Sound regulation underpins confidence in the system, encourages participation and facilitates efficient allocation of funding and risk in the economy. However, regulation also imposes costs on institutions and the economy more broadly. Regulation should strive to meet its objectives, without placing an undue burden on the regulated population.
Figure 7.1 sets out the current Australian regulatory framework at a high level.
Figure 7.1: The Australian financial system regulatory framework
The Wallis Inquiry considered financial safety as fundamental to the sound operation of the economy. Recognising that regulation with a financial safety objective can affect efficiency, competition and innovation, the prudential perimeter was tightly circumscribed — targeted to where the intensity of promise is highest, such as deposits and insurance.
Prudential regulation in Australia applies directly to authorised deposit-taking institutions (ADIs), general insurers, life insurers, and registered superannuation entities and their trustees.
Today, prudential regulation takes a group-wide view. International standards require a group’s financial and operational aspects to be understood and assessed, as well as the individual prudentially regulated entities within them. The largest and most complex groups are expected to have the greatest level of supervisory intensity. A group-wide framework is in place for banking and insurance groups.
Retail payment systems regulation
The Wallis Inquiry considered the most intense of financial promises are those that provide payment services. At the time, banks were the main providers of payment services and the primary interface with payment systems. The Payments System Board (PSB) was created as a separate board of the Reserve Bank of Australia (RBA) to make decisions related to regulating the payment system. The PSB has a clear objective to ensure stability and confidence in the system, while improving efficiency and competition.
Today, the payments landscape has changed considerably. Cash and cheque transactions have declined significantly and electronic payments have grown strongly. Technology advances and payment product innovation are expected to continue. This is consistent with international experience. It has also resulted in a range of models in different countries to regulate the payments sector.
The Wallis Inquiry considered that financial markets cannot work well unless participants act with integrity and there is adequate disclosure to facilitate informed decisions. Conduct regulation was designed to cover all financial products and services, with the intention of ensuring financial markets are sound, orderly and transparent; users are treated fairly; and markets are free from misleading, manipulative or abusive conduct.
Today, conduct regulation applies to most financial services. The number of financial products has extended through growth in market-based instruments, structural changes in financial markets, and technology and innovation. Products and markets have become more sophisticated and complex, making the application of conduct and disclosure requirements more extensive.