Chapter 10 - Regulation of trust service providers

Policy objectives

Regulation necessarily imposes costs as well as restraints on individual freedoms. In a democratic society that values individual freedom, regulation that limits the circumstances under which people are free to engage in different commercial activities must be justified. Consumer protection regulation prescribing particular standards or qualities can be justified where the goods or services in question carry risks. It may also be justified in markets for complex services to ensure that they work fairly and efficiently and to address information asymmetries.


Consumer protection regulation

Regulation can prescribe particular standards or qualities of service. Where the consumption of goods and services carry risk, more intensive regulation may be justified. In some industries, such as those manufacturing medicines or preparing food for sale, regulation aims at eliminating risk. In others, including most service markets, consumer protection regulation seeks to moderate rather than eliminate risk, or seeks to achieve the appropriate balance of risks between different parties to a transaction.

Consumer protection regulation is aimed at ensuring that consumers of services have adequate information, are treated fairly, and have adequate avenues for redress. The main regulatory tools used in consumer protection are disclosure requirements and conduct regulation. Disclosure regulation includes a general prohibition on false and misleading statements. Conduct regulation specifies standards of conduct as well as sanctions for breaches of regulatory standards.

Information asymmetry

For a market to function competitively, consumers and service providers both need to be well informed. However, the problem of information asymmetry will arise when one party to a transaction has relevant information that the other does not. When accessing some types of complex advisory services consumers can lack (and cannot efficiently obtain) the knowledge, experience or judgement required to make well informed decisions. Information asymmetry exists when disclosure alone (consumer protection) is not sufficient to address the imbalance. No matter how much information the consumer is given by the service provider they will not be able to make an effective choice.

Regulation addresses this problem by substituting the judgement of a third party for that of the consumers. This is effectively what registration and licensing regimes purport to do. The competence of doctors, lawyers, financial advisers and many other occupational groups providing services to the public is assessed and monitored for the benefit of consumers by an occupational authority or a publically funded regulator. The authority or regulator has the necessary knowledge, experience and judgement to assess the specialist services. Only providers who can meet an appropriate qualification and practice standard are registered or licenced. Consumers are then able to choose between service providers who have been assessed and licensed.

Objectives of regulation

The policy objectives behind greater regulation of trust services are therefore to:

  • protect the interests of the consumers of these services; and
  • to address information asymmetries in the market,

by ensuring that all providers of services met a certain standard.

Regulation that improved the quality of services and reduced the risks and costs of substandard services would also enhance confidence in the trust sector.