Despite its recommendations regarding the regulatory framework, the Final Report has arguably missed an opportunity to have a greater impact on achieving its objectives of fostering an efficient, competitive and flexible financial system.
The FSI’s Final Report identified two general areas where there was considerable scope to improve the way in which Australia’s financial system operates: one of which was competition and the second being the issue of funding the Australian economy. However, the Report did not identify the need for wholesale changes to the Australian regulatory architecture.
Despite this, two key issues addressed in the Report are worthy of more detailed consideration. Both of these issues relate to Australia’s regulatory framework: strengthening the focus on competition in the financial system (Recommendation 30) and seeking to reduce compliance costs and improving the processes for implementing regulatory change (Recommendation 31). We argue that whilst both of these recommendations are sensible and worthwhile, they are too limited in scope and represent a missed opportunity for the FSI to have a greater impact on achieving its objectives of fostering “an efficient, competitive and flexible financial system.”
Background to the recommendations
The Terms of Reference of the FSI were wide-ranging and expressly charged the FSI with examining a large number of issues affecting Australia’s financial system, including:
- competition issues such as: domestic competition and international competitiveness; and balancing competition, innovation, efficiency, stability and consumer protection; and
- the regulatory system, namely: assessing the effectiveness of and need for financial regulation, including its impact on costs, flexibility, innovation, industry; the role, objectives, funding and performance of financial regulators including an international comparison; and international integration, including international financial regulation.
Recommendation 30: Strengthening the focus on competition in the financial system
Two themes which are core to the Report are competition and funding the Australian economy. Indeed, the FSI states that “[c]ompetition and competitive markets are at the heart of the Inquiry’s philosophy for the financial system.” Consequently, the Report contains many recommendations that are intended to promote competition by removing impediments to its development. These include specific recommendations concerning risk weights in mortgage lending, increasing competition between superannuation funds and ensuring that regulators take greater account of the impact that their decisions have on competition, international competitiveness and the ability of capital to flow freely into and out of Australia.
It is in this context that the FSI has recommended that ASIC’s objectives, as set out in the Australian Securities and Investments Commission Act 2001 (ASIC Act) should be amended to include a specific requirement to take competition issues into account in performing its core regulatory functions. Currently, ASIC’s objectives as set out in section 1(2) of the ASIC Act cover a range of matters aimed at promoting commercial certainty, economic development and efficiency, namely:
- maintaining, facilitating and improving the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and
- administering the laws that confer functions and powers on it effectively and with a minimum of procedural requirements.
The proposed inclusion of a specific competition objective into ASIC’s existing objectives may assist in ensuring that ASIC gives some consideration to competition and long-term efficiency, as well as its more customary considerations of fairness and stability.
However, we do not think that this recommendation goes far enough to promote international competitiveness: this is despite the fact that both the Interim and Final Reports identified many benefits of cross-border competition, including the free flow of capital across borders and improved depth and international connectivity of financial markets. The FSI correctly noted in the Report that the developments and opportunities in Asia make change imperative and that we need to integrate effectively into our region, to channel surplus savings more efficiently into investment opportunities, thereby supporting economic development and trade across Asia. We had hoped therefore that the FSI would recommend that ASIC’s objectives include one which specifically mandates the promotion of Australia as a financial services centre, consistent with the approach of certain other jurisdictions, such as Singapore which has a well-established profile internationally as a financial centre. In our view, providing ASIC with such an expressly outward-facing competition mandate would assist in promoting the export of financial services and cross-border competition in financial services, as well as providing an objective for ASIC that is capable of being externally reviewed and measured.
Secondly, it is unclear just how effective the competition mandate proposed by the FSI will be in practice and ASIC is likely to face a number of challenges in incorporating a competition mandate in connection with performing its functions and exercising its powers.
For example, is not always apparent that all parts of ASIC are focusing consistently on meeting its current objectives pertaining to “commercial certainty” and “efficiency,” having regard to the way in which it undertakes some of its ordinary regulatory functions. It will be interesting therefore to see how effectively ASIC rises to the challenge of also adding the consideration of competition issues into this mix. We also note that the promotion of “competition” as an objective has traditionally been within the remit of the Australian Competition and Consumer Commission (ACCC) and that competition considerations have never been part of ASIC’s mandate. If ASIC’s objectives will also include promoting competition, then it will most likely need additional expertise and resources to enable it to implement this new competition mandate. Absent some form of increased or supplementary funding, this could potentially place an additional burden on ASIC’s already stretched and reduced resources.
Another issue is that this proposed new competition mandate could risk giving rise to the appearance of a compromised set of regulatory outcomes for the financial system, rather than improvements. For example, one of the conclusions drawn by the FSI, arising out of its review of ASIC’s performance as corporate and financial services regulator, was that it appears that the Australian public’s high expectations of ASIC and what it can achieve are unrealistic, having regard to ASIC’s actual powers. If ASIC also adopts a new competition mandate then this could result in further compromised regulatory outcomes that mean ASIC struggles to satisfy any of its stakeholders or statutory objectives. In these circumstances, ASIC could be placed in an invidious position: if ASIC is considered to have over-regulated or to have been too strict, it will be judged to have inhibited competition. However, if ASIC is considered to have been overly lenient or to have under-regulated, it will be judged as having been soft on larger institutions comprising the “big end of town.”
Lastly, we note that recommendation 30 of the Final Report also flagged the need to identify whether there are any regulatory barriers to foreign and domestic entrants to the financial system. We support the suggestion that there should be periodic reviews of whether there are any barriers to market entry of new domestic and internal competitors, as this should assist the government in determining whether regulatory settings are appropriate in light of ever-changing and evolving market conditions.
Recommendation 31: Compliance costs and policy processes
The FSI also recognised in the Report the need to improve the processes for implementing regulatory reforms, to help industry participants manage the regulatory burden on them more effectively. In particular, the Report highlighted the need to provide industry with more time to adapt to and implement complex regulatory change.
The FSI was clearly of the view that, notwithstanding the contrary perception of many in the industry, participants in the Australian financial system are not subject to overly burdensome compliance costs in comparison to their international peers. However, the FSI did recognise the need to provide industry participants with sufficient time to implement regulatory changes as they occur and to prevent unnecessary compliance costs. While this is a sensible suggestion that would certainly assist industry, recent examples of regulatory change demonstrate that there is a higher priority here: namely the need to provide industry with greater certainty and clarity in the context of significant regulatory change. One salient example of this deficiency is the way in which the Future of Financial Advice (FoFA) reforms were implemented: as originally implemented by the former Labor Government, [the FOFA reforms] were Kafkaesque from the outset, both in their conception and drafting, and the Abbott Government’s attempts to amend them ended in a debacle when the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 was disallowed in the Senate. Whilst ASIC sought to take a “facilitative” approach to implementing the FoFA reforms, in practice a great many industry participants were still subject to considerable regulatory uncertainty, leading to commercial inefficiency and cost.
Further to the FSI’s recommendations in the Report, we would like to see greater consideration being given to the extent of regulatory reform that is occurring at any given time. This is because merely providing a fixed amount of time and set dates for the adoption of regulatory changes is inadequate to address the challenges faced by industry participants (particularly smaller, and generally less well-resourced participants) attempting to manage concurrent regulatory changes affecting more than one part of their business. In recent years, financial system participants have been confronted with significant and concurrent regulatory changes such as the FoFA reforms, the implementation of the highly complex Foreign Account Taxation Compliance Act (FATCA), major updates to Anti-Money Laundering and Counter-Terrorism Financing laws, an overhaul of Privacy laws and the implementation of new rules in relation to mandatory reporting of transactions in over-the-counter derivatives.
The concurrent implementation of these many regulatory reforms has placed significant strain on the resources and capabilities of industry participants. To avoid the risk of regulatory reform fatigue (at best) or non-compliance and inadequate compliance (at worst), Government and regulators such as ASIC need to have greater regard to the timing of implementation of regulatory reforms, to assist industry participants to ensure that they have not only adequate resources available, but also an adequate focus on the detail.
The FSI has in its Final Report made many sensible recommendations, including those outlined in Recommendations 30 and 31. However, as noted above, we think that the FSI could have gone further in these two recommendations, to help achieve its objective of examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth.