Does it matter if businesses do not respect their regulators? According to Finance Minister Grant Robertson, it does.

Responding to the Initiative’s report, Who Guards the Guards? Regulatory Governance in New Zealand, Mr Robertson said, “It’s incredibly important that these institutions are respected. It’s like a rugby game. Players have to have respect for the referee – even though it’s highly unlikely they will agree with every decision.”

The minister is right. And it is even more important off the field than on it.

A poor regulator can take perfectly good laws and make them oppressive. Or, as we saw with the Securities Commission’s policing of finance company disclosure in the lead up to the global financial crisis, take perfectly reasonable laws, and render them useless. Had the former Securities Commission been awake to the risks finance companies posed – and the extent of unlawful conduct – there is little doubt the losses to retail investors would have been less than the estimated $3 billion they suffered.

At the same time, if businesses lack confidence in the consistency and predictability of regulatory decision-making, this can stifle innovation and increase uncertainty and risk. Both harm productivity and increase costs. And it is consumers who ultimately pay the price.

So, it is in everyone’s interest – business and consumers alike – that regulators have respected expertise and appropriate checks and balances to ensure their powers are exercised efficiently, fairly, and effectively.


Finance minister encouraging
It is encouraging that the minister of finance said the government will consider our report seriously. And it will be surprising if the outcome of the minister’s review of the Reserve Bank of New Zealand’s governance arrangements does not see a strengthening of the internal accountability mechanisms relating to the bank’s regulatory functions.

But while the minister of finance may be convinced, one of his cabinet colleagues still needs some persuading. Responding to the Initiative’s report, Commerce Minister Kris Faafoi seemed willing to discount the views of business on the performance of the Commerce Commission. Mr Faafoi noted that “In effect, it’s just a review of a watchdog by those that are being watched.”

But the views of business on the Commerce Commission cannot be so quickly dismissed. Not when those same businesses rated other important regulatory agencies well – agencies like the Financial Markets Authority and the Takeovers Panel (neither of which has ever been described as a soft touch). The results suggest the issue is with the particular referee ­– not with referees generally.

And if we can tell something from the relative ratings of different regulatory agencies, the differing ratings businesses gave the commission itself on different aspects of its performance, are also telling. On some, the commission did as well as some of the best agencies. So, on clarity of objectives, it scored well. But it dropped the ball on each of predictability and consistency, commercial understanding, and accountability.

The mixed results indicate the commission’s poor overall scores were not simply businesses bad-mouthing the ref – but a considered response to what the commission does well and what it does not. And overall it scored poorly. The minister of commerce should be concerned about this.


Commerce Minister’s reservations
Mr Faafoi raised a second reservation with the Initiative’s assessment of the Commerce Commission’s condition. Our report blows the whistle on the commission’s governance arrangements. They are based on the ‘commission model’ of the former Securities Commission, with commissioners who have both governance and executive roles.

When the FMA rose from the ashes of the former Securities Commission, it was reconstituted with a board. And a global search was carried out for a world-class chief executive with financial regulatory expertise.  With governance and executive functions largely separated, the government was then able to recruit a highly respected governance board. It is well-placed to hold the executive to account. And it clearly does.

But this is in stark contrast to the commission model of the Commerce Commission (and the former Securities Commission), where executive power resides in the commissioners. With the best will in the world, executive commissioners will struggle to hold themselves to account.

Responding to this criticism, Mr Faafoi noted that the commission’s model is also shared by the Takeovers Panel and the External Board – both of whom fared well in the survey.

But the similarities between the three regulators are a matter of form rather than substance. Like FMA board members, panel members at the Takeovers Panel and board members at the XRB are part-time outsiders. They spend two or three days a month – rather than the three to five days a week spent by commerce commissioners. So they bring the same outside perspective and outside expertise to their organisations as do members of the FMA’s board.

The problems with the Commerce Commission cannot be easily side-stepped. It is the minister’s role to guard the guards. It is time he used his whistle.