The Regulation of the Australian Financial System from 1996 to the Present - Assignment Example

Outline, explain and evaluate the regulation of the Australian financial system from 1996 to the present. Introduction Rapid changes in the Australian financial system have been witnessed from 1980s to present. The previous decade has been concluded as a time of rapid regulatory change. In March 1997; financial system Inquiry (FSI) gave its report proposing new regulatory systems for Australian financial systems. In 1998 (APRA) Australian Prudential Regulation Authority was formed. Australian Securities and Investments Commission (ASIC) took the responsibility of ensuring that consumers are protected in the financial sector. In the same year, Payment system board was formed. This was within the Reserve Bank of Australia (RBA) and in addition there was introduction of a fresh payment system regulation. Due to these innovations there were international and local developments in Australia. The financial sector Act 2001 began in the same year. In 2002 Financial Services Reform Act 2001 was established. This Act brought about new licensing, disclosure rules and conduct on financial intermediaries, participants and financial operators, (Bottomley, 2003). As noted from Australian Government (2007), APRA was been introduced in 2004. This was a body which dealt with licensing for the superannuation trustees, while in 2007 to date changes which result from Basel II and which lead to prudential regulations are being introduced. These regulatory changes have affected the financial sectors abundantly. Structures of financial system usually changes regularly due to financial innovations and inventions and also as a result of changes in the regulatory framework and economic environment. These factors have led to generation of major changes and as a result this period became the most eventful in the country’s financial history. There was deregulation which was introduced by Campbell committee as a result of elimination of controls resulting to entry of foreign banks in the country. Deregulation also resulted to new markets and new financial institutions, (Green, 1991). Financial regulation is defined as actions that control and command decisions made by individuals in order to prevent individual decision making which would foresee public interest, (Bottomley, 2003). Regulation can be imposed by a third party or may also be self imposed. In many countries government intervenes in industries or markets through administrative laws, moral suasion, laws and also taxation. On the other hand, self regulation can be in form of codes of conducts or through industry associations. The performance and efficiency of the market is determined by the practice and design of regulatory framework. This means that market behavior will be shaped by regulatory framework. The benefits of good regulation are that it helps financial services to operate efficiently and profitably, (Hornstein, 2005). There is also confidence while carrying out businesses as companies can get loans in Australian markets at competitive rates with other world markets. In order to increase the effectiveness and efficiency of the financial regulatory system Wallis report suggested that changes had to be made in the system. As a result of new technology, changing customer needs including economic policy reforms, the Australian financial system has resulted to new changes, (Green, 1991). Corporations and financial services commission (CFSC) has been recommended in the Australian financial system in order to take care of regulations of financial markets , corporations and also financial consumer protection. This would come in place of Australian securities commission which has been termed as inefficient and ineffective. CFSC should be given powers by the legislature in order to be able to carry out its duties. Australian prudential regulation commission (APRC) should also be formed so as to carry the duties of bank supervision, and provide consistent and integrated supervision of financial institutions thus providing safety. This would offer greater efficiency, economies of scale, regulatory neutrality and is also more flexible. There were three regulatory options put forward by Wallis, these included a lead regulator, a mega regulator and twin peaks. Mega regulator model Under this, a single regulator could perform consumer protection, market regulation and prudential regulation, (Black, 2002). It was supported in that it could lead to supervision of financial groups, regulatory consistency and also do away with regulatory arbitrage. It was opposed in that it could contain too much power, (Diver, 1983). Lead regulator model This model would get and distribute information on financial groups and coordinate other issues that may arise in the financial group. This model was supported in that it could lead to a well coordinated approach in the financial systems, (Green, 1991). Twin peaks model Under this model two financial regulators would be found. These are the Reserve Bank of Australia (RBA), the central bank and the Australian competition and consumer commission (ACCC) .They would be responsible in maintaining the integrity of financial markets and prudential regulation. Also under this model APRA’s main responsibility is to ensure that there is prudential regulation while ASIC main responsibility is consumer protection and that there exist market integrity regulation (Cooper, 2006). One of the main regulatory tools is legislation. Financial services reforms Act 2002 and the superannuation industry Act 1993 regulates the superannuation funds, while the superannuation Guarantee Act 1992 regulates the compulsory employer contributions. The 1993 Act set rules that must be adhered to by the superannuation fund, these rules covers areas such as investments, trustee, administration and also fund accounts. The Act also sets penalties and controls how the superannuation works, (Black, 2002). The superannuation industry supervision (SIS) Act and controls were amended in June 2004.This would ensure that all trustees become RSE licensee (Registrable Superannuation Entity Licensee) This is a requirement of trustee by the licensing regime to show APRA that they have enough funds (financial, human and technology), appropriate skills, risk management in order to be able to manage the funds, (Bottomley, 2003). Financial services reform act 2002(FSR) is meant to regulate the financial services industry. Both parties that is the trustee and the individuals require a license for FSR to operate. Some of the functions of FSR include: training of agents, providing licensing, setting out that which determines misconduct and good conduct and also approving on what information should be given to financial products. Some of the financial bodies in Australian financial system include: Australian prudential regulation authority (APRA): This body ensures that funds i.e. superannuation funds behave prudently. It also ensures that the funds account comply with SIS. According to Axiss Australia, (1996), Australian taxation office (ATO); ensures funds comply with rules and regulations. This body also ensures fair taxation from the Australians. Australians security and investment commission (ASIC): this body ensures trustee do their duties concerning providing information in funding members. ASIC ensures that consumers are protected in areas of financial services. In addition, this body is also required that it facilitates, maintains and also improves how the financial system performs. This it does through reduction of costs of businesses, development and efficiency of the economy and that there is consumers and investors confidence in the financial systems, (Hornstein, 2005). Superannuation complaints tribunal (SCT): This regulatory body ensures the administration of complaints act. Resolution of complaints is provided by this Act. Through conciliation and negotiation, SCT will resolve complaints occurring between superannuation fund and a member. As a matter of fact, SCT comes in to deal with the complaint incase no resolution has been arrived at. On November 6 2009, legislation that regulates margin lending established its royal assent. These changes were contained in financial services modernization act (corporations legislation amendment act. This was intended by the government in controlling of consumer credit. Among other credentials , this act requires that: new lending necessities to be met by margin lenders, services to dispute resolution should be accessible to consumers, appropriate advice should be provided clients and also AFS(Australian financial services ) should provide licenses together with ASIC (Australian security and investment commission). The latest approach to financial control or regulation in Australian financial system is International monetary funds approach. This approach advocates for “internal control, market incentives and official oversight” (Lindgren, 1996). Internal management should provide security in opposition to bank failure. Appropriate internal governance, balances and checks should result to prevention of fraud and mistakes in financial systems, (Black, 2002). In order to ensure that internal management performs efficiently and in accordance to the rules, there should be a proper policy, internal dual regulations and also presence of external and internal auditors. Successful regulation requires sound enforcement and compliance. Certain regulatory tools including exposure limits, capital ratios, camel ratings and certain constraints are designed in order to ensure that those who participate in markets adhere with negligible standard of risk and capital exposures, (Cooper, 2006). Other forms of regulation in the financial sector in the Australian financial system include quasi regulation, self regulation and also co-regulation. In self regulation, there are behavioral controls that are used at professional or industry level and in this type of regulation, Government has no say i.e. there is no government involvement. A good example of this is the 17 standards upon which members of financial and investment services association adheres to and they are found on the Associations rules. On the other hand, Quasi –regulation is the indications put forth by the government and they describe their views on how the regulated individuals should behave but there are no imposed sanctions to those who do not adhere. For instance: Guide to Good Practice of November 2005. Lastly, co-regulation on the other hand is ensuring that private arrangements are given statutory force. (For instance, pt7.2, Div 3 subdivision B of the corporation Acts, giving statutory force to the operating procedures and rules of financial licensed markets). Over the previous decade, these regulatory measures have been criticized by advisers, customers and more so by financial entities, (Hornstein, 2005). As result, there has been need for minimizing regulatory burden. In May 2005; FSR Act introduced a program which was commenced on the same year by the treasury, (Black, 2002). This program was meant to refine how the fresh financial services operated. The implementation of this program was through implementations of new regulations and also relief and guidance by ASIC during the period of second semi of 2005. A task force led by Gary Banks was formed by the government of the time in October year 2005. This was meant to look for solutions for minimizing regulatory burden especially on business and financial systems, (Green, 1991). This report of regulatory burdens was finalized on January year 2006 and there of released in April of the same year. In April of the same year, the treasury invited parties to give broader review on financial and corporate service controls .This was followed by less change in the Simpler Regulatory System Act 2007 (Hanrahan, 2007). As a result of these changes new programs emerged, these were found within regulatory agencies and between the agencies and the government. These programs among them were fresh ministerial statements which are sent to regulators and ASIC and started its duties in 2006. In the financial sector, the regulatory arrangements which are imposed by ASIC and APRA focuses on: promoting stability, protecting consumers and also ensuring maximum competence in the financial system. For example, the (ALRC, 1993; FSI, 1997). Firstly, consumer protections ensure that consumers are protected from information asymmetry especially those who deal with financial sectors. It also ensures prudential protection against institutional risks and compliance risk. On the other hand, stability ensures that financial systems function smoothly and prevents financial disturbances from occurring (for example the Asian financial instability of 1997). Lastly efficiency ensures that resources and money in the financial system are used for the intended use and ensures that distortions are removed in the process. These goals are achieved through different regulatory mechanisms. Conclusion The international monetary fund has brought to the conclusion that Australian financial system regulation is sound. Its approach to market conduct and prudential regulation is up to standards (IMF, 2006). Australian regulatory framework among OECD nations in the financial system is termed as one of the strongest. (OECD, 2006, ch 5). There is a high level of confidence and stability in the system. At a macro level, these indicate a regulatory framework that is sound though there is need for improvement, (Bottomley, 2003). References Australian Government, (2007), Best Practice Regulation Handbook, (Canberra: AGPS) [OPBR] Australian Law Reform Commission and Companies and Securities Advisory Committee, (1993). Report No 65 - Collective Investments: Other People’s Money (Vol 1) www.alrc.gov.au Axiss Australia, (1996). Australia – A Global Financial Services Centre, Retrieved From www.investaustralia.gov.au. (Accessed August 5, 2010). Black, J. (2002). Regulatory Conversations 29. Journal of Law and Society. Pgs: 163- 196. Bottomley, S. (2003). Where Did the Law Go? The Delegation of Australian Corporate Regulation 15. Australian Journal of Corporate Law 1. Cooper, J (2006). The Integration of Financial Regulatory Authorities - the Australian Experience. Speech to Comissão de Valores Mobiliários, 4-5 September 2006, Brazil, www.asic.gov.au. Diver, C. (1983). The Optimum Precision of Administrative Rules 93. Yale Law Journal 65-109 Financial Services Authority, (2007). Principles based regulation: Focusing on the outcomes that matter, www.fsa.gov.uk Financial System Inquiry (FSI), (1997). Financial System Inquiry Final Report (Canberra: AGPS) Green, J. (1991). ‘“Fuzzy” Law – A Better Way to Stop- Snouts in the Trough? Company and Securities Law Journal 144-156. Hanrahan, P. (2006). Reflections on the Design and Manufacture of Australia’s Financial Services Regulation. Paper presented to the Law Council of Australia’s Superannuation 2006 Conference, Melbourne, 24 February 2006. Hanrahan, P. (2007). Changes lighten the load a little. Australian Financial Review 30 May 2007, 59. Hornstein D T. (2005). Complexity Theory, Adaptation and Administrative Law 54 Duke Law Journal 913-960. Read More