Chapter 6: Good practice and cost effective self-regulation methods
The Taskforce is to inquire and report on best practice and cost effective self-regulation methods and approaches.
The Taskforce believes there is no single `best practice' model for self-regulation because a successful model depends on particular market characteristics and needs to be designed accordingly. However, it is possible to identify critical elements of schemes which individually or collectively have underpinned successfully operating schemes. A number of these elements are identified through the report.
Good practice in self-regulation can be understood as significantly improving market outcomes for consumers at the lowest cost to businesses. A particular self-regulatory scheme may not be appropriate in circumstances where other forms of regulation are able to provide better outcomes at a lower cost. For example, the costs involved with a complex customer dispute resolution mechanism may not be justified if the scheme only receives a few complaints per year. Further, the costs involved in administering such a scheme may be translated into higher prices for consumers so, in this case, would not constitute a better market outcome for either business or consumers.
Good practice in self regulation involves addressing industry specific problems and objectives.
The type of self regulatory scheme should be the effective minimum solution.
17. Consultation between industry, consumers and government can help ensure that specific problems and social policy objectives can be identified and addressed.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
28. Industry needs to manage the risk of any anti competitive practices in schemes, particularly where sanctions are involved.
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.
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.
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.
Self-regulation is very broad and covers guidelines, quality management systems, standards, codes, dispute resolution schemes etc. Although there is no one model for good self-regulation, the Taskforce considers that there are elements of good practice that are consistent amongst schemes.
Addressing specific problems and objectives
The form of self-regulation adopted by industry should be the effective minimum solution to the specific problem to minimise compliance costs for business.
The Australian Chamber of Commerce and Industry argued that self-regulation allows industry to respond to concerns raised by consumers and identify solutions to problems by utilising the resources and expertise unavailable to government. It commented that under self-regulation, industry (often through associations) could assume responsibility for concerns raised by the community and is able to interact directly with stakeholders to resolve the problem. 141
The Australian Chamber of Commerce and Industry also submitted that self-regulation enables commerce and industry to respond more efficiently and effectively to the changing concerns of consumers. It will also empower users, whether business or householders, through the market-mechanisms.142 In the telecommunications industry, the Telecommunications Industry Ombudsman commented that good practice in self-regulation involves the ability to address specific problems which affect consumers. Reduced to the most basic issue, the problems facing consumers are those that involve the transition from a previously monopolistic environment in telecommunications to one of open, but still regulated, competition. 143
The Telecommunications Industry Ombudsman commented that consumers have been faced with difficulties of choice not only amongst many more providers, but also amongst many new services and products with differing prices, as well as with relatively new technologies such as mobile communications and the Internet. These difficulties have contributed to disputes about bills - the single highest area of complaint to their scheme. It argued that it has resolved these types of complaints and has also highlighted systemic problems within industry forums and individual members.144
Similarly, the Federation of Australian Commercial Television Stations submitted that the industry considers that the code approach is more effective and efficient than regulation in achieving public interest objectives, in terms of flexibility, responsiveness to community views, transparency and ease of use by stations and viewers alike.145
As touched on above, although self-regulation is the responsibility of industry, both consumers and the government are stakeholders. The Taskforce considers that consultation is not only important to ensure credibility of a scheme, but consumers can help identify specific problems within an industry and government can identify social or public policy objectives.
The Australian Chamber of Commerce and Industry submitted that a key element of managing self-regulation is the establishment of structures involving stakeholders to facilitate resolution.146
The ACCC argued that if codes of conduct/self-regulation are going to be accepted by governments and the public at large, then credibility with stakeholders is absolutely vital, because only with such credibility will there be public acceptance of the code or an industry-based scheme and commitment to it by the appropriate regulators. It argued that to have any credibility at all there needs to be consultation with the appropriate consumer/community/user groups and appropriate regulatory/government agencies, as well as industry members. 147
During the Taskforce consultations, a number of schemes commented that they consult with consumer groups.148 The Financial Industry Complaints Scheme commented that some industry associations offer forums for consumers but most meet with recognised consumer groups.149
The Australian Pharmaceutical Manufacturers Association commented that it has close relationships with the Therapeutic Goods Administration and the ACCC. In addition, it maintains close relationships with prescribers and allied organisations to monitor the code and to seek comment and suggestions for its improvement. Consumers are also viewed by the Association as a key stakeholder with the Consumer Health Forum being represented on the Code of Conduct Committees. 150
Standards Australia stated that it uses the internationally accepted principle of preparing standards that involve transparency and consensus. This includes:
- the use of committees to represent all relevant stakeholders;
- the issue of drafts for public comment (usually for 60 days); and
- approval for publication by a consensus of all relevant stakeholders. 151
Similarly, the Australian Communications Authority commented that when assessing a code for registration it must be satisfied that consultation has been undertaken with the public, the industry, the ACCC, Telecommunications Industry Ombudsman, a consumer representative organisation, and for privacy codes, the Privacy Commissioner.152
However, the Taskforce recognises that consumer interests are typically diverse and highly dispersed in comparison to industry interests. ASIC commented that because of this it would usually be more difficult for consumers to independently generate sufficient resources and expertise to provide effective input to the full range of self-regulatory mechanisms without additional assistance. Importantly, ASIC argued that such input is required not only during the development of self-regulatory mechanisms, but also during the ongoing life of such mechanisms to ensure adequate accountability, appropriate independence and continuing relevance. 153
Similarly, the Australian Consumers' Association commented that codes and self-regulation are drafted by the supply side of a market. Industry has the resources to create complex analysis and reports. Whereas, it argued the demand side, as represented by the consumer movement, have fewer resources to provide the same level of input. So while the opportunity to consult is there, the means are limited.154 NSW Legal Aid also commented that these activities are labour intensive.155
The Office of Small Business also argued that any code of conduct or self-regulatory mechanism needs to have genuine small business representation on code councils (or similar style bodies). It argued that there is an equal need to ensure the same representation for small business as for other affected groups such as consumers. 156
The Taskforce supports the proposition that self-regulation should be developed and maintained in partnership between industry, the regulator and consumer organisations. This partnership is essential to identify specific problems and to arrive at effective minimum solutions. The Taskforce also recognises the important role that consumer groups can play in self-regulation development and growth.157
An important element of self-regulation is coverage.158 The extent to which an industry association represents the majority of industry participants affects the ability of the association to deliver effective self-regulation. If schemes do not have wide industry coverage, then fewer consumers will enjoy improved market outcomes. The Taskforce considers that the effectiveness of any self-regulatory scheme will only be as good as the extent of its coverage.
An industry seeking to self-regulate must be able to establish certain standards of conduct which members will support. This will ensure that members understand their obligations and consumers will be aware of their rights. As noted above, the standards will differ according to the specific problem and the industry concerned.
During Taskforce consultations, some organisations commented that self-regulatory schemes need to be written in a plain language that both consumers and industry can understand.159
In relation to codes, the ACCC argued that in order to be accepted by all stakeholders it is important for the code to be drafted in a technically legal sense but it is even more important for the language to be plain and understandable to all of its readers. Clarity in the document will instil more confidence and certainty whilst any ambiguity or vagueness will militate against acceptance, support and compliance. This is particularly important in the area of understanding obligations and allowing for enforcement. 160
As suggested by the ACCC, the code should set out clearly stated reasons why the code was established and what are the intended outcomes. To be effective in addressing consumer concerns a code needs to have rules which address common complaints and concerns about industry practices and which set performance standards for participants. Such rules should address specific stated problems and not be written as broad general principles.161
As a general rule, the Taskforce considers that standards in a self-regulatory scheme ought to be specific and written in a plain and easy to understand manner. This will ensure that consumers understand their rights and industries understand their obligations. Clarity in the documentation will also assist dispute schemes interpret legal rights.
Self-regulation needs to be promoted and consumers need to be aware of various schemes. Consumer awareness of schemes ensures that consumers know where to lodge complaints. The Taskforce believes that access to self-regulatory schemes is crucial.
The Commonwealth Consumer Affairs Advisory Council commented that codes are invisible to certain consumers. In particular:
- urban elderly women and men;
- rural and remote families;
- working parents who have no time;
- people isolated in their own homes because of poverty or ill health;
- people with low literacy and/or verbal skills;
- people of working age dependent on government support;
- young people who have never had a full time job, permanent job; and
- non-English speaking people.162
It argued that an effective code would place the onus on the provider to make consumers aware that a code exists and an easy access point to provide all necessary information about the code. The onus to advise consumers should arise during the course of a relevant transaction.163
The Australian Consumers' Association stated that empowering consumers to interact with industry in a self-regulatory environment is crucial. Consumers need easy access to dispute resolution schemes and education about the requirements of industry codes, regardless of their literacy or financial background. It argued that one of the obvious areas that require improvement is in the provision of written evidence. For people of a low literacy level or non-English speaking background this can be difficult. The Association recommended the provision of oral evidence and the use of new technologies to facilitate greater consumer education and access to dispute schemes. 164
The Law Council of Australia argued that the suggestion that self-regulation is for the benefit of consumers, as it keeps the prices of goods and services lower than would otherwise be possible, is only part of the equation. It submitted that the consumer must also have redress from an impartial umpire. Disadvantaged low income, poorly educated and foreign born consumers, who comprise a significant number of consumers, are not in a position to analyse the information or access legal and other representative systems to assess the information for them. 165
Similarly, during the consultations held by the Taskforce, other organisations raised the importance of consumer awareness of schemes and suggested the schemes should be user-friendly. However, the Taskforce recognises that equality in access is not just isolated to self-regulatory schemes - similar issues of access apply to the court system for example.
The Telecommunications Industry Ombudsman scheme conducts regular two-year public awareness surveys, as well as biannual complaint satisfaction surveys. It commented that their scheme has also paid attention to consumers from non-English speaking backgrounds. There is also no cost to consumers accessing the scheme. The scheme has widely advertised 1800 Freecall and Freefax number and also accepts complaints on-line through its Website, as well as by mail and in person. 166
The Federation of Australian Commercial Television Stations commented that consumers with a disability may complain via the telephone or on an audio cassette in the first instance. It stated that there has been a considerable degree of public awareness of the Code over the six years of its operation. This has been facilitated by on-air publication by stations. This has now been formalised in the revised Code. It commented that all stations must broadcast 360 on-air spots per year across all viewing zones about the code and the complaint process. In addition, they have established a national phone hotline (a 1800 number) which provides information about the code, how to make complaints and how to contact local stations. 167
The Australian Subscription Television and Radio Association has also pursued avenues of promoting consumer awareness of its Code, through its website and on request from the 1300 call centre numbers of FOXTEL, OPTUS Television and AUSTAR. 168
In regional areas, the Taskforce heard that consumer awareness of dispute resolution schemes is an issue. Although access is not so problematic due to modern technology, problems arise in knowing how to lodge complaints with schemes, having the time to write letters of complaint, the lack of personal contact and the time associated with having complaints investigated.169 During the Bunbury consultations, there was general agreement that codes of practice for example need to be advertised to ensure that consumers are aware of their existence.170 Similarly, the Mid West Development Commission in Geraldton, Western Australian, were concerned about how self-regulation is being carried out by some industry sectors in the less populated rural areas.171
Throughout this report, the Taskforce has stressed that consumer awareness is an important element of good practice in self-regulation. Consumer awareness of schemes ensures that consumers know where to lodge a complaint. The Taskforce recognises that schemes can encourage access by utilising technology such as web-sites, by making any complaints cost free to the consumer, through writing sample letters of complaint, through taking oral complaints where possible, and through transferring complainants between schemes where possible.
As well as consumer awareness, industry members need to be aware of what they are supposed to be doing in terms of compliance. Raising industry awareness of schemes ensures that industry participants understand their obligations to consumers.
The ACCC commented that in many cases a code fails to operate effectively, not because its principles and procedures are inadequate, but because employees or industry members are either unaware of the code or fail to follow it in day-to-day dealings.172 For example, to raise industry awareness, the Australian Subscription Television and Radio Association commented that they undertake regular codes presentations to relevant staff of platforms, channels and call centres. It argued that it is of particular importance that, with the level of staff turnover in the call centres, that these presentations are conducted regularly. 173
Similarly, the Australian Direct Marketing Association commented that it has undertaken a major industry education initiative to assist members in ensuring that their organisations comply with their code. It commented that this has taken the form of full-day Code Compliance Workshops across Australia that have, at the time of their submission, attracted over 200 of their members. 174
Actually administering a self-regulatory scheme can be a task in itself. A good administrative body can identify specific problems in an industry, collect data, monitor the scheme and enhance its credibility.
The Department of Industry, Science and Resources commented that an autonomous body with diverse stakeholder representation should be tasked with monitoring, maintaining and enforcing the regime. It is particularly important that such a body have responsibility for establishing and undertaking a continuous review program to ensure the regime is a `living organism'.175
The Commonwealth Consumer Affairs Advisory Council argued that codes must have a `home' and an administration. It noted that it has been said that one of the key reasons for the success of the General Insurance Code is that not only does it have a proper administration but also a Board of Directors comprised of insurance company Chief Executive Officers together with other major stakeholders. 176
The ACCC commented that industry-based code schemes aimed at delivering fair trading outcomes need to contain appropriate consumer/user representation on the administration committee. In some instances, representation by the appropriate regulatory authority on the code administration body can serve as a means of the regulatory body putting forward a public interest view. It argued that such representation provides transparency to the scheme by providing a `public window' on its operations that ensures the industry group will be acting in the broader public interest.177
The Australian Direct Marketing Association stated that the creation of its independent Code Authority brings greater transparency and accountability to complaints handling.178 Similarly, Financial Industry Complaints Service commented that the scheme should be an entirely separate entity from the industry so there is no perception of bias.179
The Taskforce considers that good administration of a scheme underpins good practice. It can identify issues, collect data, monitor the scheme, ensure compliance costs are at an effective minimum level and enhance credibility and accountability. The Taskforce considers the type of administration (i.e. whether a scheme can be administered by individual firms, industry associations, or some form of independent body) will depend on the nature of the specific problem and the nature of the industry.180
The Taskforce also considers that industry self-regulatory bodies should endorse their code compliant members on the basis of continued compliance.
Data collection by an industry scheme is important as a valuable source of market information about the origins and causes of complaints. It also enables identification of systemic problems which need to be addressed by industry members. This, in turn, can improve market outcomes for consumers.
ASIC stated that a vital role that self-regulation can play in the broader regulatory environment is to identify emerging industry risk areas. In doing so self-regulation can serve to alert industry to potential problems before they actually materialise in market misconduct. 181
The Consumer Law Centre of Victoria, Consumer Credit Legal Service (Vic) and the Financial and Consumer Rights Council (Vic) comment that systemic issues arise out of common practices by industry and/or experiences of multiple consumers. The identification of such issues provides valuable information to industry as to the effects of its processes on consumers as well as allowing solutions to be found. 182
Generally, systemic problems can be identified two ways. First, an individual complaint may be such as to identify a system or process problem which has the potential to affect many consumers. Second, the accumulation of complaints and further statistical analysis will either identify or suggest the existence of a systemic problem.
For example, the Telecommunications Industry Ombudsman commented that its primary role in this context is notifying individual members, referring the issue to relevant regulators (e.g. the Australian Communications Authority or ACCC), or highlighting the issues in public forums and in the media.183
As discussed by the Consumer Law Centre of Victoria, Consumer Credit Legal Service (Vic) and the Financial and Consumer Rights Council (Vic), it is inherently difficult for industries to step back from their business to identify systemic problems, particularly where the process or practice is accepted within the industry. Further, the cost of implementing strategies to address such issues may be perceived to be contrary to a profit-making imperative. 184
The Taskforce considers that data collection is a valuable tool in identifying systemic issues which need to be addressed by industry members which, in turn, can improve market outcomes for consumers. Also, depending on the nature of the specific problem being addressed, dispute resolution schemes can offer industry an effective means to identify systemic issues.
Transparency is another essential feature of schemes. 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.
A number of organisations consulted discussed the importance of transparency in enhancing the credibility of schemes. For example, the Australian Toy Association suggested that any self-regulatory arrangements should be transparent and its operation open to scrutiny, and subject to a process of review after a set period (approximately 3-5 years).185
The Commonwealth Consumer Affairs Advisory Council commented that one thing that seems to be consistent amongst all codes is that consumers are not informed of who's complying and who's not. This information is clearly potentially important to consumers when choosing which company they may do business with. 186
The Taskforce considers that schemes ought to be transparent and open to scrutiny to improve market outcomes for consumers.187
For self-regulatory schemes to achieve their objectives, compliance by industry members is a key feature. Compliance by industry ensures that specific industry problems are being addressed. As noted previously, some self-regulatory schemes are voluntary in their nature whereas others are mandatory. The degree of compliance can depend on a number of factors, such as whether firms obtain marketing benefits from it, whether they are in a competitive market, or whether they risk sanctions for non-compliance.
In house compliance
One means of compliance with self-regulatory schemes is through internal mechanisms.
In relation to codes, the ACCC commented that the code's administration body needs to ensure that each participant has some form of in house compliance system to ensure compliance with the code. It can also assist compliance at this level with advice and training. It noted that, in Australia, code compliance manuals are being developed for code schemes. These manuals are based on the recently released standard on compliance programs (AS3806). 188
Similarly, ASIC commented that adequate training of staff is good practice , in other words compliance officers in individual firms, staff in scheme administrators and, where appropriate, staff in external complaints resolution schemes.189
NRMA also considered that self-regulation is enhanced by establishing a specialised unit within the company to deal with compliance. This helps to ensure that all customer concerns and issues are given a high priority, are managed by the appropriate business unit and are addressed in a consistent and timely manner. 190
Similarly, the AAMI customer charter sets out some clearly defined rights for its customers.
A competitive market can be another driver of compliance. For example, the Australian Food and Grocery Council commented that industry self-regulation is most effective addressing issues where individual companies can play an active role in promoting voluntary codes, monitoring compliance in the market place, and contributing to code enforcement through a complaint resolution process.191
Similarly, ADMA considered that its direct marketing code brings peer pressure to bear on members who breach the code, a powerful coercive force in the marketplace. As such, member compliance is driven by enlightened self-interest, not fear of state intervention in business affairs. 192
The Taskforce considers that compliance with standards across the industry is necessary for good practice in self-regulation. It ensures that specific industry problems are being addressed and the benefits from standards of practice in schemes are flowing to consumers.
Depending on the nature of the specific problem, self-regulation should incorporate complaint handling and dispute resolution mechanisms to provide appropriate redress to customers where the standard of conduct was breached. Redress encourages industry members to react promptly and fairly to complaints by having internal complaint resolution mechanisms and, where appropriate, subscribing to some form of fair and independent dispute resolution scheme.
These processes are essential to ensure that dissatisfied consumers have access to cost-effective mechanisms for resolving their complaints about the conduct of members of the code. The formal legal system involving court litigation is not designed to provide quick and cheap complaints resolution.
For example, the Institution of Engineers commented that the most secure protection for the community lies in the fundamental requirement of its code that registered persons must practice within the limits of their personal and professional competence, and in the assurance that they will be subject to effective disciplinary action if they fail to observe that constraint. As such, the Institution has procedures for dealing with complaints about members including investigation of the complaint and applying sanctions where appropriate. 193
ASIC stated that accessible and effective complaint resolution mechanisms serve to buttress consumer confidence. They can also provide benefits to business, for example, by enabling industry to identify and address systemic consumer problems, thereby maintaining consumer confidence and avoiding the need for government intervention. 194
The Taskforce considers that businesses should establish fair and effective internal procedures to address and respond to consumer complaints and difficulties:
(a) within a reasonable time;
(b) in a reasonable manner;
(c) free of charge to the customer; and
(d) without prejudicing the rights of the consumer to seek legal redress.
If a consumer is unsatisfied with the resolution process provided by the internal complaint handling mechanism, then it is good practice for the business to provide the consumer with information regarding any external dispute resolution body to which it subscribes or any relevant government body, such as a Fair Trading Agency.
NSW Legal Aid argued that any self-regulatory scheme must allow for the establishment of internal dispute resolution procedures and for the monitoring and improvement of such processes.195
The NRMA stated that an element of good practice has been to standardise the process of dealing with customer concerns. For example, NRMA adopts a three step process of, first, referring the issue to the relevant business area, second, allowing the Customer Relations area to mediate and, third, taking the matter to the independent dispute resolution body. 196
At the more interventionist end of the self-regulatory spectrum where businesses may be dealing with a large amount of complaints and/or dealing with complaints of a more serious nature, an external dispute resolution scheme may be appropriate. An independent body capable of adjudicating and exercising sanctions can further strengthen an external dispute resolution scheme.
The Taskforce considers that a business should provide clear and accessible information to consumers on any independent customer dispute resolution mechanism to which the business subscribes.
Such independent customer dispute resolution mechanisms should be:197
(e) efficient; and
NRMA Limited submitted that dispute resolution schemes should also be independently audited and/or reviewed.198 The Taskforce takes up this issue below.
As discussed in chapter 8, a number of industries have an external dispute resolution scheme.
Consumer representatives on dispute resolution schemes can also ensure credibility and independence. A number of organisations including industry, consumer groups and government all commented on the usefulness of consumer representatives on schemes. For example, the ACCC commented that, where appropriate, industry-based code schemes aimed at delivering fair trading outcomes need to contain appropriate consumer/user representation in complaints handling. It argued that such representation provides transparency to the scheme by providing a `public window' on its operations that ensures the industry group will be acting in the broader public interest. 199
Similarly, the Law Council of Australia argued that as effective enforcement is the only way to protect consumers' rights, a minimum condition for successful self-regulation is the provision of industry funded independent consumer representatives, so that the various uneven elements of the consumers/producer relationship can be remedied.200 The Taskforce considers that self-regulatory schemes should aim to provide appropriate redress to consumers where the standard of conduct has been breached. Consumer redress is essential to ensure that dissatisfied consumers have access to cost-effective mechanisms for resolving their complaints about the conduct of members of schemes. The appropriate redress mechanism will depend on the nature of the specific problem trying to be addressed.
It will generally be desirable for the self-regulatory scheme to provide for a range of enforcement options, depending on the nature of the breach. For example, immediate expulsion may not be a suitable sanction for a minor breach of the scheme. However, effective sanctions can raise the level of credibility and consumer confidence in schemes. A comment often heard during the Taskforce consultations was that schemes need to have `teeth'.
Industry associations use a range of different sanctions. For example, the Institution of Engineers commented that all of their members are bound by their Code of Ethics. They then have procedures for dealing with complaints about members and are able to apply a range of sanctions including expulsion and suspension of membership. 201 Similarly, the Australian Pharmaceutical Manufacturers Association Code of Practice contains a hierarchy of sanctions ranging from corrective advertising, fines of up to $30 000, or expulsion.202
The Code of Practice adopted by the Fruit Juice Industry is supervised by an Industry Compliance Committee. Ultimate sanctions are law enforcement by the appropriate government regulatory bodies should the self-regulatory scheme be ignored or flouted by participants.203
The Department of Industry, Science and Resources argued that with voluntary participation, effective sanctions and incentives can be applied, with low scope for the benefits being shared with non-participants. It submitted that voluntary participation - backed by strong incentives to participate - appears to provide a stronger framework and higher degree of success, independent of the size of the industry association. 204
On the other hand, the Motor Trades Association of Australia commented that sanctions, if they exist, are usually not effective because of the voluntary nature of the regulatory scheme. For example, if a sanction is to be imposed for non-compliance, the offending party can simply `opt out' of the regulatory scheme and continue with the behaviour. 205
Similarly, a number of other organisations during Taskforce consultations echoed these comments. For example, the Mallee Tenancy and Consumer Advice Service expressed concern that ombudsman schemes in particular could be `toothless tigers' if schemes involved a drawn out process and decisions were unenforceable. It suggested that schemes need to have `teeth' in order to be effective.206
ASIC argued that the consequences of inadequate enforcement in an industry such as the financial services industry can be serious. The industry is heavily dependent on consumer confidence - if consumers suffer financial losses due, for example to intermediary misconduct in contravention of the requirements of a self-regulatory scheme, the reputation of the Australian financial markets may suffer. Accordingly, ASIC considered that it is essential that self-regulatory schemes be underpinned by effective sanctions. 207
The Australian Consumers' Association recommended a `toolkit' of actions underpinned with government involvement. These include:
- rewriting of misleading, incorrect or false consumer information;
- corrective advertising; and
- retraining staff. 208
The Department of Industry, Science and Resources also noted that the use of penalties and/or sanctions within self-regulatory regimes require careful consideration as they can lead to retaliatory action by participants.209 Similarly, the Motor Trades Association of Australia noted that if sanctions are pursued by the self-regulatory scheme administrators, perhaps a peer group or industry association, then there is a question about protecting the administrators from legal action by the party affected by the sanction.210
The Taskforce considers that there should be a range of sanctions that can be used by industry in order to achieve compliance depending on the nature of the problem and the consequences of non-compliance. Sanctions can raise the level of consumer confidence in schemes. The Taskforce considers that the severity of the sanction should also depend on the seriousness of the breach.
Where industry has the commitment to collectively sanction breaches of a self-regulatory scheme there is the possibility that such action may amount to anti-competitive behaviour. In most cases such action may not amount to anti-competitive behaviour or the benefit to the public may outweigh such behaviour. However, to avoid any threat of legal action for breach of the competition provisions of the Trade Practices Act 1974, a procedure exists whereby industry can have the arrangement authorised.
Prior authorisation for such a collective arrangement can be sought from the ACCC which assesses whether there is sufficient public benefit flowing from the arrangement to outweigh any anti-competitive effects. An authorisation from the ACCC gives parties involved in the anti-competitive arrangement immunity from court action taken under the competition provisions of the Trade Practices Act 1974.
The authorisation process can be time consuming and expensive, but it does provide industry with protection against legal action. Hence, if industry believes that there is a significant risk that their scheme has anti-competitive elements then authorisation
may be a prudent course of action to pursue.211 It is generally up to industry to manage this risk and ensure any self-regulatory scheme encourages competition.
For example, the Australian Direct Marketing Association stated that punitive actions against members, which may otherwise be judged anti-competitive have been authorised by the ACCC.212
The Taskforce considers that industry needs to manage the risk of any anti-competitive practices in schemes, particularly where sanctions are involved. Although the Taskforce recognises that there needs to be a public benefit justification process, the Taskforce notes that there has been some criticisms of the authorisation process.213
As discussed elsewhere, monitoring is an important aspect of self-regulation to ensure that agreed standards are being met. Establishing a self-regulatory scheme is only part of the equation. Industry also needs to be aware that it has a continual responsibility to ensure that self-regulation is addressing its objectives and ethical members are not being disadvantaged.
ASIC commented that the compliance monitoring mechanisms should be tailored to the particular scheme's circumstances. The appropriate compliance monitoring mechanisms will depend on the identified regulatory outcomes and the nature of the particular industry sector. There are various methods for monitoring compliance, including:
- the internal controls of the individual firm;
- annual reporting on compliance;
- independent monitoring;
- an external compliance audit; or
- the regulator. 214
The Australian Chamber of Commerce and Industry stated that encouraging managers and employees to take responsibility for their own actions is its preferred approach.215
However, some organisations have argued that the government needs to monitor self-regulation more closely. For example, the Royal Aeronautical Society argued that self-regulation must always be accompanied by a rigorous system of dialogue with, and policing by, the government agency responsible for the safety of the public.216
The Taskforce considers monitoring is crucial to good practice in self-regulation. Monitoring ensures that the scheme is addressing specific problems within an industry. The Taskforce recognises that the role of government in monitoring will depend on the circumstances. As a general principle, if there is a public policy objective to do so (e.g. health and safety reasons), then the government may choose to be directly involved in the monitoring of schemes.217
The self-regulatory scheme should publicly report whether its standards are being met. This can improve credibility and consumer confidence in schemes.
The Australian Toy Association commented that any self-regulatory arrangement needs to be accountable in terms of the body administering the scheme.218
The ACCC commented that annual reports on the operation of the code should be produced by the code administration committee, allowing for periodic assessment of the scheme's effectiveness.219
For example, the Australian Pharmaceutical Manufacturers Association stated that breaches of the code are reported in their annual reports.220 Similarly, the Australian Supermarket Institute stated that public reporting occurs annually on the Scanning Code's operation.221
The Taskforce considers that accountability is an element of good practice in self-regulation. The Taskforce recognises that annual reports are a useful tool to allow a periodic assessment of the scheme's effectiveness.
The Taskforce considers that periodic reviews of standards should also be undertaken to ensure that they are being met and are relevant and up-to-date. This ensures that the scheme is still appropriate to the specific problems it is seeking to address and allows for other stakeholders, such as consumers and government, to be involved. Preferably, reviews should be periodic, independent and be made publicly available.
The Taskforce also acknowledges that self-regulatory schemes need the time and opportunity to evolve and rectify problems as they arise.
ASIC stated that self-regulatory schemes should be regularly reviewed for efficiency and effectiveness. Such reviews are essential to deal with market changes due to innovation and other forces which can rapidly lead to out-of-date regulation. It argued that reviews of individual schemes are usually best conducted by an independent consultant in consultation with the stakeholders involved in the development of the scheme (i.e. industry members, consumer organisations and the regulator). 222
ASIC suggested that scheme reviews should be undertaken at least once every three years. This should encompass the content of the code and the operation of the external complaint resolution scheme. It argued that it is also desirable that reviews are publicly conducted wherever possible.223
Insurance Enquiries and Complaints Limited commented that their code and scheme are reviewed periodically so that a flexible approach towards a changing market place is maintained. In particular, it commented that the scheme has evolved over time with the jurisdiction being progressively widened. The company issues an annual review which reports on all aspects of the scheme, the code and now the privacy principles.224
Throughout this report, reference has been made to the benefits of self-regulation. However, self-regulation does come at a cost to both the industry and consumer. The costs involved in administering an inefficient self-regulatory scheme may be translated into higher prices for consumers resulting in a poor market outcome for both business and consumers. Compliance costs can also be high for business, which in turn, can be passed onto consumers. However, the Taskforce is not touting that schemes should be cost-effective at the risk of sacrificing consumer rights for example. It is necessary to ensure that the scheme is the effective minimum solution for the specific problem in hand.
Benefits of self-regulation over explicit regulation and courts system
During the inquiry, the Taskforce received a lot of anecdotal evidence to suggest that self-regulation is more cost effective than government regulation and the court system.225 For example, A Guide to Regulation (1998) commented that there are cost advantages from tailor-made solutions and less formal mechanisms such as access to quick complaints handling and redress mechanisms. However, the Taskforce recognises that self-regulation is not necessarily cheaper than government regulation. Furthermore, it is ultimately the consumer that bears the cost of any form of regulation in most cases.
NRMA stated that compared with more direct government regulation, in many cases industry self-regulation results in lower regulatory costs. For example, for general insurance claims, handling costs can be reduced by producing policy documentation in a standardised format. It also argued that self-regulation will normally have faster and simpler dispute resolution procedures, again resulting in lower regulatory costs. In competitive markets, these lower regulatory costs are generally passed onto consumers. 226
The Telecommunications Industry Ombudsman also commented that its dispute scheme has provided a free and timely forum for the redress of consumer complaints in contrast to costly and time consuming action in courts or consumer tribunals.227
In addition, the Office of Small Business stated that although small business often have legal recourse in disputes, their access to justice can be constrained by the cost of going to court, the long time and delays before their case is heard, the disparity in the quality of representation and their need to preserve business relationships. In many cases, neither party achieves a satisfactory result from a Court judgement. 228
In most cases, the Office of Small Business argued that self-regulatory approaches can offer small business a low-cost, quick and flexible system for resolving disputes. It submitted that this provides a viable alternative to litigation, typically achieving a success rate of around 80 per cent, without costly and time-consuming legal action. For example, the Office of Small Business quoted that some studies show that using dispute resolution schemes can cost as little as five percent of the cost of going to court.229
While a lot of the benefits and elements of good practice in self-regulation have been flagged, the schemes come at a cost. And depending on the specific problem being addressed, this cost can be significant.
As stated by the Institution of Engineers Australia any form of regulation, whether self-regulation or otherwise, requires an allocation of resources and will necessarily involve compliance costs that may or may not become onerous. It argued that effective self-regulation requires not only standards or codes of practice, but also effective mechanisms for dealing with complaints of non-compliance with those codes. Self-regulation requires extensive community and business education, and requires a commitment from all industry players to work effectively. 230
Similarly, the Federation of Australian Radio Broadcasters noted that while some may see the overlay of an implementation and monitoring system as a level of bureaucracy, it is clear that there is an expectation that industries and industry bodies take responsibility for the effective operation of their systems of self or co-regulation. If there is a cost in either time or money then so be it - `self-regulation is not meant to be cost free regulation', according to one observer.231
The cost of self-regulatory schemes can vary greatly. At one end of the spectrum, industry initiatives that improve the amount of information available to consumers to make informed choices can be relatively inexpensive. For example, a guideline may only involve printing and staff time costs.
Similarly, more sophisticated schemes can be fairly inexpensive depending on what is trying to be achieved. For example, the Australian Supermarket Institute stated that the cost of the Scanning Code administration includes materials, printing and distribution, and staff time handling issues. It is estimated this cost would not exceed $40 000 per annum. 232
Whereas, at the more interventionist end of the self-regulatory spectrum, schemes can cost more. For example, the Federation of Australian Commercial Television Stations estimated that the cost of its scheme to the industry is at least $3 million annually. It commented that the industry's Code of Practice places considerable responsibility on individual stations, and is relatively resource-intensive and costly to operate. However, it believed the industry supports the process because it is more efficient, simple and direct than any regulatory alternative. 233
Further, the bigger dispute resolution schemes that resolve customer disputes are expensive to run. For example, the Australian Banking Industry Ombudsman, Telecommunications Industry Ombudsman and General Insurance Enquiries and Complaints schemes all cost in excess of $3 million per year.234
However, the administrative costs of self-regulatory schemes is only part of the story. Compliance costs are also associated with self-regulatory schemes. It is necessary to ensure that self-regulation does not itself become a burden to industry with onerous compliance costs, particularly for small businesses.
Again, there is a spectrum of compliance costs for business. At the lower end of the spectrum, schemes that raise the level of information may simply involve preparing a disclosure document for example. Similarly, in complying with standards, there are low compliance costs involved in following the standard on work safety boots. Whereas, the quality management system standard (ISO9000) produced by Standards Australia is more expensive to implement depending on the size of the company. 235
At the more interventionist end of the spectrum, codes and dispute resolution schemes can be expensive for businesses to comply with. The Financial Industry Complaints Service stated that various levels of funding are required depending on the number of disputes and the quality and expertise of staff. Generally, the costs are allocated to members by a capacity to pay , in other words the wealthier members pay the most. 236
For example, Insurance Enquiries and Complaints Limited stated that its scheme is funded by a combination of a levy upon insurers and fee per case charges to insurers. Approximately 60 per cent of its budget is met by a levy upon the personal lines premium income of member companies. Companies either pay the minimum levy of $1 600 or a levy based on their proportion of personal lines premium income. The other 40 per cent of the budget is met by a fee per case payment. 237
In comparison, the Telecommunications Industry Ombudsman scheme commented that its funding mechanism is based on two principles. First, that each member pays for the scheme's complaint handling services based on the number, and relative percentage of total complaints, raised by the scheme against that member. Second, the complaint handling fees are structured in a way as to provide a financial incentive for members to resolve complaints in a timely manner. The handling fees are $15 for an initial enquiry, up to $1 130 for dispute resolution.238 As a corollary, a member has no financial obligation to the Telecommunications Industry Ombudsman if no complaints are made against that member. There are no membership or joining fees associated with the scheme. 239
The Taskforce recognises that as businesses become more aware and familiar with a self-regulatory scheme then compliance costs can be reduced. Indeed, often during the self-regulatory scheme's first year of operation compliance costs are particularly high as businesses are training staff etc, but in the following years costs are usually reduced. However, compliance costs can also increase later down the track.
For example, the Service Providers Industry Association argued that the self-regulatory participation burden is likely to increase, rather than decrease in the telecommunications. It considered the increasing complexity of inter-working as the wholesale market and new applications develop will drive this trend, leading to calls for more and more codes and standards, as well as the need to revisit and overhaul existing codes. The accelerating take-up of e-commerce and e-business will also lead to more demands for codes and standards to meet consumer expectations and industry inter-working requirements. 240
The Service Providers Industry Association argued that as more regulatory and industry bodies engage in the process of writing standards, codes and guidelines, compliance becomes an increasing burden on organisations. It commented that not only is it difficult or impossible for most organisations to participate in the creation of these instruments, it becomes very difficult to be fully aware of the range of regulatory instruments that apply to an individual organisation and its business operations. When this situation is reached, it introduces major challenges for staff trainers and compliance managers.241
Cost to smaller industry associations and businesses
A self-regulatory scheme stands a greater chance of success if it is backed by a large and well structured industry association. Primarily, this assists in regards to the costs associated with establishing and maintaining regimes, ensuring broad participation, and issues of enforcement, including sanctions.
Where no large industry association exists, costs would appear to be a prohibiting factor in developing and administering a regime. As discussed by the Department of Industry, Science and Resources, in such instances, sharing of the costs between participants and beneficiaries should be considered on a cost recovery basis. It argued that such cost recovery principles would be regime specific but should encompass a clear process in determining who should pay for developing and administering the regime and how charges should be structured - preferably based on tangible outcomes. 242
Similarly, the Office of Small Business argued that it is generally accepted that small business is less able than big business to cope with the costs of participating in a scheme such as a code of conduct, particularly when such a scheme is funded by industry levies. It argued that while big business is usually able to absorb such costs, small businesses in many cases have no option but to pass on these costs to the consumer in the form of higher prices for goods and services. This can place small business at a competitive disadvantage to their larger counterparts.243
The Office of Small Business also argued that the methodology for the administration of fees should be clearly established before any self-regulatory scheme is initiated. It suggested that the methodology should be as transparent as possible once in place. Small business is not likely to feel any ownership of the process of self-regulation if the funding process is not accessible to them. Transparency also ensures that charges for administering a scheme have a direct relationship to actual administration costs, and that charges are regularly reviewed to maintain this relationship. 244
The Taskforce considers that any funding arrangement for self-regulation should be transparent and designed so as not to put businesses at a competitive disadvantage.
As discussed previously, the notion of the effective minimum solution should apply to self-regulatory schemes.
For example, the National Insurance Brokers Association does not support the imposition of best practice standards as they are not always appropriate. In many cases the standards set are in fact best practice. However, this is only where it is appropriate. It argued that where this is not the case, minimum standards apply that provide proper protection for consumers. 245
The National Insurance Brokers Association also noted that depending on the resources or corporate culture of the relevant entity, they choose whether to exceed these minimum standards. Certain entities may not be able to meet the compliance costs of best practice even though minimum standards will provide consumers with appropriate service and protection.246
Similarly, Clayton Utz argued that codes of conduct should be designed and drafted with an appropriate minimum standard in mind. Such a standard must be realistically set to ensure that it can realistically be complied with by industry participants. 247
The Taskforce recognises that standards in self-regulatory schemes should be the effective minimum solution to the specific problem.
The appropriate form of self-regulation will depend on what is trying to be achieved which will vary depending on the industry. Good practice in self-regulation involves improving market outcomes for consumers at the lowest cost to businesses.
180 For further information on administering a scheme see the Ministerial Council of Consumer Affairs Guideline 1996, Fair Trading Codes of Conduct, Why have them, how to prepare them available from the Consumer Affairs Division of Treasury and State and Territory Fair Trading Offices, and also see the Commonwealth's 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
187 For further information on transparency see Benchmarks for Industry-based Customer Dispute Resolution Schemes 1997, released by the then Minister for Customs and Consumer Affairs, Senator the Hon Chris Ellison. This publication can be accessed through the Treasury web-site: http://www.treasury.gov.au/publications.
197 For more information regarding external dispute resolution schemes, businesses are encouraged to consult the Commonwealth's Benchmarks for Industry-based Customer Dispute Resolution Schemes, 1997. This publication can be accessed through the Treasury web-site: http://www.treasury.gov.au/publications. There are also a number of resources available in relation to internal complaint handling, including AS4269, the Australian Standard on complaint handling. This standards is produced by the private organisation, Standards Australia.
211 See Part VII - Trade Practices Act 1974. Aspects of a code which might require the code to be authorised include restrictions on membership, prohibitions on code members dealing with other industry participants, and imposing sanctions for non-compliance where such sanctions effect a party's ability to compete. Most applications attract a fee of $15000. Details of the ACCC authorisation process are available from the ACCC website at: http://www.accc.gov.au/adjudication/fs-adjudicate.htm.
Previous: Chapter 5: Industry environment and market circumstances
where self-regulation is likely to be most effective
Next: Chapter 7: Approaches to promoting and coordinating industry self-regulation