Risk Insensitivity
A risk-based regulatory approach is one that finds a balance between justifiable constraints and the flexibility necessary for innovation and investment to flourish. The most efficient regulatory approach should be the option that achieves the objectives at lowest cost, where those costs are justified by the benefits to society.
The design and implementation of regulation should be proportionate to the level of risk being mitigated and take reasonable account of the characteristics of the regulated firm (e.g. the track record of the firm). Interviewees felt that in some cases the burden and cost of compliance was disproportionate to the level of risk posed by non-compliance.
Summary of the issues:
The most common area in which businesses raised questions about risk sensitivity was where they had a feeling that the balance of liability places an unfair, or impractical onus upon business. Interviewees were concerned that risk has in some cases been extended across all members of a sector as the result of the behaviour of a non-compliant minority, with the result that intended outcomes may be compromised while compliance costs increase for all. A common example of this process was contract seasonal labour. A number of problems around employing contractors had been identified in the past and changes made to address these. Both horticulture and wine sector interviewees expressed concerns that withholding tax for contractors and responsibilities for contract workers can still prove to be "grey areas".
Interviewees were critical of regulatory regimes where businesses with a good track record are required to go through repeated application processes, including renewing licences that have been held for a lengthy, trouble-free period. The main focus of this criticism was the liquor licensing regime.
Businesses often stated a view that a "one size fits all" approach is taken to the design and implementation of regulation. This sort of approach runs the risk of failing to take into account the characteristics of particular sectors or sub-sectors, which can impose unnecessary costs upon them. For example, wine sector interviewees were concerned that the wine standards management plan part of a new set of wine regulations would be based on the meat and dairy industries – which have quite different food safety issues.
When regulatory requirements do not take a balanced risk-based approach, higher costs can accrue to low-risk businesses without any corresponding benefit. This reduces the incentive for businesses to improve compliance and performance to a higher standard. Interviewees pointed to a number of tax areas in which the Inland Revenue Department appeared not to take a risk-based approach. Biosecurity was another common topic, with interviewees feeling that a more risk-averse approach is taken in some instances than in others. Businesses also felt that a number of Conservation Act processes took an unnecessarily risk-averse approach.
How business sees it:
Potential plant imports are treated equally for biosecurity purposes, even though some are more risky than others. [horticulture]
Due to ACC classifications, horticulture contractors have to pay a higher ACC premium than that faced by growers, even though the work is the same. [horticulture]
Businesses have to complete the same food preparation forms for audits, regardless of scale or sub-sector. [hospitality]
Because errors are never honest mistakes in the eyes of the Inland Revenue Department, the time taken to fill out tax forms is added to by checking, double checking, and worrying. [wine]
Because people do not need any experience in order to run a licensed premise, there is a risk that "unfit" persons are being licensed to sell alcohol. [hospitality]
Renewing both on- and off-licences every three years is expensive ($776 per licence), time-consuming, requires newspaper advertising and each time repeats the information filed previously. Also, training and certification of bar managers should be akin to driver training and licensing. [hospitality]
It cost an estimated $300,000 per year to ensure that 210 outlets comply with HSNO, despite them having been built to internationally recognised standards. [retail]
Take into account previous track record. For example, the Inland Revenue Department should take a longer-term view of taxpayers' performance and make allowances, instead of presuming that everyone is guilty of trying to rip off the system. [wine]
Government initiatives to do with risk-based approaches include:
The Inland Revenue Department:
- is proposing, in its Tax Policy Work Programme, to review the requirement for businesses in the horticulture sector to pay PAYE twice monthly;
- proposes to include reviewing the issue of what constitutes an invoice for GST purposes in the upcoming government discussion document on reducing compliance costs for SMEs;
- is investigating a validation process for certificates of exemption. Such a process, if feasible, will assist in reducing the compliance costs associated with the use of contractors; and
- notes that the Government has included a number of changes in the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill which is currently before Parliament. These include removing GST and withholding-type taxes from the scope of the unacceptable tax position shortfall penalty, and increasing the thresholds above which this penalty is imposed to over $50,000 and 1% of the taxpayer's total tax figure for the relevant tax return. Another proposed change is for taxpayers to be notified the first time their payment is late, rather than incurring immediate payment penalties. The late payment legislation will be clarified relating to employer monthly schedules.
The Ministry of Agriculture and Forestry:
- is structurally integrating Biosecurity New Zealand and the Ministry's Quarantine Service by 1 July 2007 to better connect policy development, risk analysis, standard setting and implementation functions;
- is reviewing how border standards are developed and implemented. This is likely to involve developing strategies for managing biosecurity risks across groups of commodity types and pathways;
- is working with the Ministry for the Environment and ERMA New Zealand to develop proposals to address current problems with the Biosecurity Act/Hazardous Substances and New Organisms Act interface covering the importation of new organisms; and
- notes that Biosecurity New Zealand released updated standards for plant exports in June 2006, which are being phased in by 1 September 2007. The New Zealand Food Safety Authority's requirements will be similar to Biosecurity New Zealand's new standards. The revised standards are outcome-based, which gives businesses the flexibility to decide how to manage the risks.
The Department of Conservation proposes the following changes to the Conservation Act:
- extending the period for fee, rent and royalty reviews to a maximum of five years;
- enabling applications for activities with minor effects, or which are consistent with a management plan or strategy, to be issued for a maximum of five years without the need for public notification;
- shortening the period for public submissions, on a proposal to grant a concession, from 40 days to 20 days (minimum); and
- enabling the Minister to tender concession opportunities directly, if consistent with the management plan/strategy.
The New Zealand Food Safety Authority notes that:
- a key feature of the new programme of wine regulations and notices will be a requirement for wine makers to operate under a wine standards management plan (WSMP). Once winemakers obtain a WSMP, they will be exempt from the Food Hygiene Regulations. WSMPs are expected to be fully implemented in December 2008; and
- Food Hygiene Regulations requirements will be replaced with Food Handler Guidance (a non-regulatory approach) for bed and breakfast operators.
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