Deregulation needs to be a priority in COVID recovery

Business and government need to change their culture and approach to deregulation to encourage appropriate risk taking, says Professor Pamela Hanrahan.

Within weeks of the March lockdown, policymakers were already turning their attention to reform initiatives to support the post-pandemic recovery. Reserve Bank Governor Philip Lowe pointed in April to an urgent need to reinvigorate the productivity and growth agenda. Priority areas identified for attention by the Treasurer in his May ministerial statement included skills and education, infrastructure, tax reform, industrial relations reform and deregulation.

Experience shows that effective deregulation is hard to achieve. Every federal government since Fraser has promised to reduce the regulatory burden. In April 2007, then Prime Minister Kevin Rudd, in an address to the National Press Club, called business regulation “right out of control” adding, “the quantity and complexity of business regulation today is eating away at the entrepreneurial spirit of Australian business”. In a speech to the Sydney Institute in 2013, Josh Frydenberg laid out an ambitious agenda for regulatory reform. And in July 2019, Prime Minister Scott Morrison announced that the Abbott-era red-tape reduction project would be replaced with a new Deregulation Taskforce with “a laser focus on reducing the regulatory compliance burden on business”.

Against this background, numerous inquiries and reviews over the past two decades have produced a laundry list of recommended regulatory reforms, including the Productivity Commission Shifting the Dial report in 2017. Several have also examined the processes by which regulation accretes within government. But despite the apparent political commitment to deregulation, little improvement is evident. If things are to be different this time, then both business and government need to change their culture and approach to deregulation.

Deregulation is a concept encompassing a range of strategies. A paper published by the Brookings Institution in the US in 2017 identifies four distinct strategies: increasing competition in a regulated market; reducing restrictions on conduct; removing outdated, inconsistent or unnecessary rules; and eliminating particular disfavoured regulatory impacts.

In the 1970s and ’80s, deregulation was often about reducing barriers to entry or price controls in network industries and occupations, opening them up to market competition. Government involvement shifts from regulating the terms on which parties interact to regulating to protect the market in which they interact. This century, privatisation and marketisation has spread into areas previously the responsibility of government, including social services.

Restrictions on conduct

The second strategy (reducing restrictions on conduct) involves dialling down legal requirements that command or constrain conduct by reducing the stringency or scope of individual rules. For example, a prudential regulator might reduce the amount of capital a financial institution is required to hold (stringency) or exempt institutions from a requirement to comply with a capital requirement (scope). This preserves the policy intent of the regulation, but prunes its application. Another important consideration in this strategy is rule design. This is concerned, for example, with whether government rules or self-regulatory norms are more effective, or principles-based or black letter law is more appropriate, in different contexts.

The third strategy is red tape reduction. The intention here is to improve administration and make the existing regulatory stock more efficient and streamlined. Initiatives such as regulatory stewardship in New Zealand, and the OECD’s recent project on “one-stop shop” government portals fall into this category. The focus is on reduced compliance costs for business. Digital technologies have a significant potential to improve regulatory efficiency if individual rights can be adequately safeguarded.

The fourth strategy is described in the Brookings paper as “removing disfavoured regulatory impacts”, which regulated entities argue get in the way of employment and growth. Because it goes to the underlying policy intent of the regulation, this strategy typically involves contested political choices. For example, reducing or truncating approval processes for infrastructure or development projects may come at the cost of environmental protection or community objectives.

Regulatory agencies and risk taking

In the current crisis, two other aspects of deregulation are also in play. The first concerns the approach of regulatory agencies to inspections, surveillance, enforcement and compliance. In April, ASIC announced it was temporarily adjusting its regulatory work and priorities to work “constructively and pragmatically with the firms we regulate, mindful that they may encounter difficulties in undertaking their regulatory work due to the impact of COVID-19”. This included shelving its close and continuous monitoring program for the duration of the lockdown. The level and focus of regulatory engagement by all agencies will remain under significant scrutiny in the recovery.

The second concerns the broader liability settings that can impact on the capacity and willingness of business to take risks and innovate. In conditions of uncertainty, directors concerned about their potential exposure to regulatory enforcement or class action claims may hesitate. While changes to limit directors’ liability for insolvent trading were part of the government’s immediate crisis response, further reform in this area may be necessary — including to directors’ duties and continuous disclosure.

All of this points to a significant deregulation agenda. The OECD Secretariat, in consultation with the chairs and the bureaus of its Regulatory Policy Committee and Network of Economic Regulators, recently noted the pandemic “makes the need for trusted, evidence-based, internationally co-ordinated and well-enforced regulation particularly acute”, and emphasised that “beyond the immediate crisis response, regulatory issues are also at the heart of economic and social recovery, as well as better preparedness for future crises”. Poorly designed regulation has a direct cost in wasted compliance efforts, but its indirect impact on competition and innovation is even more significant. The regulatory framework is a vital piece of economic and social infrastructure that requires constant attention and enhancement.

In Australia’s federal system, working across jurisdictions and levels of government compounds the difficulties in achieving meaningful change. The national cabinet process may assist. As the COVID-19 crisis unfolded, governments responded quickly with a range of deregulatory measures. These ranged from relaxing rules on the sale of takeaway alcohol to clarifying the responsible lending laws to facilitate the flow of credit to SMEs. The Treasurer’s May statement pointed to more than 80 regulatory changes made at federal level and announced the deferral of new regulatory requirements including some arising from the banking Royal Commission.

This suggests deregulation is possible, but requires courage and urgency. Without it, politicians and regulators — sensitive to partisan attack and suspicious of lobbyists who urge opportunistic change — can shy away from clearly articulating their underlying policy goals or having a sophisticated discussion about the optimal way to achieve them. Effective deregulation that goes beyond red tape reduction requires a frank discussion with all stakeholders about the trade-offs inherent in regulation and the level of risk in commercial dealings the community is prepared to accept.

The highly path-dependent nature of regulatory systems makes winding existing rules back challenging. Processes that leave recommendations on the shelf and ignore legal/regulatory design expertise cannot continue.