Chapter 4: Options for establishing an occupational licensing regime
We are considering whether we should introduce an occupational licensing regime for CRD assurance practitioners.
4.1 Status quo
The CRD Act requires climate statements to be assured by independent CRD assurance practitioners, to the extent that they contain information about GHG emissions. We propose extending this requirement to the whole of the climate statement (see Chapter 5 for more detail).
Currently, any person carrying out an assurance engagement for information contained in a climate statement does not need to be licensed and there is no formal process in place for monitoring their work or addressing complaints.
The FMA has some powers that it could exercise in relation to CRD assurance practitioners under the current regime. This includes the FMA’s general warning and information-gathering powers under the Financial Markets Authority Act 2011. The fair dealing provisions under Part 2 of the FMC Act will also apply*. Injunctive relief will be available in respect of conduct that contravenes the FMC Act. (See section 480 of the FMC Act)
In addition, while there is no offence provision for non-compliance, the CRD Act provides that CRD assurance practitioners must carry out assurance engagements in accordance with applicable auditing and assurance standards. (See section 25 of the CRD Act inserting, in particular, future section 461ZHA of the FMC Act)
CRD assurance practitioners who are members of professional bodies may also be subject to some oversight by those bodies. For example, New Zealand members of Chartered Accountants Australia and New Zealand (CA ANZ) who offer assurance services are regulated as chartered accountants.
* Part 2 of the FMC Act requires “fair dealing” in relation to financial products and services. The fair dealing provisions set out the core standards of behaviour that those operating in financial markets must comply with. Fair dealing principles are broad and prohibit misleading or deceptive conduct, including conduct which is likely to mislead or deceive, and false, misleading or unsubstantiated representations.
4.2 Problem Definition
Climate-reporting entities may be incentivised, for credibility reasons, to select suitable individuals to provide assurance over their climate statements. However, the absence of an occupational licensing regime for CRD assurance practitioners means that practitioners who are un-skilled, or not subject to satisfactory professional standards, could carry out assurance work. In addition, without the minimum requirements that would be introduced by an occupational licensing regime, firms with less stringent assurance practices and oversight might undertake the work at a lower cost than highly competent and qualified practitioners. This may deter highly qualified practitioners from entering the market.
If CRD assurance practitioners are not appropriately skilled this may reduce confidence in the practitioners and the information in the climate statements that they assure.
2. Have we described the status quo and problem definition correctly? If not, why not?
4.3 Summary of the options
We have identified 3 options that may address the problem:
- Option 1: continue with the status quo
- Option 2: co-regulation modelled on the Auditor Regulation Act
- Option 3: direct regulation of CRD assurance practitioners by the FMA.
4.3.1 Option 1: continue with the status quo
Option 1 is continuing with the status quo. This means that no regulation for CRD assurance practitioners would be introduced. The status quo has been described in more detail above in section 4.1 of this consultation document.
4.3.2 Option 2: Co-regulation modelled on the Auditor Regulation Act
Option 2 would introduce co-regulation modelled on the Auditor Regulation Act. The Auditor Regulation Act specifies that both accredited bodies and the FMA undertake regulatory activities in relation to auditors. This would also be the case if co-regulation was adopted for CRD assurance practitioners.
Overview of the Auditor Regulation Act
The Auditor Regulation Act requires that:
- individuals who act as auditors for FMC reporting entities must be licensed (See section 8 of the Auditor Regulation Act.)
- audit firms that have at least 1 licensed auditor must be registered. (See section 9 of the Auditor Regulation Act.)
A co-regulation model for CRD assurance practitioners would similarly involve both the licensing of assurance practitioners and the registration of firms with at least 1 practitioner.
FMC reporting entities are defined in the FMC Act to include entities such as listed issuers, registered banks, licensed insurers, credit unions etc. (See section 6(1) of the FMC Act.)
Climate-reporting entities are a sub-set of FMC reporting entities.
How would co-regulation work?
We have set out below the regulatory responsibilities of accredited bodies and the FMA under the Auditor Regulation Act. At a high level, the FMA accredits professional bodies who undertake the frontline licensing and enforcement. The FMA also monitors the accredited bodies and carries out quality reviews. A co-regulation model for CRD assurance practitioners would involve similar requirements.
The accredited bodies
Other than quality review, the frontline regulation under the Auditor Regulation Act is undertaken by accredited bodies. The FMA sets the minimum standards for licensing and registration. (Auditor Regulation Act (Prescribed Minimum Standards and Conditions for Licensed Auditors and Registered Audit Firms) Notice 2020.)
The accredited bodies then license auditors and register audit firms, regulate ongoing competence requirements, investigate complaints and take disciplinary action. Under a co-regulatory model, they would do the same in respect of CRD assurance practitioners.
There are currently 2 professional bodies that are accredited under the Auditor Regulation Act – the New Zealand Institute of Chartered Accountants (NZICA)* and CPA Australia. These are the professional bodies that undertake the day-to-day regulation of auditors of FMC reporting entities.
To gain accreditation under the Auditor Regulation Act, a professional body must have objectives consistent with the purpose of the Auditor Regulation Act and relevant expertise, i.e. only professional accounting bodies can become accredited. For climate statement assurance the relevant skill-set will relate to both assurance and climate or carbon energy expertise. This means that the accounting bodies (NZICA and CPA Australia) and potentially another professional body representing climate or carbon energy professionals could apply for accreditation. We are aware of at least 1 such professional body in existence in New Zealand (Carbon and Energy Professionals New Zealand).
* The Institute of Chartered Accountants in Australia and the New Zealand Institute of Chartered Accountants (NZICA) merged in 2015 to create Chartered Accountants Australia and New Zealand (CA ANZ). The New Zealand legislation that facilitated the merger requires NZICA to continue to regulate its members. CA ANZ members living in New Zealand are automatically members of NZICA
The FMA – quality review and monitoring the accredited bodies
The FMA has responsibility under the Auditor Regulation Act for accrediting the professional bodies and monitoring and reporting on the adequacy and effectiveness of those bodies’ regulatory systems. The FMA also:
- prescribes the minimum standards for licensing of auditors, registration of audit firms and accreditation of professional bodies
- undertakes quality reviews of registered audit firms
- issues licences to overseas auditors.
Co-regulation for CRD assurance practitioners would involve the FMA carrying out similar tasks. In particular, the FMA would determine which professional bodies meet the requirements for CRD accreditation.
Strict requirements for accreditation
Three requirements must be met before the FMA will grant a professional body accreditation under the Auditor Regulation Act (See section 48 of the Auditor Regulation Act). First, the FMA must be satisfied the professional body’s systems and processes are adequate for performing its regulatory functions. In addition to considering applications for licences and for registration of audit firms, these regulatory functions of professional bodies under the Auditor Regulation Act include:
- adopting, implementing, and monitoring codes of ethics
- monitoring compliance with auditing and assurance standards
- monitoring and reviewing the ongoing competence of members
- inquiring into the conduct of members and audit firms
- investigating complaints, taking disciplinary action and dealing with appeals from decisions of the disciplinary body.
Second, to become accredited, a professional body must meet certain minimum standards the FMA prescribes. (See the Auditor Regulation Act (Prescribed Minimum Standards for Accredited Bodies) Notice 2012). These minimum standards are extensive and include:
- having adequate governance and organisational structures, including a constitution
- being financially sustainable, including having sufficient access to funds to accommodate reasonable but unforeseen expenditure demands
- having a sufficiently independent disciplinary body to adjudicate on alleged breaches of conduct rules, conditions of licences or registration, the Auditor Regulation Act and auditing and assurance standards.
Third, the professional body must be a fit and proper person to perform regulatory functions for the purposes of the Auditor Regulation Act.
Co-regulation for CRD assurance practitioners would involve applying these same 3 requirements for accreditation. Taken together, these requirements are extensive. The significance of this for new professional bodies is discussed further below under the heading “assessment of the options”.
3. Do you have any comments about how we have described the co-regulatory model under the Auditor Regulation Act?
4. If co-regulation is the preferred option should we depart from any of the Auditor Regulation Act requirements? If so, which ones and why?
4.3.3 Option 3: Direct regulation of CRD assurance practitioners by the FMA
Under this option, a government regulator would be responsible for all aspects of regulating CRD assurance practitioners and firms. Regulatory activities undertaken by the accredited bodies under the co-regulatory model would instead be undertaken by the government regulator. This means the government regulator would licence CRD assurance practitioners, register firms, investigate complaints and take disciplinary action, and monitor ongoing competence requirements and compliance with codes of ethics. The government regulator would also undertake the activities the FMA would carry out under the co-regulatory model, including quality review and setting the minimum competency standards.
Direct regulation could involve a new government regulator being set up to carry out these tasks. In Australia, the Clean Energy Regulator regulates and maintains the register of greenhouse and energy auditors. Registered auditors conduct most of the audits required under the Emissions Reduction Fund, the National Greenhouse and Energy Reporting Scheme and the Renewable Energy Target.
Audits (cleanenergyregulator.gov.au)(external link) — Australian Government
We do not propose establishing a similar new climate regulator in New Zealand. This is because the Australian Clean Energy Regulator was established to administer schemes for measuring, managing, reducing or off-setting carbon emissions only. Its focus is much narrower than New Zealand’s climate-related disclosures regime, which introduces mandatory climate-related reporting based on the TCFD model. The TCFD requires reporting across 4 key areas (governance, strategy, risk management and metrics and targets) i.e., the focus is much wider than carbon emissions. The FMA is already well-positioned to regulate this sort of reporting.
We therefore consider that the FMA is the best option to act as the regulator for the CRD regime if the direct regulation model is the preferred model. This is because:
- All climate reporting entities are already regulated under the FMC Act by the FMA because they are all FMC reporting entities.
- There are synergies with the FMA’s responsibilities as co-regulator under the Auditor Regulation Act. For example, the FMA already undertakes quality reviews of registered audit firms. This activity could be extended to CRD assurance practitioners.
5. If direct regulation is the preferred option do you agree that the FMA should be the regulator? If not, why not and who else should it be?
4.3.4 A hybrid model
We also considered a hybrid model. Under this model co-regulation would be available for professional bodies that have sufficient regulatory infrastructure to obtain accreditation. Direct regulation would be available for professions without the necessary regulatory infrastructure.
However, we concluded that the hybrid model is not a viable option for a number of reasons. First, it is complex as it requires 2 regulatory systems to run in parallel. This may create inconsistencies in treatment of CRD assurance practitioners and will also result in inefficiencies. For example, introducing 2 regulatory systems with multiple regulators will mean a dilution of the regulatory function. Resources would be spread thinly and knowledge will not be centralised. A hybrid model may also require the FMA’s time and resources to share knowledge and insights from its monitoring activities across all regulators.
Second, operational costs are likely to be multiplied under the hybrid model. For example, the accredited bodies and the FMA would all need processes for licensing practitioners. Ultimately these costs are likely to flow to CRD assurance practitioners, market participants and investors.
The third reason why we do not think the hybrid model is a viable option is because it may compartmentalise assurance practitioners depending on their qualifications and experience. That could act as a barrier to the development of a new or evolving profession of CRD assurance practitioners. We consider that the hybrid option may therefore lead to the worst of both worlds.
6. Do you agree that the hybrid model is not viable? Why/why not?
4.3.5 Requirements for the co-regulation and direct regulation options
If Option 2 or 3 is preferred, the regulation of the CRD assurance practitioners and their firms would remain the same. The difference between co-regulation and direct regulation relates to who should do the regulating, not what that regulation should involve. In either case, all CRD assurance practitioners would have to meet the same minimum competency standards and be subject to similar regulatory oversight, whether by a professional body, a government regulator, or a combination of both.
Under the Auditor Regulation Act, the FMA issues minimum standards for auditors by notice following a consultation period. We propose the same method for setting standards for CRD assurance practitioners if either the co-regulation or direct regulation model is preferred.
Regardless of the model, the CRD assurance practitioner would need to be accountable for the contents of the assurance report and for contributions from technical experts (if they have been used). As is the case under the Auditor Regulation Act, we intend to regulate only the person who takes overall responsibility for the assurance engagement and not other individuals who may contribute to the assurance engagement in some way. This approach is consistent with the XRB’s Explanatory Guide Framework for Assurance Engagements, which notes that an assurance practitioner has sole responsibility for the assurance conclusion expressed and that responsibility is not reduced by the assurance practitioner’s use of the work of experts or other assurance practitioners.
7. Do you agree with our proposal that the FMA will set the minimum standards for CRD assurance practitioners? Why/why not?
8. Do you agree that we should only regulate the CRD assurance practitioner who takes overall responsibility for the
assurance engagement? Why/why not?
9. Have we considered the best options (continuing with the status quo, co-regulation and direct regulation) to
assess? If not, what other options should we consider?
In this chapter we have used 4 criteria to assess the options:
- effectiveness in achieving our objective i.e. enhancing trust and confidence in the climate statements (see Part 1.2 of this consultation document)
- competitive neutrality
In our view, the first criterion (effectiveness) is the most important and should have the most weight attributed to it.
When assessing the co-regulation and direct regulation models, we consider whether these models perform better, worse or the same as the status quo.
10. Do you agree with the criteria we are using to assess the options? Do you consider that the effectiveness criterion should have the most weight or should they all have equal weight?
4.5 Assessment of the options
4.5.1 Effectiveness in enhancing trust and confidence in the climate statements
The first criterion we have considered is the effectiveness of each option in meeting our objective of improving trust and confidence in the climate statements. If information in the climate statements is not trusted, then it will not be relied upon to make investment decisions. This means that the effects of climate change are less likely to be routinely considered in business and investment decisions and consequently investors may not redirect capital to more sustainable activities.
The status quo may not promote trust and confidence in the climate statements. There is a risk of unqualified individuals carrying out the assurance work if no occupational licensing is introduced. The tools available to the FMA may not be sufficient to counteract this risk. If unqualified individuals carry out the assurance work this could create significant reputational damage to the climate-related disclosures regime and a loss of confidence in the climate statements.
Continuing with the status quo means that there will be no minimum competency requirements for CRD assurance practitioners. As noted above, this means that firms with less robust practices and oversight could undertake the work at a lower cost than highly competent practitioners. This may reduce the pool of reputable and competent practitioners and diminish the credibility of the climate statements being assured.
11. What level of trust and confidence do you think users will have in the climate statements under the status quo?
Co-regulation and direct regulation
Both the co-regulation and direct regulation models represent a significant improvement on the status quo when considering the effectiveness criterion. This is because both models would introduce minimum requirements for licensing of practitioners, quality review processes and disciplinary processes. These attributes would help to give users of the climate statements confidence in the CRD assurance practitioners and in the information the practitioners assure.
Both regulatory regimes should also reduce the risk of greenwashing. Introducing an occupational licensing regime means that qualified people should be carrying out the assurance engagements. This may reduce the risk that an organisation will misrepresent its green credentials in the climate statements.
As noted, we consider that the co-regulatory model is an improvement on the status quo. However, there are still some risks associated with co-regulation that may impact on trust and confidence in the climate statements.
The co-regulatory model involves front-line regulation by professional bodies. It could be argued that professional bodies regulating their own members might be at an advantage in promoting trusted information. These bodies should know their own profession well and this may help them to undertake the regulatory function. However, we think that the potential benefits of a professional body regulating its own members are outweighed by the risks inherent to a co-regulation model.
The risk of inconsistent treatment could impact on trust and confidence in the assurance practitioners, and the climate statements they assure, under the co-regulatory model. For example, 1 professional body might deal with a complaint more leniently than another professional body.
There is the potential for 3 professional bodies to apply for accreditation under the co-regulatory model (the 2 existing accounting bodies that are accredited under the Auditor Regulation Act and a professional body representing carbon and energy professionals). The more professional bodies accredited, the greater the risk of inconsistent treatment.
Real or perceived conflicts of interest might also impact on trust and confidence in the climate statements under the co-regulatory model. This conflict relates to the dual function undertaken by professional bodies. They provide professional services to paying members, but they are also responsible for disciplining those members. If the professional bodies were perceived to be conflicted, this may impact on the trust people place in the CRD assurance practitioners and the climate statements assured by the practitioners.
The direct regulation model does not have issues of inconsistent treatment or conflict of interest when compared to the status quo. All regulatory activities are carried out independently of the interests of the profession.
12. Do you agree with our assessment of the effectiveness criterion? If not, why not?
The new CRD assurance practitioner licensing regime is being adopted at a time of significant change. As discussed in Chapter 3 and Appendix 1, climate and sustainability reporting requirements have been expanding rapidly worldwide. Multiple jurisdictions are now proposing laws that require climate-related disclosures to align with TCFD recommendations.* The ISSB has also been set up in response to the demand for high quality and comparable reporting by companies on climate and other environmental, social and governance matters.
We anticipate that mandatory climate-related and sustainability reporting is likely to become the international norm for large entities that participate in financial markets. In our view, the new CRD assurance practitioner licensing regime needs to be sufficiently flexible to enable an expansion from climate reporting assurance into sustainability reporting assurance for these financial market entities.
* Status Report(external link) — Task Force on Climate-Related Financial Disclosures
The flexibility of the status quo could be considered in two ways. On the one hand, the status quo is very flexible, inasmuch as it is a blank slate – a hypothetical future regime for sustainability assurance practitioners would have no need to take account of any transition constraints that our two more immediate options might impose. On the other hand, inasmuch as flexibility suggests a certain agility in adapting to changing circumstances, the status quo could prove inflexible if a future regime needed to be designed from scratch, rather than by simply amending an existing framework.
For the purposes of the discussion below, we take the view that the status quo is flexible in its ability to adapt to future changes and therefore both the co-regulation and direct regulation options are less flexible than the status quo.
The co-regulation model relies on a suitable professional body developing that can become accredited to take on the front-line regulation. The requirements for accreditation are strict and not easy for new professional bodies to meet.
Both accountants and carbon and energy professionals may well have suitable skills to undertake climate statement assurance. Therefore, it might follow that NZICA, CPA Australia and a climate or carbon energy focussed professional body could become accredited under a co-regulation model. However, if reporting expands into entirely new sustainability areas beyond climate (e.g., gender equality is listed as 1 of the UN’s sustainable development goals) there could be a demand for multiple different sorts of professional bodies to undertake the frontline regulation. Professional bodies with expertise in different sustainability topics might be required. This would significantly increase the complexity of the co-regulation model.
When compared to the status quo, the co-regulation model is complex and not easily adapted to accommodate future developments.
Direct regulation is a more flexible model than co-regulation but less flexible than the status quo. If there is expansion into sustainability reporting for financial market participants only 1 regulatory body (likely the FMA) would need to respond to the change.
13. Do you agree with our analysis of the flexibility criterion? If not, why not?
4.5.3 Competitive neutrality
Climate statement assurance will rely on both assurance and scientific competence. We do not want to exclude competent practitioners from undertaking this work. As noted above, 1 of the reasons the licensing regime was removed from the CRD Bill was because of concerns that non-accountants could be excluded from carrying out assurance engagements. The new occupational licensing regime must address this concern, i.e. it must be competitively neutral.
Both accountants and carbon and energy professionals have expressed interest in undertaking climate statement assurance. Both professions could have (or acquire) the necessary skill set to do this work. The new regulatory regime should not favour 1 of these professions over the other.
The status quo does not specify who may carry out the assurance work and therefore does not specifically favour 1 profession. The status quo could therefore be regarded as competitively neutral. Our analysis of whether the co-regulatory and direct regulatory models are competitively neutral when compared to the status quo is discussed below. There is some overlap between our analysis of the competitive neutrality criterion and the efficiency criterion which is focussed on costs (also set out below).
The co-regulatory approach requires 1 or more accredited bodies to undertake the front-line regulation of CRD assurance practitioners. The regulatory infrastructure needed for a professional body to become accredited is extensive and not easily set up by a new membership body. To get accredited a professional body must have systems for issuing licences, monitoring codes of ethics and auditing and assurance standards, investigating and hearing complaints, taking disciplinary action etc. Setting up this regulatory infrastructure likely relies on having a large membership base to spread the costs (see discussion below). These factors make it challenging for a new professional body to become accredited.
The co-regulation model is likely to favour the accounting profession and therefore may provide them with a competitive advantage. Arguably, the co-regulation model is not competitively neutral when compared to the status quo.
Two accounting membership bodies (NZICA and CPA Australia) are already accredited under the Auditor Regulation Act. Given their existing regulatory infrastructure, it may be relatively straight forward for these membership bodies to become accredited bodies under a new co-regulatory regime for CRD assurance practitioners. However, the nascent carbon and energy profession may not be so well placed to undertake front-line regulation. There is at least 1 professional body in existence in New Zealand (Carbon and Energy Professionals New Zealand) but membership numbers are small when compared to the accounting bodies and further infrastructure development may be needed for accreditation. The high up-front and ongoing costs of the co-regulatory model may prevent carbon and energy professionals from entering the market.
Direct regulation is closer to being competitively neutral when compared to the status quo. Under the direct regulation model, appropriately qualified practitioners would apply direct to the FMA for a licence. This option does not require the involvement of any professional bodies. There would still be costs for CRD assurance practitioners to become licensed and regulated by the FMA and some practitioners would be likely to be better positioned than others to meet these costs. However as discussed below, we expect this to be cheaper than the distributed costs of gaining accreditation under a co-regulatory model.
14. Do you agree with our analysis of the competitive neutrality criterion? If not, why not?
We discuss below the costs met by practitioners and firms, and by the regulators, under the 3 options. We also discuss the cost efficiencies of the 3 options. This is assessed in terms of the benefits received in relation to the costs incurred.
The discussion under this criterion relating to professional body costs is also relevant to the discussion under the competitive neutrality criterion.
The status quo does not involve any regulator costs or costs to the CRD assurance practitioners or firms themselves. Both co-regulation and direct regulation will be more costly than the status quo.
CRD Assurance practitioner and firm costs – co-regulation
We expect that CRD assurance practitioners would have to pay a licence fee to their professional body and practitioner firms would have to pay a registration fee under the co-regulation model. The fees will need to reflect the professional body’s costs of obtaining and maintaining accreditation. As discussed further below, these costs would be much higher for new professional bodies.
Under the co-regulatory model the FMA would also incur costs. These may be met through the payment of a levy by the industry or in some other way. This will be explored in more detail if the co-regulation model is the approach to be adopted.
CRD Assurance practitioner and firm costs – direct regulation
CRD assurance practitioners and firms would likely pay a licence and registration fee directly to the FMA. Other FMA fees and levies may also be charged to meet ongoing costs. However, as discussed under the competitive neutrality criterion, our expectation at this stage is that direct regulation would be more cost efficient for a new profession such as carbon and energy professionals. This is because of the significant costs of developing and maintaining the regulatory infrastructure required to become accredited. However, we are interested in whether you agree with this analysis.
Regulator costs – co-regulation
The co-regulatory model would impose costs on accredited bodies and the FMA as co-regulators. We can look to costs imposed on the regulators under the Auditor Regulation Act model to give us approximate costs for regulating CRD assurance practitioners.
We expect that the number of licensed CRD assurance practitioners under the climate-related disclosures regime would be less than the number of licensed auditors under the Auditor Regulation Act. This is because there would be fewer climate-reporting entities than FMC reporting entities needing assurance. The FMA’s costs should therefore be somewhat reduced for regulating CRD assurance practitioners.
We do not know the exact costs for accredited bodies under the Auditor Regulation Act – either in terms of set up or ongoing operations. However, we note that the two professional accounting bodies (NZICA and CPA Australia) already have the required regulatory infrastructure in place to become accredited to regulate CRD assurance practitioners. This infrastructure was required for accreditation to regulate auditors under the Auditor Regulation Act. It is therefore likely to be cost and resource efficient for the professional accounting bodies to continue with a co-regulatory model for CRD assurance practitioners.
For new or developing professional bodies there would be much higher incremental costs. There would be the new staff costs for licensing, monitoring and review. There would also be costs associated with setting up an investigatory function for complaints, a disciplinary tribunal and appeals function from the disciplinary tribunal. These costs are likely to be significant and possibly prohibitive for a new professional body to absorb. Existing professional bodies with large membership numbers can spread their costs among their members and utilise their reserves. Small and newly established professional bodies do not have this option.
Disciplining members in particular can involve significant one-off costs. In the FMA’s experience, accredited body costs for a disciplinary case can range from $10,000 – $15,000 for a simple breach and up to $1,000,000 for more complex cases. Costs may be incurred for taking disciplinary action, dealing with appeals and potentially for judicial review proceedings.
A likely minimum standard for accredited bodies under the co-regulation model is being financially sustainable, including having sufficient access to funds to accommodate reasonable but unforeseen expenditure demands. Given the potential costs associated with disciplining members, new professional bodies may find it challenging to meet this requirement.
15. Do you have any information about set-up and ongoing costs for new professional bodies to obtain the regulatory infrastructure required by the Auditor Regulation Act?
16. Do you agree that new professional bodies will incur much higher costs than professional bodies already accredited under the Auditor Regulation Act to become accredited under a new co-regulatory model for CRD assurance practitioners?
Regulator costs – direct regulation
Under this option there would be no direct professional body costs. All regulator costs would be met by the FMA (which is part funded by levies and fees). In our view, this is likely to be a more efficient approach than multiple professional bodies and the FMA incurring operational costs under the co-regulation model.
If the FMA takes on the direct regulation role there will be significant synergies with its existing regulatory role for financial advisers and auditors. As a rough estimate, ongoing costs are expected to be less than the cost of financial adviser regulation where the FMA monitors more than 600 fully licensed financial advisers and about 1200 financial advisers with a transitional licence. However, FMA costs are likely to be higher than those for the auditing regime due to the FMA undertaking the entire regulatory role rather than co-regulating.
Although we expect it to be efficient for the FMA to undertake the role of regulator, given processes and policies already in place, there is likely to be less difference in costs associated with disciplinary matters across the two regulatory options, i.e., there would not be a significant cost reduction if the FMA rather than a professional body meets the disciplinary costs.
Cost efficiencies of the 3 options
The status quo involves no direct costs. However, nothing is gained under the status quo. We take the view that co-regulation and direct regulation are both more cost efficient because both may lead to benefits (i.e., the benefits of occupational licensing) that exceed the costs imposed. In our view, direct regulation is more cost efficient when compared to the status quo than co-regulation. Direct regulation avoids similar operational costs being repeated across the professional bodies and the FMA.
17. Do you agree with our analysis of the efficiency criterion? If not, why not?
4.6 Preliminary conclusions and preferred options
The status quo has some advantages over the two regulatory options. It is likely to be competitively neutral and it is arguably more flexible than the regulatory options. However, our preliminary view is that introducing an occupational licensing regime is justified because licensing will promote greater trust and confidence in the climate statements than the status quo. Having properly regulated CRD assurance practitioners goes directly to the issue of trust – particularly in light of our proposal to extend climate assurance from GHG emissions only to the whole of the climate statement (discussed in Chapter 5).
If occupational licensing is to be introduced, the question is how co-regulation and direct regulation perform when compared to the status quo. Our preliminary view is that direct regulation is the preferred option.
Direct regulation has advantages over co-regulation when considering whether these options enhance trust and confidence in the climate statements. This is due to the challenges inherent to a co-regulatory system discussed above. In particular, there is the potential for different standards to be applied by accredited bodies from different professions who are used to regulating in different ways.
In terms of the flexibility criterion, we consider that centralising the regulatory function via direct regulation will provide greater flexibility and future adaptability than co-regulation if the regime needs adjustments.
The main advantage of co-regulation is that it simplifies compliance for the two professional accounting bodies that are accredited under the Auditor Regulation Act for economies of scope and scale reasons. However, the big downside of co-regulation is its potential to act as a barrier to entry for non-accountants because of the extensive regulatory infrastructure required for accreditation and the cost of that infrastructure for new or small professional bodies.
We are concerned that co-regulation could exclude non-accountants from the market. Licensing systems should not exclude competent practitioners. When considering the competitive neutrality criterion, we take the view that direct regulation is the better option.
In relation to the efficiency criterion we also consider that it is cost efficient for the FMA to take on the direct regulatory role. Under the co-regulation model costs would be imposed across multiple professional bodies and the FMA. In some instances these costs would be repeated for example, all professional bodies would have the cost of running a licencing system.
18. Do you agree with our assessment of the 3 options? If not, why not?
19. Which option do you prefer and why?
Summary of our preliminary assessment of the options
Option 1: Continue with the status quo
Option 2: Co-regulation modelled on the Auditor Regulation Act
Option 3: Direct regulation
Criterion 1: Effectiveness in enhancing trust and confidence in the climate statements
(applied a multiplier of 2 to reflect higher weighting)
|0 No change
|+2 x 2 = 4
Significant improvement on the status quo
|+2 x 2 = 4
Significant improvement on the status quo
Criterion 2: Flexibility
|0 No change
Not adaptable if changes required
Centralised function provides some flexibility for future changes
Criterion 3: Competitive neutrality
|0 No change
May favour the accounting profession
Closer to competitive neutrality
Criterion 4: Efficiency (cost proportionate to benefits)
|0 No change
Cost efficient but some operational costs repeated across regulators
|0 No change
|Total = 1
|Total = 4
+2 much better than doing nothing/the status quo
+1 better than doing nothing/the status quo
0 about the same as doing nothing/the status quo
- 1 worse than doing nothing/the status quo
- 2 much worse than doing nothing/the status quo