Chapter 5: Regulatory system

Australia needs strong, independent and accountable regulators to help maintain trust and confidence in the financial system. This is critically important for attracting investment and supporting growth. The quality of oversight and supervision is vital in maintaining financial stability and achieving positive consumer outcomes. Appropriate firm culture is critical, but needs to be supported by proactive regulators with the right skills, culture, powers and funding.

Australia's regulatory system, as described in the Interim Report, is a legacy of the Wallis Inquiry's functional approach to regulation.1 This means regulators generally focus on particular outcomes across the system, rather than particular sectors.2 The Australian Prudential Regulation Authority (APRA) specialises in prudential regulation of banking, insurance and superannuation, while the Australian Securities and Investments Commission (ASIC) has a broader conduct and market integrity mandate.3

Since the Wallis Inquiry, Australia's regulatory system has undergone significant change. The overall approach to prudential regulation changed significantly in the wake of the collapse of HIH Insurance Limited (HIH) in 2001. There has been a stronger focus on developing tools for crisis management and resolution. APRA also acquired a more active role in the superannuation sector.4 In addition, ASIC's mandate expanded significantly, assuming responsibility for regulating credit as well as financial market supervision.

The global financial crisis (GFC) prompted policy makers and regulators around the world to reconsider their approach to maintaining financial stability. Some countries at the epicentre of the crisis have since expanded their prudential perimeters and adopted more formal and centralised institutional arrangements. This includes establishing single entities with responsibility for macro-prudential regulation.

Australia has long adopted what could be called a ‘macro-prudential' approach to supervision under the rubric of financial stability. Yet, Australia's institutional structure is relatively informal and decentralised. The Reserve Bank of Australia (RBA) and APRA each have responsibility for financial stability. However, most macro-prudential tools can only be deployed by APRA. This places a strong premium on cooperation between the two agencies.

Against the background of developments overseas, the Inquiry has considered whether Australia should change its institutional arrangements for making and implementing financial stability policy.

However, the Inquiry does not see a strong case for change in this area. Although Australia's approach has advantages and disadvantages, alternative institutional approaches are yet to be tested — as indeed is the effectiveness of many macro-prudential tools. For this reason, the Inquiry recommends no fundamental change to the current institutional arrangements for financial stability policy and no change to the prudential perimeter at this time.5 However, it believes that the RBA should continue to monitor risks in the non-prudentially regulated sector, and the Council of Financial Regulators (CFR) should periodically consider whether change is required.6

The Inquiry does not see a need to expand the permanent membership of the CFR to include the Australian Competition and Consumer Commission (ACCC), the Australian Transaction Reports and Analysis Centre (AUSTRAC) or the Australian Taxation Office (ATO), as these agencies can already attend meetings as necessary. However, there would be benefit in increasing the transparency of the CFR's deliberations, including its assessment of financial stability risks and how these are being addressed.

The Inquiry also considered whether superannuation outside self-managed superannuation funds (SMSFs) should still be subject to prudential regulation by APRA and whether to narrow ASIC's responsibilities.

The Interim Report identified that defined contribution superannuation is different to banking and insurance and therefore needs to be regulated differently. Unlike deposit accounts, defined contribution superannuation balances are intended to be exposed to market risk, and do not guarantee a particular return. However, the Inquiry believes the compulsory nature of superannuation justifies ongoing prudential regulation by APRA, including the availability of compensation in the event of fraud or theft.

Some submissions suggest that SMSFs might be prudentially regulated by APRA.7 The Inquiry does not support this. The defining characteristic of the SMSF sector is that trustee members are directly responsible for each fund and must take responsibility for their own decisions.

The Inquiry agrees there is scope to separate ASIC's registry business from the rest of its functions, but is not persuaded that there is a strong case for removing other functions. Neither has it recommended any additions to ASIC's responsibilities.8 The Inquiry accepts the view that there are synergies between functions—such as market supervision, insolvency and consumer protection—that would be lost if these functions were moved to other agencies. The Inquiry has not recommended giving the ACCC sole responsibility for consumer protection because these powers are an important part of ASIC's enforcement toolkit. The Inquiry sees value in an integrated consumer regulator for financial services.9

Although there is no need for major change to the responsibilities of the regulators, the Inquiry has identified some weaknesses in how financial regulation is implemented and believes there is scope to improve regulatory processes. It notes: Government lacks a process for holding regulators accountable for their overall performance; some significant weaknesses exist in regulator funding arrangements and enforcement tools, particularly for ASIC; and competition and efficiency in designing and applying regulation may not be adequately considered.


1 Commonwealth of Australia 2014, Financial System Inquiry Interim Report, Canberra, page 3–90.

2 The exception is the Payments System Board, which focuses on the payments industry.

3 This is described as the ‘twin peaks' model.

4 This includes trustee licensing, the capacity to make prudential standards and authorisation of MySuper products.

5 The section on graduated payments regulation in Chapter 3: Innovation recommends making some changes to the current authorisation regime that applies to purchased payment facilities. It recommends that the current arrangements should be replaced with a two-tiered authorisation regime.

6 The Financial Stability Board produces an annual survey of the global shadow banking sector, including that in Australia.

7 Financial Services Council 2014, Second round submission to the Financial System Inquiry, Chapter 3, page 89; Actuaries Institute 2014, Second round submission to the Financial System Inquiry, page 8.

8 The Interim Report asked whether ASIC should regulate technology providers and superannuation administrators of scale, and whether securities dealers who are not direct market participants should be regulated as market participants: Commonwealth of Australia 2014, Financial System Inquiry Interim Report, Canberra, pages 3-106 to 3-108.

9 ASIC currently has exclusive responsibility for consumer protection in relation to financial services and credit, while the ACCC has these powers in relation to the rest of the economy.