Commercial regulatory agencies wield enormous power. They can take away a business’s licence to operate. They can impose restrictions on how firms operate. And they have enforcement powers the police can only dream of.

How they exercise their powers really matters. A good regulator can make sense of bad regulation. A bad regulator can make good regulation senseless. Poor regulatory decision-making can be disastrous for commerce. It can stifle innovation, add cost and reduce efficiency. And ultimately, it is consumers who pay the price.

Consequently, it should be of great concern to politicians and the public alike that respect for New Zealand’s commercial regulators has declined over the past four years. That is the headline finding in a research report released by the New Zealand Initiative earlier this week. The decline in the Commerce Commission’s previously poor performance is perhaps the most alarming finding in the new study.

Reassessing the regulators: The Good, the Bad and the Commerce Commission derives its findings from an in-depth survey of New Zealand’s top 200 companies. The new study follows up on the Initiative’s 2018 report, Who Guards the Guards? Regulatory Governance in New Zealand.

As in the 2018 study, companies were asked to both rate and rank the regulators they interact with. In total, the survey tracked 23 key performance indicators for 24 regulatory agencies. The KPIs ranged from consistency of decision-making to accountability and learning from mistakes.

On average, only 29.9% of survey respondents agreed or strongly agreed that the Commerce Commission met the KPIs, while 38.5% disagreed. These results are in stark contrast to the ratings for the Financial Markets Authority. 58.5% of respondents agreed or strongly agreed the FMA met the KPIs. Only 20.2% disagreed.

The FMA’s results have also deteriorated since the Initiative’s earlier survey. But the lack of respect for the Commerce Commission is a damning indictment of one of New Zealand’s most important regulators.

Conversely, ratings for the Reserve Bank of New Zealand’s prudential regulatory role showed marked overall improvement. And the improvements may partially reflect the focus on the RBNZ’s (then extremely poor) regulatory performance in the Initiative’s 2018 report.

Among the other regulatory agencies for whom the Initiative obtained a significant number of ratings, only one other improved on its earlier result. The Inland Revenue Department was this sole exception. Respect for all the others slid backwards. And the decline in respect for regulatory functions exercised by government departments fell comparatively more than for those regulators constituted as independent statutory entities.

The Ministry for Business, Innovation and Employment is a good example of this decline. Only 40.3% of respondents agreed or strongly agreed that MBIE met the 23 KPIs. This was down from an already low 44.6% in 2018.

Poor accountability and appointment processes

Overall, regulatory agencies rated worst for accountability and for the robustness and transparency of leadership appointment processes. The survey results also raise concerns about the increasing politicisation of regulatory agencies.

There are good reasons for believing that the poor ratings for accountability and appointment processes contribute to the poor overall ratings for regulatory agencies.

As the Initiative explained in Who Guards the Guards, governance arrangements for regulatory agencies are key to regulatory performance. Better governance improves accountability. And greater accountability appears to improve regulatory performance and regulatory outcomes.

Three factors were found to be important: internal governance, external monitoring, and appointment processes.

Yet, important as they are, across all regulatory agencies, survey respondents gave the lowest ratings for the KPIs addressing these three factors in the Initiative’s latest survey.

Improving internal governance

In Who Guards the Guards, the Initiative made recommendations addressing each of these three aspects of regulatory governance. This year’s survey suggests the need for regulatory agency reform is now more acute.

The recommendations included specific recommendations – repeated in the Initiative’s latest report –  in relation to the Commerce Commission’s internal governance arrangements. The recommendations involve replacing the Commission’s flawed ‘commission’ governance model with the board governance model of the FMA.

Such a change would mirror the 2011 reforms which saw the Securities Commission’s ’commission’ governance model, scrapped in favour of the board-led FMA.  The change would bring about a separation of the board and executive functions at the Commerce Commission. This would contribute both to greater internal checks and balances and to greater levels of expertise from independent board members.

The Government has already implemented an earlier recommendation to similar effect in relation to the governance of the RBNZ. This latest survey reveals it is high time for the same type of governance makeover to be implemented for the Commerce Commission.

Better external monitoring

External monitoring of regulatory agencies is also currently deficient. That was the finding of the Productivity Commission in its 2014 report, Regulatory Institutions and Practices.

The Initiative’s latest survey reveals similar concerns. The problem is hardly surprising. Neither politicians nor officials have the expertise needed to evaluate the complex regulatory regimes enforced by agencies like the Commerce Commission.

To address the same concern across the Tasman, last year the Australian Parliament created a standalone ‘Financial Regulator Assessment Authority’. The Authority is tasked with periodic reporting to Parliament on the performance of the Australian equivalents of the FMA and RBNZ.

The Initiative’s report recommends New Zealand’s Parliament do likewise – but with the Authority reporting to Parliament on the performance on each of the Commerce Commission, FMA and RBNZ.

Appointment processes

Good governance structures will count for nothing if those responsible for governing are not up to the task. Yet the Initiative’s survey reveals the robustness and transparency of the processes for appointing regulatory agencies’ leadership received the second-worst overall rating from respondents.

The United Kingdom and Canada have addressed concerns about appointments to government-controlled agencies by establishing independent appointment agencies. The Initiative recommends our Parliament should follow suit. Creating an independent agency would ensure all appointments to regulatory agencies are subject to robust, independent scrutiny and a standardised process.

More robust and transparent appointment processes should also address concerns raised by survey respondents about the increased politicisation of regulatory agencies.

Regulatory governance may not be a topic on the tip of readers’ lips. But a bit more focus on regulating the regulators may make the wheels of commerce spin faster. This would be to everyone’s benefit.