Principles-based regulations: What are the opportunities and trade-offs?

As Australia’s energy market continues to evolve, so do the approaches to its regulation. With consumers engaging in a wider range of products and services, regulators are exploring a shift from prescriptive, rules-based models to principles-based frameworks. Central to this discussion is the potential introduction of a “consumer duty” for retailers aimed at addressing future risks and supporting better outcomes. We take a closer look at the current consultations underway, unpack what principles-based regulation involves, and consider the opportunities and challenges it may bring.

What is principles-based regulation?

Broadly, principles-based regulation is a move away from relying on detailed prescriptive rules to instead using broadly stated rules and principles to set standards by which a regulated firm must conduct business.

Outcomes-based duties typically form a part of the overall principles-based approach, expressing the standards of expectations providers are expected to meet, such as an obligation to act in a consumer’s best interest. Typically, this broadly stated standard is supplemented by more prescriptive rules and soft law guidance to ensure regulatory certainty for service providers.

Examples of Principles-Based Regulation and General Duties

Over the past 20 years, the use of these broadly stated standards and outcomes-based duties, as opposed to more detailed and prescriptive rules has been a feature of many different regulatory regimes both in Australia and internationally.

The most recent development is the Consumer Duty, which was implemented recently by the UK Financial Conduct Authority (FCA). This regulation came into force in 2023, establishing an overarching duty that firms should ‘act to deliver good outcomes for retail customers’, which is underpinned by principles-based expected outcomes related to products and services, price and value, customer understanding and customer support.[i]

Further, although there is not a legislated consumer duty of care to energy customers within the UK, Ofgem, Britain’s energy regulator and rule making body, has been introducing and enforcing principle-based rules since 2013 to apply to the activities of retailers and service providers. These are in the form of ‘standards of conduct’, which contain broad principles relating to how suppliers ‘behave, provide information, and carry out customer services’ and how suppliers ‘seek to identify each consumer in a vulnerable situation and respond to their needs’.[ii]

Likewise, here in Australia, forms of principles-based regulation and general duties have been adopted in a number of sectors. For instance, the Corporations Act 2001 provides an overarching obligation on financial services licensees to do all things necessary to ensure their services are provided ‘efficiently, honestly and fairly’. Here, financial advisors likewise have a duty to act in the best interests of their clients when providing financial advice and give priority to clients in the case of a conflict of interest. These provisions have been applied by the Australian Security and Investment Commission (ASIC) in numerous cases since.

In the environmental regulatory space, Victoria created a general environment duty (GED) under the state’s Environment Protection Act 2017 which came into effect in 2021. This GED shifts the regulatory regime of the Environment Protection Authority Victoria (EPA) from a reactive to a prevention-based approach, by creating a duty for entities captured under the act to ‘proactively identify and manage environmental risk. The act and relevant guidance material has a stated outcomes-based focus for the environment and human health, including a duty to disclose and notify.[iii] Other states likewise maintain environmental duties, though these have a far more limited scope.[iv]

Finally, Victoria’s Payment Difficulty Framework (PDF) developed by the Essential Services Commission (ESC) has been seen by some stakeholders as an example of a regulator pursuing a principles/outcomes-based approach.[v] This is underpinned by the principle that disconnection must be an option of last resort, with customers entitled to minimum standards of flexible and practical assistance. However, the PDF is more of a hybrid framework, with a positive conduct standard underpinned by specific and prescriptive obligations on assistance that needs to be offered to retail customers.[vi]

The move towards a principles-based model for Australian energy retail

Currently, energy service providers are regulated under the Australian Consumer Law (ACL) nationwide and the National Energy Customer Framework (NECF) within the National Energy Market (NEM), while states not covered by the NECF - Victoria, Western Australia, and the Northern Territory - maintain comparable state-based regulatory frameworks The NECF and other state-level regulations provide specific protections for customers buying electricity or gas from energy retailers. There has been a concern among regulators, decision makers and the energy industry that these regulations at present tend to be prescriptive and inflexible, with this becoming particularly apparent as the energy market evolves to be more complex. As noted in a University of Melbourne article, such concerns have been ‘amplified in markets such as energy for services that are essential’.[vii]

Indeed, although customers now have access to new and innovative energy products and services, such as solar, batteries, EV chargers and smart appliances, we have also highlighted that the prescriptiveness of the present framework has been slowing down this innovation ‘when it could be faster and more impactful for customers’.

These issues with the present framework have led to a range of reviews and consultations that look to balance economic efficiency and innovation with the broader goal of customer protection through consideration of a principles-based approach to regulation.

Specifically, the final advice report provided by the Australian Energy Regulator (AER) as part of a wider review of consumer protections for future energy service recommended that an overarching consumer duty be ‘applied across entities that fall within the scope of an expanded NECF definition’. This ‘duty’ was described as an integral part of a shift towards a more principles-based regulatory model, with the AER noting that it could be complemented by ‘specific consumer outcomes’.[viii]

The recommendations from this report have since fed into the ongoing Better Energy Customer Experiences consultation where the ECMC is seeking to review the consumer protections regime of the NECF. This process includes ‘assessing the role an overarching consumer duty, and more generally, the role principles-based regulation could play in addressing systemic consumer issues in the energy market’.

Similarly, the Victorian Department of Energy, Environment and Climate Action (DEECA) has initiated a consumer energy resources (CER) consumer protections review. This includes the proposed introduction of a general consumer duty that would require providers to act ‘efficiently, honestly and fairly to deliver positive outcomes for customers and ensure any CER they provide be aligned with customer needs and circumstances.’ [ix]

Opportunities and Challenges

Expressed within the Better Energy Customer Experiences consultation is the sentiment that ‘strong consumer protections are fundamental to the community’s trust towards energy transformation’, a view that the AEC strongly supports.[x] Through a move to a more principles-based approach, that could include an outcomes-based duty, it is hoped the regulatory framework would be more capable of adapting to changing market practices, rapid technological innovation, and social expectations. Likewise, it has been noted that such an approach might result in greater flexibility, be more cost effective, and avoid the gaps, inconsistencies, and burden of prescriptive rules. Indeed, the AEC has highlighted the burden of increasing regulatory overload in the past.

However, there are trade-offs and risks associated with a move to more principles-based regulation, both for the regulator and the regulated community. Greater flexibility intrinsically leads to greater uncertainly and unpredictability not just in how the regulated follow the rules, but also in how the regulator applies them. Predictability and certainty are related but distinct. Certainty means shared understanding of how rules apply in specific situations, while predictability refers to consistent regulatory responses. Some uncertainty can be acceptable if firms know regulators will allow reasonable interpretations and acknowledge good-faith efforts to comply.

It is essential, therefore, that regulators and the wider industry work together to find a common ground and develop a shared understanding and vision that protects customers while prioritising their centricity and choice throughout the transition.

The Australian Energy Council looks forward to continued engagement with regulators and decision makers in developing the architecture of the future regulatory regime.

[i] See ; https://www.fca.org.uk/firms/consumer-duty

[ii] OFGEM, ‘Standards of Conduct’, [April, 2024]

[iii] See; https://www.epa.vic.gov.au/about-epa/laws/laws-and-your-business/general-environmental-duty-for-businesses

[iv] See for example, Environmental Protection Act 1997 (ACT,) s 22; Environment Protection Act 1993 (SA), s 25; Environmental Protection Act 1994 (QLD), s 319

[v] O’Neill, ‘Exploring Regulatory Approaches to Consumer Vulnerability’, [February, 2020] 54

[vi] Paterson & Bourova, ‘Outcomes-based regulation: Proposing an overarching ‘consumer duty’ within the regulation of essential services’, [December, 2024], pg.16.

[vii] Ibid, pg.6.

[viii] AER, ‘Review of consumer protections for future energy services – Final Advice Report’, [November, 2023], pg.27-31.

[ix] DEECA, ‘Consumer Energy Resources (CER) Consumer Protections Review’ [December, 2024], pg.31

[x] See https://consult.dcceew.gov.au/better-energy-customer-experiences