suggested it;

• the change would ensure that the costs of the regulatory activities undertaken by ASIC are borne by those creating the need for regulation (rather than all taxpayers);

• it would establish price signals to drive economic efficiencies in the way resources are allocated in ASIC;

• it would improve ASIC’s transparency and accountability.

There are a number of problems with the proposal.

The fact that it was suggested by the Financial System Inquiry is important but not decisive. It seems likely that the Government will pick and choose amongst the recommendations of the Inquiry, supporting some and not others. The recommendation is thus a factor but not a deciding one.

The second argument is far more interesting. The discussion paper pitches the proposal as an example of user pays. The logic is that consumers of financial products need to be protected and that the costs of ASIC providing that protection should be paid by the firms operating in that industry.

By similar logic all consumer product protection undertaken by the ACCC should also be costed out to the industries involved. All food safety protection might be dealt with the same way and all border protection might be farmed out to all international travellers. We would not even need public schools, because students could be charged for the educational services they receive.

Clearly we could operate that way. In effect, our taxation system would not be necessary and it would be replaced by a complex system of user charges. Unfortunately the Minister is not proposing to reduce general taxes, just to raise some specific ones.

The suggestion that the system of levies paid by industry would improve ASIC’s transparency and accountability appears naïve. Under the current arrangements ASIC has to fight for its funding in the budget round with a Finance Department determined to restrain the growth of public spending.

The new proposal shifts ASIC towards a cost-plus framework, overseen by an array of committees to entities it regulates. Thee would still be some budgetary oversight but inevitably the disciplines would be weaker.

The proposal is rather like asking the players before a match to announce publicly how much they were going to pay the referee. It will be difficult for the groups being regulated by ASIC to complain about its spending for fear of potential retribution. Costs are likely to rise as a result.

The way in which the system will be managed creates further problems. Frydenberg proposes setting panels of industry representatives to oversee the ASIC budget proposals. For a minister responsible for reducing red-tape, it is a very unusual proposal. It is complex, it shifts even more costs onto industry, and is likely to be completely ineffective.

Inevitably it will result in groups fighting with each other to shift ASIC’s costs from between categories and ASIC has the potential to set them off against each other. And there will still be some budgetary oversight so there are no savings just costs.

The proposal will have strong support from ASIC and Finance, and will probably succeed. ASIC has lobbied hard to have accepted its cost-plus model of funding raised from the parties it regulates. The Finance Department too will appreciate having more of ASIC’s costs shifted off budget.

However it is not clear that the proposal is in the public interest. It does not reduce costs. It is an increase in business taxes. The budgetary pressure on ASIC will be reduced and ASIC is likely to grow a lot bigger. The mechanisms proposed to raise the funds are also complex and shift further costs onto the industry.

Looking further ahead, if ASIC succeeds in shifting costs onto industry, other regulators will surely follow. The consumer protection functions of the ACCC are almost the same as those of ASIC so it will certainly follow the new funding model.

Separating the regulators from most of the normal disciplines in the budget round could make them lazier, cost-plus operations, but there are also examples in the international experience where by encouraging the regulator and the regulated closer together creates increased potential for regulatory capture.