Recommended actions

The Inquiry believes the innovative potential of Australia’s financial system and broader economy can be galvanised by taking action to ensure policy settings facilitate future innovation that benefits consumers, businesses and government. Specifically, the Inquiry believes action can be taken in the following areas:

  • Industry and government can work together to identify innovation opportunities and emerging network benefits. Where competitive forces prevent these opportunities from being fully realised, government should facilitate industry coordination. The Inquiry recommends establishing a permanent public–private sector collaborative committee to facilitate financial system innovation and enable timely and coordinated policy and regulatory responses.

    Digital identity is a significant current example of an area where network benefits can be harnessed more effectively through public–private sector collaboration, and Government facilitating industry action. The Inquiry recommends developing a national strategy for a federated-style model of trusted digital identities in which public and private sector identity providers would compete to supply trusted digital identities, enhancing consumer choice, privacy, innovation and system efficiency.

  • Government and regulators can remove unnecessary impediments to innovation. The Wallis Inquiry advocated functional frameworks to ensure risks emanating from similar economic functions are regulated in the same way and to provide entities performing the same function with competitive neutrality. This Inquiry believes graduating such functional frameworks can reduce barriers to innovation, while ensuring regulation is broadly risk-based. Graduation involves providing lower-intensity regulation for new entrants that pose smaller risks to the system — that is, it targets regulation to where it is most needed in the system.

    A dynamic and efficient payments system is an important component of the broader financial system as it underpins most transactions in the economy. At present, payments regulation is complex and fragmented. Developing clearly graduated functional regulation would facilitate innovation in the payments system. The Inquiry recommends mandating the ePayments Code, narrowing the scope of the Australian Financial Services Licence (AFSL) regime, and introducing a new two-tier framework for prudential regulation of purchased payment facilities. The Inquiry also recommends broadening the application of interchange fee caps across payment systems (including companion card systems) and proposes lowering current caps. Significant changes are recommended to the current rules on customer surcharging by merchants to allow system providers to ban customer surcharging for low-cost payment methods and apply fixed limits for medium-cost payment methods. Only higher-cost system providers would remain subject to the current arrangements.

    Further graduating the regulation of market-based financing could improve the financial system’s efficiency in funding future growth. Amending restrictive regulation that prevents small firms from seeking financing online from the general public could facilitate innovation in this area. The Inquiry recommends facilitating crowdfunding by adjusting fundraising and lending regulation, streamlining issuers’ disclosure requirements and allowing retail investors to participate in this new market with protections such as caps on investment.

    Amending unnecessarily technology-specific regulation and removing superfluous regulation can facilitate innovation. Technology-specific regulation can impede innovation by preventing the adoption of best technology or innovative approaches. For example, regulation may entrench the use of cheques or paper-based disclosure documentation, creating inefficient outcomes. See Recommendation 39: Technology neutrality.

  • Government and regulators can support data-driven business models. As increasing amounts of data are collected and more sophisticated analytical techniques emerge, data can be used to develop alternative business models, products and services that improve consumer outcomes and system efficiency. These innovations can be facilitated by increasing access to de-identified and aggregated public sector data, improving consumers’ access to their personal information, and enabling access to private sector data where this does not reduce incentives to collect the data. These processes could be aided by developing standards for accessing and formatting data, including product information, and addressing consumer privacy concerns to strengthen confidence and trust in the use of data. The Inquiry recommends Government commission the Productivity Commission to hold an inquiry into the costs and benefits of increasing access to and improving the use of data, subject to privacy considerations.
  • Regulators need flexibility to respond to future developments. As market developments occur, regulators need to balance the benefits and risks of innovation and take a system-wide view. Regulators need appropriate frameworks, skills, capabilities and powers to manage emerging risks. Regulators should also have appropriate accountability mechanisms to assess the impacts of their policies on competition, innovation and efficiency. These mechanisms are discussed in Chapter 5: Regulatory system.