The legislation will see the establishment of the Financial Regulator Assessment Authority (FRAA), which will be tasked to evaluate both ASIC’s and APRA’s effectiveness and capability every two years.

The new regulator of regulators will receive $7.7 million over three years as part of the set-up and will consist of three appointed part-time members, including an independent chair. The Treasury secretary will also be part of the new authority as an ex-officio member.

As its first order of business, the FRAA will be tasked with taking a closer look at ASIC as the corporate regulator looks to restructure following the departure of previous chair James Shipton in late April.

“In its first year, the FRAA will be tasked with assessing the effectiveness and capability of ASIC so as to assist newly appointed ASIC chair Joseph Longo in ensuring ASIC is operating consistently with the government’s Statement of Expectations and is supporting Australia’s economic recovery from the COVID-19 pandemic,” said Treasurer Josh Frydenberg.

Mr Frydenberg also noted that the FRAA’s biennial reports on both ASIC and APRA would complement the existing accountability mechanisms that apply to the regulators.

The creation of the new financial regulator watchdog comes after the Hayne royal commission found that ASIC’s and APRA’s effectiveness in delivering on their mandates was not subject to consistent and independent expert review over time.

It noted that while both regulators were already subject to an array of external assessment, review and oversight mechanisms, greater expertise beyond the scrutiny of politicians was required to keep them accountable.

“While both regulators are accountable to the Parliament, the financial services royal commission noted that parliamentary committees, including Senate estimates, have some limitations in assessing the effectiveness of the regulators (for example, the fields of expertise required to assess the regulators),” the bill’s explanatory memorandum said.

“Both agencies report extensively on their activities, but these reports are not necessarily subject to rigorous and consistent external analysis. Performance audits by the Australian National Audit Office are conducted on an ad hoc basis.

“The [new] authority’s activities are designed to complement and augment the existing external accountability mechanisms that apply to the regulators, not to duplicate them.”