A proposed user-pays funding model for the Australian Securities and Investments Commission (ASIC) will eventually weaken supervision of the financial sector, according to insurer and consumer advocacy groups.

The Insurance Council of Australia’s (ICA) submission to a consultation on the plan says the model presents “material risks” and leaves the sector exposed to lax accountability.

“The Insurance Council wishes to reiterate its in-principle objection to industry funding of financial services regulators,” CEO Rob Whelan said.

ICA says a user-pays model would mean the Government is less involved with ensuring the system is properly regulated.

“Principally, it presents a moral hazard for the Government, because the incentive for proportionate and efficient regulation is diminished by the removal of the cost of regulation – and therefore fiscal discipline – from the Government budget,” Mr Whelan said.

“Consequently, industry would not have effective control over ASIC resourcing decisions. This raises concerns with respect to accountability.”

ICA agrees an effective regulator must be properly funded, but it sees no rationale for the model recommended in the Financial System Inquiry.

The inquiry report says a user-pays model would provide more funding certainty and enhance transparency on costs and operations.

ICA says the Government’s consultation paper fails to adequately lay out the advantages of such a model to the financial system.

The user-pays model would add another layer of cost to Australians who already bear the burdens of one of the most heavily regulated sectors in the economy.

“It seems there has been an inadequate consideration of the resulting cumulative impact on business that would result from industry funding… and the potential flow-on effect to consumers,” Mr Whelan said.

“The passing on of these costs would be harmful to industry and consumers, because it would have long-term adverse impacts on competition and innovation in the financial system.”

Consumer groups including Choice support an industry funding model but reject the Government’s proposal, because it “falls short on ensuring adequacy and stability of funding”.

The proposal would instead drain the regulator’s stretched resources, as it handles more consultation and accountability requirements.

“We accept the intent behind the industry funding model is there will be incentives for business to improve their conduct and so create less demand for regulation,” the groups say in a joint submission.

“This should theoretically lead to ASIC having more resources to direct at problem sectors… but the model proposed offers no guarantees ASIC will end up with the increase in resources for regulation that it demonstrably needs, or even that resources won’t reduce.”

The submission is signed by Choice; Care Financial Counselling Service and the Consumer Law Centre of the ACT; the Consumer Action Law Centre; Consumer Credit Legal Service WA; Financial Counselling Australia; the Financial Rights Legal Centre; Hobart Community Legal Service; the Indigenous Consumer Assistance Network; and National Seniors Australia.