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Industry Self-Regulation in Consumer Markets

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Chapter 2: Framework for the Taskforce Inquiry

At the outset of the inquiry, the Taskforce considered the approach it would take to examining the matters under reference. The scope of the Terms of Reference and the inquiry methodology the Taskforce intended to adopt were set out in the Issues Paper released in October 1999.

The Taskforce was established to advise the government on promoting effective industry self-regulation. The Taskforce inquiry is occurring in the context of the government's overarching policy on `making markets work' for the shared benefit of business and consumers. In this context, the Taskforce has defined effective industry self-regulation as industry initiatives that significantly improve market outcomes for consumers while reducing compliance costs for business.

Onerous compliance burdens are recognised as detrimental to business. What is less obvious but equally important is that consumers may also `pay' for sophisticated and costly industry self-regulatory schemes - notably in the form of higher prices. Moreover, industry self-regulation can also have the purpose or effect of inhibiting competition - with serious implications for consumers.4

It follows that consumers and businesses have a mutual interest in finding simple and inexpensive mechanisms for resolving market problems.

Principles

  • The appropriate form of self-regulation will depend on what is trying to be achieved - that is the way in which it is necessary to significantly improve market outcomes for consumers. This can vary within and between industries.
  • The form of self-regulation adopted by industry should be the one which effectively solves the identified problem and minimises costs for industry.

Reviewing particular schemes

Throughout the inquiry, the Taskforce was encouraged by some stakeholders to appraise particular models of industry self-regulation, to identify problems with particular schemes and to recommend specific improvements, perhaps including underpinning in law. Some stakeholders also anticipated that the Taskforce would identify particular markets where self-regulation should be initiated or where dispute schemes should be set up.

However, while the Taskforce supports regular reviews of self-regulatory schemes, the Taskforce itself did not have the resources or timeframe to be able to conduct meaningful and fair reviews of particular schemes - nor to conduct rigorous assessments of particular market circumstances that might benefit from the development of a self-regulatory regime.

The Taskforce is aware that there have been independent reviews or audits of certain existing code and dispute resolution schemes, each of which has involved a resource commitment comparable to the Taskforce inquiry. The Taskforce was cautious not to draw any conclusions about particular schemes on the basis of a fairly superficial analysis of each scheme.

Instead, the Taskforce has attempted to develop some principles to shape the development and review of schemes in the future. The Taskforce itself was not established to initiate or review individual schemes.

Analytical tools for identifying lowest cost effective options

Internationally, and also in Australia, in line with the drive for efficiency gains, there has been an increasing focus on regulatory reform.

Many of the analytical tools that have been developed to ensure effective regulation by governments can be adapted easily to ensure effective self-regulation by industry, and some of these are discussed below.

The Council of Australian Governments has issued Principles and Guidelines for National Standard Setting and Regulatory Action.5 While these guidelines were framed for proposed regulatory action by governments, the general principles apply equally to industry self-regulation. Under the COAG Guidelines, the impact of proposed

regulation must be assessed to ascertain that regulation is necessary, and if so, what is the most efficient regulatory approach to use. This assessment should consider:

The option of no action should be considered if it will produce the best outcome for consumers and industry. This option is worth pursuing if a self-regulatory scheme cannot prove that it will improve the situation.

Similarly, the guidelines prepared by the Office of Regulation Review to assist Commonwealth agencies to prepare Regulation Impact Statements (RIS), offered the Taskforce an attractive analytical framework for assessing the effectiveness of self-regulation.6 The RIS Guidelines also require identification of the problem being addressed, specification of the desired objective(s), identification of options and an assessment of the costs and benefits of each option.

Catalysts for industry self-regulation

Industry self-regulation is increasingly being seen as an alternative means of promoting fair trading, ethical conduct and streamlining compliance with agreed product and service standards in an industry. While industry self-regulation can advance consumer confidence in products and individual companies, it also can promote good business practices.

The Government is encouraging self-regulation because this mechanism is often more flexible and less costly for both business and consumers than direct government regulation. In the government response to the report of the Small Business Deregulation Taskforce, it was made clear that:

The Government is keen for industry to take ownership and responsibility for developing effective and efficient self-regulatory mechanisms where this is appropriate.7

Properly conceived and drafted, industry self-regulation can be a positive tool for industry and a safeguard for consumers.

It is generally accepted that well functioning markets produce better results for the community. Competition results in greater choice and lower prices for consumers and efficient resource allocation towards more successful suppliers.

Generally with clear information flows, markets provide incentives for business and consumers to resolve many of the problems without intervention.

However, markets can `fail' to deliver the optimal efficient allocation of resources in the economy for reasons, including the following.

In such circumstances, there is often an incentive for industries to self-regulate.

Markets may also fail to fulfil significant social policy objectives, with the result that the relevant industry may face a choice between government intervention or industry-based initiatives to ensure the market delivers results consistent with those desired by the community.

When industry is confronted with the demonstrated failure of the market mechanism to deliver a problem in the marketplace, the nature and magnitude of that problem must be accurately assessed. Failure to understand the problem may lead to an inappropriate solution being used. Such an outcome may have unintended consequences for many sectors of the community.

Identifying and quantifying the problem

The types of factors that need to be considered include:

The presence of market failure or absence of socially desirable outcomes may not be sufficient to justify industry setting up a self-regulatory regime. Inappropriate intervention could create new problems that are greater than the problems it was designed to fix. In particular, a self-regulatory scheme may have an incidental anti-competitive effect, the impact of which is more damaging to consumers than the original market problem.

For this reason, any intervention needs to be weighed up to ascertain whether the extent of the problem is sufficient to justify intervention.

The Taskforce believes that the specific problem and objectives need to be clearly defined before any decision is made about how the desired outcome is to be achieved. Once the decision has been made that intervention is necessary then the focus can properly shift to choosing the most appropriate model of regulation to achieve the desired outcome.

Choosing the appropriate solution from the spectrum of self-regulatory options

In a broad sense, regulation can be considered as a spectrum ranging from self-regulation where there is little or no government involvement, to quasi-regulation which refers to a range of rules, instruments or standards that government expects businesses to comply with, through to explicit government regulation. Further, there is an overarching legal framework governing fair trading, contract, negligence, privacy etc underpinning self-regulation,10 and the Consumer Law Centre of Victoria made the point that existing self-regulatory schemes can sometimes simply establish mechanisms for industry participants to comply with the law.11

There is also a spectrum of self-regulatory options to address market failure and social policy objectives and the art of developing effective self-regulation is to `customise' solutions to provide optimal outcomes.

The spectrum of self-regulatory options available to industry is a continuum.

It is a basic principle of industry efficiency and public welfare that the degree of intervention should be the minimum necessary to achieve the identified objectives. The manner of intervention should be that which imposes the least cost of compliance consistent with achieving the identified objectives.

The advantages of industry self-regulation to address market failure

As discussed in the Grey-letter Law report (1997), self-regulatory approaches can effectively remedy market problems, but can be as inefficient as any form of regulation if they do not address the underlying problem.12 Self-regulation is a means to an end, it is not an end in itself.

Amongst others, the Australian Information Industry Association recognised this, supporting self-regulation that enables industry to respond to rapid technological change, but warning that `a code that is poorly designed and improperly implemented can actually harm both its proponents and the public'.13 The Consumer Law Centre Victoria also thought it was important to acknowledge that self-regulation can be detrimental to consumer interests if it lowers standards or gives an appearance of legitimacy to questionable market players or practices.14

Self-regulation is a viable option if it can improve market outcomes with direct reference to lowering costs to industry participants and providing benefits to both businesses and consumers.

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.

Specific problems can be addressed on an industry wide basis, and so enhance the competitive process. However, it is also necessary to minimise the anti-competitive potential of industry self-regulatory schemes by ensuring that such schemes do not set up barriers to entry to the industry, nor stifle innovation or competition amongst industry participants. Self-regulation may not be appropriate in circumstances where other forms of regulation are able to provide more cost-effective outcomes.

As well as the costs involved in the implementation, administration, monitoring and enforcement of self-regulation, there may be other disadvantages. For example, community cynicism regarding industry regulating itself may lead to a distrust of self-regulation on some issues and the industry as a whole may be blamed for the practices of one or two disreputable firms. Individual firms that are not part of a self-regulatory scheme may also gain commercial advantages from having immunity from sanctions.

As a general guide to whether self-regulation is appropriate, the Taskforce endorses the Commonwealth Office of Regulation Review's Regulatory Impact Statement checklist. The checklist states that self-regulation should be considered where:

However, changes in the industry environment and market developments can effect the conditions underpinning self-regulation. It is important to monitor self-regulation to ensure that it is addressing what it was designed to achieve and to assess whether it is still the most appropriate form of intervention.

It is also evident that there is no one model for self-regulation. The Taskforce considers that good practice in self-regulation involves applying an appropriate scheme to a specific problem or objective. Ascertaining which scheme should be applied will depend on the nature and risk of the problem and the consequences of no action.

Chapter 5 will examine in more detail the industry environments and market circumstances where self-regulation may be appropriate and where it is not.


4 Industry self-regulatory schemes that inhibit competition are at risk of breaching the restrictive trade practices provisions of the Trade Practices Act 1974. The Australian Competition and Consumer Commission (ACCC) has the power to authorise such schemes on public benefit grounds, giving the schemes immunity from court action. Details of the ACCC authorisation process are available from the ACCC website at: http://www.accc.gov.au/adjudication/fs-adjudicate.htm.

5 Council of Australian Governments (COAG) endorsed by COAG in April 1995 and amended in November 1997, Principles and Guidelines for National Standard Setting and Regulatory Action by Ministerial Councils and Standard-Setting Bodies. This document is available from the Department of the Prime Minister and Cabinet, including on the Departmental website at: http://www.pmc.gov.au/briefing/doc/coagpg.pdf.

6 Office of Regulation Review 1998, A Guide to Regulation, Second Edition. Available on the Internet at http://www.pc.gov.au/orr/reguide2/index.html.

7 Statement by the Prime Minister, the Hon John Howard MP 24 March 1997, More Time for Business. Available on the Internet at: http://www.dewrsb.gov.au/group_osb/smallbus/moretime.htm.

8 This form of market failure is typically referred to as `information asymmetry' since there is an imbalance in the information available to suppliers and consumers. This does not necessarily imply that suppliers have `withheld' information that consumers need to make decisions; it may result from the complexity of the transactions involved and the expertise required to understand all aspects of such transactions. Nonetheless, information asymmetries are often remedied by improved information disclosure to consumers. The various forms of market failure are addressed in the Codes of Conduct Policy Framework released by the then Minister for Customs and Consumer Affairs in March 1998; this document is available on the Internet at http://www.treasury.gov.au (choose Consumer Affairs/Publications/Industry Self-Regulation Publications).

9 High transaction costs refer to the costs of participating in a market and include the costs of searching for relevant information and the costs of obtaining redress if a supplier fails to honour its side of the bargain.

10 Australian Business Limited submitted that self-regulation can enhance compliance with the law by adding detail and industry-specific guidance within a regulatory framework. (Submissions of 14 June and 18 July 2000).

11 Submission of 24 July 2000. The Consumer Law Centre of Victoria points out that the Code of Practice for the Fruit Juice Industry is based on trade practices law.

12 Grey-letter Law: Report of the Commonwealth Interdepartmental Committee on Quasi-regulation, 1997. Available on the Internet at http://www.pc.gov.au/orr/.

13 Submission of 20 July 2000.

14 Submission of 24 July 2000.

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Next: Chapter 3: Types of self-regulation in consumer markets in Australia