Regulator structure and coordination
Australia’s regulatory structure and coordination mechanisms performed well during the GFC, contributing to Australia’s strong performance through the crisis. Following the GFC, other jurisdictions have adopted Australia’s ‘twin peaks’ approach, with separate prudential and conduct regulators.
Submissions focused on coordination between the regulators, rather than their individual structures.
Regulator cooperation and coordination
During the GFC and beyond, Australia’s regulatory coordination mechanisms have been strong, although there may be room to enhance transparency.
The GFC demonstrated the importance of having strong coordination mechanisms to ensure domestic regulators form a consolidated view of risks in a particular sector and implement coordinated activities. Internationally, there has been a push to increase the coordination and cooperation mechanisms between domestic agencies.
A review of the Australian regulatory landscape highlights a clearly defined mechanism for cooperation and coordination actions between regulatory agencies. Underlying these structures is a culture of cooperation and collegiality.
Based on the issues raised by submissions, the Inquiry’s assessment of regulator cooperation and coordination mechanisms has focused on the role, transparency and accountability of the Council of Financial Regulators (CFR). There was a strong sense from submissions that the CFR was the right body for high-level coordination, but that its role could be strengthened.
The Inquiry notes that beyond the CFR, a number of other mechanisms promote effective inter-agency cooperation and coordination on financial sector policy and enforcement issues through, for example, overlapping representation on the agencies’ boards and bilateral memoranda of understanding (MOU) between CFR members.
Role and responsibilities of CFR
The CFR provides a forum for the main financial system agencies (i.e. the RBA, APRA, ASIC and Treasury) to facilitate coordination and information exchange on financial sector policy issues. As specified in its Charter, the CFR’s ultimate objective is to contribute to the efficiency and effectiveness of financial regulation, by providing a high-level forum for cooperation and collaboration.
The CFR has proven to be a flexible, low-cost approach to coordination.37 The current structure also provides for frank discussion and collaboration between its members. Importantly, the CFR has no regulatory functions separate from those of its members.
Submissions point to the interactions between the regulatory agencies and Treasury as being inclusive and fostering knowledge transfer, promoting the CFR’s effectiveness. The CFR is also recognised internationally as a well-functioning coordination mechanism: the IMF has highlighted that the CFR plays a key role in coordinating financial regulation and stability issues.
However, submissions raise issues with the CFR’s membership, transparency and accountability. Some stakeholders recommend the CFR should not be given any additional responsibilities beyond coordination, as this would dilute and blur the responsibilities of individual regulators. The following discussion addresses these points.
The Inquiry recognises that the four CFR members do not have direct responsibility to address some objectives relevant to the financial system; for example:
- Anti-competitive behaviour — regulated by the ACCC
- AML and counter-terrorism financing — regulated by AUSTRAC
- Compliance-based regulation of SMSFs — regulated by the ATO
However, broad inter-agency cooperation and coordination mechanisms enable the four CFR member agencies to seek input from other agencies as required. To the extent the CFR members see relevance in doing so, other agencies are invited to participate in Council meetings. For example, the ACCC has been invited to participate on issues relating to contestability and competitiveness.
Transparency and accountability
The CFR has a website with information on how it operates, as well as publications by its members. In addition, many of the issues discussed by the CFR to date are reported on in the RBA’s semi-annual Financial Stability Review, with input from other CFR member agencies.
Policy options for consultation
There are a range of options for potentially increasing the role, transparency and external accountability mechanisms of the CFR. If options were pursued, it would be important that the CFR remained a vehicle for coordination and cooperation, and did not assume powers that appropriately sit with the relevant member agencies.
Formalise the role of the CFR within statute
Some submissions suggest legislating the CFR’s powers and functions. On one hand, legislating the CFR would mandate continued inter-agency cooperation if informal collaboration breaks down in the future. On the other hand, the RBA’s submission highlights that the CFR is best seen as the collaborative dimension of the regulatory agencies’ activities, rather than as a separate body with its own ability to make the regulatory agencies cooperate.
A number of factors should be considered before pursuing this option. In particular:
- Legislation cannot be relied on to promote a culture of cooperation, trust and mutual support between domestic regulatory agencies. These have been highlighted as essential elements of an effective financial stability framework, especially during a crisis.
- If powers were formalised in statute, this could suggest that the regulatory functions are separate from those of its members and could engender confusion as to whether the regulatory agencies’ obligations to coordinate arose from their respective charters or that of the CFR.
Increase CFR membership to include the ACCC, AUSTRAC and the ATO
Some submissions felt consideration could be given to widening the CFR’s membership to include other financial sector regulators, such as the ACCC, AUSTRAC and the ATO, who are currently only invited to participate in Council meetings as and when required. Widening its membership would strengthen the Council’s ability to perform its role as a coordination body on a whole-of-sector basis.
The effectiveness of the CFR relies on maintaining the clarity of its scope and frankness in discussions. For this purpose, extending its membership to other agencies with much broader mandates may divert its focus.
Increase the reporting by the CFR
To increase transparency and accountability, the CFR could produce a report each year setting out its activities for the year under review.
The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:
- No change to current arrangements.
- Consider increasing the role, transparency and external accountability mechanisms of the CFR:
- Formalise the role of the CFR within statute.
- Increase the CFR membership to include the ACCC, AUSTRAC and the ATO.
- Increase the reporting by the CFR.
Macroprudential Analysis and Policy in the Australian Financial Stability Framework, Australia.