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'Proactive' regulation a bad idea

By Darcy Allen and Jason Potts - posted Wednesday, 27 April 2016

The Australian Securities and Investments Commission (ASIC) will soon be handed more power to intervene proactively in financial product markets. These regulatory powers will stymie financial entrepreneurship and innovation.

Last week the government announced $127.2 million in funding to financial watchdog ASIC.

Among other things, that money will go towards wiz-bang technology for data analytics ($61 million) and ongoing surveillance and prosecution ($57 million).


This money-spending power-granting exercise has been branded as an attempted political deflection to avoid a Royal Commission.

But there is a deeper concern here: the acceleration in powers towards ‘proactive’ regulation.

At first, proactive and outward-looking regulators looks like a good thing. But the problems with this new approach are easily demonstrated.

Take one new extended power: product intervention. This is a recommendation from the Financial Systems Inquiry (FSI) to provide  more regulatory tools to ASIC ‘as a last resort or pre-emptive measure’ to warn consumers, restrict, or even ban bad financial products, allowing the regulator to ‘respond to market problems in a flexible, timely, effective, and targeted way.’

Wielding of pre-emptive regulatory power is both dangerous and naïve.

This is dangerous because it is tantamount to enforcing financial pre-crime.


In 2002 American film the Minority Report starred Tom Cruise as Chief of PreCrime. The department he worked in was tasked with policing crimes before they were committed.

The links between the fictional characters of Minority Report, and the new proactive approach to regulation by ASIC, are chilling.

Indeed, new product intervention powers will ‘give ASIC the capability to intervene before serious harm is done rather than simply cleaning up the mess after the event,’ according to Minister Kelly O’Dwyer.

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About the Authors

Darcy Allen is a PhD candidate in economics at RMIT and a research fellow at the Institute of Public Affairs.

Jason Potts is a Professor of Economics at RMIT University, as well as an Adjunct Associate Professor in the School of Economics at the University of Queensland, and an Adjunct Fellow at the Institute of Public Affairs. He was the 2000 winner of the International Joseph A Schumpeter Prize, has published over 60 articles and six books. He is currently an editor of Journal of Institutional Economics, and Innovation: Management, Practice and Policy.

Other articles by these Authors

All articles by Darcy Allen
All articles by Jason Potts

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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