Regulation of Australian Financial System from 1996 to Date - Case Study Example

Regulation of Australian Financial System from 1996 to Date Name: Course: Tutor: Date: Introduction The year 1996 market a turnaround for the financial system in Australia. It is in this year that the Finance Treasurer announced the formation of the Financial System, Inquiry also known as the Wallis Inquiry, which was intended to check the financial system in the country. Specifically, the Inquiry was mandated to research and analyse the consequences of financial deregulation in the country since the 1980s and; analyse the driving forces affecting change in the Australian financial system, especially in view of technological development. Based on the results of the exercise, the Inquiry was further mandated to provide regulatory recommendations that would be enforced in the country in order to ensure that the financial system was responsive, efficient and flexible to the contemporary needs of Australia. It was hoped that proper regulations would lay the basis for financial stability, better economic performance, integrity, fairness and prudence in the country’s financial system (Commonwealth of Australia, 2009). Prior to this, the financial system had been de-regulated in the 1980s, around the same time that the Australian Dollar was floated (Cameron, 1998). Upon the completion of the inquiry, the FSI proposed a regulation system based on three agencies namely (i) the central bank, (ii) a prudential regulator, and (iii) “a corporations and financial services commission” (Cameron, 1998, p. 4). Before 1997 The recommendations made by the Wallis Inquiry were enacted in 1997 (Bakir, 2003). Before this however, Australia had a largely semi-regulated financial system. The bulk of the regulators back then followed under the commonwealth with the main mandate of overseeing them falling under the treasurer. States also regulated a small number of players in the financial system mainly under the ministerial council watch. Under the treasurer were the ACCC1, which was in charge of consumer protection and trade practices; RBA2, which was in charge of banks; Insurance and Superannuation Commission, which was in charge of general insurers, superannuation and life insurers, and; Australian Securities Commission, which was in charge of corporations’ law, market integrity and unit trusts. The Ministerial councils on the state level hand on the other hand the mandate to oversee the operations of the Australian Financial Institutions Commission, which was in turn charged with the responsibility of overseeing the operations of credit unions and building societies (Bakir, 2009, p. 912). Overall, there were 11 supervisory agencies in the country’s financial system, which formed the “Council of Financial Supervisors”, which according to Bakir (2009) were not only a “historical accident” on the part of the country, but continued to be a great injustice to the proper functioning of the financial system in Australia (p. 7). Among the most stated anomaly of the pre-Wallis period were the regulatory gaps, discord and overlaps that the different agencies created in the financial system by their inconsistent mode of treating financial products. More to this, consumer complained of bureaucracy, which cost them money and much valuable time. On a much lower level, constant attempts were being made to reform the financial system. In 1990 for example, two of the country’s largest life-insurance companies (National mutual and ANZ) wanted to merge. However, the Commonwealth blocked their bid, stating that any such action would reduce competition, thus further jeopardising the financial system. Further, the government prohibited the four big banks in the country from going into mergers, citing the same reason it did for the insurers (Gizycki & Lowe, 2000, p. 190). After 1997’s implementation of the Wallis Inquiry recommendations Reserve Bank of Australia’s Role Under the Wallis Inquiry recommendations, the RBA was to be responsible for the overall maintenance of the financial system stability (Cameron, 1998). The bank would however continue to have lending powers on financial corporations. Unlike earlier times however, the RBA would cease having explicit responsibility of protecting depositors. The role of protecting depositors would be transferred to a prudential regulator, while the RBA would embrace the bigger national interest mandate. The RBA would also have a subsidiary board serving in the Reserve Bank, and who’s specific mandate would be to ensure that the integrity of the Australian financial system was upheld (Cameron, 1998). The current role of the RBA factors in the Wallis Inquiry recommendations, as well as earlier roles set for the bank in different legislations. Addition made to the Bank’s roles since 1996 were ratified through the “Payments Systems Act” that was enacted in 1998, and the “Payment Systems and Netting Act” enacted in the same years. These two pieces of legislation gave RBA extra mandate to control risks that could exist in the financial system and promote the use of efficient payment systems. Further, the Bank in observance of the 2001 Corporations Act is expected to execute its functions and powers in a manner that best contributes to the stability of financial systems in the country (Reserve Bank of Australia, 2010). Australian Prudential Regulation Authority’s role Under Wallis Inquiry’s recommendations, the prudential regulator would identify all the prudential regulations needed in the financial system. This would include licenses or approval of all financial entities operating within the commonwealth jurisdiction. More to this, the prudential regulator would take on the job of the issuance and revocation of licenses from deposit-taking financial institutions. The prudential regulator would also take on the control and management of financial entities that were at risk of failing or which had already failed. Finally, the regulator’s mandate would include the “administration and enforcement of the requirements relating to superannuation” (Cameron, p. 4). By recommending this form of regulation, the Wallis Inquiry was introducing a new way of managing risks in the country’s financial system as recommended by Kidwell et al (2008). APRA commenced work officially on July 1, 1998. In a press release authored by Gaetjens, Ingram and Furnell (2008), it was stated that APRA would “provide prudential regulation of superannuation, insurance and deposit-taking institutions” (p.1). Specifically, the Authority was to ensure that all regulated financial institution would meet their promises. As such, any deposit-taking institution such as banks would ensure that their customers received their deposits in full upon request, and that such deposits would be accompanied by interest rates earned at a prior agreed rate. APRA‘s role further extends to ensuring that insurance companies pay their clients for any investment contracts and legitimate policy claims. Further, the Authority was mandated with ensuring that super funds worked with due consideration to the beneficiaries interests. This was especially so because the super funds were charged with handling the retirement savings of a majority of the Australian people. Overall, the mandate that APRA was charged with starting 1998 was mainly to become a regulator for the financial system, a task which has been attained over the years through the authority’s ability to detect risky financial behaviour that the prudentially regulated institutions engage in. Once a risky behaviour is detected, the Authority moves fast to work with the financial institution in order to curb the persistence of any acts that may have negative outcomes on the funds entrusted by clients to the institution (Litrell, 2003). Seeing that detecting risks is not such a straightforward thing, APRA has to engage the services of expert analysts who are able to detect financial risk well before the warning signs become obvious to the general public. Secondly, APRA must respond to the potential risk before the tell-tale signs become obvious to the general public in such a way that they would cause panic in the financial systems. According to Litrell (2003), APRA is supported by statutory mandate in its work, which includes its ability to acquire data from all regulated financial entities, and its ability to put constrain on risky behaviour practised by the financial entities. APRA further collects statistical data from all financial institutions on a quarterly basis (Litrell, 2003). From the analysed data, the Authority is then able to detect any warning signals that could indicate that a specific financial institution is not performing as it should. Australian Corporations and Financial Services Commission’s (ASIC) roles The Wallis Inquiry had recommended the establishment of a regulator who would watch the ‘conduct and disclosure in the financial system’ (Cameron, p. 4). In response to this recommendation, the government established ASIC - a commission mandated to enforce regulations that would promote consumer protection and market integrity. ASIC was intended to promote consumer confidence in the market by enforcing fairness in the Australian financial system. According to Litrell (2003), ASIC’s main mandate is on the overall welfare of the investors. As a legal regulator, it focuses on the processes and outcomes that financial institutions engage in to ensure that they support the public good. ASIC derives its mandate from Australian legislation, which gives it the mandate to enforce laws against any financial institutions which engage in misconduct. It is also mandated with supervising all Australian Financial Services license-holders. Just recently in July 2010, an additional responsibility was delegated to the institution, and it has to supervise real-time trading in the licensed markets in the country (ASIC, 2010). Evaluation While the debate about regulation especially after the Wallis inquiry released its recommendations had its fair share of opponents and proponents, it is notable that the regulations that were enforced starting in 1997 have had a beneficial effect on Australia’s financial system. As Cooper (2006) notes, the regulated atmosphere allowed more Australians and even international investors to conduct business more confidently on the country knowing that there were specific rules that were applicable to every financial institution. The post Wallis Inquiry Era also opened a new leaf for customers who now knew that financial institutions could treat them fairly and with honesty, and were also regulated to avoid risking their (customers’) investments. More importantly, Cooper (2006) observes that with regulation in the financial system came respect, attraction and confidence from both the local and international investors. This especially came from the notion that regulation of the financial system, or at least the streamlining of the regulatory bodies, brought about efficiency and honesty in the financial system. Despite the benefits of the financial regulation, which was modelled around the Twin-peaks modelled and adopted since 1996 in Australia, it is noteworthy that other options that the country could have adopted include the lead-regulator model or the mega-regulator model. Under a mega-regulator model, a single regulator is usually mandated with prudential regulation, the protection of consumers and market regulation. The lead-regulator model on the other hand, would have one regulatory agency, charged with the responsibility of assessing capital adequacy and risk profiles of a diversified financial group. Under this proposal, the multiple regulatory agencies that existed in Australia’s financial markets would still be allowed to continue operations, while the lead-regulator would be mandated with handling problems or issues arising from specific financial groups (Cooper, 2003, p. 3). The twin-peaks modelled which was recommended by the Wallis Inquiry and later adopted as the formal regulatory model in the country, proposed the use of two regulators in addition to RBA, and the ACCC. The latter’s mandate has always been the regulation of competition in the country. According to Cooper (2006, p.3), it was argued that the creation of two regulators each with a different mandate would create specialised agencies that had clear and well comprehensible regulatory roles. This was in turn meant to create confidence and efficiency, which it has done well. Conclusion The deregulation of the financial system in Australia in the 1980s had created confusion and bureaucracy in the 1990s as financial products continued growing and diversifying. Anticipating the troubles that such mayhem could cause in a troubled financial market, the Australian Commonwealth government through the Treasurer was well placed to form a commission of inquiry which was mandated to find the exact way that regulation would be eased back into Australian financial system. The Wallis Inquiry no doubt did a good job. Starting 1997, the country started experiencing regulations and confidence within the country about the prospects of the financial systems grew. With the checks and balances introduced by the regulators, the financial system is well guarded against careless risk taking by financial institutions, which has led to financial catastrophes elsewhere in the world. The too-big-to-fail phenomenon is one unlucky case where banks in other developed countries take risks hoping that the government can bailout them out. In Australia’s case, this is unlikely to happen since the regulators are always watching. Above all however is the fact that ordinary consumers, investors and financial services beneficiaries are cushioned from losses that may be caused by laxity on the part of the financial institutions. References Australian Securities & Investments Commission. 2010. Market Supervision and Surveillance. viewed 05 August, 2010, Bakir, C. 2003, ‘Governance in financial supervision: The Australian Experience in the 1990s,’ refereed paper presented to the Australasian Political Studies Association Conference University of Tasmania, Hobart, pp. 1-17. Bakir, C. 2009, ‘The governance of financial regulatory reform: the Australian experience,’ Public Administration Journal vol. 87, No. 4, pp. 910-922. Cameron, A. 1998, Rationalisation of the Australian regulatory system, Australian Securities and Investments commission, viewed 05 August, 2010, Cooper, J. 2000, ‘The Integration of Financial regulatory authorities- the Australian experience,’ Australian Securities & Investments Commission, pp. 1-16. Gaetjens, P., Ingram, V. & Furnell, P. 1998, Treasurer heralds new era for financial System regulation, Australian Prudential Regulation Authority: Treasurer’s media release, viewed 05 August, 2010, Gizycki, M. & Lowe, P. 2009, ‘The Australian financial system in the 1990s,’ RBA Conference, vol. 2000, pp.182-215. Kidwell,D., Blackwell, D., Whidbee, D. & Peterson, L. 2008, Financial Institutions, markets and Money, John Wiley & Sons, London. Littrell, C. 2003, APRA’s role and approach to regulation (under FSR), Australian Prudential Regulation Authority, viewed 05 August, 2010, Reserve Bank of Australia. 2010. Financial System Inquiry. viewed 05 August, 2010, Read More