Regulation in human services has tended to be paternalistic in its approach, with risks framed around worst-case scenarios and all service providers treated the same regardless of the level of risk to the individual or the performance of providers.

In regulating human services, governments have focused on traditional approaches which involve licensing/registration of providers, strict monitoring and compliance regimes and extensive reporting requirements.

While these tools may have been effective in managing risks in the past, they have also encouraged a passivity among both providers and individuals which has stifled innovation and productivity.

Regulation is being defined more and more broadly to include not just black-letter law but other types of arrangements entered into by government which affect third parties, including service agreements and administrative guidelines. These have also tended to reflect heavy-handed master–servant type relationships. As the Productivity Commission noted in its report Contribution of the Not-for-Profit Sector (2010), “improving the overall efficiency and effectiveness of community services delivered by the not-for-profit sector has been constrained by the propensity for governments to combine short-term heavy-handed contracts with extensive reporting requirements and a tendency to ‘micro-manage’ service delivery”.

Notwithstanding the increasingly broad view of what constitutes regulation, there is a distinction between policy making and regulation. For example, decisions to introduce competitive type reforms in human services are policy decisions, as are decisions about how much funding human service delivery organizations should receive and what services government should fund. Regulatory behavior comes into play in thinking about the types of interventions that will assist in achieving government policy objectives – for example, whether the government needs to use the force of law to compel behavior towards achieving its particular goals.

Regulations and purchasing agreements have generally been designed internally by government with little attempt to work with stakeholders to look at different ways of addressing policy problems. Political imperatives often demand regulatory solutions to one-off problems, which end up creating systemic responses to non-systemic issues. In particular, there has been little understanding of how markets work in a human services context and of the opportunities that government has through intervening in different ways to encourage more innovative service practices.

At the same time, it is important to recognize that human services markets have a number of unique characteristics which can be challenging for regulators. Most human services markets are characterized by information asymmetry, where consumers have difficulty judging the need for and quality of the services they receive. Consumers also include the vulnerable and disadvantaged, who are not well placed to exercise consumer choice. On the supply side, these markets tend to be dominated by not-for-profit providers who are largely dependent on government funding, and there can be particular problems with supply of services in rural and remote and Indigenous communities.