When regulated entities become too adversarial

There is an inherent tension in regulatory relationships, particularly between regulators and the entities they regulate.

A regulator's job is to ask difficult questions, require information, scrutinise decisions and, depending on the circumstances, impose conditions, refuse approvals or take enforcement action. A regulated entity may believe that the regulator has misunderstood an issue, reached the wrong conclusion or does not have all the relevant facts.

Disagreement is inevitable and somewhat natural, but an adversarial relationship need not be.

A regulated entity should seek clarity where the regulator's position is unclear. It should have an opportunity to explain the circumstances, provide relevant evidence and correct factual inaccuracies. If legislation provides formal review or appeal rights, it is entitled to exercise them.

None of that requires posturing, aggression or treating every regulatory interaction as a contest.

When disagreement becomes combativeness

APRA's 2018 Prudential Inquiry into the Commonwealth Bank provides a useful example.

In a 2015 meeting with the CBA Board, APRA's Chair characterised the bank as "bureaucratic and arrogant". The Inquiry explained that the reference to arrogance concerned the complacency that can develop after a prolonged period of institutional success.

The Inquiry subsequently found that this attitude was reflected in CBA's regulatory relationships. It found that CBA had interacted with regulators in a "legalistic and defensive manner", inhibiting constructive engagement. Regulators described responses as defensive and, at times, perfunctory. CBA could be slow to respond and reluctant to volunteer information without first being approached.

On some occasions, CBA reportedly insisted on being shown why it was legally required to act before doing so. The Inquiry considered that this approach could elevate strict legal interpretation above broader risk or customer outcomes.

The Inquiry noted that better-practice institutions engage with regulators to resolve risk and customer issues rather than treating regulators primarily as forces to be opposed on legal grounds.

The 2022 Bell Review into The Star provides a more extreme example. Bell found that The Star had misled its regulator about aspects of its operations. His broader finding about the relationship was particularly stark: The Star had treated the Authority "with disdain, as an impediment to be worked around."

The regulator had effectively become an obstacle to be navigated around in pursuit of business objectives. Most regulated entities will never approach that extreme. But elements of the same attitude can appear in more routine interactions:

• Why do you need this information?

• What power do you have to ask for it?

• We have a business to run and you're impeding our ability to do so.

• You're regulating us out of business.

Regulated entities can legitimately ask questions and seek clarity about a regulator's powers, information requests, interpretation of legislation and proposed action. The issue is the posture that sits behind it.

When regulated entities contest every information request, minimise every concern and turn every disagreement into a question of authority, the relationship shifts from legitimate scrutiny of the regulator's position to reflexive resistance.

Why adversarial regulatory relationships can be self-defeating

This attitude can be particularly tempting for large, successful or highly specialised organisations. They may employ people with decades of industry experience. Their legal and technical resources may exceed those of the regulator. They may be economically important or have substantial access to government and other influential stakeholders.

None of that changes the regulator's statutory role. Industry expertise is valuable and regulators should listen to it. But repeatedly disputing minor points, unreasonably delaying responses to information requests, dismissing regulatory concerns, unnecessarily escalating routine matters through lawyers or senior executives, or repeatedly emphasising the organisation's importance can undermine rather than strengthen its position.

The most immediate consequence is loss of regulatory confidence. Regulators have to make judgements about the degree of assurance they can take from the entities they regulate. An organisation that identifies problems, provides complete information, responds promptly and acknowledges legitimate deficiencies gives the regulator more reason to rely on its systems and representations.

An organisation that minimises problems, misleads, resists reasonable inquiries, argues over every issue or provides information only when compelled gives the regulator less reason to rely on those assurances. The regulator’s natural response is greater verification: more questions, more evidence, more testing and monitoring, and less reliance on what management says.

Cooperation can also matter when regulators exercise discretion. Depending on the statutory framework, remediation, responsiveness and cooperation may legitimately influence the regulatory response.

Combativeness can therefore become self-reinforcing. The regulated entity resents increasing scrutiny and responds more defensively. The regulator's confidence falls further and it increases scrutiny. What began as resistance to regulatory intervention ultimately produces more of it.

Constructive disagreement is different

The key is to distinguish reasonable disagreement from unnecessary resistance. The first can improve regulatory decision-making. The second usually damages the relationship without changing the underlying regulatory obligation.

A regulated entity does not need to agree with its regulator on every issue. But it does need to recognise the regulator's legitimate public-interest mandate and engage accordingly. Some entities approach the regulatory relationship as a contest over who is right, who knows more, or who holds greater power and influence. That is the wrong contest to have.

The better approach is to focus disagreement on the matters that genuinely warrant it, explain the entity's position with evidence and avoid turning routine regulatory engagement into a contest over status or authority.

Regulated entities should pick their battles carefully.

The most effective regulatory relationships are built on clarity, evidence and mutual respect, not unnecessary debates that tend to serve neither interest.