Auditor General warns on regulatory capture

The Australian National Audit Office (ANAO) has sent a strong message to the financial services regulators about the need to maintain independence from the organisation or individuals they regulate to avoid regulatory capture.

The key message from the ANAO followed an audit of the regulator overseeing bankruptcy laws and the Personal Property Securities Register – the Australian Financial Security Authority (AFSA) which identified shortcomings.

The ANAO audit concluded that AFSA management of conflicts of interest had been “partly effective”.

“AFSA’s processes for declaring, managing and overseeing conflicts of interest resulted in arrangements not being sufficient to manage conflicts of interest in a regulatory operating environment. The arrangements in the control framework had not been effectively operationalised,” the audit conclusion said.

“AFSA has developed partly appropriate arrangements to manage conflicts of interest. As a financial regulator, AFSA has not sufficiently articulated conflict of interest risks and controls in its risk management artefacts nor identified regulatory capture as a risk,” it said.

The audit report stated:

Deficiencies in AFSA’s processes for declaring and managing conflicts of interest were identified which related to:

• annual declarations of material personal interests not being completed by all applicable Senior Executive Service (SES) staff;
• annual governance committee conflict of interest declarations not being completed by all applicable personnel;
• insufficient records to support whether disclosed material personal interests and conflicts were subsequently reviewed to determine if conflict mitigation strategies were required;
• gift and benefit declaration processes not requiring recipients or approvers to document whether the acceptance of a gift, benefit or hospitality may give risk to an actual, potential or perceived conflict of interest;
• no processes to review outside employment applications on an annual basis in accordance with AFSA’s internal policy requirements, and one approved outside employment application not satisfying AFSA’s internal policy requirements;
• recruitment conflict of interest declarations not being completed by all relevant AFSA personnel; and
• insufficient arrangements to maintain oversight of conflict of interest declarations that were previously made by AFSA staff.

The findings resulted in the ANAO issuing a key message for all Australian Government entities:

“Public officials have a duty to disclose and manage personal interests that may create a conflict of interest. Conflicts of interest can be a source of internal fraud and corruption risk. They pose a particular risk for regulatory entities,” the ANAO message said.

“Regulatory entities need to maintain independence from the organisations or individuals they regulate to avoid regulatory capture. Implementing effective policies and procedures to manage individual and enterprise integrity risks ensures that entities can be confident that conflicts are not impeding the delivery of their objectives.”