When Regulators Roam Out Of Control

Written by:
28 August 2019
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Ask Australian business people and industry representatives in formal meetings about our nation’s regulatory burden, and you will be told that reform is necessary, a governmental inquiry would be welcome, and the evidence detailing the burden of red tape is persuasive.

Ask them privately, and the language is much less measured. They will say that the sea of legislation is vast and impenetrable, that additional regulations being proposed are insult piled upon insult, and that regulators are out of control. It is a potent combination of private anger and public diplomacy and acquiescence.

Business leaders look at financial estimates of the cost of red tape and say they still do not capture the Kafkaesque nightmare of dealing with a regulator determined to make itself a not so silent partner. Previously it has been difficult to quantify the cost of such harassment, but last week’s Federal Court judgment in ASIC v Westpac demonstrates it to be it is $34 million of shareholder funds just for one company.

Australian entrepreneurs with operations in the USA have endorsed President’s Trump use of rules such as “one in two out” for new regulations, and seen the economic upside. But more than that they’ve seen the importance of regulators being brought back within the confines of the rule of law. As one with experience of the Obama era put it to me, what do you do when a team from the EPA literally parks itself in your head office for months on end, asking endless questions and interfering in decision-making?

In search of quantifiable evidence of the red tape burden, the IPA has counted pages of legislation, as was done recently in the financial services sector. This revealed that while there was an already impressive 9,524 pages of relevant legislation, plus a further 19,011 pages of regulation, and an even more incredible variety of ‘regulatory dark matter’ such as the guidelines, notes, advice and so on, running to 56,965 pages.

We’ve also cooperated in a project using world-leading AI techniques revealing the number of regulatory restrictions in Federal legislation has increased from about 2,000 in the late 1970s to 95,000 by 2015. This analysis is fundamental to build a case for change, but there is the further research challenge of how best to capture and cost the culture of unlimited discretion in which regulators operate?

At last, there’s direct evidence, thanks to a landmark case of ASIC’s pursuit of Westpac for alleged breaches of the National Consumer Credit Protection Act 2009. The detail of the case is literally irrelevant. Just as Herr K in Kafka’s The Trial was never told the nature of his offence; it was the power of the prosecutor and not the strength of its case that mattered.

For a considerable period, Westpac argued with gusto the merits of its defence, but ultimately it caved and in November 2018 agreed to a settlement in which it would have paid a $35 million fine. Striking a blow against expediency and for the rule of law, Justice Nye Perram in the Federal Court refused to endorse the settlement, stating “I will not declare conduct which is not unlawful to be unlawful. “How,” he asked, “can the court be expected to assess the reasonableness of the proposed penalty if it be left in the dark about what the actual problem is?”

Despite this more than reasonable question ASIC simply resumed pursuit of its quarry through the court, but on 13 August 2019, Justice Nye Perram in the Federal Court found wholly in favour of Westpacon points of fact and on points of law. ASIC was ordered to pay costs.

In response, ASIC said it would “carefully examine” the judgment but that in any event, it had been a “test case”. If it was such an important test case, why had it been so willing to settle in 2018? The reality is that maintaining ambiguity by NOT testing the law would have allowed it greater scope to pursue other companies. Labelling it now a “test case” is a risible retroactive rationale for prosecuting a corporation for the ‘vibe’ of its alleged offending.

I raised this case with Dr Chris Berg of RMIT University (and Adjunct Fellow on the IPA) on the IPA’s Looking Forward Podcastand Chris – whose doctoral dissertation was on the Australian banking system – pointed out a litany of previous such cases where ASIC’s pursuit of alleged corporate wrongdoing had comprehensively failed in court. These include Australian Securities & Investments Commission v Fortescue Metals Group Ltd [No 5] [2009] FCA 1586and a case against a former AWB Executive which the judge labelled an “abuse of process” which “brings the administration of justice into disrepute in the minds of right-thinking people.”

We and our fellow panellists also discussed how regulators like ASIC (but not only ASIC) use regulatory dark matter (so-called soft law), enforceable undertakings, and ‘cooperative regulation’ to achieve outcomes never contemplated by and certainly not overseen by democratically elected representatives.

I can only imagine – and certainly hope – that in the Westpac boardroom when their case was discussed in late 2018 the tone of the conversation veered towards the anger and frustration I described earlier. But nevertheless, the decision was for abasement and apology for a crime directors must have known their corporation had not committed (since the crime could not even be accurately described). It was submission to a forced confession in a manner that would have made Lenin or Torquemada proud.

Before the Federal Court’s decision, we did not know how to quantify the price we pay for our out of control regulators, how to quantify the price we pay for a culture in which regulators can endlessly abuse their authority and operate well beyond the rule of law. Thanks to Westpac and Justice Nye Perram we now know: $34 million, multiplied across every large and small business in Australia.

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