Sunday, 29 January 2017

Discipline in Regulation, Let's Learn from the Accountants

This is my second posting on the principles of regulation. The first article was about my exposure to regulation, especially in professional services and capital market.

When I was involved in negotiations to liberalise the accountancy sector at both, the World Trade Organisation and ASEAN, I had to be comfortable with the issues which were critical in enabling free flow of trade and ensuring the balance of benefits are shared fairly between countries. There were two principle agreements which Malaysia are parties to, the General Agreement on Trade in Services (GATS) and the ASEAN Framework Agreement on Trade in Services (AFAS). Naturally, understanding the modes of export in the services sector and trade barriers were critical for trade negotiators.

One of the issues in liberalisation of trade is domestic regulation. This is the trick applied by many countries. While many offered liberal access to their markets, foreign service suppliers are subjected to the same regulation like their domestic counterparts. Well and fine, until the domestic regulations are peeled and the substance revealed. One common example is the usage of national language. While it could be a reasonable condition generally, national language may not necessarily be relevant in international transactions. How would this be addressed? Hence, there was a recognition for some sort of discipline to be agreed upon when crafting domestic regulation.


To my surprise, the Council on Trade in Services in Geneva decided to use the accountancy profession as a showcase for discipline in domestic regulation. It was argued that the large accountancy firm exist in most jurisdictions in the world, hence accountancy sector is more homogenous. The document explaining about domestic regulation (Discipline on Domestic Regulation In The Accountancy Sector, adopted in 1988can be downloaded here.

In essence, the discipline proposed was intended to ensure regulation around services are:
  • based on objectives and transparent criteria, such as competence and the ability to supply the services
  • no more burdensome than necessary to ensure the quality of the services
  • in the case of licensing procedures, not in themselves a restriction of the supply of the services
There were also a set of "horizontal" disciplines in negotiating liberalisation of accountancy services. They are:
  • Transparency 
  • Impartiality and objectivity
  • Relevance of foreign qualification and experience
  • Legal certainty
  • International standards
  • Necessity
While many countries have various approaches in arriving at their domestic regulation, the approach taken at WTO and also ASEAN was to ensure they are developed transparently and do not go beyond regulating the services. This was a bit contentious for countries which are using domestic regulation for other purposes such as to redistribute opportunities based on certain national policies.

To me, the key principle in formulating regulation is to be clear of their regulatory objectives and applying measures which facilitate the achievement of the objectives in the least trade-restrictive ways. This is very important so that regulators do not go in the ways which create unnecessary burdens to business, where the cost would eventually passed to consumers. Hence, recognising that regulatory objectives could be achieved in more than one way (what the regulator believes as the only way) is very important and this discussion has to be provided for the in the rule-making process.

I really hope that the discipline is applied across all agencies in Malaysia as it would require relevant agencies to be clear of the market failures and risks which are being addressed using measures which do not go beyond what is necessary. For this to be actualised, transparency, impartiality and objectivity have to be observed, irrespective of the powers these agencies have. If we read the rationale of the discipline, nobody would argue they are bad unless the person has other interests.

By the way, I was invited to share my views about the regulation pertaining the accountancy sector in Malaysia at the Council on Trade in Services in Geneva. That was the first time when I spoke in a United Nations-like environment where I could not hear my own voice. Finally, when questions started to come, I was glad that the audience were giving attention to my points. My presentation could be downloaded here.
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