Clarity the key to regulatory compliance

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12 October 2009

A constant stream of “soft” regulation is preventing insurers from maximising their compliance investment, according to a study by the University of Technology Sydney.

The study, compiled in conjunction with the Australasian Compliance Institute (ACI), examines how organisations implement regulations and what influences their approach.

The report focused on results for two types of regulations: core financial and insurance services industry regulations and cross-industry occupational health and safety regulations.

It found a stable regulatory environment is crucial to firms investing in systems that would take compliance beyond minimum regulatory standards.

It’s a timely reminder given the raft of regulatory changes seen worldwide in reaction to the global downturn.

“When there is constant change in the regulatory landscape, such as the financial services industry, organisations are less willing to make that investment,” the study says.

In spite of that finding, most of the financial sector respondents claimed they go beyond minimum compliance standards.

But crucial to that decision is compliance costs, including the cost of administration and reporting, clarity of design, clarity of benefits and adequate consultation and implementation periods.

Firms with a positive compliance experience are more likely to be proactive in their future approach, making adequate consultation vital.

ACI CEO Martin Tolar told insuranceNEWS.com.au the financial services sector has faced a challenging regulatory environment over the past five years, making compliance difficult.

“Soft regulation such as advisory notes are being constantly updated,” he said. “It’s therefore difficult to make an investment above and beyond that.”

A mismatch between regulator and industry perspectives over such “soft regulation” as guidance is only adding to industry confusion. It’s important that regulators don’t overcook it, and get in the way of the core business function.

“What regulators may view as guidance, organisations often take as hard and fast law,” Mr Tolar said. “There is a mismatch and we may need further clarity to outline how that guidance is intended to be used.”

Looking specifically at the insurance sector, Mr Tolar says brokers in particular may find it difficult to avoid new developments across the broader financial services sector.

The global downturn showed some insurers had moved outside of their core focus into broader financial services, he said.

“The focus for regulators will be consumers protection issues, and looking at the way products are sold to individuals,” he said. “There’s a lot of tension at the moment about what constitutes advice and how product manufacturers compensate advisers. That’s likely to involve insurance brokers as well.”

But he says the industry shouldn’t fear widespread reform, given the twin peaks model of Australian regulation has proved a fairly able watchdog. Effective – not more – regulation is the way forward.

“We’ve perhaps had two sets of eyes where others haven’t,” Mr Tolar said. “Now we’re seeing the Asia-Pacific region adopting our models and Australian regulators taking high-profile posts in the region because they want to move toward a similar system.”

While Australia’s regulators can quite rightly take some satisfaction from the fact that their control systems helped prevent disaster here, they can’t relax. As this latest study shows, there’s a constant need to weigh the benefits of new controls against the ability of the regulated to support and even afford them.