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Australia’s Approach to Regulatory Reform

Australia’s Approach to Regulatory Reform. Jeff Carmichael AO Chairman Carmichael Consulting Pty Ltd. Outline. Background to the Inquiry Evidence produced by the Inquiry Philosophical framework Structural options considered. The Inquiry. Campbell (30 years earlier):

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Australia’s Approach to Regulatory Reform

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  1. Australia’s Approach to Regulatory Reform Jeff Carmichael AO Chairman Carmichael Consulting Pty Ltd

  2. Outline • Background to the Inquiry • Evidence produced by the Inquiry • Philosophical framework • Structural options considered

  3. The Inquiry Campbell (30 years earlier): • Outdated regulations • Consensus for deregulation Wallis (1996/97): • System working fine • Considerable resistance to change

  4. Terms of Reference • Stock-take of results of deregulation following Campbell • Analyse forces for change • Recommend a framework designed to ensure an efficient, flexible and competitive financial system

  5. Contrasting Approaches • Full public inquiry • Reform behind closed doors • Reform as a response to crisis Comment: Structural reform does not guarantee the correction of regulatory failure

  6. Evidence Found by Inquiry 1. Inefficiencies: • Cost of financial system > $A40 b p.a. • Cost = 4% on assets • Australia’s costs in upper to middle range of developed countries • Australia inefficient in branching, payments mix, insurance expenses, and funds management costs

  7. Evidence Found by Inquiry 2. Changing Landscape: • Changing customer needs • Technological progress • Regulation itself

  8. Implications of Findings • Increasing focus on competition and efficiency • At a minimum, change would be incremental • At the other extreme, there could be a paradigm change (cyber finance)

  9. Changes that were Coming Anyway • Technology to erode role of FIs • Competition from abroad • New payments services providers • Evolution of conglomerates • New design of financial services • Household wealth to move towards market claims (away from institutions)

  10. From Implications to Objectives Needed to design a system that was: • Flexible and responsive • Clear in its goals • Accountable • Able to supervise conglomerates • Able to ensure regulatory neutrality • Able to reduce costs to consumers • Able to enhance Australia’s competitiveness

  11. Philosophical Foundations Regulation rests on market failure and the impact of that failure on: efficiency, safety, and fairness Sources of market failure: Anti-competitive behaviour Market Misconduct Information Asymmetry Systemic Instability

  12. Anti-Competitive Behaviour Regulatory Measures include: • Rules covering industry structure; • Rules to prevent anti-competitive behaviour; and • Rules to ensure contestability

  13. Market Misconduct Common problem areas: • Unfair & fraudulent conduct; • Inadequate disclosure Regulatory Measures include: • Disclosure standards; • Conduct rules: • Entry restrictions; • Governance requirements; and • Minimal financial strength requirements

  14. Asymmetric Information Arises from inherent complexity of products and institutions Regulatory Measures include: • Entry requirements; • Capital requirements; • Liquidity requirements; • Governance requirements; and • Customer support schemes

  15. Systemic Instability Confidence is fundamental to the financial system Regulatory Measures include: • Monetary and fiscal policy; • Lender of last resort; and • Payments system regulation

  16. Implications for Structure Committee concluded: • All markets need competition regulation • All need conduct regulation • Only some warrant prudential regulation • While banks are important for systemic stability it is only some of their functions that require systemic stability regulation

  17. Options Considered • Industry-based regulators (status quo) • Structure based on market failures • Super regulator Each had strengths and weaknesses

  18. The Committee’s Recommendation 4 Pillars based on the 4 sources of market failure: ACCC ASIC APRA RBA Competition Mkt. Conduct Prudential Systemic

  19. Concluding Comments • Process matters • Unless there is adequate public exposure fear can play a destructive role • No structure is perfect • While structure can help, good regulation also requires well-trained and experienced staff with the courage and support to act

  20. Australia’s Approach to Regulatory Reform Jeff Carmichael AO Chairman Carmichael Consulting Pty Ltd

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