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2014 Financial System Inquiry
The 2014 Financial System Inquiry was annouced by the Treasurer, the Hon. Joe Hockey MP, on 20 November 2014. The Inquiry's Final Report was released on 7 December 2014 and the Inquiry has concluded. For more information please visit the 2014 Financial System Inquiry website.
Treasurer's Press Release No. 102
AUSTRALIAN FINANCIAL SYSTEM REFORM
The Government's response to the Final Report of the Financial System Inquiry will be announced today in the House of Representatives by the Treasurer, The Hon Peter Costello MP.
A copy of the Parliamentary Statement and details of the Government's decisions is attached.
2 September 1997
Statement by the Treasurer, The Hon. Peter Costello, M.P.
House of Representatives - 2 September 1997
REFORM OF THE AUSTRALIAN FINANCIAL SYSTEM
Mr Speaker, on behalf of the Government, I announce today a comprehensive set of financial system reforms in response to the recommendations of the Financial System Inquiry.
This is a major structural reform by the Government which will deliver billions of dollars of benefits for Australian business and consumers.
In line with our election commitments, upon taking office the Coalition Government moved quickly to set up the Financial System Inquiry, headed by Mr Stan Wallis.
The Inquiry delivered a high quality Report making 115 recommendations for regulatory reform in the Australian financial system.
The Report was directed to the fundamental goals of the Government, to increase competition and improve efficiency, while preserving the integrity, security and fairness of the financial system.
The system now provides annually over $40 billion worth of services to consumers and other sectors of the economy, directly employs over 300,000 people and plays an increasingly important role as a service export industry.
The performance of the financial system, and the cost effectiveness of its regulation, are critical to the efficient functioning of the whole economy:
- and in its own right, the financial industry can make an increasing contribution to Australia's economic welfare and progress.
Rationale and Goals for Reform
The Wallis Inquiry concluded that efficiency, choice and quality in Australia's financial sector has improved since the major de-regulation measures of the 1980s.
After nearly two decades, now is the time to improve the system further.
There are three main reasons.
First, in a globally competitive world we must strive to be the best. Given its contribution to every other sector of the economy, creating the best possible financial system provides a vital foundation to Australia's future economic success.
The Wallis Inquiry found Australia's financial sector performance to be close to the world average rather than among the world's best.
- In every area, there remains room for further improvement.
- Reform is needed to secure those potential gains.
Secondly, we must maintain the pace of reform to respond to change. The financial system is undergoing accelerated change through rapid technological innovation, increasing globalisation and changing business strategies and consumer needs.
Our regulatory arrangements must keep up. Existing arrangements do not treat all new market structures and activities equally, and do not always ensure that we get the maximum benefits from change.
Thirdly, the Wallis Inquiry found that there are a number of areas of the financial system which could be more competitive, and proposed a number of ways to promote more competition.
- The Government is keen to pursue all of these initiatives.
Mr Speaker, the proposals I am announcing today will:
- help obtain for Australian consumers and industry the potential benefits of new technologies and world's best practice in the financial system, and at the same time maximise the international competitiveness of our financial services industries;
- better focus regulation according to its underlying objectives and ensure that it applies in a competitively neutral way across the newly emerging market structures; and
- promote greater competition, and through it the achievement of greater efficiency, across the spectrum of financial and payments services.
At the same time, the reforms that I am announcing today build on the advantages of the existing arrangements, preserving the basic goals of safety and stability.
OVERVIEW OF PROPOSED REFORMS
I turn now to the main proposals for reform of regulatory arrangements in the financial system.
The key elements of this package are a new organisational framework for the regulation of the financial system and a variety of measures to improve efficiency and contestability in financial markets and the payments system.
Rationalisation of the Regulatory Framework
The Government has decided to establish a new regulatory structure based on three agencies.
Each agency will be responsible across the system for clear regulatory objectives.
The Government has decided:
- first, that the Reserve Bank of Australia will be strengthened and its role focused on the objectives of monetary policy, overall financial system stability and regulation of the payments system. As part of this, a new Payments System Board will be appointed within the Reserve Bank with stronger regulatory powers to ensure safety, greater competition and efficiency in the payments system;
- secondly, an Australian Prudential Regulation Authority (APRA) will be established to prudentially supervise deposit taking institutions, life and general insurance companies and superannuation funds; and
- thirdly, an Australian Corporations and Financial Services Commission (ACFSC) will be established to cover market integrity, disclosure and other consumer protection issues.
The new regulatory agencies will have substantial operational autonomy and a clear charter of objectives.
They will have boards of directors or commissioners responsible for operational and administrative policies, and will be accountable to the Treasurer and the Parliament for their performance.
There will be legislative provisions to authorise the exchange of confidential information amongst the three regulators and there will be close co-operation between them, both bilaterally and through a Council of Financial Regulators responsible for coordination across a wide range of issues.
In principle, the Government considers that regulation of building societies, credit unions, friendly societies and possibly other financial entities should come under this scheme, and will facilitate this transfer from State to Commonwealth regulation if the States and Territories also agree.
Given the importance of settling the future of these sectors as soon as possible, the Prime Minister will be asking the States and Territories to determine in principle their positions before the end of this year.
Balancing Prudential and Competition Goals
The Wallis Inquiry concluded that prudential regulation should maintain safety while being sufficiently flexible to respond to financial system developments. Prudential arrangements should also minimise adverse effects on competition, competitive neutrality and efficiency.
The Government agrees with this general approach. We have decided to establish a single licensing and prudential regulation regime for all deposit taking institutions.
This will achieve more neutral regulatory treatment and maintain financial
safety across all providers of similar deposit products.
Non-bank deposit taking institutions will more readily operate on a national scale and provide more effective competition for banks in the retail market. The new regime will provide a flexible approach to prudential regulation to deal with the unique characteristics of different deposit taking institutions.
Licensing and prudential regulation of life insurance products, as for deposit taking, should be provided under a consistent and competitively neutral regime. Therefore, subject to the agreement of the States and Territories, we propose that the financial business of friendly societies be subject to the same regulatory arrangements as life offices.
To encourage new entry and more effective competition the Government will also:
- facilitate the establishment of non-operating bank holding companies, and allow holding companies to own more than one bank or other licensed entities;
- streamline the process of licence issue, transferring responsibility to the prudential regulator;
- remove prohibitions on mutual ownership of banks;
- facilitate possible future participation of a wider range of entities in the deposit taking market; and
- streamline the regulation of financial institution shareholdings with a single ceiling of 15 per cent above which Government approvals must be obtained.
The broad objectives of prudential regulation will be set out in the charter of the regulator. In setting these objectives, the Government will broadly follow the approaches to the conduct of prudential regulation recommended by the Wallis Inquiry, ensuring that standards of financial safety are not diminished.
In particular, the conduct of regulation will ensure that the risk of loss of depositor funds remains, as now, very remote and that regulation is consistent with international standards.
Prudential standards will as far as possible be reinforced through encouraging greater public disclosure by financial institutions of their risks, management systems and ratings.
Mr Speaker, total superannuation savings have reached $280 billion and are growing at a much faster rate than bank deposits. They are vital to the retirement security of millions of Australians and for increasing numbers of people represent by far the greater part of their total financial assets.
The APRA will take responsibility for the prudential regulation of superannuation funds and retirement savings accounts. This will create more consistent and effective prudential arrangements for this rapidly growing sector, enhancing its safety while facilitating greater choice, competition and efficiency.
Maintaining Protection of Depositors
As part of its package of reforms, the Government will fully maintain and in some areas strengthen the effectiveness of the existing arrangements for the protection of depositors.
There will be no lessening of protection for bank deposits from that which is currently provided.
The existing depositor protection provisions will be retained under the Banking Act and extended to all licensed deposit takers.
This will involve extending to all regulated deposit taking institutions the priority over the assets of an institution now afforded only to bank depositors.
This will apply for the first time to deposits in building societies and credit unions if they join the Commonwealth regulatory scheme.
The APRA, instead of the Reserve Bank, will be responsible for dealing with institutions which are unable to meet their obligations, but will undertake this action in close cooperation with the Reserve Bank. The Reserve Bank will retain its existing role in providing liquidity support to financial institutions if such assistance is required.
The operational effectiveness of the depositor protection provisions will be strengthened, by providing powers for early intervention in a financially troubled institution and by making clear that the regulator can wind up an insolvent entity.
The APRA will also be given enhanced powers to take action in the case of financial difficulties experienced by life and general insurance companies, and superannuation funds.
APRA will be a separate statutory authority funded by fees and levies from the institutions it regulates and will be outside the Budget sector.
Promoting Efficiency, Competition and Confidence in the Payments System
The Government has accepted recommendations for further measures to promote efficiency and competition, as well as safety and confidence, in the payments system.
The payments system is a particularly important, yet little understood, part of the economy. It is the infrastructure that enables resources to be traded and goods to be exchanged.
The smooth functioning of the economy relies on confidence in the payments system.
The Wallis Report concluded that there is considerable scope to increase efficiency in the payments system without compromising its safety.
The Government accepts there is a need for greater oversight of the payments system. A Payments System Board and new regulatory powers will be established within the Reserve Bank to regulate clearing and settlement systems, to control risk in the financial system and to promote efficiency and competition.
The Reserve Bank will have the power to ensure that clearing stream bodies provide access to their facilities to third parties on reasonable terms. Access to clearing streams and settlement accounts would be liberalised on the basis of clear and open guidelines determined by the PSB. These guidelines will ensure there is no compromise in safety and stability objectives.
Greater competition in payments services will be possible from new types of players processing payments on behalf of their customers.
The development and application of new payment technologies also have the potential to reduce considerably the costs of financial services.
To ensure that they continue to develop with consumer confidence and do not undermine the safety of the financial system, the funds underlying general payments instruments such as electronic cash and stored value cards will be subject to prudential regulation.
The Government has taken careful note of the Inquiry's comments relating to ensuring that there are no impediments to migrating from paper based payments instruments such as cheques to lower cost electronic payment instruments.
The Government accepts that financial institutions will need to reflect the cost advantages of more efficient systems in the overall pricing structure of their services. At the same time, the Government is not yet assured that the financial system is adequately competitive to ensure that pricing is always fair.
Accordingly, it will continue to monitor informally developments in relation to financial sector fees and charges and will oppose any unfair or uncompetitive practices.
Promoting More Effective Disclosure and Consumer Protection
The Inquiry also made a range of recommendations aimed at achieving more effective and efficient disclosure regulation, better regulation of securities and futures markets, promoting the coordination and extension of dispute resolution schemes and overhauling the regulation of financial advice.
The Government has endorsed a range of recommendations aimed at achieving more effective disclosure and consumer protection.
Financial sector conduct and disclosure regulation is currently undertaken by a variety of regulatory agencies. The main disadvantages with this are that:
- regulation is inconsistent across the range of competing financial products;
- financial service providers face a range of different regulatory rules that raises the complexity and cost of compliance; and
- consumers face inconsistent rules resulting in difficulties in understanding and comparing competing products.
For these reasons a single market integrity and consumer protection regulator will be established the Australian Corporations and Financial Services Commission. The agreement of the States and Northern Territory will be required since this Commission will exercise all of the current powers of the Australian Securities Commission.
The new Commission will be given comprehensive market integrity, and consumer protection functions across the range of Commonwealth level interests in the financial system.
In addition to current powers, the Commission will be given the same general consumer protection laws to enforce as currently exist under the consumer protection provisions of the Trade Practices Act as well as a range of enforcement powers. This framework legislation would provide specific regulation in certain areas and allow for industry codes of practice in others, provided they are cost effective and fully meet essential standards and coverage requirements.
The Trade Practices Act will continue to have universal application administered by the ACCC. However, arrangements will be made to provide that the ACFSC undertakes full responsibility for consumer protection issues arising in the financial system.
This will improve the level of specialist financial services consumer protection regulation in Australia as well as remove areas of duplication and inconsistency which are ultimately costly to the consumer.
Disclosure requirements for retail financial products will be reviewed by the new regulator to ensure they provide information which enables comparison between products. In particular I want to ensure that disclosure information is:
- comprehensible and sufficient to enable consumers to make informed decisions;
- consistent with that for similar products regardless of which institution offers them; and
- sufficient to identify remuneration or commissions paid to advisers.
The Government also endorses the Inquiry recommendation for a single gateway for consumer complaints and dispute resolution and will act on this as soon as possible.
Other Measures to Promote Efficiency
The Government will be pursuing a number of other initiatives to promote financial system efficiency.
Further study will be undertaken of the potential economic benefits of changes in credit reporting and intra-group information sharing arrangements and of options for alternative instruments for social security payments.
The implications of foreign investment policy for life offices and other funds managers will be reviewed as part of a broader review of foreign investment policy.
Regulatory responsibility for self-managed superannuation funds will be transferred from the Insurance and Superannuation Commission to the Australian Taxation Office.
Once the new regulatory arrangements have been fully implemented, the existing requirement that banks hold non-callable deposits at the Reserve Bank will be abolished. This will eliminate a competitive disadvantage of licensed banks compared with their unlicensed competitors and ensure that all licensed deposit-taking institutions face the same regulatory arrangements.
Finally, the Government also will establish closer consultation arrangements with the private sector on financial sector issues. A Financial Sector Advisory Council will be established to provide the Treasurer with ongoing advice on financial sector developments and policies.
The members of the Council will be drawn wholly from the private sector and a secretariat will be provided by my Department.
Mr Speaker, the Financial System Inquiry and the many other financial system initiatives already announced by this Government have received strong support in Australia and favourable recognition overseas.
The reform package that I announce today represents the Government's most substantial step yet to improve Australia's financial system.
Further details of the measures we are taking are contained in the document I now table.
The Prime Minister is writing today to the Premiers and Chief Ministers seeking the cooperation and support of the States and Territories. The Government will also consult widely with industry and consumers on the details of the various reforms.
Further reforms in the areas of disclosure requirements and other areas of the Corporations Law will be progressed through the Government's Corporate Law Economic Reform Program.
A series of comprehensive papers containing proposals for reform will be issued over coming weeks, dealing with fundraising, takeovers, futures and securities markets, director's duties and electronic commerce. After consultation processes are completed, legislative proposals will be presented to Parliament early next year.
It is in all of our interests to press on with these changes. In pursuing these reforms, I look forward to continuing close cooperation with the States and Territories and with the financial industry itself.
The financial sector lies at the heart of the entire economy, and we all depend on its success.
The measures I have announced today will facilitate greater choice and competition
in financial services.
They will encourage more rapid innovation, providing wider access and enhanced levels of service.
Australia will have a world class regulatory structure that ensures the highest standards of prudence and safety, and consumer protection.
Regulation will be more efficient, with greater consistency and less overlap.
More openly contested markets will drive lower industry costs and prices.
These benefits will flow to all areas, including small business, those in
rural and remote areas and consumers generally.
At the same time, Australia's financial system will be positioned to compete strongly in the global economy, and to continue to grow as a service export industry.
The Government's initiatives will ensure that Australia's financial system provides the best possible foundation for the continued development and growth of the whole Australian economy.
Additional documentation Tables in Association with the
Statement by the Treasurer, The Hon. Peter Costello, M.P.
House of Representatives - 2 September 1997
REFORM OF THE AUSTRALIAN FINANCIAL SYSTEM
DETAILS OF MEASURES
Consistent with the recommendations of the Financial System Inquiry, the Government has decided:
- to establish a new framework for the conduct of regulation of the financial system;
- subject to the agreement of the States and Territories, to include in the new framework regulatory responsibility for credit unions, building societies, and friendly societies (and to consider also the transfer of regulatory responsibility for trustee companies and cooperative housing societies if the States and Territories agree); and
- to reform a range of regulations to facilitate greater financial sector innovation, competition and efficiency while at the same time maintaining financial sector stability, prudence and safety.
The Government will seek the in principle agreement of the States and Territories to the proposals which relate to their areas of responsibility by the end of this year. Following this, there will need to be extensive negotiation and consultation in 1998 with the States and Territories and other relevant parties (including the existing regulators) to formulate detailed proposals, including legislative measures.
In developing the new arrangements, the Government will take into account not only the best approaches to meeting regulatory objectives for the financial system but also the need to minimise the risks of fraud, the use of money laundering techniques or other criminal behaviour.
The new regulatory framework will establish three regulatory agencies, each with system-wide responsibilities for the different objectives of government intervention in the financial system:
- the Reserve Bank of Australia will be responsible for monetary policy, financial system stability and regulation of the payments system;
- an Australian Prudential Regulation Authority will provide prudential regulation for deposit taking institutions, life and general insurance companies, and superannuation funds; and
- an Australian Corporations and Financial Services Commission will provide regulation for the integrity of market conduct, consumer protection and corporations.
Overview of Regulatory Framework
THE RESERVE BANK OF AUSTRALIA
Responsibility for financial system stability and the provision of liquidity
The Reserve Bank of Australia (RBA) as the central bank of Australia will remain responsible for overall financial system stability and the provision of liquidity. Central banks are best placed to manage systemic financial sector risks. In meeting this responsibility, the RBA will continuously and closely liaise with the other financial sector regulators. In particular, the RBA will maintain very close liaison with the prudential regulator in arrangements for the provision of liquidity and in dealing with financial difficulties that may be experienced by licensed deposit-taking institutions. To assist its system-wide purview, the RBA will retain responsibility for reporting under the Financial Corporations Act 1974.
Regulation of the payments system
Creation of a Payments System Board
A Payments System Board (PSB) will be created within the RBA with responsibility for implementing policies to improve payments system efficiency, including the adoption of the most efficient technology platforms and enhancing the competitive framework, consistent with overall systemic stability.
The PSB's membership will comprise the RBA Governor or Deputy Governor (as Chairman) and two other RBA officers nominated by the Governor, an officer nominated by the Chief Executive of the Australian Prudential Regulation Authority, and up to five independent members.
In the event of a conflict between the main RBA Board and the PSB, the Governor will have statutory authority to implement the decision of the main RBA Board.
The PSB will establish targets for the implementation of efficiency benchmarks for each part of the payments system and will report annually against these benchmarks and other aspects of payments system costs.
The existing Australian Payments System Council (APSC) will be disbanded with its functions in relation to the payments system assumed by the PSB. The consumer protection responsibilities of the APSC will be transferred to the Australian Corporations and Financial Services Commission.
Additional Regulatory Powers
Legislation will be introduced to give the RBA additional powers to regulate clearing and settlement systems, to control risk in the financial system and to promote payments system efficiency, competition and stability. The legislation will provide for regulatory flexibility so that where industry arrangements adequately meet public policy principles, they will be able to continue to provide for the ongoing management and operation of the system. The new legislation will provide 'reserve power' to be used only if the preferred coregulatory approach proves inadequate.
The RBA will have powers to determine the rules for participation in clearing streams, including to ensure that clearing stream bodies provide access to their facilities and arrangements to third parties on reasonable terms and conditions. Access to clearing systems will be widened to include all institutions fulfilling objective criteria. The RBA will also be given powers to promote the control of international settlement risks and to ensure compliance for their achievement, to establish targets for the implementation of efficiency and risk control benchmarks for each part of the payments system, and to arbitrate and make determinations on disputes over technical standards in clearing.
The Australian Competition and Consumer Commission (ACCC) will continue to have trade practices jurisdiction in the payments system including for authorising agreements, approving industry codes and accepting access undertakings pursuant to the Trade Practices Act 1974. The PSB, in consultation with the ACCC, will review interchange pricing arrangements for credit and debit cards, and the membership arrangements and rules for international credit card associations.
Regulation of Purchased Payment Systems
Purchased payment instruments (such as stored value cards, "electronic cash" and traveller's cheques) involve the pre-purchase of an instrument that can be used to make payments and which ultimately can be redeemed by a holder for value held by the original issuer. Such instruments operating in open systems or intended for widespread use as a means of payment may become an increasingly important part of the general payments system. Confidence in these systems is important for their development and potentially for future payments system stability.
Where the store of value of 'purchased' payments instruments is not held by licensed deposit-taking institutions, the RBA will be empowered to impose prudential requirements on the issuer of value, taking into account regulatory arrangements offshore and issuers' ownership, capital and other backing. Stored value cards operating in closed systems for the purposes of a single merchant or a small number of merchants pose little systemic risk and will not require special prudential regulation.
Access to Exchange Settlement Accounts
Access to the settlement system is to be determined according to objective criteria specified by the RBA, taking account of developments in risk control technologies and opportunities to fully collateralise exposures. High entry standards are to be maintained, with no reduction in standards of safety and stability. Access will be limited to those with, or proposing to provide, extensive third party transactions and which do not pose significant risk to the system. While the immediate scope for greater access is likely to be limited, access will not be constrained to licensed banks or other deposit-taking institutions provided necessary standards of safety are met.
THE AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
A single Commonwealth regulator, the Australian Prudential Regulation Authority (APRA), will be established with comprehensive powers to prudentially regulate deposit taking institutions, insurance companies and superannuation funds (other than excluded funds). If the States and Territories agree, building societies, credit unions and friendly societies (in so far as they offer financial products) will also be included in the Commonwealth scheme of regulation.
Under the existing institutional regulatory structure: the RBA supervises banks; the State-based Financial Institutions Scheme (incorporating the Australian Financial Institutions Commission and State supervisory authorities) covers building societies, credit unions and friendly societies; and the Insurance and Superannuation Commission regulates life and general insurance companies and superannuation funds.
The APRA will be a statutory authority with considerable operational autonomy. Its charter will have as its basic objective the protection of depositors and insurance and superannuation investors. It will also:
- emphasise the need to balance the objectives of financial safety with efficiency, competition, contestability and competitive neutrality;
- provide for autonomous governance arrangements through the establishment of a Board with a majority of independent directors and funding based on an annual levy on regulated institutions (rates of levies will be subject to the Treasurer's approval); and
- ensure that its reporting arrangements identify its effectiveness and efficiency.
While the APRA will be separate from the RBA, both organisations will operate very closely together. There will be provision for:
- the RBA to have three ex-officio members on the APRA Board;
- full information exchange between the two organisations;
- a bilateral committee, chaired by a deputy governor of the RBA, to coordinate information exchange, reporting arrangements and ongoing cooperation between the two agencies; and
- RBA participation in APRA inspection teams.
The APRA will be responsible for licensing regulated entities, conducting prudential regulation of licensed entities, and providing for depositor and investor protection in the event of financial difficulties being experienced by regulated entities.
Details of policy decisions relating to these matters are set out in later sections of this statement.
The prudential regulator will be off budget and self-funded through fees or levies set to cover the costs of its operations.
THE AUSTRALIAN CORPORATIONS AND FINANCIAL SERVICES COMMISSION
The Government has agreed in principle to the establishment of a new regulator which would have comprehensive responsibilities for market integrity and consumer protection functions across the financial system.
The new regulator, known as the Australian Corporations and Financial Services Commission (ACFSC), will be based on the existing Australian Securities Commission (ASC). In addition, relevant responsibilities will be transferred to the new body from the Insurance and Superannuation Commission (ISC), the Australian Competition and Consumer Commission (ACCC), the Australian Payments System Council (APSC), and the Australian Financial Institutions Commission (AFIC) and associated State Supervisory Authorities (SSAs).
It is proposed that the ACFSC will be responsible for:
- corporate regulation, securities and futures markets (currently performed by the ASC);
- market integrity and consumer protection functions in connection with banks, finance companies, merchant banks, building societies, credit unions, friendly societies, superannuation interests, retirement savings accounts, and general and life insurance products (but not including State and Territory consumer credit functions);
- consumer protection functions for the finance sector (currently performed by the ACCC and the APSC); and
- oversight of industry initiatives for consumer protection in the areas of new technology in the finance sector and ensuring they develop in a coordinated way.
The ACFSC's legislation will permit it to adopt a flexible regulatory approach which allows industry bodies to play a role in regulation where appropriate. However, in recognition of the importance of the credibility and security of the financial system to the wider economy, the ACFSC would be given a full range of enforcement options, access to adequate resources for enforcement functions and a mandate to use them where appropriate.
The legislation establishing the ACFSC will:
- provide for governance by a board of commissioners accountable to the Parliament through the Treasurer;
- provide for operational autonomy in relation to staffing and remuneration to develop and maintain an appropriate balance of expertise across relevant fields;
- require annual reports to Parliament which contain internal assessments of efficiency, compliance cost and cost effectiveness; and
- provide for it to be budget funded and for its fees and charges to be paid into consolidated revenue (as currently occurs, for example, with the ASC).
The current legislative and administrative framework for corporate regulation is based on cooperation between the Commonwealth, the States and the Northern Territory (NT). The States and the NT continue to play a role in the national corporate regulation scheme and their legislation underpins the scheme. Significant changes to the scheme as proposed require the agreement of all parties. Furthermore, the proposed transfer of some responsibilities currently regulated by State and Territory law (in connection with building societies, credit unions and friendly societies) will require agreement of all States and Territories to be fully effective.
The Government will seek the in principle agreement of the States and Territories to the proposals by the end of the year. Following this, there will need to be extensive negotiation and consultation in 1998 with the States and Territories and other relevant parties (including the existing regulators) to finalise details, including legislative measures.
There would need to be either a new Act to establish the ACFSC and provide for its powers and functions, and/or substantial changes to the existing Australian Securities Commission Act 1989, the Corporations Act 1989 and the Corporations Law (including changes to complementary State and Territory legislation). A number of other Acts would also need to be amended or repealed.
Statutory fees and charges to users will be set as far as possible on the basis that the costs of regulating particular industry sectors are borne by those sectors. Regard will also be had to the total costs of administering the scheme.
COORDINATION AMONG THE REGULATORS
Cooperation and Information Exchange
While the three regulatory agencies, the RBA, the APRA, and the
ACFSC, will have clear and independent responsibilities, operational and policy
coordination processes will be put in place to monitor systemic risk. Close
coordination between the agencies will be necessary to ensure that gaps do not
emerge in regulatory coverage, for better harmonisation of data and reporting
requirements, to effect liaison with law enforcement agencies (both domestic
and international), and to ensure that regulations do not breach competitive
neutrality principles. A particular focus of coordination efforts will be the
minimisation of agency and compliance costs. Similarly, financial exchanges
have an important regulatory role and need to share information.
The increased pace of financial and technological innovation, and the increasingly global nature of financial markets, dictate the need for further close coordination between regulatory agencies both in Australia and internationally.
The Government will introduce legislation to authorise the exchange of confidential information among the financial regulatory agencies, relevant counterpart overseas regulatory agencies, and between financial exchanges, provided that the information is reasonably required for the performance of their regulatory functions.
Establishment of the Council of Financial Regulators
In addition to bilateral arrangements, a Council of Financial Regulators comprising the RBA, APRA and ACFSC will be established to further facilitate the cooperation and collaboration between the three financial regulators. The Council will be non-statutory and replace the existing Council of Financial Supervisors. The new Council will extend cooperation across the full range of regulatory functions including to explore means of minimising agency and compliance costs. The three regulatory agencies will provide secretariat support to the Council.
POLICIES FOR PRUDENTIAL REGULATION
Licensing and prudential regulation of deposit taking institutions (DTIs)
A licensing regime for deposit-taking institutions will be established under the Banking Act 1959, providing for the issue of a licence common to all banks and non-bank DTIs. Under the new arrangements, the power to grant licences, impose conditions and administer exemptions (but not the powers in relation to mergers and shareholdings) will be vested in the prudential regulator.
The regulator will be granted power to impose varying conditions on the use of names under the common licence enabling a distinction to be retained between the identities of banks and non-banks, while facilitating the entry to the market of small non-bank DTIs. The existing requirements for the use of the name 'bank' would be retained, including that the entity must have a minimum of $50 million in capital and hold an exchange settlement account with the Reserve Bank.
The Government has agreed in principle that building societies and credit unions be included in the single licensing and regulatory regime subject to agreement of the State and Territory Governments who are currently responsible for such bodies. The Government is seeking the in principle support of the State and Territory Governments to this proposal by the end of this year, with the intention of facilitating the transfer by 1 July 1999. The single regime would facilitate not only such a transfer but also the licensing and regulation under Commonwealth jurisdiction of new non-bank DTIs (for example, life insurance companies may wish to establish non-bank DTIs within their corporate groups).
Business of deposit taking
The Government will legislate to prohibit the general business of deposit taking unless an institution is licensed under the Banking Act 1959 or exempted by the APRA. The 'general business of deposit taking' would be interpreted broadly. This measure will increase the power of the APRA to ensure the safety of deposits. In addition, regulation will be better able to cope with developments in the financial system.
Currently, some institutions which are not licensed or prudentially regulated as deposit taking institutions and are exempt from the fundraising provisions of the Corporations Law, in limited circumstances, accept deposits or offer products that are near substitutes for retail deposits.
The existing exemptions for money market corporations (in respect of banking), pastoral finance companies and other institutions taking restricted deposits, and the taking of deposits under a prospectus will be retained. The measure will also exempt building societies and credit unions until these transfer to the Commonwealth scheme.
Non-operating bank or deposit taking institution holding companies
In the financial sector, corporate structures based on non-operating holding companies can provide for greater transparency of group operations and are often preferred for a variety of commercial reasons.
In the past, non-operating holding company structures generally have not been permitted where financial conglomerates contain a bank. This prohibition will be lifted to allow financial conglomerates to adopt non-operating holding companies where the conglomerate contains a bank or deposit taking institution subject to the corporate group and the non-operating holding company meeting certain prudential requirements. The APRA will be given sufficient powers to regulate non-operating holding companies and financial conglomerates to the extent necessary to prevent material risks to the financial safety of licensed financial entities within the group.
The APRA may consider a range of factors in deciding whether to approve non-operating holding companies, including the adequacy of firewalls, management and capital.
Non-operating holding companies containing a bank or deposit taking institution will need to be licensed by the APRA. This will enable the regulator to access information about non-regulated financial activities of the group.
Multiple bank or deposit taking licences
Banking and deposit taking groups are currently prevented from holding more than one bank or deposit taking licence. In the event of mergers, financial institutions have previously been required to withdraw one of their brands. The rationale for this policy has been to ensure that depositors are treated equally in the event of a wind-up.
However, a change will be made so as to allow financial groups to hold more than one bank or deposit taking licence where prudential standards are not compromised and deposit holders and investors are treated equitably.
Life Insurance and Friendly Societies
The Government has decided in principle to provide for the licensing and regulation of friendly societies which conduct life insurance business on a comparable basis to life insurance companies under the Life Insurance Act 1995. This would provide a consistent and competitively neutral regime for life insurance. Currently regulation of friendly societies is the responsibility of the State and Territory Governments.
Spread of Ownership Provisions
The Government will continue to support a policy which promotes a wide spread of ownership within Australia's prudentially regulated financial institutions.
Benefits of this approach include:
- minimising the potential for the resources of a financial entity being used inappropriately by a dominant owner;
- quarantining the financial entity from the fortunes (or misfortunes) of a dominant owner; and
- minimising the possibility of the fortunes or actions of a dominant owner having an adverse effect on public confidence in a financial entity.
A Single Acquisitions Act
While continuing to support the general principle of a wide spread
of ownership, the Government will streamline existing legislation and rules.
This will be achieved by the introduction of a single Acquisitions Act, with
a common 15 per cent shareholding limit for DTIs (banks, building societies
and credit unions), insurance companies and their holding companies.
Under this Act, the Treasurer will have the power to approve acquisitions which exceed the standard shareholding limit, where this is in the national interest. In exercising this power, the Treasurer will take into account, but not be limited by, advice from the ACCC in relation to competition considerations, and the advice of the APRA on prudential considerations.
Provision will be made to allow the Treasurer to delegate approval powers to the APRA in cases where one financial institution acquires another. Delegation may be exercised, for example, in the case of mergers of small institutions.
The Acquisitions Act will replace existing spread of ownership legislation and rules in the Banks (Shareholdings) Act 1972, the Banking Act 1959, the Insurance Acquisitions and Takeovers 1991, and the Financial Institutions Scheme (building societies and credit unions).
The anticipated benefits of streamlining ownership legislation and rules include:
- reduced administration and compliance costs;
- increased consistency in the applications of rules and procedures governing shareholdings in financial conglomerates; and
- simplifying procedures for regulating ownership in non-operating holding companies. (Ownership approval in the parent entity will carry through to the various entities, saving the need for separate approval of the holding company ownership in each subsidiary entity.)
Mutual Ownership of Financial Institutions
The blanket prohibition on mutual ownership of banks will be
removed. Licence applicants, in this respect, will first need to satisfy tests
of probity and financial standing, and demonstrate a capacity for ongoing compliance
with capital requirements.
This measure will facilitate new entry into the Australian banking sector which will heighten the level of competition in the Australian market.
The Government will continue to support the principle of separating ownership of regulated financial activities from commercial and industrial activities. The Government will, however, seek to inject greater flexibility in its application by relaxing restrictions where there is demonstrable congruity between financial and non-financial activities - that is, where financial products can be logically bundled with a supply of non-financial goods and services.
In determining what is congruent, the APRA will assess applicants on a case by case basis, although it will be guided by emerging trends and practises occurring globally.
This policy change will initially be applied conservatively. In particular, any proposal by an industrial company to acquire an existing operating licensed entity will be rejected for the time being. Exceptions in the near term are likely to emerge in the area of new licences being sought by companies with a mix of established unlicensed financial activities (representing a major share of total revenues) and non-financial activity (congruent with the provision of licensed financial services). The range of congruent activities could be expected to increase in line with technological and market developments.
The Government will adopt a similar conservative strategy towards deposit takers seeking greater flexibility in their investments in non-financial entities.
To ensure the safety and soundness of the financial system, the APRA will administer strict tests of probity, financial standing and capacity for compliance with prudential regulation on an ongoing basis. Successful applicants will also be required to adopt a transparent corporate structure with appropriate firewalls between financial and other activities.
This measure will increase the level of competition and innovation in financial services markets by generating new entry.
'Excluded' superannuation funds
The Government has decided to accept in principle the recommendation of the Financial System Inquiry that excluded superannuation funds (essentially self managed funds) be regulated by the Australian Taxation Office rather than the prudential regulator. However, this decision is subject to further consideration of the definition of excluded funds for this purpose and other administrative issues.
Banks are currently required, under the Banking Act 1959, to hold one per cent of their liabilities with the Reserve Bank of Australia as non-callable deposits (NCDs). The interest paid to the banks on these funds is currently 5 per cent below the prevailing market rate.
Consequent on, and subject to, the transfer to the Commonwealth of regulatory responsibility for building societies and credit unions, and the establishment of a single prudential regulator fully funded by industry fees and charges, the existing requirement that banks hold non-callable deposits at the Reserve Bank will be abolished. This will eliminate a competitive disadvantage of licensed banks compared with their unlicensed competitors and ensure that all licensed deposit-taking institutions face the same regulatory arrangements.
This proposal would not be implemented until the APRA is established and takes responsibility for credit unions and building societies which is expected to be by 1 July 1999. Its cost to the Budget from 2000-01 would be $196 million per annum at current interest rates.
MAINTAINING PROTECTION OF DEPOSITORS AND INVESTORS
The APRA will be responsible for the ongoing supervision of DTIs and also for providing depositor protection (in close consultation with the RBA) in the event an institution experiences financial difficulties or failure. The APRA will liaise closely with the RBA in liquidity support matters, where the RBA will retain its existing role.
The existing depositor protection mechanisms in Division 2 of the Banking Act 1959 based on depositor priority over the assets of an institution will be retained and extended to all DTIs licensed under the new Commonwealth scheme. There will be no lessening of existing protection for bank deposits.
The protection mechanisms will generally be those currently applying to banks but amended to:
- modify the requirement that the regulator remain in control of the business by giving it the discretion to seek a winding up order where a DTI is not solvent and could not be restored to solvency within a reasonable period of time; and
- strengthen the ability of the regulator to influence outcomes earlier by enabling it to direct the operations of a DTI or to suspend any or all of the business activities of a DTI when, in the opinion of the regulator, such action is necessary in the interests of depositors or the DTI has materially breached prudential regulations or standards.
If the Commonwealth assumes responsibility for the prudential regulation of building societies and credit unions:
- existing compulsory contingency fund schemes would be wound up, although the establishment of voluntary replacement arrangements will be encouraged; and
- restrictions on the classes of debt and equity that may be issued by DTIs, particularly mutuals, would, as far as possible, be removed.
Insurance Companies, Friendly Societies and Superannuation Funds
The APRA will be empowered to take over the management of insurance companies and trusteeship of superannuation funds in the event of their failure or in the event that the regulator reasonably believes that failure is likely to occur in the absence of such intervention.
- for superannuation entities the APRA will have the authority to appoint new trustees; and
- for life and general insurers the prudential regulator will now be able to appoint an administrator (or alternatively use existing provisions for the appointment of judicial management).
If the Commonwealth assumes responsibility for friendly societies, they will be subject to equivalent protection arrangements as currently apply to life insurance organisations. Friendly societies would be supervised by the same regulator as are superannuation and insurance institutions, and the regulator could appoint an administrator if necessary.
For competitive neutrality reasons, the existing policyholder preferences applying to statutory funds of life companies (which will be retained) would also be extended to friendly societies.
Limited restitution of superannuation funds depleted by fraud
The Superannuation Industry (Supervision) Act 1993 enables the Treasurer, where he or she considers it to be in the public interest, to grant financial assistance to a superannuation fund which suffers a loss as a result of fraudulent conduct or theft and where that loss has caused substantial diminution of the fund leading to difficulties in the payment of benefits.
The Treasurer may, under the Superannuation (Financial Assistance Funding) Levy Act 1993, impose a levy on each superannuation fund, other than the fund which will receive the grant or another fund which has received a grant in the same financial year. The maximum rate (or rates) of the levy which may be imposed on a fund in a year is a total of 0.05 per cent of the fund's assets. The rate of the levy must be set so that the Commonwealth only recoups the amount it has paid out.
Where the beneficiaries (excluding employer sponsors) of superannuation funds incur large losses as a result of fraud on the part of trustee(s), fund administrators and/or fund managers, the Treasurer will, upon advice of the APRA, continue to have the powers to levy superannuation funds and other superannuation providers at a rate not exceeding 0.05 per cent of assets where such restitution is considered to be in the national interest. However, restitution will be limited to 80 per cent of the entitlement of beneficiaries to reduce moral hazard (whereby investors will allocate their funds to reap the highest return, irrespective of the risks they face). Losses resulting from any activity other than fraud will not be covered by these arrangements.
Retirement savings accounts and excluded superannuation funds with no arm's length members will be excluded from the scheme.
Consideration will be given to the possible extension of this scheme to other retirement income products such as annuities once the new regulatory arrangements are established.
MARKET CONDUCT AND CONSUMER PROTECTION
Market conduct and disclosure initiatives
A range of initiatives for improving market conduct and disclosure are currently under consideration by the Government in the context of reform processes, including the Corporate Law Economic Reform Program (CLRP). The majority of the recommendations of the Financial System Inquiry relating to specific changes in disclosure and consumer protection measures will be developed further by the Government through the processes of the CLRP. Under this program papers containing proposals for reform will shortly be released relating to:
- accounting standards;
- futures and securities;
- director's duties; and
- electronic commerce.
Single gateway for consumer dispute resolution schemes
Relevant Government agencies will facilitate the establishment of a central complaints referral service for consumers of retail financial products and services. The result will be a single gateway to the government and industry-based consumer dispute resolution schemes in the financial sector. It is envisaged that the service will be funded indirectly by retail financial institutions on a cost recovery basis.
Initiatives in this regard are already at an advanced stage by way of a round table group established by the Department of Industry, Science and Technology and chaired by the ASC. Negotiations with industry bodies are continuing and it is likely that the ASC will begin to provide this service in 1998. The Government considers that this initiative should not await the establishment of the ACFSC.
Licensing of real estate agents who give financial advice
Real estate agents who promote negatively-geared investment packages are providing retail financial advice. Other financial market participants are subject to registration and licensing requirements. The existing regulation of the financial advice activities of real estate agents will therefore be reviewed for their adequacy, and on the basis that real estate agents providing investment advice should be subject to licensing requirements, unless it can be established that the existing regulatory arrangements are adequate.
This review will be undertaken by the ACFSC, which will be in the best position to coordinate a review of the existing practices and licensing regimes of the States and Territories.
OTHER MEASURES TO ENHANCE FINANCIAL SYSTEM EFFICIENCY
Bank Fees and Charges
The Government endorses the Financial System Inquiry recommendation that financial institutions (operating in a competitive setting) should be free to set their fees and charges based generally on the costs of provision. Such a pricing policy will ensure that the most efficient technologies and systems will be successful. However, until further progress is made in increasing competition in Australian financial markets, the Government will maintain its policy of informal monitoring of pricing developments in the financial sector and opposing any unfair or non-competitive practices.
Social Security Payment Mechanisms
The large majority of the Government's transfer payments are by direct credit to a nominated bank account. With the widespread use of fees and charges for retail financial and transaction services, the Government is keen to investigate alternative payment instruments. The Department of Social Security and Commonwealth Services Delivery Agency, in conjunction with the Department of the Treasury and the finance sector, will therefore investigate and report on possible options for alternative payment instruments.
Superannuation Fund Choice
The Government announced in the 1997-98 Budget that legislation would be introduced, with effect from 1 July 1998, to provide employees with greater choice as to which fund receives compulsory employer superannuation contributions made on their behalf. Legislative amendments will be made to override any specification of superannuation fund in Federal awards. The choice legislation will not, however, override provisions contained in workplace agreements, and will not apply to employees working under State industrial awards.
The Government also announced (in its pre-election policy statement on superannuation) that it will require, by the year 2000, that employees in accumulation superannuation funds be able to move their benefits between funds. A maximum twelve month notice period will apply to assist trustees protect fund assets. Maximum exit fees will be set if needed. The full vesting of Superannuation Guarantee contributions when an employee transfers to another fund will be maintained. Further, the Government will encourage regulated accumulation funds to offer members choice of investment strategies and benefit design by the year 2000.
Privacy, Positive Credit Reporting and Information Sharing
The Government is aware of concerns that the current credit reporting structure, which is restricted to negative reporting relating to delinquencies, may deny access to finance for customers who should obtain it or constrain the development of lower cost financing options. It is also aware of claims of economic benefits in allowing information sharing among entities within a financial group.
Reporting of good credit behaviour-positive credit reporting-is used in a number of other countries, including the United States and Canada, and may contribute to greater competition by enabling consumers with a good record of meeting their commitments to obtain finance more readily, and at lower cost, from institutions with which they do not have an existing banking relationship.
Against this, however, the provision of positive credit reporting and information sharing may compromise Australia's vital privacy regime.
In view of these competing concerns, the Government has decided that before considering any changes to the law, the Treasury, consulting with the Attorney-General's Department and the private sector, will review and report to the Treasurer on the potential economic implications of positive credit reporting and information sharing among entities in a financial group.
More generally, the Privacy Commissioner, who has a statutory function to encourage the adoption of privacy principles by corporations, is currently working with the private sector and others to develop a voluntary self-regulatory scheme which both achieves adequate privacy standards and minimises red tape for business. The Commissioner will take into account the principles outlined in the Financial Sector Inquiry's Recommendation 101 concerning the application of the privacy regime in the financial sector.
Superannuation Fund Investment in Small and Medium Enterprises
The Government made a pre-election commitment that superannuation funds will not be directed to invest their funds in any particular sector of the economy. Investment decisions will continue to be a matter for the trustees of the superannuation funds concerned, subject to the relevant prudential requirements.
The Government is confident that the continued growth of superannuation funds will lead to higher levels of investment in small and medium enterprises through diversified investment strategies. In addition, the measures detailed in this Statement will further improve the availability of capital to small and medium enterprises.
Better data about small business
A lack of benchmarking and performance management information about small and medium-sized enterprises (SMEs) adds to the cost of SME fundraising. In principle, therefore, data-collection agencies such as the ACFSC and the Australian Bureau of Statistics should consider the requirements of credit-rating agencies and fund managers when reviewing SME data collection. Implementation of this policy will raise several issues requiring careful consideration, and will be coordinated by the Treasury in consultation with other relevant departments and agencies.
Private Sector Consultation - the Financial Sector Advisory Council
The Treasurer will appoint a non-statutory Financial Sector Advisory Council to facilitate the flow of views between the private sector and the Government, and to provide advice on financial sector developments and policies.
Members of the Advisory Council will be drawn from the private sector and its secretariat provided by the Treasury. The Council will also be asked to review the outcome of the financial sector reforms being introduced by the Government within five years after their commencement.
Measures which are the responsibility of State and Territory Governments
The Government will also suggest to State and Territory Governments that they progress, in their own right, a number of recommendations of the FSI Report, namely:
- a review of the cost effectiveness of the Uniform Consumer Credit Code;
- establishment of a modern uniform, national regime for trustee companies, unless a transfer of jurisdiction to the Commonwealth is preferred;
- facilitate the creation of a nationally uniform dispute resolution scheme for finance companies;
- establishment of a panel for uniform commercial laws; and
- introduce legislative amendments to allow for the admission of evidence in electronic form.
Other Decisions and Reviews
A number of recommendations of the Financial System Inquiry have already been acted upon by the Government or are subject to ongoing review processes. The Government has previously announced decisions relating to mergers in the financial sector, a review of foreign investment regulations (which will include consideration of managed funds and life offices), a restructuring of the Housing Loans Insurance Corporation, pursuit of competitive neutrality principles for government business activities (including the RBA), the extension of the right to issue cheques to building societies and credit unions, a regulatory revamp for managed funds including the appointment of a single responsible entity for such funds, and legislation to provide for legal certainty for multilateral netting and the real time gross settlement system.
The Financial System Inquiry recommended the phased introduction of financial system reforms. The Government anticipates that measures which require administrative rather than legislative action will be implemented as soon as is practicable and that:
- legislative measures which do not involve transfers of regulatory responsibility under agreements with the States and Territories will be introduced as early as possible in 1998, including legislation providing for the establishment of the new regulatory agencies; and
- the transfer of regulatory responsibilities for financial entities presently regulated by the States and Territories, if agreed, occur by 1 July 1999.