In 2009, an uncontrolled release of oil and gas from the Montara oil field in the Timor Sea continued for more than 10 weeks. The subsequent Montara Commission of Inquiry identified serious failures by both the operator, PTTEP Australasia, and the Northern Territory Department of Resources, which acted as the delegate of the Designated Authority responsible for overseeing well integrity.
The Inquiry found that the Department's regulatory regime was "totally inadequate", describing it as little more than a "tick and flick" exercise. More significantly for the regulatory relationship, it found that the relationship between the Department and PTTEP Australasia had become "far too comfortable" and that the company engaged with the regulator as though it were a "soft touch".
The Department had adopted a minimalist approach to oversight that gave it little chance of discovering the operator's poor practices. The Inquiry also found that the Department lacked adequate resources and expertise for the role, and criticised arrangements that combined industry-development objectives with regulatory responsibilities. It ultimately recommended separating those functions through an independent regulator.
The Inquiry concluded that the Department's minimalist oversight was one contributing factor to PTTEP Australasia's poor practices, while leaving primary responsibility for the blowout with the operator.
The case illustrates a fundamental risk in regulatory relationships. Regulators need to understand the industries they regulate; they need constructive relationships, access to information and enough trust to have candid conversations with regulated entities. But constructive engagement can become excessive accommodation when the relationship reduces the regulator's willingness to probe, verify and exercise independent judgement.
A regulated entity is an important stakeholder. It is not the regulator's client.
The public interest comes first
Regulators exercise public powers for public purposes. Their precise statutory objectives differ, but their ultimate responsibility is to the community or interests the regulatory framework exists to protect. Depending on the scheme, that may include consumers, patients, workers, investors, the environment, vulnerable people or the broader public.
Those interests will sometimes align with those of the regulated industry, but sometimes they will not. Effective regulation can create certainty, improve confidence in a sector and prevent organisations that ignore their obligations from gaining an unfair advantage.
Effective regulation can also impose substantial costs on regulated entities, restrict profitable activities, require remediation, reject established industry practices, impose penalties and produce decisions that industry strongly opposes. A regulator cannot avoid an otherwise appropriate decision because it wants to preserve a positive industry relationship.
Industry satisfaction is not a regulatory outcome
The OECD's work on regulatory independence recognises this tension. Regulators operate between government, regulated industries and end-users and must remain objective, impartial and consistent despite the influence that can arise through those relationships. Independence is not simply a matter of institutional structure; it also depends on how regulators manage their day-to-day interactions with the organisations they regulate.
When engagement becomes accommodation
There is an important role for persuasion in regulation. Not every breach requires punishment. Guidance can prevent non-compliance, education can improve understanding, and cooperative remediation can sometimes achieve the required outcome more efficiently than formal enforcement.
Persuasion becomes a problem when it shifts from one regulatory tool among several to the institutional preference.
The Banking Royal Commission's 2018 Interim Report identified this risk in Commissioner Hayne's assessment of ASIC's enforcement approach. Hayne said that, when responding to misconduct, ASIC's starting point appeared to have been: "How can this be resolved by agreement?"
In its response to the Interim Report, ASIC said that, particularly for larger financial institutions, strategic regulation required a clear willingness to use serious sanctions for serious or repeated misconduct. In October 2018, ASIC adopted the "Why Not Litigate?" approach. Where it considered that a breach was more likely than not to have occurred and pursuing the matter would be in the public interest, ASIC would actively ask itself why it should not litigate.
ASIC noted that this did not mean litigating every matter and continued to emphasise the use of regulatory tools across the enforcement pyramid. More broadly, persuasion and negotiated remediation are more credible where regulated entities know that stronger enforcement remains available.
If regulated entities learn that persistent negotiation produces another extension, another promise of remediation avoids consequences, or serious enforcement is unlikely, the incentive for them to comply is diminished. The regulator may believe it is maintaining a constructive relationship, while the regulated industry may simply be learning how much regulatory tolerance exists.
Accommodation is not regulatory capture
Regulatory accommodation should not automatically be characterised as regulatory capture. Capture is a more serious condition.
NSW ICAC defines regulatory capture as occurring when a regulator over-identifies or aligns too closely with the party or industry it regulates, resulting in decision-making that lacks objectivity. ICAC notes that capture can occur at the level of an individual regulator, a work unit or an entire agency. It can also manifest as a general attitude and may not be intentional.
A regulator can make an overly accommodating decision without being captured. The risk increases when accommodation becomes persistent, institutionalised or begins changing the weight given to industry interests.
ICAC identifies several conditions that can increase this risk, including:
close personal or social relationships between regulatory staff and industry participants
career incentives for regulators to move into the regulated industry
dependence on industry expertise or cooperation because the regulator lacks equivalent capability, resources or powers
regulatory arrangements in which outcomes are substantially negotiated with regulated entities
excessive cost or difficulty associated with imposing sanctions
political pressure, lobbying or reluctance to make decisions likely to be unpopular
regulators providing technical assistance to organisations they also regulate
broader policy settings that give disproportionate weight to industry interests.
None of these factors necessarily demonstrates capture on their own. They identify conditions in which maintaining independent regulatory judgement becomes more difficult.
The relevant test is whether the regulatory relationship begins affecting the regulator's willingness or ability to apply its statutory framework objectively and put the public interest first.
The problem with 'partnership'
The language of partnership can be misleading when describing the relationship between regulators and regulated entities.
Regulators and industry can cooperate, share information, clarify expectations, solve problems and maintain respectful relationships over many years. But they do not occupy the same institutional position. A regulated organisation legitimately pursues its own commercial or organisational interests within the regulatory framework. The regulator must administer that framework according to its statutory purpose and the public interest.
Sometimes those interests coincide. Sometimes they do not. A partnership implies a degree of shared interest that can obscure that distinction. The better principle is constructive engagement with institutional distance.
The stakeholder who is often not in the room
Regulated entities have an inherent advantage in regulatory engagement because they are highly visible. They employ executives, lawyers, compliance specialists, industry experts and government-relations professionals. They meet regularly with regulators, make submissions and can explain in detail how regulatory decisions will affect them.
The people and interests the regulatory framework exists to protect often have much less direct access. Individual consumers, patients, workers, investors, residents or vulnerable people may never participate in a consultation. Public and environmental interests may be diffuse and lack an organised representative sitting across the table from the regulator.
The stakeholder a regulator hears from most often is not necessarily the stakeholder whose interests should carry the greatest weight.
The Montara Inquiry provides an example of what can happen when regulatory distance becomes too small. The Department regarded PTTEP Australasia as a good operator despite deficiencies the Inquiry considered impossible to reconcile with that assessment. Its limited capability, minimalist oversight and overly comfortable relationship with the operator left it poorly placed to identify serious weaknesses in PTTEP Australasia's practices before the blowout occurred.
Industry views should inform regulatory decisions but they should not define the public interest.
Constructive relationships require distance
The risk of accommodation or capture does not necessitate hostile regulation. Regulators need industry knowledge; they should listen to legitimate concerns, explain their reasoning, avoid unnecessary burden and reconsider decisions when the evidence warrants it. They should also use persuasion where persuasion is likely to work.
The issue is whether maintaining a constructive relationship becomes an objective in its own right. A regulator needs enough institutional distance to ask difficult questions, test what it is being told, reach an unpopular conclusion, reject an industry's preferred position or impose consequences where the evidence and statutory framework require it.
The relationship should be constructive without becoming dependent. The regulated industry is an important stakeholder. The public interest remains the regulator's mandate.
