Minter Ellison specialist financial services partner Richard Batten has welcomed the Financial Systems Inquiry (FSI) Interim Report, released on 15 July 2014, as a very comprehensive survey of all issues affecting Australia’s financial system. He said it reinforced the system’s overall strength and confirmed the fundamental adequacy of regulatory architecture.
He said: ‘We support the key touchstones of the inquiry in assessing the performance of the financial system and its regulatory structure: efficiency, stability and fairness. This focus is consistent with our view that change is required to promote innovation, efficiency and competition in the financial system.’
According to Batten, the FSI Interim Report identifies some significant changes that should be considered. ‘In the main, those changes aim to facilitate the operation of and improve access to our financial system rather than radically transform it.’
He added: ‘Importantly, the inquiry has concluded that the banking system is generally competitive, although it identifies some areas where regulation may be impeding competition or may need to change to reduce the moral hazard of institutions that are perceived to be “too big to fail”.’
Batten highlighted the Interim Report’s recognition of key pressure points for the 21st century, including the significant challenges arising from increased globalisation, the impact of technology and demographic change.
He emphasised that while the report does not contain recommendations for change, there are a number of indications of the direction the inquiry is heading on some key issues. These include examining the role and structure of Australia’s regulators.
‘We agree with the inquiry’s strong support of the current “twin peaks” regulatory model, which served Australia so well in the lead-up to and following the GFC,’ Batten said.
However, the inquiry asks key questions about the role of Australian Prudential Regulation Authority (APRA) and whether its scope should be able to be extended beyond the institutions it currently regulates. Another important focus is whether the Australian Securities and Exchange Commission (ASIC) should be restructured.
‘While the inquiry does not support the creation of new regulators, it has asked for submissions about the ability of ASIC to give enough attention to each of its areas of regulatory responsibility,’ Batten explained.
He noted that the inquiry also considered the funding of regulators and the impact of government measures to seek budget savings.
‘We would support appropriately targeted financial measures that enable regulators to be self-funding and therefore independent of the government’s budgetary process, provided the mechanisms for allocating costs are fair across industry and don’t result in unfair outcomes or lead to undue cost burdens.
‘There is clearly a need for funding certainty and ensuring an environment where regulators have the resources needed to regulate the system properly. A lack of funds for proper supervision and enforcement could otherwise pose a significant risk for the financial system in the future.’
On the same theme, Batten noted that while the FSI panel recognised the potential need for an agency to have macro-prudential tools to manage systemic risk across the economy, it did not appear to support the Council of Financial Regulators (CFR) having a greater regulatory role.
He said: ‘The panel seems to support the view the current consultative nature of the CFR would be compromised if its role is more formalised.’
Consideration about the extent to which various forms of regulation impose a regulatory burden — and whether Australia should aim to be ‘ahead of the curve’ in a global sense or sit ‘within the pack’ on this point — was also a key issue raised in the report.
Batten continued: ‘It is still unclear which way the FSI panel is leaning on this — but there is no doubt of its view that Australia’s regulatory system should not take a minimum possible compliance approach.’
He added: ‘Another important element the FSI Interim Report is its focus on consumer outcomes. While the prudential aspects of the report reflects its focus on stability, its concerns in the consumer area demonstrate the priority given to fairness in the system.’
Batten said an area of real concern is about the effectiveness of disclosure in enabling consumers to make decisions. He noted that a view of the Interim Report seemed to be that the current disclosure regime is not effectively serving consumers, and that the Product Disclosure Statement (PDS) regime produced too complex documents.
‘The shorter PDS regime has not worked, so the FSI’s preparedness to reconsider the role and nature of the retail disclosure regime is to be welcomed,’ he said.
‘The inquiry is also seeking guidance on the extent to which product suitability requirements should be imposed on issuers similar to the credit regime and whether we require a UK-style regime to enable ASIC to prevent certain types of products being be offered to certain consumers.
‘We would be very concerned to see a paternalistic approach to financial product availability being introduced in Australia. One of our strengths is our system of principles-based, non-prescriptive regulation. We would be concerned about the impact on product innovation for consumers.’
Batten added: ‘Government and regulators are not best placed to identify what products consumers should or should not have and a one-size-fits-all approach prevents consumers from getting access to products that they may need.’
On this point, Batten said the better approach would be to focus on how higher-risk products are distributed rather than restricting access to particular types of products.
Another key area of focus in the report is the role of superannuation in funding the Australian economy, the adequacy of retirement incomes policy and addressing longevity risk.
‘These are just some of the important regulatory considerations raised in the Interim Report. Overall, we welcome its comprehensive nature and look forward to preparing further responses on key matters raised in Minter Ellison’s next submission.’