Victorian Guide to Regulation
Updated July 2014
Toolkit 1: Purposes and types of regulation
The Secretary
Department of Treasury and Finance
1 Treasury Place
Melbourne Victoria 3002
Australia
Telephone: +61 3 9651 5111
Facsimile: +61 3 9651 5298
www.dtf.vic.gov.au
Authorised by the Victorian Government
1 Treasury Place, Melbourne, 3002
© State of Victoria 2014
This work is licensed under a Creative Commons Attribution 3.0 Australia licence. You are
free to re-use the work under that licence, on the condition that you credit the State of
Victoria as author. The licence does not apply to any images, photographs or branding,
including the Victorian Coat of Arms, the Victorian Government logo and the Department of
Treasury and Finance logo.
Copyright queries may be directed to IPpolicy@dtf.vic.gov.au
ISBN 978-1-921831-51-5
Published August 2011
If you would like to receive this publication in an accessible format please email
information@dtf.vic.gov.au. This document is also available in PDF format at
www.dtf.vic.gov.au
An appropriate citation for this publication is: Government of Victoria, 2011, Victorian Guide
to Regulation, Department of Treasury and Finance, Melbourne.
Toolkit 1: Purposes and types of regulation
Contents
1.
Purposes and types of regulation .............................................................1
1.1 Rationale for government intervention............................................................................. 1
1.2 Characteristics of good regulatory systems....................................................................... 4
1.3 Types of regulatory regimes .............................................................................................. 6
Attachment 1. Maintaining Consistency with the Australian Consumer Law ....18
Background .............................................................................................................................. 18
Victoria’s approach to maintaining IGA consistency ............................................................... 19
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
i
1.
Purposes and types of regulation
This toolkit provides policy context, examines regulatory options, and addresses the
following issues:
 Under what circumstances should governments consider intervening in the market
(Section 1.1)?
 What are the characteristics of ‘good’ government regulatory systems (Section 1.2)?
 What are the different types of regulatory regimes (Section 1.3)?
 What are the different forms of government regulation (Section 1.3)?
1.1
Rationale for government intervention
Traditionally, government intervention in markets is justified on economic efficiency grounds,
or to achieve social and environmental objectives.
From an economic perspective, freely functioning markets generally provide the most efficient
means of allocating goods and services between members of the community so as to maximise
the well-being of the community. The market mechanism is also generally the best means of
ensuring that a good or service is produced efficiently. In addition to these allocation and
production efficiencies, competitive markets encourage innovation and greater consumer
choice, thereby maximising society’s economic welfare.
Addressing market failure
In some instances, the market does not deliver the best outcomes for society – for example,
because of the existence of market distortions or imperfections. In such cases, the market is
said to be ‘failing’ and, in some circumstances, government intervention may be justified on
the grounds that economic outcomes could be improved.
Major causes of ‘market failure’ include:
 External costs and benefits, commonly referred to as externalities or spillovers – which
occur when an activity imposes costs (which are not compensated) or generates benefits
(which are not paid for) on parties not directly involved in the activity. Without regulation,
the existence of externalities results in too much (where external costs or negative
externalities occur) or too little (where external benefits or positive externalities arise) of an
activity taking place from society’s point of view. Pollution is the most common example of
a negative externality, while immunisation against a contagious disease is an example of an
activity that generates a positive externality.
 Insufficient or inadequate information. Consumers may not have adequate access to the
information they require to make decisions that are in their best interests. For example,
consumers need access to information on the quality or content of products (including
associated hazards). Sometimes, sellers may have access to better information than buyers
(often referred to as ‘information asymmetries’). Under such circumstances, governments
may regulate to require information disclosure, to provide the information directly, or place
restrictions on the supply of goods or services regarded as dangerous.
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
1
 Public goods – are goods or services which display both the following characteristics:
– they are non-excludable, which means that anyone can have access to them once they
are provided; and
– they are non-rivalrous, which means that any person can benefit from them, without
diminishing anyone else’s enjoyment.
National defence and street-lighting are commonly cited examples of public goods. Once
provided, the benefits of public goods can be enjoyed by all parties, although it is not
feasible to charge all users for these goods. As a result, public goods may not be provided,
or will be under-provided, unless governments intervene.
 The existence of overwhelming market power – which may arise from uncompetitive
market structures (e.g. a monopoly or a small number of market participants) or from
anti-competitive conduct (e.g. collusion). In these circumstances, prices may be higher or
output lower than they should be, and too few resources are allocated to the production of
particular goods and services. In other words, the market does not produce enough of what
best meets society’s needs. Regulation may be required to ensure this market power is not
exploited to the detriment of consumers.
Addressing social welfare objectives
In addition to addressing market failure, government intervention may be justified in the
pursuit of social and equity objectives. Such objectives include the redistribution of income to
achieve equity goals; establishing law and order; cultural objectives; and preserving and
protecting environmental resources. Key rationales for government intervention of this kind
are as follows:
 Governments generally achieve redistributive goals through the taxation and social security
systems. It is a widely held belief that every individual should have access to at least some
minimum level of income – hence, taxes are collected and partially redistributed to those
who are economically disadvantaged. In addition, there is a strong view within the
community that certain goods and services are fundamental or essential and should be
provided free of charge to all (or, at least, at concessional rates to those most in need). This
helps to explain why governments typically provide financial support for education and
health services.
 Regulations may also be imposed to assist in the policing of crimes or to reduce the risk of
criminal activity. Thus, persons in certain occupations may be required to keep detailed
records of transactions to assist police in apprehending and prosecuting suspected
criminals.
 Other social policies include human rights, protecting the vulnerable and disadvantaged,
and relieving geographic and social isolation (e.g. by ensuring adequate community facilities
and the appropriate provision of infrastructure).
Addressing the management of public risk
A particular form of social regulation relates to requirements that seek to reduce or manage
the risk of harm to health, safety or welfare of individuals or the community. Sometimes
referred to as ‘protective’ regulation, it includes:
 measures to promote public health and safety – examples include occupational health and
safety regulations, which seek to reduce the incidence of injuries and deaths in the
workplace; and regulation of product and home safety (e.g. electrical safety standards),
which seeks to reduce the risk of accidents causing injury;
2
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
 reducing the risk of harm to vulnerable sections of the community – examples include
regulation of minimum quality standards in childcare and supported residential services,
which seeks to protect children and aged care residents from poor care; and
 restrictions on the practice of certain occupations and professions – such as health
services, which seek to protect consumers from risky practitioners.
It is not possible for governments to provide a completely ‘risk-free’ society, or to prevent
every possible event that might cause harm. While, in many cases, risk regulation will have
large and important benefits, the direct and indirect costs imposed by regulatory approaches
may not be as immediately obvious. Moreover, it needs to be recognised that regulation
consumes scarce resources. Risk regulation that is poorly targeted or costly will divert
resources from other priorities. Conversely, appropriately targeted regulation enables the
direct and/or indirect pricing-in of the market failure by the agent being regulated.
The decision of when it is appropriate to intervene in the market to reduce or manage public
risk is a challenging one. Even in these situations, the underlying reasons for which these risks
arise and are not dealt with in the market still need to be analysed - just as with other areas of
regulation. For example, restrictions on medical practice in part aim to address problems
arising from information asymmetries. Framing the problem in this way allows a more
targeted and commensurate response to the problem to be developed.
Moreover, as discussed below, risk assessment can be a particularly valuable tool to assess
whether a proposal represents a high priority for government intervention to manage public
risks.
Risk assessment
Any problem identified as potentially requiring government intervention will have an element
of risk attached to it. Risk refers to the probability that existing hazards will cause harm – i.e.
that an undesirable event will occur. For example, measures to address occupational health
and safety issues recognise that there is risk of an accident happening in the workplace.
Risk analysis is the process of discovering what risk is associated with a particular hazard, which
involves identifying hazards and the mechanisms that cause them, and estimating the
probability that they will occur and their consequences. As illustrated in Figure 1 below, the
‘level’ of risk can be assessed by combining the consequences of an adverse event occurring
and the likelihood or probability that these impacts will occur (while recognising that there
may be a degree of uncertainty surrounding such assessments). In assessing the consequences,
consideration needs to be given to the size of the population likely to be affected, and the
severity of the impact on those affected. This will provide an indication of the aggregate effect
of an adverse event. For example, ‘major’ consequences may include significant harm to a
small group of affected individuals, or moderate harm to a large number of individuals.
Likelihood
Figure 1: Assessing the level of risk
High
Mod
Low
Medium risk
Low risk
Low risk
Low
High risk
Medium risk
Low risk
Moderate
High risk
High risk
Medium risk
High
Consequence
Risk analysis is a valuable tool in addressing the threshold issue of whether or not governments
should intervene. It can help to determine:
 whether the risks that government intervention is intended to address are of significant
magnitude compared with other risks; and
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
3
 the extent to which government intervention reduces the initial risk problem (i.e. the
effectiveness of the proposed government response).
When combined with an assessment of the extent to which markets fail to manage these risks
efficiently, or in line with social goals, and the net cost of the proposed regulation (relative to
other approaches), risk analysis can be used to assess the level of priority for government
regulation. Table 1 provides an illustration of how this might be done.
Table 1: Assessing the priority for government intervention – an illustration
Problem
Level of risk
Extent of market failure
Effectiveness in addressing
problem
Cost
Priority
A
B
C
D
High
Moderate
Medium
Major
Low
Minor
High
None
Low
High
High
Low
High
Low
Medium
High
Low
Medium
High
Low
There may be little justification for government intervention where:
 the likelihood of a particular problem occurring is very small – where the effects of an
adverse effect would be low to moderate; or
 the level of risk is relatively high, but the capacity of regulation to address it in a cost
effective way (i.e. effectiveness or expected net benefits) is low.
In other words, efforts at reducing risks are best directed to areas where gains are greatest and
the risks are regarded as unacceptable (e.g. regulation of major hazard facilities), rather than
cases where efforts will generate only modest gains.
Risk assessment enables decisions to be made about government regulation to ensure it is in
proportion to the risks involved. The objective of implementing a proposal to deal with risk
should not be to reduce the risk at all costs, or to reduce it to a minimum level, but rather to
balance the marginal benefits and costs to society of lowering the risk.
1.2
Characteristics of good regulatory systems
While government regulation is sometimes necessary to achieve certain economic, social and
environmental goals, excessive or poorly developed regulation can impose costs on business
and the community that outweigh the benefits of this regulation. These costs can have
negative implications for overall economic performance, including employment and
investment opportunities.
To avoid the problems caused by poorly designed regulation, the Victorian Government has
given a high priority to regulatory reform. This is based on the premise that government should
not resort to explicit regulation unless it has clear, continuing evidence that:
 a problem exists;
 government action is justified; regulation (i.e. in the form of primary or subordinate
legislation) is the best option available to government; and
 (where regulation is justified) the regulatory model chosen addresses the policy objectives
at least cost (relative to other options) to businesses and the community.
Once a positive argument for government regulation has been established, it is important that
the nature of the regulation meets the following key characteristics:
 Effectiveness. Regulation, in combination with other government initiatives, must be
focused on the problem and achieve its intended policy objectives with minimal side
4
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
effects. The regulatory system should also encourage innovation and complement the
efficiency of markets.
 Proportionality. Regulatory measures should be proportional to the problem that they seek
to address. This principle is particularly applicable in terms of any compliance burden or
penalty framework which may apply. This characteristic also includes the effective targeting
of regulation at those firms/individuals where the regulation will generate the highest net
benefits. This would include risk-based approaches whereby different burdens are imposed
within a regulatory regime depending on the assessed risk of regulated entities.
 Flexibility. Government departments and agencies are encouraged to pursue a culture of
continuous improvement, and regularly review legislative and regulatory restrictions.
Where necessary, regulatory measures should be modified or eliminated to take account of
changing social and business environments, and technological advances. All subordinate
legislation must be reviewed regularly and systematically under the Subordinate Legislation
Act 1994. The Act mandates that subordinate legislation ‘sunsets’ after 10 years. This
should be considered as the maximum time period at which the legislation is reviewed. Best
practice would require more frequent review periods (although overly frequent changes in
the law can place burdens on the community).
Flexibility should also be taken into account when drafting legislation, to ensure that it does
not unnecessarily constrain future government responses. For example, if primary
legislation requires prices to be specified in subordinate legislation, it makes it illegal to
adopt other less prescriptive options (e.g. price monitoring), even if such less prescriptive
approaches become more appropriate over time.
 Transparency. The development and enforcement of government regulation should be
transparent to the community and the business sector. Transparency can promote learning
and information-sharing within the regulatory system to improve the design, administration
and enforcement of regulation, and can also help to build public trust in the quality of
regulation and the integrity of the process.
 Consistent and predictable. Regulation should be consistent with other policies, laws and
agreements affecting regulated parties to avoid confusion. It should also be predictable in
order to create a stable regulatory environment and foster business confidence. The
regulatory approach should be applied consistently across regulated parties with like
circumstances.
 Cooperation. Regulation should be developed with the participation of regulated parties
and the community. Consideration should also be given to other jurisdictions, both within
Australia and internationally, to take into account the needs to multi-jurisdictional
businesses and Victoria’s major trading relationships. Regulators, in administering and
enforcing regulation, should also seek to build a cooperative compliance culture.
 Accountability. The Government must explain its decisions on regulation and be subject to
public scrutiny. The same is true of its enforcement agencies. As such, the development and
enforcement of regulation in Victoria should be regularly evaluated against key
performance indicators, with the results being reported to the public on a systematic basis.
 Subject to appeal. There should be transparent and robust mechanisms to appeal against
decisions made by a regulatory body that may have significant impacts on individuals
and/or businesses.
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
5
1.3
Types of regulatory regimes
There are different forms of regulation and a range of other measures that government may
adopt to achieve its policy objectives. It is important to ensure that the regulatory model
chosen is consistent with the type of regulatory problem.
Direct approach
In general, adopting a direct approach to addressing an identified problem will ensure that a
more efficient and effective outcome is achieved as compared with an indirect response
(which, for example, may target a contributory cause of the problem). A direct approach will
generally cause fewer distortions in the market, and provide a clearer indication of the
objectives of the regulatory proposals. Furthermore, the most direct regulatory proposal will
relate most directly to that regulatory objective, therefore minimising secondary or
unintended effects. The following example (see below) indicates the weakness of adopting an
indirect approach to addressing the problem of drink-driving.
Tackling drink-driving – the weakness of an indirect approach (hypothetical example)
An indirect approach to addressing the issue of drink-driving would be to require the
early closure of all licensed premises (e.g. before 8pm). Not only would the costs of such
an approach be high (e.g. loss of business to licensed premise holders), but it may induce
individuals to consume alcohol more quickly than otherwise, and still drive home. This
approach would also adversely affect those using the premises who are not drinking
alcohol or not intending to drive home.
A more direct approach would be to prevent or discourage drinkers from driving – for
example, through the use of educational campaigns against drink-driving or by
increasing enforcement of the legislation through increased random breath testing. Of
course, these direct approaches would need to be subject to cost-benefit analysis to
determine the option with the greatest net benefit.
Regulatory approaches
Regulation may take the form of prescriptive rules, which focus on the inputs, processes and
procedures of a particular activity. For example, as part of regulation designed to reduce
workers’ exposure to noise levels in a particular industry, a prescriptive measure may be to
mandate the wearing of ear protection and/or prohibiting the use of certain industrial
equipment.
One of the main advantages of prescriptive regulation is that it provides certainty and clarity
regarding what constitutes compliance. By setting out requirements in detail, it provides
standardised solutions and facilitates straight-forward enforcement.
However, because of its inflexibility, prescriptive regulation is unsuitable in situations where
circumstances are subject to change (e.g. due to technological change) or there are feasible
alternative approaches to achieve the desired outcome. Moreover, prescriptive rules often do
not provide incentives for the intended outcomes of regulation to be achieved at least cost.
Hence, such a regulatory model should not be used in Victoria if the outcome can be clearly
specified, and there are multiple solutions to mitigate the regulatory problem.
6
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
The Victorian Government encourages that – where appropriate and where permitted by the
enabling legislation – prescriptive rules should be avoided, and consideration should instead be
given to the use of:
 performance-based standards (or principle-based regulation in cases where it is not feasible
to set objective performance based-standards);
 process-based regulation, where there are substantial risks that need to be managed
simultaneously; and/or
 targeted regulatory requirements proportionate to risk.
Performance-based standards specify desired outcomes or objectives, but not the means by
which these outcomes/objectives have to be met. Taking the above example of reducing
workers’ exposure to noise levels, a performance-based approach would be to set a required
outcome for each firm in terms of the maximum decibels to which workers should be exposed.
It would then be left to each firm in the industry to decide how it would achieve this outcome.
This allows for different technological solutions to the regulatory problem, and should be the
preferred method of regulation when the regulatory standard can be clearly expressed and
measured and there are different potential compliance methods.
In some cases, it will not be feasible to set objective performance-based standards, either
because any reasonable performance benchmark would depend on the particular
circumstances, or because objective standards would need to change over time as knowledge
develops on how to address individual risks. However, these issues also make prescriptive
regulation unsuitable. Principle-based regulation addresses these issues by requiring the
application of general objectives or principles, rather than specific outcomes. An example of
principle-based regulation is the general duty under occupational health and safety legislation
of eliminating or reducing risks so far as is ‘reasonably practicable’.
Process-based regulation is increasingly adopted when governments are seeking to manage
substantial but diverse risks. It is generally best applied when: there are a number of
substantial risks that need to be managed simultaneously; there are a range of management
measures available; and individual firms within the regulated industry have sufficient capacity
to effectively assess risks and develop tailored solutions to mitigate those risks under their
control. However, this regulatory model should not be used when there are few risks, and/or
the options for risk management are well known.
Examples include requirements to prepare and implement: risk management plans for cooling
towers; safety management systems for major hazard facilities under occupational health and
safety legislation; risk management plans for water suppliers regarding the quality of drinking
water; emergency management plans for public passenger vehicles such as buses; and
management plans for electrical distribution and transmission companies regarding electrical
line clearance.
Process-based regulation requires certain processes to manage the risk of adverse outcomes,
and is generally centred on the key elements of:
 Risk identification – this involves identifying all hazards (i.e. anything that has the potential
to cause harm).
 Risk assessment – this involves making a judgement about the seriousness of each hazard,
and deciding which hazard requires the most urgent attention. An assessment must be
made on the likelihood of adverse outcomes, and the impact of such outcomes.
 Risk controls – this involves identifying ways to eliminate each risk and, where this is not
appropriate, how it might be controlled to reduce the impact of adverse outcomes and the
likelihood of them occurring. The judgement on the required controls will often be guided
by more general principles that underpin the regulatory framework, such as ‘as far as
reasonably practicable’.
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
7
The risk management process is generally required to be documented to demonstrate
compliance, and often a risk management plan must be submitted to government or made
available for inspection. Regulations may require regular audits of the implementation of the
plan, and reviews at specified intervals or after specified events.
The main advantages that performance-based standards and process-based regulation have
over prescriptive regulation are the greater flexibility afforded to regulated parties in achieving
the desired outcomes (which can also encourage the pursuit of low cost solutions), and their
ability to be used in situations where circumstances may change over time (e.g. as knowledge
improves and/or technology advances). Nevertheless, they do have some disadvantages. For
example, the greater flexibility (and freedom) offered by performance-based regulations is
often cited as a problem for those being regulated as it can lead to uncertainty as to whether
the actions they undertake are sufficient to satisfy the standards set by the regulations. Where
regulated parties (for example, small businesses) lack the resources to tailor compliance
approaches, guidance material that demonstrates (without prescribing) how to comply can be
effective in reducing compliance costs.
Targeted regulatory requirements according to risk set out:
 different risk classes or categories of regulated entity according to the activities they
undertake; and
 regulatory obligations for each category.
In this way, the regulatory obligations placed on an entity are able to be more proportionately
matched to the risk the activities impose. Entities classified as high risk can in this way be
regulated much more stringently (for example in terms of licensing criteria, performance
standards and monitoring arrangements) than low risk entities (which might not be required to
be licensed and have less onerous reporting requirements).
An example of such a risk-based regulatory approach is the classification of food businesses
under the Food Act 1984. Under this regime, businesses and groups that sell food are classified
into one of three classes, according to the public health risks involved in handling foods:
 Entities preparing temperature-controlled meals eaten on-site by vulnerable people
(e.g. nursing homes) fall into the highest risk class. Regulatory requirements for this class
include a requirement to have an independent food safety program and a food safety
supervisor, and undergo two annual compliance checks.
 Businesses in the lower risk class (e.g. convenience stores that only handle packaged food
that is refrigerated or reheated) are not required to have a food safety program or food
safety supervisor. Instead, they must complete simple record keeping and undergo one
annual compliance check.
 Very low risk businesses (e.g. chemists selling packaged food that does not require
temperature control) are subject to the lowest level of regulation. They do not have to
keep any records and do not need to undergo an annual compliance check.
A pre-condition for such an approach towards targeting of regulatory requirements across a
sector is having a whole of sector risk assessment framework and appropriate data to enable
regulated parties to be assessed (or to self-assess) and be categorised into appropriate classes.
A summary of the advantages and disadvantages of the various approaches to regulation is
provided in Table 2.
8
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
Table 2: Approaches to regulation – summary of advantages and disadvantages
Advantages
Prescriptive rules
Disadvantages
 Certainty and clarity – requirements  Inflexibility in meeting regulatory
are set out in detail; standardised
solutions; ease of enforcement
 The decision to prosecute can be
made on objective criteria
Performance-based  Suitable for industries subject to
changing circumstances (e.g. due to
standards
technological change)
 Greater flexibility in dealing with
technical matters
 Encourages least-cost means of
achieving the outcome
 Lower compliance costs
 May encourage continual
improvement through innovations
Process-based
regulation
 Suitable for controlling substantial



Targeted
regulatory
requirements



objectives
 High administration and compliance
costs
 Unsuitable in industries subject to





changing circumstances (e.g. due to
technological change), where
prescriptive rules may be rendered
obsolete
May lead to uncertainty as to
whether actions undertaken satisfy
standards set by regulation
Generate uncertainty because
circumstances giving rise to
prosecutions may be determined
subjectively
May require high levels of guidance
Increased risk of non-compliance
because standards may not be
uniform across the industry
May be costly to administer
(particularly for small firms)
There is a risk of regulatory creep
where scope of risks covered or
standards of controls required
increase over time
Potential for overlap with other
general regulation
but diverse risks
Can be applied to complex areas of 
different operations subject to
technological change
May promote innovation in the
development of risk mitigation

practices
May encourage greater ownership
and accountability for risk mitigation
practices
Suitable where regulated entities or  May only be feasible where there is
activities pose varying risks
a detailed understanding of the risk
Enables proportionate targeting of
profile and ability to differentiate
regulatory requirements (and
risk across regulated activities
focussing of enforcement activity)
on the basis of risk
Effective in ensuring that regulatory
burden faced by regulated entities is
not disproportionate/excessive
Regulation can also be viewed along a ‘continuum’, with explicit government regulation
representing one end of this continuum, and self-regulation at the other extreme (see
Figure 2).
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
9
Figure 2: Regulation continuum
Self-regulation
Voluntary agreement within an industry
Characterised by voluntary codes of conduct or standards
No government enforcement
Quasi-regulation
Government influences business to comply
Government assists with the development of codes of conduct, accreditation and/or rating schemes
Ongoing dialogue between government and industry
No government enforcement
Co-regulation
Strong partnership between industry and government
Industry develops own code of conduct or accreditation/ratings schemes with
legislative backing from government
Explicit government regulation (legislation)
Industry’s role in formulating legislation is limited to consultation, where relevant
Compliance is mandatory, with punitive sanctions for non-compliance
Little flexibility in interpretation and compliance requirements
Government enforcement
10
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
Self-regulation
Self-regulation (or voluntary codes of practice or standards) refers to the benchmark actions or
procedures, as determined by the particular industry or profession, that are generally
acceptable within the peer group and the wider society. The relevant industry is solely
responsible for enforcement, although government may also be involved in a limited way – for
example, through the provision of advisory information.
Self-regulation usually implies that firms in an industry or members of a profession have
accepted mutual obligations. These obligations are often described in a code of practice or
conduct.
Advantages
Disadvantages
 Because of agreement between major industry  No legal remedies exist for breaches of the




participants and therefore high levels of
awareness, compliance may be high
Utilises the expertise and experience of those
in the industry
Allows for innovative behaviour of industry
participants
Lowers administrative costs for governments
Can facilitate national and/or international
consistency of requirements
code or agreement
 Could be used to promote anti-competitive
behaviour (e.g. rules may confer commercial
advantage)
 Imposes monitoring costs that are incurred by
the industry or professional association
 Compliance may be low if a sense of
commonality amongst those affected is not
present
 May implicitly create barriers to entry and
trade
Suitable conditions for use
 The problem to be addressed is a low-risk event, or of low impact
 The problem can be fixed by the market
 When there is sufficient power and commonality of interest within an industry to deter
non-compliance
 When the cost of compliance is small
 Where a body with appropriate expertise and representation is available to develop an industry
code or standard
Quasi-regulation and co-regulation
Quasi-regulation and co-regulation are similar in that they refer to situations where the
regulatory role is shared between government and industry.
In the case of quasi-regulation, there is no formal enforcement role for the government, but
the government does influence businesses to comply by assisting in the development and/or
endorsing industry codes of conduct. An example is the Electronic Funds Transfer (EFT) Code of
Conduct, which was endorsed by Commonwealth and state/territory governments, and which
applies to financial transactions that are effected through the use of a card and a personal
identification number. The code is monitored by the Australian Securities and Investments
Commission, and requires EFT providers to issue customers with certain information and a
transaction receipt.
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
11
Co-regulation typically refers to a situation where an industry or professional body develops a
code of practice (or accreditation or rating scheme) in consultation with the government, and
the government provides legislative backing to the code/schemes (and consequently plays an
enforcement role). Co-regulation has long been adopted in professions such as lawyers and
engineers.
Advantages
Disadvantages
 Utilises expertise of industry or professional
 Could raise barriers to entry within an industry
associations
(e.g. through standards or education
 Encourages industry or professional
requirements)
association to take greater responsibility for
 Unintended monopoly power gained by
the behaviour of its members
market participants could restrict competition
 Reduces requirements for government
 Danger of regulatory ‘capture’, whereby
resources to be dedicated to regulation
government agencies promote the interests of
 Industry involvement is likely to improve
regulated parties at the expense of the
industry acceptance of the scheme and ensure
community at large
that the requirements are practical to the
characteristics of the industry
Suitable conditions for use
 There is public interest in some government involvement in regulatory arrangements, and the
issue unlikely to be addressed by self-regulation
 Where professional independence is a major consideration
 When there are advantages in the government engaging in a collaborative approach with
industry, with industry having strong ownership of the scheme, which will require:
– a specific industry solution rather than regulation of general application;
– a cohesive industry, where incentives and interests are aligned; and
– a strong industry association with broad coverage.
Explicit government regulation
Sometimes referred to as ‘black letter law’, explicit government regulation covers the making
of legislation, either primary or subordinate, to achieve specified objectives. It attempts to
change behaviour by detailing how regulated parties should act, and it generally imposes
punitive sanctions (such as fines or even custodial sentences) when there is non-compliance
with the regulation.
Advantages
Disadvantages
 Creates certainty
 Greater industry-wide coverage
 Enforcement via legal sanctions likely to lead
 May impose significant burden on affected
to higher levels of compliance
parties (e.g. high compliance costs)
 Significant resources may be required to
establish and maintain regulatory framework
 Can be more inflexible than other forms of
intervention
Suitable conditions for use
 The problem to be addressed is high risk, with high impact/significance (e.g. public health and
safety)
 The government requires the certainty imposed by legal sanctions
 Universal application is required (e.g. coverage of one or more industry sector)
 There is a systematic compliance problem that requires effective sanctions
12
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
Increased enforcement of existing provisions
The possibility of increasing enforcement of existing provisions should be considered when
there is relatively low levels of compliance, perhaps among particular groups. This option may
simply require an upgrade of existing enforcement mechanisms, and is particularly relevant for
long-standing mechanisms given that technology could have changed, allowing enforcement
mechanisms to be reconsidered or re-engineered. A good example of this is the development
of laser-based detection devices to enforce traffic speeding laws.
Advantages
Disadvantages
 Increases the effectiveness of regulation
 Not all problems can be solved by simply
without increasing its complexity
increasing enforcement mechanisms
 Appropriate response to allow for the
 May require unacceptably high costs, without
adoption of new technology for enforcement
delivering benefits
mechanisms
 May increase the need for additional
 Demonstrates a credible threat – i.e. penalties
resources to administer increased
for non-compliance are imposed, which
prosecutions
prevents the law from being brought into
disrepute
Suitable conditions for use




When technology changes rapidly
When too many breaches are occurring
When it is cost-effective to do so
When costs of non-compliance are great
Extending the coverage of existing legislation
If essential facilities or procedures are already provided by an existing legislative regime, it may
be more efficient to extend the application of that legislation to related concerns, rather than
have them duplicated. For example, if enforcement mechanisms (e.g. inspections, reporting
requirements) already exist for manufacturers or suppliers of certain types of drugs or poisons,
these might be efficiently and effectively applied to manufacturers or suppliers of alternative
medicines.
This approach is also likely to assist in ensuring the consistency of government action in the
treatment of issues with similar concerns.
Advantages
Disadvantages
 Eliminates unnecessary duplication of a
 Not appropriate for problems that require
proven legislative framework
 Enables better utilisation of existing legislative
framework
 Promotes consistent treatment of related
issues or concerns
 Saves resources and costs associated with
developing an alternative or parallel
framework
 May promote a high level of compliance
where existing legislation is well understood
specific regulation to address the particular
circumstances of the case
 Could result in legislation that is too complex
 Current resources may not be able to deal
adequately with all matters covered by the
legislation
 Not as flexible as other options when
technology is changing rapidly
Suitable conditions for use
 When existing laws are pertinent to the issue being addressed
 When existing legislation is comprehensive and well understood
 When extending existing legislation can be achieved with minimum cost or difficulty
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
13
Targeted regulatory requirements according to risk
Traditional command-and-control approaches to regulation do not acknowledge or reward
compliance with regulations. Accordingly, industries with good track records are penalised for
non-compliance on the same basis as firms that frequently breach the law. Hence, in order to
capture offenders, regulations sometimes place monitoring and reporting requirements on
complying industry participants that are too onerous.
As a consequence, consideration should be given to risk-based approaches that are less
burdensome for low risk and/or highly compliant parties, while focusing compliance and
enforcement activity on high risk and/or low compliance parties. Under such an approach,
organisations that show a consistent record of compliance with the regulations could be
rewarded. (Such rewards could include a reduction in the number of licences required, a
lowering of the frequency of inspections or audits, reducing reporting requirements, or by the
allowance of self-regulation). Those undertaking higher risk activities or with a history of
non-compliance on the other hand, would face stricter regulatory requirements and more
frequent inspections.
Advantages
Disadvantages
 Provides economic incentives that encourage
 Dependent on data for regulator to assess risk
compliance
 Allows regulator efforts to be focused in areas
where community benefits are greatest
 Can provide incentives for regulated parties to
improve their performance
profile of regulated parties
Suitable conditions for use
 When such economic incentives are likely to increase the incidence of good behaviour
Negative licensing
Negative licensing is designed to ensure that participants that have demonstrated previously
that they are incompetent or irresponsible are precluded from operating in a particular
industry. As a result, the worst offenders against the set standards are removed from the
industry/profession without, at the same time, placing an undue burden of registration on the
entire industry/profession.
Advantages
Disadvantages
 Avoids the need of administrative or personal
 As no screening occurs, the number of
certification. The resulting lower costs on
participants may result in lower prices for
consumers
 Costs of entry are lower compared with the
situation where certification is required
inappropriate participants initially entering an
industry may be higher than under a
registration process
 Some participants may be able to operate
undetected or act inappropriately before they
are detected – i.e. licence removal will only
occur after the detection of a breach
 The process relies on objective evidence that
may not be a reliable indicator of future
inappropriate behaviour
 Enforcement activities may need to be
increased, thereby increasing monitoring costs
Suitable conditions for use
 When monitoring requirements are low
 When screening processes are already carried out by some organisation or law enforcement body
14
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
Public information and education campaigns
Research on regulatory compliance and the practical experience of regulators indicates that
non-compliance with the requirements of regulations can be the result of ignorance rather
than any intentional desire to flout the law. Where the problem to be addressed results from a
lack of knowledge amongst consumers or participants in an industry, then an education
program should be considered.
An education campaign by government and/or industry bodies is likely to be successful where
the target can be easily identified and reached economically. Approaches include advertising in
industry magazines and newspapers, distributing information brochures in areas where the
problem exists, soliciting community groups or associations to disseminate information, or
targeted mail-outs to affected groups.
Advantages
Disadvantages
 Represents a quick method of disseminating
 May be less effective than other regulatory
information about compliance requirements
approaches as it relies on voluntary
 May reduce costs to the government and the
compliance rather than being supplemented
community because of a higher level of
by the element of coercion
awareness about issues of concern
 The community can become de-sensitised or
 May reduce resources expended on
weary of messages, thereby reducing the
implementing regulatory programs and
effectiveness of education campaigns,
ongoing enforcement
particularly if the problem is long-term
 Can educate the community about the virtues  Target groups may not be easily identified
of a particular policy and therefore increase
 Public interest may warrant further action
compliance
than just education, particularly when the
issue being regulated is of a serious nature
Suitable conditions for use




When the problem or non-compliance results from misinformation or a lack of information
When target audiences can be easily and economically reached
When the virtues of a particular policy are not well understood
When a light-handed approach would be more appropriate
Information disclosure
While closely related to public education campaigns, this option requires information about
the attributes of products or processes to be disclosed (e.g. hazardous substances in use, food
labelling, disclosure statements for buying a franchise and entering into a retail lease).
Information disclosure does not directly seek to prohibit or regulate the consumption of a
good or service, but is designed to ensure that the public is aware of all the advantages and
disadvantages of using the products.
Advantages
Disadvantages
 Influences user behaviour without prohibiting
 The information necessary could be too
it
 Facilitates informed decision-making by
consumers
 Promotes high-quality goods, services and
quality
 Preserves the opportunity for innovation
technical (e.g. information on contents of
drugs)
 May not be perceived as being responsive
enough
Suitable conditions for use
 When consumers do not possess full information
 When ignorance or lack of understanding is an element of non-compliance
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
15
Market-based instruments
Market-based instruments are policy interventions that use the characteristics of
well-functioning markets to deliver policy outcomes. If properly designed, they can reveal
important information to policy makers and provide incentives which align individual and
public objectives, helping government to achieve its objectives while avoiding the regulatory
burden of more traditional regulatory intervention. Market-based instruments can be applied
when naturally occurring markets are missing or inefficient, and may be effective when
individuals each have different costs and benefits associated with conforming to a policy’s
requirements.
Taxes and subsidies
Although taxes require legislation and are primarily a source of revenue for governments, they
can also be used to influence the economic and social behaviour of individuals and firms. By
increasing the cost of an action to individuals or firms (i.e. internalising the costs of any
externality), a reduction in undesirable behaviour can be achieved. When the explicit aim of
imposing a tax is to change behaviour/internalise an externality, particular consideration needs
to be given to the underlying problem to be addressed and the extent to which it is reasonable
to expect behaviour to respond to a change in price.
Where governments wish to encourage certain behaviours, subsidies could be provided – for
example, grants to home owners for installing insulation, or cash-back payments for purchases
of energy efficiency appliances such as washing machines.
Advantages
Disadvantages
 Provide greater flexibility and freedom of




 May be difficult to target the policy directly –
choice for industry participants in terms of the
i.e. determine the required amount of the
methods of compliance
instrument to get the desired response
Encourage economically efficient allocation of  Need to take into account political
resources
considerations and commitments (e.g. in
Encourage least-cost technologies and
terms of overall levels of taxation)
methods of compliance
Low enforcement costs
Avoid problems associated with centralised
discretionary decision-making
Suitable conditions for use
 When the behaviour to be addressed is across many sectors or areas of the community
 When the activities being regulated are financially based
Tradeable permits
Tradeable permits are government-issued licences that grant a tradeable property right to the
holder – i.e. they grant the holder the right of use of a material or resource, or the right to
engage in a particular activity that can be bought or sold. These permits can encourage an
efficient allocation of resources and a market-based solution to environmental and distributive
concerns. Tradeable permits can force firms to internalise (pay for) the external costs that their
activities place on society. Such permits may be used to control pollution, and there has been
much discussion about the use of tradeable permits in controlling the emission of greenhouse
gases.
16
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
Generally, governments will make available a fixed supply of permits or licences, which would
be consistent with a desired level of output. However, there is a risk that tradeable permits
may increase the level of market power of incumbent firms or individuals.
Advantages
Disadvantages
 Efficient mechanism to require firms and
 Can represent a barrier to entry
individuals to internalise their external costs
 Can limit the number of participants in an
 Encourage adoption of least-cost technologies
industry and therefore reduce competition
 Provide financial incentives for firms to engage  Excessive rents (monopoly profits) may accrue
in desirable behaviour, thereby protecting the
to participants
environment and/or resource
Suitable conditions for use







When the market and market participants can be easily identified
When rights involved can be legally specified
When the method for trade or exchange can be adequately defined
When transaction costs (i.e. those associated with the trade of permits) are low
When a competitive market can be sustained, thus limiting market power of incumbents
When monitoring of usage is feasible
When the desired level of output is measurable and that measurement is cost-effective
Procurement
For certain types of issues, for instance when goods and services are not provided by private
markets in sufficient quantity, Governments can achieve specific objectives by procuring those
goods and services directly. If designed effectively, this can lower compliance costs on
individuals, and lower monitoring and enforcement costs for government. For instance,
mechanisms such as auctions can be used to reveal low-cost service providers, while incentive
structures can be embedded in service contracts to ensure that individuals and firms behave as
government requires.
Programs such as Bushtender and ecoTender are examples of where the Victorian Government
has procured a public good (in this case, environmental outcomes) instead of compelling
individuals to deliver its objectives through regulation.
Advantages
Disadvantages
 Can identify low cost providers of government  Can levy the costs of achieving policy
objectives
objectives on government
 Can target monitoring and enforcement effort,
lowering administrative costs
Suitable conditions for use
 When individuals and firms have different costs and benefits associated with contributing
towards government objectives and these are unknown to policy makers
 When the outcomes of individual actions are easily measurable
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
17
Attachment 1. Maintaining Consistency with the
Australian Consumer Law
Background
The Australian Consumer Law (ACL) is a single, national law that is applied consistently across
all Australian jurisdictions, including at the Commonwealth level.
The ACL includes:

core consumer protection provisions prohibiting misleading or deceptive conduct in trade
or commerce, and declaring unfair terms in standard form consumer contracts to be void;

specific protections against defined ‘unfair’ practices, including enumerated instances of
misleading or false conduct, pyramid selling, unsolicited supplies of goods and services,
component pricing and incorrect billing and receipting practices; and

regulation of certain aspects of consumer transactions, such as:
o
statutory consumer guarantees for consumer goods and services, including
business goods valued under $40,000;
o
a national legal framework for unsolicited consumer agreements, including doorto-door and telephone sales;
o
a national product safety law for consumer goods and product-related services;
and
o
provisions for enforcement powers, penalties and consumer redress.
Where provisions in State/Territory legislation duplicate or are inconsistent with the ACL, there
is a risk of unnecessary regulation and/or confusion. The Commonwealth, State and Territory
governments have agreed to a principles-based approach to maintaining ACL consistency
through the 2009 Intergovernmental Agreement for the Australian Consumer Law (the IGA).
Inconsistent provisions are those which alter the effect of the ACL by conflicting with a
command, power or other provision in the ACL, or which alter, impair or detract from the
operation of the ACL. Examples of inconsistent provisions are where:

the proposed/existing law cannot be followed concurrently with the ACL;

the ACL permits a certain activity that is prohibited by the proposed/existing law; and

the ACL confers a right to protection which the proposed/existing law seeks to remove.
Duplicative provisions are those that replicate the equivalent ACL-provision (with no
divergence), or which are perhaps framed in a different way, or only concern certain industries
but provide identical obligations and/or protections to the ACL.
These are not inconsistent per se but can cause confusion among suppliers and consumers.
Such laws can also become inconsistent over time if amendments to the ACL or the law in
question are passed at different times.
Complementary provisions are those that generally align with the ACL but have some
elements that go over and above what the ACL provides for, such as specific examples of
prohibited conduct (i.e. misleading or deceptive labelling of food).
18
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
Victoria’s approach to maintaining IGA consistency
Consistent with the IGA, Victoria’s approach to maintaining IGA consistency is as follows:


for new legislative/regulatory provisions, consideration should be given to whether the
issues being addressed are covered by the ACL and, if so, whether additional industry
specific provisions are necessary in light of the ACL provisions; and
where existing legislation/regulation is being reviewed or amended, consideration should
be given to whether existing provisions are inconsistent with, complementary to, or
duplicative of the ACL and, if so, whether those provisions are necessary to provide more
effective and/or certain consumer protection.
There is no onus to justify retaining existing consumer protection provisions within Victorian
statutes. In some cases, these may have particular context in relation to the industry or activity
to which they apply, complementing the ACL laws.
For guidance on the Australian Consumer Law, departments may wish to contact CAV’s Policy
and Legislation Branch on Ph: 8684 6484.
The reporting arrangements for departments are to assess new proposals and existing
provisions using the template available at
http://www.consumerlaw.gov.au/content/Content.aspx?doc=consistency_with_acl.htm and
forward it to the CAF Secretariat.
Victorian Guide to Regulation
Updated July 2014, Toolkit 1: Purposes and types of regulation
19
dtf.vic.gov.au