'Proactive' regulation a bad idea

This is also clear in the supposed problem the FSI was attempting to rectify: ‘ASIC can only take action to rectify consumer detriment after a breach or suspected breach of the law by a firm.’

Such a world of pre-crime furnishes some troubling questions around innovation.

Would credit cards exist if ASIC had determined they were too risky? As humans we’re constantly overweighing the perceived dangers of new things. And ASIC will be no different.

It is deeply naïve to think any regulator could possibly gather the information to determine whether a product is going to harm consumers before the fact.

To suggest such a monstrous bureaucracy can accurately predict the diffusion and adoption of financial products is fantasy.

As Nobel Laureate F A Hayek suggested, the problem is that the information necessary is distributed about the economy in the minds of individual consumers.

The only way to discover this information—about what products and good and what are bad—is through entrepreneurial endeavour in markets.

Losing touch with the market process through pre-emptive or proactive red tape hinders financial product innovation.

While this isn’t red tape in the traditional sense—of direct and tangible costs like signing forms and writing reports—it is distortive regulation nonetheless.

The threat of ASIC regulatory intervention over some arbitrary level of riskiness of future harm will have disastrous economic effects.

Erstwhile entrepreneurs considering launching new financial products are already dismayed by the peril of a ‘tough cop on the beat’, let alone the latest extension in powers.

By fully insulating the downsides of risk—by banning or restricting products—we lose the potential upsides of risk—diversity within our financial services industry.

What is needed in Australia is a permissionless innovation approach: where entrepreneurs are left free to test, trial and experiment with new financial products.

The further we move towards a world of financial pre-crime, ruled by the arbitrary powers of ASIC, the fewer financial innovations will be born.

The biggest cost of the latest extension of ASIC powers is not the $127 million face value, but the impact of proactive pre-emptive regulation holding back entrepreneurship.