The Government has an objective of lowering regulatory costs on business and improving market outcomes for consumers, by encouraging self-regulation, where this is the most effective option for addressing an identified problem. The Government also has the objective that industry should take increased ownership and responsibility for developing efficient and effective self-regulation.
Before deciding on the most appropriate regulatory response, any specific industry problems and objectives need to be clearly defined. Once the decision has been made that intervention is necessary, recognising that regulation in any form can potentially set up barriers to entry to the industry, or stifle innovation or competition amongst industry participants, then the focus can properly shift to choosing the most appropriate model of regulation to achieve the desired outcome.
In a broad sense, regulation can be considered as a spectrum ranging from self-regulation where there is little or no government involvement, through quasi-regulation which refers to a range of rules, instruments or standards that government expects businesses to comply with, to explicit government regulation.
Consistent with its Terms of Reference, the Taskforce has examined the option of self-regulation.
Australia is at the forefront of international policy initiatives to promote regulatory reform and effective self-regulation. The Taskforce has had regard to the international experience with industry self-regulation in this report. An outline of international policy and practice can also be found in Appendix D of the Taskforce's Draft Report.
Self-regulatory schemes tend to promote good practice and target specific problems within industries, impose lower compliance costs on business, and offer quick, low cost dispute resolution procedures. Effective self-regulation can also avoid the often overly prescriptive nature of regulation and allow industry the flexibility to provide greater choice for consumers and to be more responsive to changing consumer expectations.
The Taskforce recognised that self-regulation may not be appropriate in all circumstances. Other forms of regulation may provide more cost effective outcomes in certain cases. As well, community cynicism regarding industry regulating itself may lead to a distrust of self-regulatory schemes unless schemes operate effectively and consumers have confidence in them.
Individual firms that are not part of a self-regulatory scheme may also gain commercial advantages from avoiding the costs and sanctions involved in participating in self-regulation. However, these problems are not unique to self-regulatory schemes and in practice can exist within regulated industries.
Self-regulation includes a host of options ranging from a simple code of ethics, to codes that are drafted with legislative precision together with sophisticated customer dispute resolution mechanisms.
The Taskforce has examined self-regulation in terms of significantly improved market outcomes for consumers with direct reference to lowering costs to industry participants, thus providing shared benefits to both businesses and consumers. This approach focuses on the efficiency and effectiveness of self-regulatory structures. The Taskforce has assessed that there needs to be a balance between minimising costs for business and the benefits to both business and consumers by looking at the market circumstances where self-regulation arose.
Good practice in self-regulation involves applying an appropriate scheme to a specific market failure or social policy objective. Ascertaining which scheme should be applied will depend on the nature and risk of the market failure and the consequences of no action. In other words, there is no one model for self-regulation. Nonetheless, it is possible to identify common characteristics of successful schemes and the Taskforce has done so in Chapter 6 of its report.
The Taskforce has applied these principles when inquiring into and reporting on its Terms of Reference. The Taskforce has reached the following conclusions which are cross-referenced to the body of the report to assist readers to locate the discussion of, and rationale for, each finding.
Chapter 3: Types of self-regulation in consumer markets in Australia
There are different reasons for establishing self-regulatory schemes. Industries may self-regulate to improve the image of suppliers or to promote consumer confidence in new products or technologies. Industries may also self-regulate to avoid regulation, satisfy legislative requirements or minimise costly litigation.
Industry has an array of self-regulatory options available to address specific problems and objectives, including codes of conduct, industry service charters, guidelines and standards, as well as industry-based accreditation and complaint handling schemes.
The Taskforce examined self-regulation across a broad range of industries, including broadcasting and media, telecommunications, and financial services. The Taskforce also examined many self-regulatory schemes dealing with marketing practices generally - including advertising, direct marketing and the use of scanning equipment in supermarkets.
The Taskforce reached the following conclusions:
1. There is a broad and diverse range of self-regulation at the national level affecting consumers (page 24).
2. There is no single model for industry self-regulation as it depends on what is trying to be achieved (page 24).
Chapter 4: Gaps and overlaps in the coverage of self-regulation
Self-regulatory schemes operate in dynamic markets, which are influenced by globalisation, increasing vertical integration, and the growth of `hybrid' products that span traditional markets or industries.
As a consequence, gaps and overlaps can emerge in the coverage of various products, services, sectors and industries. Similarly, existing self-regulatory schemes may find themselves covering the same ground where the distinction between products or services has become blurred.
It is undesirable that there be market problems that are not addressed by industry self-regulation, as consumers may find it costly and time consuming to obtain redress through the Courts. It is equally undesirable that there be inefficient duplication of self-regulatory schemes. The Taskforce is confident that self-regulation is sufficiently flexible to respond quickly to new market issues.
In short, the Taskforce concluded that:
3. Gaps and overlaps continually emerge and re-emerge in dynamic markets (page 33).
4. A `gap' in the market does not necessarily mean that self-regulation is the appropriate solution (page 34).
5. Self-regulation is a flexible response to market failure and may fill a `gap' quickly and efficiently (page 34).
6. Some small businesses can have difficulties in participating in self-regulatory schemes as can consumers (page 34).
Chapter 5: Industry environment and market circumstances where self-regulation is likely to be most effective
Self-regulation is not the answer to every market failure and all social policy objectives. The Taskforce was asked to provide some guidance for industry and policymakers as to where self-regulation is likely to prove most effective.
There is a general recognition that industry self-regulation is often more flexible and less costly for both business and consumers than direct government involvement. However, it is necessary to ensure that self-regulation is the appropriate form of intervention given the particular industry environment and market circumstances.
The circumstances where self-regulation is likely to be most effective will depend on the nature and extent of market failure, the market structure, industry and consumer interests.
Nature and extent of market failure
7. Self-regulation is likely to be most effective where there are cl
early defined problems but no high risk of serious or widespread harm to consumers (page 44).
8. An industry environment with an active industry association and/or industry cohesiveness is most likely to administer effective self-regulation as industry participants are more likely to commit financial resources, consult with stakeholders and monitor the effectiveness of self-regulation (page 48).
9. Self-regulation is less effective where there is a broad spread of smaller businesses that do not communicate with each other (page 49).
10. Self-regulation is more likely to be effective in a competitive market as industry participants are more likely to be committed to it, either to differentiate their products or in fear of losing market share (page 48).
11. A more mature industry may be able to administer more effective self-regulation, as industry participants are more likely to have sufficient resources and be more committed while any `shakeout' of rogue traders may already have occurred (page 50).
Industry and consumer interests
12. Self-regulation is likely to be most effective where firms recognise that their future viability depends not only on their relationship with their current customers and shareholders, but also on the wider community (page 50).
13. The more incentives there are for industry participants to initiate and comply with self-regulation, then the more chance a scheme can remedy specific industry problems (page 53).
14. The extent to which industry participants are prepared to sign up to a self-regulatory scheme will affect the ability of that scheme to provide effective self-regulation. Where a scheme has a high level of consumer recognition, to the point where consumers will favour scheme participants when making purchasing decisions, then the scheme is most likely to be effective. This will create incentives for non-members to join the scheme (page 55).
15. The interests of all levels of industry should be considered in the development and maintenance of a self-regulatory scheme, and particularly the level of involvement of smaller businesses where appropriate (page 56).
16. Where there are cost advantages and/or increased flexibility in self-regulatory initiatives to address specific industry problems compared with government regulation or the court system, then there is a greater chance of improving market outcomes for both business and consumers, and minimising compliance costs for businesses (page 56).
Chapter 6: Good practice and cost effective self-regulation methods
There is no single `best practice' model for self-regulation because a successful model needs to be designed to address particular problems identified in the context of particular market circumstances. Accordingly, the Taskforce considered it inappropriate to develop a `checklist' of features of good self-regulation. Nonetheless, it is possible to identify critical elements that, individually or collectively, have underpinned effective schemes.
Good practice in self-regulation can be understood as significantly improving market outcomes for consumers at the lowest cost to businesses, and the following factors were seen as contributing to this.
17. Consultation between industry, consumers and government can help ensure that specific problems and social policy objectives can be identified and addressed (page 63).
Coverage and publicity
18. Increased industry coverage of schemes ensures that the benefits from standards of practice in schemes flow to consumers. Wide coverage also ensures that consumers can identify self-regulatory schemes (page 65).
19. Clarity in the schemes' documentation can help industry understand their obligations and assist dispute schemes interpret legal rights. Clarity can also help consumers understand their rights (page 65).
20. Consumer awareness of schemes ensures that consumers know where to lodge complaints. Schemes are encouraged to make use of new technologies such as the Internet, make complaints cost free to the consumer, write sample letters of complaint, take oral complaints, provide personal contact and transfer complainants between schemes (page 66).
21. Industry awareness campaigns and education about schemes is needed to make sure industry participants understand their obligations and, where appropriate, understand the consequences of failing to abide by these obligations (page 68).
22. A good administrative body can identify issues, collect data, monitor the scheme, enhance credibility and ensure compliance costs are at an effective minimum level (page 69).
23. Data collection by an industry scheme is a valuable tool in identifying systemic issues and allows industry to address these problems, which in turn, can improve market outcomes for both businesses and consumers (page 70).
24. As consumers cannot guard against specific industry problems that they do not know exist, transparency in schemes is an important mechanism to ensure credibility and accountability (page 71).
Dispute procedures and sanctions
25. Industry adherence to self-regulatory schemes is essential to ensure that the benefits flowing from the standards of practice set by schemes are passed onto the consumer (page 71).
26. Where the standard of conduct has been breached, self-regulatory schemes should incorporate complaint handling and dispute resolution mechanisms to provide appropriate redress to consumers. The appropriate redress mechanism will depend on the nature of the specific problem and the consequences of non-compliance (page 73).
27. A range of sanctions can be used by industry in order to achieve compliance depending on the nature of the specific problem and consequences of non-compliance. The severity of the sanction should depend on the seriousness of the breach (page 75).
28. Industry needs to manage the risk of any anti-competitive practices in schemes, particularly where sanctions are involved (page 77).
Monitoring and reviewing
29. Monitoring of self-regulation is essential to ensure that it is still relevant to the industry addressing specific problems and improving market outcomes. In this context, reviews and annual reporting are important tools for monitoring schemes and can also assist in the transparency and accountability of schemes. Preferably, reviews should be periodic, independent and the results made publicly available (page 78).
30. Self-regulation comes at a cost, in administration, promotion and compliance. However, self-regulation can be cheaper (in terms of compliance costs) and more flexible than government regulation and the court system. Ultimately, the consumer bears the cost of regulation in most cases as it is part of a firm's cost structure (page 82).
31. Any funding arrangement for self-regulation should be transparent and designed so as not to put businesses at a competitive disadvantage through excessive compliance costs (page 85).
Chapter 7: Approaches to promoting and coordinating industry self-regulation
There are a variety of options for designing and promoting self-regulatory schemes and what works for one industry may not work for another. It follows that the `mix' of industry, government and consumer involvement that works well for one self-regulatory scheme may be inappropriate for another.
Industry approaches to promoting self-regulation
32. Experience has shown that industry will initiate a self-regulatory scheme in response to a clear commercial imperative to win consumer confidence and boost sales (page 89).
33. Industry may promote self-regulation as an alternative to government regulation where there is perceived to be a serious market failure or important social policy objective
Role of government in promoting and coordinating self-regulation
34. Government involvement in self-regulation is justified when there is a public policy objective that would otherwise call for a regulatory response (page 91).
35. Government can assist in analysing systemic problems in an industry and in facilitating the design of a self-regulatory response to address those systemic problems (page 96).
36. Government can assist in integrating schemes into the regulatory framework (page 96).
37. Government is uniquely placed to promote international cooperation and harmonisation of self-regulatory initiatives (page 96).
38. The degree of government involvement will depend on the significance of the market failure or social policy objective being addressed and the consequences of self-regulation proving ineffective (page 99).
Role of consumer advocates in promoting self-regulation
39. Consumer input is important in the development and in maintaining the relevance of self-regulation. Consumer advocates can promote consumer confidence in self-regulatory schemes (page 104).
40. Consumer participation will be limited by human and financial resource constraints if there is no external financial assistance forthcoming (page 106).
41. Code administration authorities established by industry should take responsibility for the monitoring and review of self-regulation, in consultation with government and consumer groups.
Chapter 8: Options that facilitate the improvement and harmonisation of dispute resolution schemes
Effective dispute resolution is a crucial element of industry self-regulation offering redress to consumers and it can also identify systemic problems in the industry. Dispute resolution schemes are an excellent monitoring tool increasing performance and industry standards.
42. In the future dispute resolution schemes may operate across different sectors with similar products/services, driven by changes in technology and market circumstances. Harmonisation of schemes would be less costly and less confusing to consumers and the use of umbrella-type arrangements with a single co-ordinated access point would likewise be of assistance to consumers (page 115).
43. Promotion of dispute resolution schemes to consumers raises their awareness of the availability of quick and inexpensive redress (page 116).
The Taskforce encourages the government, in addition to existing guidelines and benchmarks, to provide industries with further practical guidelines based on the principles flagged in this report to help inform/assist the development and review of self-regulatory schemes.
The Taskforce also encourages the government to consider up-dating its guidelines for policy makers on how to assess the range of options for addressing a particular market failure or social policy objective. The purpose of such a revision would be to incorporate the Taskforce findings on the industry environment and market circumstances that are most likely to lead to effective self-regulation.