Phil Hanratty
Economics, Commerce and Industrial Relations Group
23 June 1997
Contents
Major Issues Summary
Introduction
Summary of Part One: Forces for
Change
Chapter One: Changing Customer Needs
Chapter Two: Technology Driven Innovation
Chapter Three: Regulation as a Driver of Change
Chapter Four: The Changing Financial Landscape
Summary of Part Two: Key Issues in Regulatory
Reform
Chapter Five: Philosophy of Financial Regulation
Chapter Six: Cost and Efficiency
Chapter Seven: Conduct and Disclosure
Chapter Eight: Financial Safety
Chapter Nine: Stability and Payments
Chapter Ten: Mergers and Acquisitions
Chapter Eleven: Promoting Increased Efficiency
Chapter Twelve: Coordination and Accountability
Chapter Thirteen: Managing Change
Summary of Part Three: Stocktake of Financial
Deregulation
Chapter Fourteen: Stocktake, Historical Perspective
Chapter Fifteen: Stocktake, The Financial System
Chapter Sixteen: Stocktake, Financial Regulation
Chapter Seventeen: Stocktake, The Economy
Critique of the Report: Some Opposing Policy
Arguments
Consumer Protection
The Mega Prudential Regulator
Separating Prudential Regulation from the RBA
Fees and Charges
Access Points to Financial Institutions
The Six Pillars Policy
Foreign Ownership
Deposit Insurance
Appendix: Recommendations of the Wallis
Report
Conduct and Disclosure
Financial Safety
Stability and Payments
Mergers and Acquisitions
Promoting Increased Efficiency
Coordination and Accountability
Managing Change
Endnotes
Abbreviations
- ACCC
- Australian Competition and Consumer Commission
- AFIC
- Australian Financial Institutions Commission
- APRC
- Australian Prudential Regulation Commission
- APSC
- Australian Payments System Council
- ASC
- Australian Securities Commission
- ATM
- Automatic Teller Machine
- BBP
- Basic Banking Product
- CFSC
- Corporations and Financial Services Commission
- DTI
- Deposit Taking Institution
- EFTPOS
- Electronic Funds Transfer/Point of Sale
- ESA
- Exchange Settlement Account
- ISC
- Insurance and Superannuation Commission
- NBFI
- Non Bank Financial Institution
- OTC
- Over the Counter
- PSB
- Payments System Board
- RBA
- Reserve Bank of Australia
- RTGS
- Real Time Gross Settlement
- SME
- Small and Medium Enterprise
The Wallis Report has proposed that some fundamental changes be
made to financial regulatory arrangements in order to increase the
efficiency and effectiveness of the system and build upon the
existing achievements of financial deregulation. The Australian
financial system is experiencing ongoing change in response to
changing customer needs, new technology and other economic policy
reforms. It is argued that financial regulatory reform will allow
the financial sector to better respond to these pressures.
It is recommended that a Corporations and Financial Services
Commission (CFSC) be formed to provide Commonwealth regulation of
corporations, financial market integrity and financial consumer
protection. The current regulatory structure in these areas is
argued to be inconsistent with the broadening direction of markets,
has resulted in inefficiencies, inconsistencies and regulatory
gaps, and is not conducive to competition in the financial system.
The new structure will help to overcome these problems.
The Australian Securities Commission (ASC) would be abolished
and its current functions folded into the CFSC, while the
administration of financial consumer protection would be taken away
from the Australian Competition and Consumer Commission (ACCC) and
placed with the CFSC. Some functions of the Insurance and
Superannuation Commission (ISC) would also be incorporated into the
CFSC. The CFSC should have powers provided by legislation which are
commensurate with its responsibilities.
It is also recommended that a single prudential regulator, the
Australian Prudential Regulation Commission (APRC), be formed for
the entire financial system to provide integrated and consistent
supervision of financial institutions for safety purposes. A single
prudential regulator offers regulatory neutrality, greater
efficiency and responsiveness, greater resource flexibility,
economies of scale and lower costs in regulation, and more
flexibility to cope with likely future changes in the financial
system.
Bank supervision would be taken away from the Reserve Bank of
Australia (RBA) and given to the APRC, while the supervision of
building societies and credit unions, now done by the state-based
Australian Financial Institutions Commission (AFIC), would also be
incorporated into APRC, as would the remaining functions of the
ISC. However, the APRC would have a close cooperative relationship
with the RBA, with RBA officers having places on the APRC Board.
The APRC should have powers provided by legislation which are
commensurate with its responsibilities.
In regard to the failure of financial institutions, it is
recommended that the depositor protection mechanism which currently
applies to banks be extended to all deposit taking institutions
under APRC regulation. Here, depositors have priority over other
stakeholders in the disposition of remaining assets of the
institution after liquidation. Explicit deposit insurance schemes
do not seem to be practicable or workable. Existing forms of
prudential regulation, such as capital and liquidity requirements,
should continue to operate.
It is proposed that the Trade Practices Act continue to apply to
the financial system and that the ACCC be the sole competition
policy arbiter on mergers and acquisitions in the sector. The
current 'six pillars' policy, prohibiting mergers between the four
largest banks and two largest life offices, should be abolished and
such decisions left in the hands of the ACCC. It is not possible to
say much of any value about merger proposals in the abstract and
each requires its own particular examination.
It is recommended that the blanket prohibition on foreign
takeovers of the four largest banks be lifted and that proposed
foreign investments in the financial system be reviewed in terms of
the general guidelines of the Government's direct foreign
investment policy. While large scale transfer of ownership of the
financial system into foreign hands would be contrary to the
national interest, because it would restrict options about the
future development of the financial system, it is argued that some
increase in foreign ownership could bring benefits such as
injections of new capital, access to new skills and technologies
and enhanced competitive pressures in domestic financial
markets.
It is argued that the widespread existence of cross-subsidies
between products, channels and customer groups reduces efficiency
in the financial system by creating divergences between costs and
prices. Such cross-subsidies can be unwound by allowing
institutions full freedom to set fees and charges on their services
and products according to cost-relevant criteria. It is therefore
argued that governments should not intervene in, or otherwise try
to influence, this process. Other ways should be sought, such as
through the tax/ transfer payments system, to provide low cost
transaction services to groups such as social security
recipients.
Financial regulatory agencies should have operational autonomy
to pursues their legislated objectives in the most efficient and
cost effective manner possible. They should finance their
operational costs through levies upon the institutions they
supervise.
It is proposed that a Financial Sector Advisory Council be
formed to advise on regulatory arrangements and other matters,
while the RBA, APRC and CFSC should constitute a renamed Council of
Financial Regulators to facilitate cooperation across the full
range of regulatory matters. It is argued that further amalgamation
of these three agencies would be unnecessary and counterproductive
at this time.
Many of the Report's recommendations can be, and have been,
challenged. First, the proposed formation of the CFSC might be
challenged on the grounds that it entails removing the
administration of financial consumer protection from the ACCC. It
could be argued that this policy change will create disparities in
consumer protection with the rest of the economy, because of the
tendency for the industry-specific CFSC to come under 'undue'
influence from the finance sector. If this occurred it could be
viewed as both unfair and likely to generate some loss of economic
efficiency.
Second, it could be argued that the formation of a single
prudential regulator for the entire financial sector, the APRC,
will reduce the effectiveness and efficiency of prudential
regulation. It is argued that this will arise because of the size
and complexity of the regulatory task set for the APRC. The
proposed single prudential regulator might also be criticised on
the grounds that it will encourage non-deposit institutions, and
their customers, to increase their risk exposures in the belief,
albeit mistaken, that Commonwealth Government protection for bank
deposits has been extended to other financial assets.
Third, separating prudential regulation from the RBA might be
challenged on the grounds that it might dangerously slow down the
provision of emergency loan assistance to institutions in times of
distress, since such assistance would, under the Report's
proposals, require mutual agreement and coordination between the
APRC and the RBA. Separation might also be criticised for closing
off the option of the coordinated deployment of monetary policy and
prudential policy instruments.
Fourth, it could be argued that the Report's advocacy of more
efficient pricing of fees and charges by financial institutions
clashes with equity concerns about the rights of citizens to the
provision of 'basic banking services', especially for low-income,
low-wealth customers. If compensation through the tax/ transfer
payment system is not implemented, then legislation to ensure the
continued provision of such services might be argued to be
warranted. Similarly, it could be argued that the community has
rights of access to financial institutions which should constrain
the ongoing rationalisation of the distribution channels of
financial institutions. Thus, it could be argued that the
Commonwealth Government should ensure that the geographical
coverage and range of type of access does not fall below some
minimum limits.
Fifth, it could be argued that the issue of mergers between the
four largest banks is of such national importance that it justifies
the continuation of explicit Commonwealth restrictions in this
area. The Commonwealth Government has already announced such a
position.
Sixth, the Report's rather ambivalent attitude towards direct
foreign investment in the finance sector might be criticised on the
grounds that it sits very oddly with concerns with increasing
financial sector efficiency and does not explicitly deal with
current issues such as the role of foreign bank branches in
Australia. As an alternative, it could be argued that one strength
of explicit deposit insurance schemes is that they facilitate a
better role for such branch operations. Well-designed deposit
insurance schemes might also generate efficiency, equity and safety
gains in the finance sector. It could be argued that these issues
were not adequately discussed in the Report.
Australia has a long history of conducting public inquiries into
its financial system. The Campbell Committee reported in 1981 and
advocated substantial financial deregulation.(1) Their Report's
conclusions were largely validated by the Martin Review Report of
1983.(2) Financial deregulation, and its impact on banking, was
reviewed by the House of Representatives Standing Committee on
Finance and Public Administration (the Martin Committee) in
1991.(3) In the same year, the Industry Commission examined the
financial system in terms of the availability of capital for
investment.(4) Now, the Wallis Committee has published its own
review of financial deregulation and of ways to build upon past
achievements through further regulatory reform.(5)
This paper provides a concise summary of the arguments and
recommendations of the Wallis Report using, wherever possible, the
actual language and sentences of the Report. All 115
recommendations of the Report are mentioned and each of its
chapters is summarised individually. In order to fully and fairly
cover the debate on the policy changes advocated by the Report, the
paper concludes with a survey of arguments opposing some of the key
conclusions and recommendations of the Report.
Chapter One: Changing Customer Needs
Changing customer needs are helping to reshape the financial
system by influencing choices on distribution channels, financial
products and financial suppliers. In turn, such needs have been
primarily influenced by changes in demographic structure, work
patterns, the financial assets and liabilities of households,
awareness of value and willingness to adopt new technology.
The Australian population is ageing. This increases the
importance of assets to fund consumption in retirement. The
Commonwealth Government has sought, through superannuation
initiatives, to encourage private asset accumulation and thus to
encourage reduced dependence upon the age pension in retirement.
This has led to a shift in household financial assets into
market-linked investments, meaning that households are bearing more
investment risk than in the past. Improved financial advisory
services and increased efficiency in funds management are thus
required.
The number of people working extended hours continues to
increase. Thus, many people may now have less leisure time and less
time available to manage their financial affairs. Such people will
have a greater need for financial products which offer convenience
and ease of access. At the same time, many consumers will
experience greater variability in the timing of income. Those
spending longer periods in education, those in part-time
employment, the unemployed and those in early retirement will
generate a greater need for financial products which smooth cash
flows and spending over their life cycles.
Households continue to accumulate both assets and liabilities.
Thus, households now rely more on the financial system and have
greater exposure to financial institutions. They will be more
concerned with issues of financial efficiency and safety. Those
with greater net financial wealth will tend to shift their assets
towards more risky, higher return products such as holdings of
market-linked investments. Consumers are becoming increasingly
aware of value for money in financial products and services.
Information sources on the financial system have proliferated.
Rising fees and charges on transactions services have increased
customer value awareness. The rising range of housing loan products
has encouraged consumers to shop around for the best deal. There is
also an increased willingness to take up new technologies providing
financial services. This is related to increased familiarity with
the new technologies in the workplace and in the home.
Chapter Two: Technology Driven Innovation
Improvements in communications infrastructure and technology are
breaking down physical constraints and cost barriers to the
transmission, storage and use of information. Information networks
are expanding rapidly. Pressures for standardisation,
interoperability, ease of use and cost effectiveness are
increasing. Enhanced authentication of users and more secure
transmission of information will accelerate network use.
Electronic channels for payments and financial service delivery
are increasingly taking advantage of networks. The expansion of
Automatic Teller Machines (ATMs) and Electronic Funds Transfer/
Point of Sale (EFTPOS) access points have generated a large shift
towards electronic retail transactions and away from reliance upon
access to the branches of financial institutions. Telephone banking
is also encouraging such trends. Once security is improved, the
conduct of financial transactions through the Internet will expand
rapidly. Operating costs per transaction are much lower through
these new electronic mediums.
Figure 1: Percentage of Transactions using Specific
Financial Channels in September 1996

Note: Base = Volume of Transactions/visits, September
1996.
Source: Data provided to the Wallis Inquiry by Roy Morgan
Research.
Risk assessment relating to financial products has become much
more sophisticated through advanced data analysis capabilities made
possible by technological advances. Technology has profoundly
influenced the conduct of financial markets and exchanges.
Organised markets and exchanges are facing competition from the
availability of information and trading systems which threaten the
value of their business. Organisations standing between the
customer and the ultimate supplier of financial services must
increasingly justify their value in the delivery process.
Chapter Three: Regulation as a Driver of Change
Changes in regulation have strongly affected the financial
sector. The four most important policy changes have been the
liberalisation of trade and capital flows, the development of
compulsory superannuation, the removal of direct government
participation in the financial services industry, and changes to
taxation.
Economic globalisation is proceeding apace. Markets are becoming
more internationally integrated and the economies of different
nations are becoming more interdependent. These trends have been
partly due to technological advances and broadening planning
horizons of firms and investors. They have been also much assisted
in the case of Australia by policy relaxations such as the lifting
of restrictions on outward investment by Australian companies, the
floating of the Australian dollar and the abolition of exchange
controls, the liberalisation of restrictions on inward direct
foreign investment, and the progressive opening of the Australian
banking system to foreign banks.
The development of compulsory superannuation contributions has
led to the rapid growth in aggregate assets in superannuation
funds. The great bulk of these have been invested in more risky
market-linked assets rather than in capital guaranteed assets on
the balance sheets of financial intermediaries.
In recent years the Commonwealth and State governments have
corporatised and then privatised many of their financial
enterprises. This has been motivated by the desire of governments
to exit commercial businesses (including non-financial enterprises)
to ensure that competitive neutrality is achieved in those markets,
and has also been prompted by losses in certain
state-government-owned businesses and the resultant burden on their
taxpayers.
Taxation arrangements in Australia, like those in many other
countries, contain a wide range of economic distortions. Taxation
has been a key factor in the creation of legal and organisational
structures specifically designed to minimise taxation liability.
Progress has been made in reducing distortions in some areas but
many remain. Variations in effective taxation rates across assets
and saving vehicles remain substantial, while the rates and scope
of transaction taxes also distort financial flows.
Chapter Four: The Changing Financial Landscape
The financial system has undergone, and will continue to
undergo, four central types of structural change. There is an
increased focus upon efficiency and competition, globalisation of
financial markets is continuing, financial market widening and the
development of financial 'conglomerates' has arisen, and there has
been a further shift from financial institutions to direct
connections between capital suppliers and final users, through
financial markets.
Financial institutions have improved their ability to identify
costs and profits entailed in the products and services they offer.
The use of customer and product profitability models allows
institutions to price products and services more accurately. As
these methods come to be more widely used, they will combine with
enhanced competition to generate pricing which more accurately
reflects the underlying cost of supply, thus raising the economic
efficiency of the financial sector. Specialist financial providers
have overcome barriers to entry in the most profitable financial
markets and have thus intensified competition in these areas. Such
intensified competition has increased pressure to abandon
inefficient pricing in other financial services which have been
traditionally used to 'cross-subsidise' other products. More
efficient pricing will encourage consumers to use lower-cost
channels of access to products and services, thus reinforcing the
trend to greater efficiency in the financial system.
Australian markets have become increasingly global over the last
decade and now have a relatively high level of integration with
international markets. Australian businesses and markets have
responded in four ways. Fundraising by corporations and
institutions is becoming increasingly global. Foreign inward and
outward investment are both growing. Trading on share, bond and
foreign exchange markets is becoming increasingly more
international. The location decisions of many financial services
corporations reflect an increasingly international perspective.
However, at this stage the globalisation of retail financial
services is still relatively undeveloped.
Increased globalisation intensifies competition for domestic
financial suppliers, increases pressures for rationalisation and
international harmonisation of financial regulation in Australia,
and heightens the exposure of Australia to world financial trends
and shocks.
The Australian financial system is already predominantly
composed of financial conglomerates. These are groups of companies
under common control whose predominant activities consist of
providing at least two different classes of financial services. For
example, many Australian banks have operations in funds management
and insurance. Underlying trends are resulting in conglomerates
which focus on a wider spectrum of activities. Heightened
competition is encouraging a reconfiguration of conglomerates to
achieve more cost efficient structures. Conglomeration is also
assisted by product innovation where products are designed to be
offered by a range of financial entities, and by commercial
strategies of 'bundling' of financial products across traditional
market boundaries.
Financial markets are increasingly challenging financial
intermediaries for the provision of finance and the management of
risk. Large corporations have had direct access to financial
markets, for debt and equity fundraising, for some time.
Developments in 'securitisation' (the bundling of loan assets and
their sale as marketable securities) now allow markets to provide
finance to retail borrowers. An increasing range of risks can be
managed through an array of market-based 'derivative' financial
instruments (e.g. options, swaps and futures contracts), while the
needs of savers are also increasingly being met through financial
market products. Financial intermediaries will continue to perform
an important role in meeting the financial needs of their clients
but the form of their participation is likely to change.
Chapter Five: Philosophy of Financial Regulation
Regulation of all markets for goods and services can be
categorised according to three broad purposes. First, regulation is
to help ensure that markets work efficiently and competitively, and
thus to overcome sources of market failure. Second, regulation can
prescribe particular standards or qualities of service, especially
where the consumption of goods and services carries risks, so that
safety is a focus of concern. Third, regulation can help achieve
social objectives such as, for example, 'community service
obligations' which typically take the form of price controls.
More particularly, general financial system regulation can be
motivated by four considerations. Financial market integrity
regulation aims to promote confidence in the efficiency and
fairness of markets. Financial market prices can be sensitive to
information and this raises the potential for misuse of
information. For this reason regulators impose specific disclosure
rules (such as prospectus rules) and conduct rules (such as
prohibitions on insider trading) on financial market participants.
Consumer financial protection arises from the complexity of
financial products and the consequent scope for deception,
misunderstanding and dispute. Competition regulation of financial
markets arises from concerns over the anti-competitive effects of
market concentration and collusion between financial market
participants.
A case for regulation also arises from the risks attached to
financial promises (such as the promise to repay borrowed funds).
As a general principle, financial regulation for safety purposes
will be required where promises are judged to be very difficult to
honour, difficult to assess, and likely to produce highly adverse
consequence if breached. Financial promises which rank high on all
three characteristics (e.g. promises to repay retail deposits) are
called 'high intensity' promises.
In markets for intense financial promises, two sources of market
failure have long been recognised. First, there is the risk of
third party losses due to systemic instability. The most potent
source of the risk of systemic instability is financial contagion,
where financial distress in one market or institution is
communicated to others and eventually engulfs the entire system
through a general loss of confidence. Second, there is the problem
of information asymmetry facing most consumers, which means that
they cannot reliably assess risk, particularly the creditworthiness
of the financial promisor.
Financial regulation for safety purposes is called 'prudential
regulation' and is intended to prevent the emergence of problems
which threaten the viability of financial institutions. Once such
problems have emerged, the task falls to the central bank and
government to restore stability through the provision of liquidity
and other policies.
Overall, it should be noted that there are five broad principles
of good financial regulation. First, competitive neutrality
requires that regulation apply equally and to all who make
particular financial commitments. It further requires that there be
minimal barriers to entry and exit from markets and products, that
there be no undue restrictions on institutions or the products they
offer, and that markets be open to the widest possible range of
participants.
Second, cost effectiveness requires that regulation be no more
onerous than necessary to achieve its goals, minimise overlap and
duplication and conflict amongst regulators, properly balance
efficiency and effectiveness, distinguish the goals of financial
regulation from broader social objectives, and allocate regulatory
costs to those enjoying its benefits.
Third, transparency of regulation requires that all government
guarantees be made explicit and that all purchasers and providers
of financial services be fully aware of their rights and
responsibilities. Fourth, flexibility requires that the regulatory
framework must be able to adapt and cope with changing
institutional and product structures without losing effectiveness.
Fifth, accountability requires that regulatory agencies operate
independently of sectional interests, be subject to regular reviews
and evaluations and be open to scrutiny by their stakeholders.
Chapter Six: Cost and Efficiency
It is estimated that in 1995 the total cost to users of the
Australian financial system was about $41 billion. This is more
than the residential construction sector or the costs of the entire
retail sector. Banks made up about $22 billion of these financial
system costs.
In general, significant improvements should be able to be
achieved through the removal of inefficient regulation and the
enhancement of competition in financial markets; these required
reforms are discussed in later chapters.
In regard to the banking system, where potential improvements
are estimated to be large, most of the efficiency and cost
reduction gains can be achieved by changing the mix of transaction
channels in favour of electronic transactions, by reducing the
density of the branch network and by using more differentiated
branch formats (e.g. kiosks versus full branches).
Figure 2: Bank Branch Density

Note: The range of included institutions may vary slightly due
to national differences in classification. Figures for Australia
include banks and building societies.
Source: Bank of International Settlements, 1996, 66th Annual
Report; KPMG 1996, New Zealand Financial Institutions Performance
Survey.
In regard to insurance, where potential improvements are
estimated to be of medium magnitude, while there is scope to
improve the cost structures of individual insurance companies, this
is best achieved through competition rather than through
regulation. In regard to the funds management industry, where
potential improvements are estimated to be large, regulation and
taxation rules have contributed to its high cost levels by creating
barriers to foreign entry and by failing to encourage the
consolidation of the fragmented superannuation industry. Further
unnecessary cost is added by the lack of low-cost distribution
channels.
The costs of the payments system, where potential improvements
are also estimated to be large, are driven directly by the
frequency of use of different instruments and by the proportion of
electronic transactions. Despite the rapid uptake of some forms of
electronic payments instruments such as EFTPOS, Australia still
depends heavily on cheques. As a result, total payments system
costs are relatively high by international standards, constituting
between $5 billion and $7.5 billion annually.
Figure 3: Automatic Teller Machine (ATM) and EFTPOS
Penetration
(1995)

Note: Not all systems have the same functionality (e.g. on-line
capabilities) as those in Australia.
Source: Bank of International Settlements, 1996, Statistics on
the Payments Systems in the Group of Ten Countries, RBA and
APCA (unpublished data).
Chapter Seven: Conduct and Disclosure
Financial markets cannot work well unless participants act with
integrity, to ensure mutual trust, and unless there is adequate
disclosure to facilitate informed judgements. Regulation is
necessary to ensure that these conditions hold. Market integrity
regulation seeks to ensure that markets are sound, orderly and
transparent, users are treated fairly, the price formation process
is reliable and markets are free from misleading, manipulative or
abusive conduct. Consumer protection regulation seeks to ensure
that retail customers have adequate information, are treated fairly
and have adequate avenues for redress.
Such conduct and disclosure regulation is currently undertaken
by several Commonwealth agencies, such as the Insurance and
Superannuation Commission (ISC), the Australian Securities
Commission (ASC), the Australian Competition and Consumer
Commission (ACCC), and the Australian Payments System Council
(APSC). Most such regulation is based on the institutional form of
the service provider, although market integrity regulation is
conducted on a functional basis by one agency alone, the ASC. This
regulatory structure is inconsistent with the broadening structure
of markets, has resulted in inefficiencies, inconsistencies and
regulatory gaps, and is not conducive to competition in the
financial system.
In order to overcome these problems, it is recommended that a
single agency, the Corporations and Financial Services Commission
(CFSC), should be established to provide Commonwealth regulation of
corporations, financial market integrity and financial consumer
protection. It should combine the existing market integrity,
corporations and consumer protection roles of the ASC, ISC and
APSC. The tasks of these three roles are more complementary than
conflicting. The CFSC should take over the administration of
consumer protection in the financial system from the ACCC, and
especially monitor the use of new technology in relation to
consumer protection. On the other hand, the States and Territories
should retain and review their consumer credit laws.
The CFSC should have powers to use a combination of regulatory
approaches. In addition to its framework legislation, the CFSC
should have the power to adopt detailed codes which prescribe
appropriate conduct and disclosure in particular industries or to
allow the industry to develop such codes. Given these broad powers,
the CFSC should have the discretion to decide the best approach to
regulation to be used in particular circumstances. The CFSC should
have an explicit mandate to balance the efficiency and
effectiveness of its regulatory approaches.
It is recommended that a number of specific current regulatory
practices also be reformed. Disclosure requirements for retail
financial products should be reviewed by the CFSC to ensure that
they provide information that enables comparison between products.
The disclosure codes of conduct applying to banking, building
societies and credit unions should be made consistent wherever
possible, while 'due diligence' defences should apply to positive
disclosure requirements. As well, the law should be amended to
require the issue of succinct profile statements about offers of
retail financial products, including initial public offers. In
order to avoid information overload for consumers, the CFSC should
encourage shorter prospectuses where applicable. Financial
institutions' financial reports should meet both Corporations
Law and prudential supervision requirements, while the
accounting standards of financial institutions should be harmonised
with international standards.
The CFSC should establish a single regime to license advisers
providing investment advice and dealing in financial markets. There
should be separate categories of licence for investment advice and
product sales, general insurance brokers, financial market dealers,
and financial market participants. However, the CFSC should have
power to delegate accreditation responsibilities to industry
bodies.
On the other hand, the CFSC should develop a single set of
requirements for investment sales and advice concerning minimum
standards of competency and ethical behaviour, the disclosure of
fees and adviser's capacity, rules on handling client property and
money, financial resources or insurance available in cases of fraud
or incompetence, and responsibilities for agents and employees. In
particular, real estate agents providing investment advice should
be required to hold a financial advisory licence unless a review
clearly indicates otherwise. However, professional advisers, such
as accountants and lawyers, should not be required to hold a
financial advisory licence if they provide investment advice only
incidentally to their other business and rebate any commissions to
clients. Additional prudential regulation of financial market
licence holders is not required at this time.
Broader regulation of 'financial products' should replace
current, less flexible, securities and futures law. The CFSC should
authorise financial exchanges (such as the Stock Exchange and the
Futures Exchange) under a single regime, while the ACCC and the
CFSC should coordinate their examination of exchange rules. The
regulation of exchanges should not be excessive compared with
Over-the-Counter (OTC) markets which involve more specialised
transactions between buyers and sellers. In particular,
prohibitions on retail participation in OTC derivative markets
should be discontinued. OTC markets may be conducted by
appropriately licensed financial market dealers, while exchange
clearing houses should be appropriately authorised. A central
national gateway for dispute resolution for all consumers of retail
financial services and products should be established.
Overall, the CFSC should have broad enforcement powers and
resources which are adequate for carrying out its responsibilities.
In particular, it should have adequate powers over investigations,
protection from liability for those providing regulatory
assistance, the imposition of administrative sanctions such as
disqualification and banning orders, the initiation of civil
actions in the courts, and the referral of matters to the Director
of Public Prosecutions for criminal prosecution. The CFSC should
also participate in global regulatory programs to provide consumer
protection for cross-border financial transactions.
Chapter Eight: Financial Safety
Financial safety is fundamental to the smooth operation of the
economic system. Government intervention through prudential
regulation provides an added level of financial safety beyond that
provided by conduct and disclosure regulation. The intensity of
prudential regulation should be proportional to the degree of
market failure it addresses, but it should not involve a government
guarantee of any part of the financial system.
The current framework for prudential regulation is
institutionally based, with separate agencies regulating the
activities of each class of institution. The Reserve Bank Australia
(RBA) covers banks and the payments settlement, the ISC covers life
and general insurance and superannuation, while the state-based
Financial Institutions Scheme, coordinated by the Australian
Financial Institutions Commission (AFIC) covers credit unions,
building societies and, it is expected, friendly societies from 1
July, 1997.
Prudential regulation should be imposed on institutions licensed
to conduct the general business of deposit taking from the public,
or offering capital backed life products, general insurance
products or superannuation investments. A single Commonwealth
agency, the Australian Prudential Regulation Commission (APRC),
should be established to carry out regulation for all these
products. That is, it should conduct prudential regulation
throughout the financial system. The APRC should be separate from,
but cooperate closely with, the RBA.
A single prudential regulator offers regulatory neutrality and
greater efficiency and responsiveness, provides a sounder basis for
regulating conglomerates, offers the prospect of greater resource
flexibility and economies of scale in regulation that should
enhance the cost effectiveness of regulation, and provides the
flexibility and breadth of vision to cope with changes that seem
likely to occur in the financial system in the coming years.
Separating the prudential regulator from the RBA recognises the
supervision functions for non-bank institutions which the regulator
will be taking on, clarifies the nature of the assurance provided
by prudential regulation to customers of financial institutions,
and enables each organisation to focus clearly on its primary
responsibilities and clarifies the lines of accountability for
their regulatory tasks. It also removes a potential conflict of
interest for the regulator in cases where institutions require
emergency liquidity assistance and the prudential regulator might
be too willing to provide it in order to bolster its own reputation
for preventing institutional failure. Allowing this function to
remain with the RBA, as is recommended, avoids this problem.
However, the RBA should have three ex-officio members on the
APRC Board, and provision should also be made for full information
exchange between the RBA and the APRC and for RBA participation in
APRC teams inspecting financial institutions. The RBA should retain
responsibility for reporting under the Financial Institutions
Act 1974. A bilateral operational coordination committee
should be established between the RBA and the APRC. The three
financial system regulators-the RBA, CFSC and APRC- should also
continue to pursue operational cooperation through a joint council
chaired by the RBA. This is discussed in a later chapter.
The APRC should be empowered under legislation to enforce
prudential regulations on any licensed or approved financial
entity. Unlicensed entities would be prohibited from offering
financial products for which approval had not been given. Licenses
could be revoked or made conditional on certain courses of action.
However, the intensity of prudential regulation needs to balance
financial safety with consideration of its possible adverse effects
upon efficiency, competition, innovation and competitive
neutrality. This balance should preserve a spectrum of market
risk-and-return choices for retail investors, thus meeting their
differing needs and preferences.
Prudential regulation of all licensed Deposit-Taking
Institutions (DTIs) should be consistent with standards approved by
the Basle Committee of Banking Supervision and should aim to ensure
that the risk of loss of depositors' funds is remote. Quantitative
prudential requirements such as capital adequacy, liquidity
requirements and large exposure limits should apply. Regular
on-site reviews of risk management systems should form an integral
part of the approach to prudential regulation.
The APRC should be responsible for the licensing of all DTIs
subject to prudential regulation. Only those entities which meet
minimum capital requirements and hold an exchange settlement
account (ESA) with the RBA should be entitled to use the name
'bank', while only those entities which are mutually owned (where
each depositor has an equal share of ownership) should be entitled
to use the names 'credit union', 'credit society' or 'mutual'. Any
licensed DTI should be entitled to use the name 'building society'
and licensed DTIs should be entitled to use any other business
names provided they are not, in the view of the APRC, misleading to
depositors. Deposit taking by unlicensed entities (such as finance
companies) should be subject to the fundraising provisions of the
Corporations Law and be regulated by the CFSC.
The APRC should regulate life companies and general insurers,
while the regulation of friendly societies should be shared between
the CFSC and the APRC. The APRC should regulate superannuation in
accordance with retirement objectives, while other APRC regulated
institutions should have the right to offer Retirement Savings
Accounts (RSAs). However, 'excluded' superannuation funds (with
less than 5 members) should be exempt from APRC regulation.
Overall, the APRC should promote transparent disclosure of
institutional activities and performance in order to strengthen
risk assessment by customers and shareholders.
The general principle of a wide spread of ownership of regulated
financial entities (or holding companies where part of a
conglomerate) should be retained. This protects against undue
influence by a major shareholder and also guards against contagion
risk that may otherwise occur if a financial institution is damaged
by adverse changes in the fortunes of its major shareholder.
Existing legislation and rules should be streamlined through the
introduction of a single Acquisitions Act with a common
15% shareholding limit. The APRC should have power to approve,
subject to prudential requirements, an exemption allowing an
existing licence holder to acquire more than 15% of an institution.
Any other person may acquire more than 15% of a licensed
institution only if the Treasurer approves the acquisition in the
national interest.
Current policy generally requires the separation of the
ownership of DTIs and life companies from other sectors of the
economy. This is justified principally on the basis of the need to
ensure that the safety of the financial sector is not compromised
by the influence or fortunes of other entities. The general
principle of separation of regulated financial activities from
other activities should be retained but applied with greater
flexibility than at present. Mutual entities should be permitted to
hold all classes of licences. New applicants for licences are
currently required to meet certain capital requirements. In
general, these should be retained but the APRC should be flexible
in granting exemptions under some circumstances.
Financial conglomerates raise the issue of the most appropriate
legal structure in which they should operate. It is recommended
that, subject to a financial conglomerate meeting prudential
requirements, the APRC should permit adoption of a non-operating
holding company structure. The structure must satisfy the APRC in
the areas of capital management, adequacy of firewalls, reporting
of intra-group activities and independent board representation on
subsidiary entities. A conglomerate should not be prohibited from
obtaining a number of classes of licences or conducting
non-regulated financial activities. The APRC should have clear
powers to verify intra-group exposures and otherwise satisfy itself
as to the adequacy of the separation of the regulated financial
entity from other financial operations of the group.
Turning to some other financial entities, fundraising by money
market corporations and finance companies should be subject to CFSC
surveillance but not APRC regulation.
Finally, in regard to dealing with the failure of financial
institutions, the depositor protection mechanism that currently
applies to banks should, subject to appropriate transitional
arrangements, be extended to all regulated DTIs. Associated
resolution arrangements should be transferred to the APRC and
clarified by legislative amendment. Current depositor protection
provisions would provide a greater level of security, in the event
of collapse and liquidation, than an explicit deposit insurance
scheme and are to be preferred on these grounds.
To facilitate depositor protection, restrictions on the classes
of debt and equity that may be issued by DTIs, particularly mutual
institutions, should, as far as possible, be removed (in order to
expand non-deposit sources of funds). In regard to insurance
companies and superannuation funds, the APRC should be empowered to
replace management or trustee control of regulated financial
entities in the event of their actual or likely failure. Existing
policy holder preferences applied to statutory funds of life
companies should be retained and extended to benefit funds of
friendly societies.
Chapter Nine: Stability and Payments
In any financial system a limited range of financial claims can
be used as a means of payment to settle transactions. For example,
notes and coins, the deposit liabilities of banks (mobilised by
instruments such as cheques) and credit cards backed by lines of
credit, can all be used to settle transactions, and thus form part
of the payments system. There is scope for increased competition in
the payments system which will help to lower its costs of
operation. However, this must be balanced against the need to
maintain stability in the financial system. The payments system
provides one central way in which instability can be generated. The
RBA should retain overall responsibility for the stability of the
financial system, the provision of emergency liquidity assistance
and for regulating the payments system.
Large scale instability (called systemic instability) can arise
from default on settlement of transactions, especially for high
value transactions on bonds, foreign exchange and derivatives
products where receipts and payments may not be synchronised.
Initiatives such as the 'real-time-gross-settlement' (RTGS) system
should mitigate domestic sources of settlement risk; here, each
high value transaction is settled as it occurs. Time lags in other
settlements are also being shortened. However, substantial risks
remain, especially for international transactions. The RBA should
give high priority to promoting further cost-effective control of
both domestic and international settlement risks. On the other
hand, the CFSC should be responsible for regulation of financial
exchanges in these matters.
Apart from settlement risk, financial system instability may
also have its origins in generalised disruption to financial and
other markets. Confidence in some financial market participants may
plummet and this may generate a broader market crisis. The policy
responses to such developments will vary with their particular
circumstances but may include the provisions of emergency funds
(i.e. liquidity) to markets generally or to particular sectors.
These should remain the responsibility of the RBA (in consultation
with the Treasurer), in its role as both monetary authority and
manager of systemic risk.
Increased competition in the payments system is possible without
jeopardising systemic stability. A new institutional framework is
necessary to achieve this. Existing arrangements should be
dissolved and a new Payments System Board (PSB) should be formed
within the RBA to regulate payments with a view to increasing
efficiency and competition. It should set performance benchmarks
for these goals and its membership should reflect this. The RBA's
regulatory activities in these areas should be clearly separated
from its commercial activities, such as acting as main banker to
governments.
In regard to specific reforms to increase competition and
efficiency, the right to issue cheques in their own name should be
extended to all licensed DTIs. The ACCC and the PSB should monitor
the delivery fees charged on credit and debit cards while the ACCC
should monitor the rules of international credit card associations
to ensure they are not overly restrictive. Access to final
clearance for financial transactions should be liberalised, its
efficiency upgraded, and the Trade Practices Act 1974
should continue to apply to it. Access to ESAs with the RBA should
be liberalised, while non deposit-taking institutions should be
able to directly settle consumer electronic and bulk electronic
payments through an ESA.
In regard to increased financial system security, RTGS
benchmarks should be established, the PSB should issue payments
system approvals and the PSB and the APRC should establish close
coordination arrangements, while holders of 'stores of value' for
payments instruments such as traveller's cheques and smart cards
should be subject to prudential regulation. High-value settlement
providers should be regulated to international standards.
Chapter Ten: Mergers and Acquisitions
A competitive financial system is in the best interests of
Australia and the laws and administration of policies on mergers
and acquisitions play an important role in achieving this. The
Trade Practices Act 1974 provides a set of economy-wide
laws on competition. It is recommended that Section 50 of the Act
should continue to apply to the financial system, so that a merger
is prohibited where, in a substantial market, a substantial
lessening of competition would be likely to result. Indeed, the
Trade Practices Act should provide the only competition
regulation of financial system mergers. The ACCC should continue to
administer competition laws for the financial system. However, the
APRC (and not the Treasurer) should be given powers to regulate
mergers and acquisitions on prudential grounds.
In particular, the current 'six pillars' policy should be
abolished. Under this policy, mergers are not permitted between the
four largest banks (National Australia, Commonwealth, ANZ and
Westpac) and the two largest life insurance institutions (AMP and
National Mutual). There are no persuasive arguments for continuing
to separate out such possible mergers from the general operation of
competition policy and then to impose a blanket ban upon them.
On the other hand, this Report makes no recommendations about
particular merger scenarios and it is not possible to comment
definitively on assessment criteria in the abstract. However, the
methodologies used in recent ACCC examinations of proposed bank
mergers need review. Competition in retail transaction accounts and
small business finance, currently at relatively low levels, is
likely to be crucial in future assessments of merger proposals. The
ongoing formation of national markets in some banking products and
the competitive effects of the presence of regional banks will also
be important considerations. In general, assessments of merger
proposals should always take account of changes occurring in that
sector.
In regard to foreign investment, the current policy position
prohibiting the foreign takeover of any of the four major banks
should be explicitly removed and replaced with a policy which
provides that all foreign acquisitions in the financial system will
be assessed through the general provisions of foreign investment
policy under the Foreign Acquisitions and Takeovers Act
1975. While a large scale transfer of ownership of the
financial system to foreign hands would be contrary to the national
interest (since it would restrict options for the future
development of the financial system), some increase in foreign
ownership of aspects of the Australian financial system could
generate significant benefits such as injections of new capital,
access to new skills and technologies and enhanced competitive
pressures in domestic financial markets.
Chapter Eleven: Promoting Increased Efficiency
The funds management industry is composed of funds collectively
invested in life insurance, superannuation, equities and unit
trusts. It has both retail and wholesale dimensions. Funds
management fees in Australia appear to be higher than those in
comparable countries. One of the potential reasons for higher costs
in Australia is the fragmentation of the managed funds
industry.
Regulatory reform can improve the performance of the managed
funds industry. The following specific reforms are recommended.
Foreign investment regulations restricting foreign owned or
controlled managers of collective investments should be reviewed.
The Corporations Law should be amended to provide for the
application of takeover provisions modelled on Chapter 6 of the
Corporations Law for public unit trusts, and to provide
for streamlined merger and reconstruction provisions for collective
investment scheme. The Australian Stock Exchange should amend
Listing Rules 15.14 to permit the exercise of sanctions in trust
deeds designed to provide unit holders with the protection embodied
in Chapter 6 of the Corporations Law.
Superannuation fund members should have greater choice of fund.
Employees should be provided with choice of fund, subject to any
constraints necessary to address concerns about administrative
costs and fund liquidity. Transfer costs should be transparent and
reasonable. Regulation of collective investments and public offer
superannuation should be harmonised. The States and Territories
should give urgent priority to establishing a modern, uniform,
national regime for trustee companies. There is also considerable
scope for rationalising and standardising the taxation of
collective investments, although this is outside the Report's terms
of reference.
A regulatory framework which is responsive to technological
innovation will also promote increased efficiency. Relevant
legislation should be generally amended to allow for, and
facilitate, electronic commerce. Regulation should not differ
between different technologies or delivery mechanisms in such a way
as to favour one technology over another. Australia should also
adopt international standards for electronic commerce, and
international harmonisation of law enforcement and consumer
protection should be pursued, especially in regard to electronic
commerce. Financial regulators should keep abreast of technological
developments as they affect the financial system and liaise with
each other as well as government departments and other agencies on
these issues.
The existence of cross-subsidies between products, channels and
customer groups is pervasive in the financial system. Profits from
higher prices for some transactions are used to provide prices
which are lower than they would otherwise be for other
transactions. Cross-subsidies are derived from historical product
bundling, earlier difficulties with apportioning costs, and
community expectations that institutions should meet community
service obligations. The unwinding of such cross-subsidies can
increase efficiency in the financial system. Institutions should
have the freedom to set fees and charges on their services and
products based upon costs, without government intervention or
suasion. Governments should expedite the examination of alternative
means of providing low-cost transaction services for remote areas
and for recipients of social security and other transfer
payments.
In regard to the mortgage insurance market, which is of great
importance to mortgage lenders, the Housing Loans Insurance
Corporation should be privatised to eliminate its undercharging, in
comparison to private insurers, which is derived from the
Commonwealth Government's guarantee of its activities.
Improved flows of market information can also increase
efficiency. In regard to small and medium-sized enterprises (SMEs),
debt markets are not seriously deficient, while equity markets are
improving. The current low investment by superannuation fund
managers in this sector will probably increase and there should be
no compulsion on funds managers to invest in SMEs. However,
compared to the United States, Australia lacks benchmarking and
performance measurement data on investment pools in the SME sector.
This discourages institutional investment there. The CFSC and the
Australian Bureau of Statistics should take into account the
specific requirements of credit-rating agencies and funds managers
when reviewing SME data collection.
In regard to privacy issues, current credit reporting for lender
institutions is restricted to negative reporting of defaults and
delinquencies. The Privacy Act prevents positive credit
reporting (i.e. the successful completion of debt repayments). The
latter would be very useful in making more efficient credit
assessments of potential borrowers. This restriction should be
reviewed. In a similar vein, credit information sharing amongst
group entities should be allowed unless the customer withdraws
consent. In general, reforms to the privacy regime should balance
protection, choice and efficiency, be responsive to market changes,
be national in scope, avoid duplication and deal sensibly with
information collected under previous privacy regimes. The
administration of privacy laws in the financial system should be
done by the Privacy Commissioner rather than the financial consumer
protection regulator.
Chapter Twelve: Coordination and Accountability
The regulatory agencies should be established under legislation
with substantial operational autonomy. The APRC and the CFSC should
establish their own staffing and remuneration structures in
whatever form will be most conducive to their effectiveness and
efficiency. They should locate their headquarters in the main
financial capitals, rather than Canberra. Inspection staff should
be located in the cities where the financial industry operates. It
is only under these conditions that regulation can be as effective
and efficient as possible. Regulatory agencies' charges should
reflect their costs, subject to approval by the Treasurer, so that
they fund themselves. In this context, the current below-market
rate of interest paid by the RBA on its holdings of banks'
non-callable deposits is distortionary and should be reviewed.
Regulatory agencies should thus be 'off-budget' in their treatment
by the fiscal authorities.
APRC, CFSC and PSB should all have boards of directors
responsible for their operational and administrative policies, the
fulfilment of their legislative mandates and their performance. The
key principles in the composition of these new boards are that
there should be majorities of independent members and that there be
substantial cross-representation. The chairpersons of the APRC and
CFSC boards and the PSB should be appointed by the Treasurer from
among the independent members. Each agency should report annually
to Parliament and should seek continuous improvement in reporting
quality. Reports should include results of internal assessments of
efficiency, compliance costs and cost effectiveness. Where
possible, comparisons with international best-practice should be
provided. Legislation should authorise the exchange of confidential
information amongst the financial regulatory agencies.
A Financial Sector Advisory Council should be created to provide
independent advice on implementation of the new regulatory
arrangements, their relevance and cost effectiveness, the
compliance costs imposed upon financial market participants, the
international competitiveness of the financial sector and new and
potential financial developments. The Council of Financial
Supervisors should be renamed as the Council of Financial
Regulators and reconfigured with the aims of facilitating the
cooperation of its three members (RBA, APRC and CFSC) across the
full range of regulatory functions.
Further amalgamation of financial regulators is not warranted
because it would be premature, would reduce the benefits of
specialisation and thus undermine efficiency, and would create an
agency which might be excessively powerful.
Chapter Thirteen: Managing Change
A staged approach should be adopted to implementing this
Report's recommendations, commencing with an announcement of the
Government's position in principle on the main recommendations, and
followed by establishing the new regulatory agencies and investing
them with existing regulatory powers. It is highly desirable that
the Government announce its position on the mergers and
acquisitions recommendations as soon as possible, in order to quell
speculation and provide commercial certainty.
Negotiations with State and Territory Governments would also
need to proceed on the transfer of regulatory powers which are
currently the responsibility of the state-based AFIC regime. As
well, a Panel for Uniform Commercial Laws should be established to
pursue uniform Commonwealth, State and Territory commercial laws.
The Panel should complete its task by no later than the end of
1999.
Chapter Fourteen: Stocktake, Historical Perspective
Tight control of the banking system in the post-World War Two
era encouraged the growth of non-bank financial institutions
(NBFIs). Life companies were actively engaged in mortgage lending
to satisfy demand unmet by banks. Building societies and credit
unions also expanded. Merchant banks developed to satisfy unmet
demand for corporate borrowing. The banks themselves established
subsidiary finance companies to overcome the strict regulation of
their own lending and borrowing activities.
By the late 1970s pressure for regulatory reform was mounting
through a combination of inflation, exogenous shocks and the
declining effectiveness of a monetary policy system which was
reliant upon control of banks' balance sheets, despite the
importance of NBFIs in the financial system. It was in this context
that the Campbell Committee was established in 1979; it issued its
report in 1981. Its recommendations were targeted at both improving
the efficiency of macroeconomic management and at the abolition of
direct interest rate and portfolio controls on financial
institutions. Although the Campbell Committee was concerned to
remove barriers to entry to the financial system, its
recommendations also included strengthened prudential measures to
preserve system stability.
As of mid-1996 the majority of the Committee's recommendations
had been implemented. Most importantly, interest rate and bank
lending controls were relaxed, barriers to entry in banking were
liberalised, controls on capital flows were abolished, and the
exchange rate was floated. These policy changes are usually called
'financial deregulation'. In the period since Campbell, many other
important policy changes have occurred, such as the privatisation
of financial institutions, the development of compulsory
superannuation and economy-wide microeconomic reform. These changes
make it difficult to assess the effects of financial
deregulation.
Chapter Fifteen: Stocktake, The Financial System
The Campbell Committee believed that less intrusive regulation
and greater competition would lead to greater efficiency in the
financial system, and that consumers would benefit from these
changes. However, the expected increase in competition,
particularly in the retail deposit taking sector, has been slow to
arise. Only in more recent times have some retail financial markets
(e.g. home mortgages) become obviously more competitive. On the
other hand, efficiency has improved in several areas since
deregulation. Increased pricing efficiency, in securities and
foreign exchange markets in particular, has improved the efficiency
of resource allocation. The productivity of financial market
participants has also risen in many cases, with technological
innovation playing a major role in this.
International competitiveness was not a major focus of the
Campbell Committee. The limited data available provide some support
for the view that underlying competitiveness has increased since
deregulation in some areas but deteriorated in others. On the other
hand, product choice has clearly widened since the early 1980s.
This is attributable to deregulation as well as to technological
developments, government superannuation initiatives, and increased
integration with international financial markets. The quality of
financial products has also risen. However, one exception to the
improvement of financial products and services is the provision of
information and advice, which still appears to be in need of
further development. Overall, although deregulation has yielded
benefits in the above areas, there is room for further
improvement.
Chapter Sixteen: Stocktake, Financial Regulation
In response to both the financial problems which occurred in the
late 1980s (such as increased loan default rates and heightened
financial institution distress) and the expansion of
superannuation, prudential regulation was upgraded through tougher
capital requirements and structurally reformed through
consolidation, refocusing and better coordination of regulatory
agencies. The greater range and complexity of financial products
and, in some areas, concerns about more aggressive selling
practices, have also led to an increased focus upon consumer
protection. This has resulted in new consumer credit regulation and
new rules for disclosure, codes of conduct and dispute
resolution.
Globalisation has created an increasing need for global
harmonisation of, and cooperation in, the conduct of financial
regulation. In the face of new technologies, alliances and market
structures, increased regulatory attention has been given to
ensuring competitive conduct in all segments of the market and to
providing a competitively neutral policy environment.
However, the ad hoc nature of some new regulation has created a
quite expensive regulatory framework. Over 800 staff are now
involved in financial regulation in Australia, resulting in direct
and compliance costs which appear to be high by international
standards.
Chapter Seventeen: Stocktake, The Economy
While the difficulty of determining the effects of financial
deregulation on the economy has been noted, some observations can
still be made. The removal of exchange controls accelerated the
integration of Australia with world capital markets. This expanded
the opportunities for both Australian-owned capital and
foreign-owned capital in Australia. In both cases this is likely to
have been beneficial to Australia.
Indeed, measures on productivity in the Australian economy
suggest an upturn in the 1990s, which has bolstered economic
growth. This may be attributable in part to greater efficiency
resulting from financial deregulation.
However, the adjustment to a deregulated financial system was
difficult, with a credit boom and asset-price inflation generating
a subsequent correction in the early 1990s and associated bad debts
and bankruptcies.
Exchange rate flexibility has increased Australian flexibility
in responding to economic shocks, while financial deregulation has
restored the power of monetary policy and allowed it to focus upon
inflation control.
Increased scrutiny of government's economic policies by
financial markets may be viewed either as an undesirable constraint
or as a desirable source of discipline upon governments.
The weakness in national savings in the period since
deregulation does not appear to be strongly associated with
deregulation, since it is due mainly to low public sector savings,
especially as a result of Commonwealth Government budget deficits.
Similarly, the impact of deregulation on long-term employment seems
small and is likely to be dominated by its impact on economic
growth. It cannot be blamed for enduring high levels of
unemployment.
In this section we gather together some noteworthy arguments
which can be, and have been, made against some of the policy
recommendations made in the Wallis Report. This provides the
counterbalance to the earlier sections which summarised the
Report's arguments and recommendations. These opposing arguments
are a 'smorgasbord of dissent' which are drawn from a variety of
perspectives. Some of the arguments and perspectives are in
conflict with each other, so that, as a whole, the following do not
form a consistent, integrated set of alternative policies.
Consumer Protection
The main policy position opposing the construction of the CFSC
would seem to be one advocating that consumer protection should be
administered on an economy-wide basis by the ACCC while regulation
of corporations and financial market integrity is done by another
agency. We now present the main arguments in support of this
view.
The central advantage of an economy-wide regulator in any policy
field is that it can ensure standardisation of regulation across
industry sectors and thus achieve competitive neutrality. Here, the
burden of regulation is born equally by all industries affected, so
that regulation does not create economic distortions by favouring
some sectors over others, and thus changing the allocation of
resources across industries. With more than one regulator in the
field, there is a consequent danger that regulation will not be
standardised, and differences in regulation will thus distort
economic and commercial choices.
It could be argued that this danger is particularly relevant in
the case where a regulator for one sector of the economy is to be
constructed, for here the narrow focus of the specialised
regulator's work, the corresponding focused industry opposition to
it, and its limited ability to generate political support in other
areas of the political economy, make it vulnerable to 'capture' by
the industry. Here, the standards of regulation will often be less
rigorous and demanding than for the rest of the economy, because
the industry will ensure that regulatory policy is 'industry
friendly'.(6)
It could be argued that this scenario is very much applicable to
the case of the construction of the CFSC since it is envisaged that
financial consumer protection will be taken away from the ACCC, the
formerly economy-wide regulator, and given to a body which will not
concern itself with consumer protection in other industry sectors.
This danger could be reinforced if the CFSC is dominated by staff
from the ASC who might thus have little interest in consumer
protection and concentrate on their other responsibilities, while
allowing financial consumer protection to be overly influenced by
the wishes of financial sector firms.(7)
The ACCC's well-known rigorous standards for consumer protection
could thus be watered down by the CFSC in relation to the financial
system. Besides creating inefficiencies, this outcome could also be
interpreted as unfair by those who regard rigorous consumer
protection as a high social and political priority.
It could be argued that lodging the administration of all
financial consumer protection with the ACCC avoids these problems.
A CFSC might still be formed but its responsibilities would now
resemble those of the currently existing ASC. As such, the argument
for any institutional reform in this area would become much more
tenuous.
The Mega Prudential Regulator
While there do not seem to be any substantial arguments against
the formation of one regulator for all DTIs, there are a couple of
noteworthy arguments against the formation of a single prudential
regulator for the entire financial system.
First, it is clear that the nature of prudential regulation is
different for products where a commercial promise of a capital
guarantee of funds has been made (e.g. bank deposits) compared to
products where no such promise has been made and funds are deployed
and used on a 'best-endeavours' basis, often by a trustee structure
(e.g. superannuation fund contributions). In the latter case, there
is no institutional promise that investment mistakes and market
fluctuations will not be sufficiently large as to wipe out some
portion of the capital value of the investments.
Prudential regulation is, and will continue to be, very
different in these two cases, and their conjoining in the one
regulatory body will necessitate different divisions within the
regulator to cope with the very different demands of regulation in
the two classes of investments and institutions. This might
undermine the advantages of policy specialisation which arise from
giving public instrumentalities a few clear goals which they should
pursue.(8) The greater the complexity of the regulatory goals and
practices set for any organisation the greater the danger that it
will not fulfil any of them terribly well but will do only a
minimally satisfactory job of each.
This might mean, for example, that the high standards of
prudential bank supervision achieved by the RBA could be
compromised through the formation of the APRC.
Second, it could be argued that the formation of the mega
prudential regulator, the APRC, will generate excessive
expectations about the safety of investments with non-deposit
taking institutions especially. This might lead to problems of
'moral hazard' in which such investors and institutions engage in
excessively risky behaviour on the assumption that there is a
government guarantee of any investments made.(9) This could create
the very sort of financial collapse that prudential regulation is
designed to avoid.
Large segments of the general public clearly believe that bank
deposits are currently guaranteed by the government through the
RBA. Official spokespersons may deny such a guarantee exists but it
seems clear from mass financial behaviour and public opinion poll
responses that this belief exists. The creation of a mega regulator
might thus lead many individuals to believe that this guarantee has
been extended to all investments and institutions supervised by the
APRC. Such a belief might be quite immune to denials by official
sources.
Indeed, the mere existence of such a belief could generate such
powerful mass political sentiments, at times of financial
institution distress or collapse, that governments are forced to
step in and ensure that the retail investments in question are
fully refunded. This could place enormous pressure on the
Commonwealth Budget. Thus, it could be argued that the formation of
an APRC will vastly increase these implicit and contingent
liabilities for the Commonwealth Government, and thus, this
regulatory change should be avoided.
One way to avoid such problems for the APRC might be to delete
any explicit reference to deposit protection, by any government
agency, in its defining legislation and to have this deletion well
publicised by the Commonwealth and APRC officers. Alternatively,
such problems could also be avoided under an APRC regime by
ensuring that DTIs are clearly distinguished from non-DTIs, through
the use of explicit, and compulsory, deposit-insurance schemes in
the former. Such schemes are discussed later in this paper.
Separating Prudential Regulation from the RBA
There are a couple of noteworthy arguments against the view that
prudential regulation should be separated from the central
bank.
First, it should be remembered that the Wallis Report proposes
that provision of emergency liquidity assistance to financial
institutions in distress should remain with the RBA and not be
given as responsibility to the APRC. It could be argued that this
arrangement creates the danger that RBA decision-making responses
may be too slow in times of financial emergency, precisely because
it has not been dealing with the supervision of institutions on a
continuing day-to-day basis and is thus not sufficiently familiar
with the cases of financial distress which have arisen.
Placing RBA officers on the board of APRC reduces this danger
somewhat, as would the formation of a bilateral operational
coordination committee, but only to the extent that such RBA
officers take their work with the APRC seriously and have
sufficient influence within the RBA during times of emergency that
decision-making is rapid enough to meet the needs of the
institution in trouble. If not, then slowness of provision of
emergency funds might allow a basically sound institution, in only
temporary difficulties (e.g. in a 'solvent but illiquid'
situation), to collapse needlessly.(10)
This problem might be avoided by vesting control over emergency
liquidity with the prudential regulator, so that rapid response can
match the need of the institution for rapid emergency help.
However, this raises questions of where such funds are to be raised
and what volumes of funds will be necessary to cope with 'typical'
problems of financial distress. One solution would be to give the
APRC power to quickly draw such emergency support funds from the
RBA when the former thought it necessary; here, the requests would
be 'compulsory' in nature (i.e. much more like instructions) and
the RBA would not have the power to delay, resist or refuse
them.
Second, the separation of RBA responsibilities for monetary
policy from prudential regulation gives up completely on the
possibility of the coordinated deployment of monetary policy
instruments (short-term nominal interest rates) and prudential
policy instruments (capital requirements, liquidity requirements,
etc.) to jointly achieve monetary policy goals and prudential
soundness. That is, monetary policy may sometimes be useful in
achieving prudential goals (e.g. in enhancing institutional
soundness) while prudential policy may sometimes be useful in
achieving macroeconomic goals such as inflation control (e.g. by
affecting borrowing and lending flows).(11)
There may be many occasions where such joint usage of
instruments in a coordinated fashion will more effectively and
efficiently achieve all these goals than the narrow specialised
targeting of one set of instruments on one goal, as would occur
under separation and as occurs now. Current RBA philosophy and
policy practice does not advocate such joint deployment of policy
instruments but this does not mean that such usage will not be
possible in the future. Such policy coordination would be very
difficult to achieve when policy is decided by two separate
bodies.
Fees and Charges
The Report's recommendation that financial institutions be free
to set fees and charges at efficient, profitable levels could be
challenged on the basis of the following arguments.
Particularly in regard to transaction accounts, it could be
argued that financial institutions have a community service
obligation of offering at least the rudiments of low cost services,
often called a Basic Banking Product (BBP). These products are
especially important to low-income, low-wealth customers of
financial institutions.(12) Such a BBP would allow the avoidance of
fees below some threshold of usage, provide regular account
information, and also offer some convenient and extensive
bill-paying facility.
The nature of a BBP is such that its features necessarily imply
that the financial institution is not pricing such a product
according to efficiency principles of the marginal costs of
operation. For example, efficient pricing would not allow any
fee-free threshold of usage because each account transaction
entails some cost to the institution which should, according to
efficient and profit-seeking pricing, have a fee attached to
it.
Transaction accounts quite closely approximating the concept of
a BBP are now offered by the banks. These were introduced in the
aftermath of the issue of the report by the former Prices
Surveillance Authority in 1995 on the subject.(13) They offer, for
example, a fee-free range of usage, in exchange for generally not
having to pay interest on account balances.(14) It now remains to
be seen whether they continue to be offered or are withdrawn in
response to the coming policy changes which the Wallis Report will
generate.
It is generally agreed that other policy approaches to providing
a BBP, especially for low-income and low-wealth customers, can be
more economically efficient than the operation of the budget
accounts described above. One obvious option is to use the tax/
transfer system to subsidise the account usage of such
disadvantaged customers. Here, account pricing could be efficiently
set but this would not reduce the real incomes of such customers,
who will be recompensed for such costs. The Wallis Report advocates
the further study of such compensation schemes.
However, the current reality of fiscal politics at the
Commonwealth level is that ongoing moves to budgetary tightening
over the next few years will almost certainly preclude the
introduction of such schemes. Even in the medium to long term, the
likelihood of such an introduction may be slight, given the many
other claims which will be made upon the Commonwealth's revenue and
spending systems.
In this situation, it could be argued that the Commonwealth
should ensure that such basic transaction accounts continue to be
offered by legislating to force all deposit taking institutions to
offer them.(15) The inefficiencies entailed in such compulsion
would probably be small so long as institutions continued to offer
a range of other accounts which had economically efficient pricing
policies attached to them.
Access Points to Financial Institutions
Similar arguments can also be made in regard to the convenience
of access to financial services. The Report argues that substantial
cost savings are possible if financial institutions rationalise
their distribution systems so that high cost channels of
distribution, such as bank branches, undergo some contraction while
low cost channels, such as ATMs, undergo expansion. These changes
will come about, both through direct management decisions by the
institutions and as an automatic result of more efficient and cost
relevant pricing of distribution channels. Branch transactions
should be more expensive, in relative terms, while electronic
transactions should become cheaper in relative terms.
The contrary argument would be that financial institutions have
a community service obligation to provide a reasonable spread of
their distribution channels, both in terms of geographic
distribution and in terms of offering a range of types of
transactions. This would mean that the configuration of
distribution points should not just be determined by efficiency and
cost considerations but also by the needs of the community. Thus,
it could be argued that governments should liaise with financial
institutions and apply relevant incentives and pressures to them to
ensure a sufficiently wide and varied distribution system for
financial services.
In particular, this argument probably implies that the branch
systems of financial institutions should not be allowed to fall
below some minimum breadth of coverage and that the fees attached
to branch transactions should not be allowed to rise above some
threshold. Alternatively, the provision of basic transaction
accounts discussed earlier could be designed so that some branch
transactions were always included as a part of the fee-free range
of usage.
In regard to branches, this argument could imply allowing, or
encouraging, explicit cooperation amongst financial institutions so
that towns and suburbs were left with at least one or two of their
branches for the use of customers, even if the full range of
institutions was no longer present in each of them.(16) This would
allow cost savings for the financial system as a whole while
preserving a minimum level of financial services.
The Six Pillars Policy
The Wallis Report recommended that the prohibition on mergers
between the largest banks and life offices be abandoned so that the
ACCC will be the sole competition policy regulator in these
matters. The Commonwealth Government has already announced that
while it now does not, in principle, oppose mergers between any
life office and any bank, it will still maintain the ban on mergers
between the four largest banks until such time as competition in
key areas such as finance for SMEs, and transactions accounts, has
intensified substantially.(17)
Many sections of the community support the Government's move
since they hold substantial grounds for disquiet over further bank
mergers at a time when newly released competitive forces are just
finding a foothold in a quite concentrated financial system. While
it appears somewhat unlikely that the ACCC would have approved such
proposed mergers if allowed to, it can be argued that the issue is
of such national importance that it warrants the Government's
continued pre-emptive overriding of any ACCC views on these
matters.
The operational autonomy of regulatory bodies is of considerable
importance for good public policymaking, but on matters of high
national interest it could be argued to be perfectly valid and
proper for the elected government of the day to take matters into
their own hands and make binding decisions, for which they will be
answerable to the general public at the next election. This
principle could also be applied to matters of high importance in
regulatory matters conducted by other financial system bodies, such
as the prudential regulator or the consumer protection agency.
Foreign Ownership
The Report's somewhat half-hearted support for, and ambivalent
attitude towards, higher direct foreign investment in the
Australian financial system, could be challenged from perspectives
both of being too hostile to foreign investment, and then of being
too trusting and naive in its attitude to foreign investment. The
Report's position on this issue has been largely adopted by the
Commonwealth Government.(18)
As the Report notes, direct foreign investment in the financial
system can bring with it the substantial benefits of new capital,
skills, technologies and intensified competition. It might also lay
the foundation for the outward expansion of Australian financial
institutions into new markets. This, in turn, could generate
benefits for their Australian operations in terms of economies of
scale and world-best-practice operational efficiency.
However, the Report's warning that a substantial increase in
foreign ownership would be against the national interest, because
it might close off options for future development of the financial
sector, could be viewed as fundamentally inconsistent with the
great bulk of the arguments and recommendations it makes. The
Report is very much in the mould of advocating greater freedom for
market forces to improve efficiency and productivity in the
financial system. However, in relation to foreign investment it
proposes the continuation of restrictions which have the effect of
shielding the sector, in large part, from the full force of
international investor competition.
If, for example, all DTIs in Australia were open to takeover by
overseas financial institutions then they would face intensified
pressure for continued good performance in order to be able to ward
off such potential threats to their independence.(19) This attitude
of the Report on the dangers of foreign investment could thus be
viewed as somewhat paradoxical. Indeed, this very principle which
supports investment restrictions might be applied to many other
sectors of the economy and become the justification for imposing
substantial restrictions on direct foreign investment there. But
clearly, it is not at all the intention of the Wallis Committee
that its argument should be used in this way.
It is also interesting to note that the Report is silent on
specific foreign investment issues such as whether foreign bank
branches should be allowed to enter retail markets directly by
accepting small retail deposits in their Australian operations. The
foreign banks which initially flowed into Australia in the 1980s
were required to set up locally incorporated subsidiaries in order
to facilitate full prudential supervision by the RBA. The previous
Commonwealth Government allowed foreign banks to set up branches
(i.e. directly controlled divisions of their foreign parent bank)
operating in wholesale markets but not in retail markets. One
concern about foreign bank branches operating in retail markets has
been that in the case of their collapse and liquidation there might
be substantial doubt about Australian depositors having any sort of
preference over other creditors in the final distribution of
remaining assets after liquidation.(20)
Overall, it might be viewed as indicative of the Report's rather
strange treatment of foreign investment that it failed to address
this important current policy issue.
Of course, the Report can also be criticised from the opposite
perspective that foreign ownership of key national assets such as
its largest banks and insurance companies should not be allowed at
all, for the Report's very own reason that it would close off
options for future development of these industries in ways which
might be against the long-term national interest of Australia. From
this perspective, at the very least, foreign investors in these
sectors should be subject to rigorous performance criteria to
ensure that Australia gets a good share of the benefits which their
presence might generate.(21)
Deposit Insurance
Finally, the Report's abandonment of the idea of explicit
deposit insurance for retail customers could be challenged. Such
schemes are quite widely used throughout the world, in both
advanced and developing countries.(22)
As the Committee notes, the great advantage of such explicit,
compulsory insurance schemes is that they give retail customers
certainty that their deposits with financial institutions are
completely safe. This would remove any lingering doubts about the
current system which the Report describes as ensuring that the
chances of losing depositors' funds is remote, rather than being
zero. This certainty promotes policy transparency and provides a
good environment in which efficient customer choices can be made
about the allocation of their wealth amongst assets of differing
risk and return characteristics. It also provides a social equity
value of safety for customers, especially low-income ones, seeking
full security and unable to judge the varying security of the
financial institutions on offer in terms of retail accounts. Thus,
it furthers both efficiency and equity as financial outcomes.
After consideration of overseas schemes and the role of deposit
insurance in the savings and loan fiasco in the United States, the
Committee concluded that, for Australian financial circumstances,
it was unable to devise insurance schemes which would not undermine
incentives for institutions to take proper care of their
depositors' funds. Thus, it dropped the idea.
However, it is well known that there are ways of designing such
insurance schemes which encourage prudent use of deposit funds by
institutions.(23) These are schemes where the insurance premiums to
be paid by institutions (either to public or private insurers) vary
with the risk profile of the assets of the institution, with more
risky lending to business, for example, attracting higher premiums
than for other types of lending. Such insurance schemes have some
likeness to the risk-weighted capital adequacy rules now widely
applied by bank regulators throughout the advanced world, where
more risky lending requires greater capital backing in order to
better protect deposit funds from the greater dangers of default in
these cases.
There have also been doubts expressed, in the Report and
elsewhere, about whether governments will have the political will
and commercial and actuarial sense to price the insurance premiums
at levels that will fully cover any likely payouts from
institutional collapse. There are two options to address this
issue. First, for insurance schemes operated by governments, they
could call upon private insurance expertise in designing and
operating these schemes so that they are financially and
actuarially sound. Second, governments could completely 'contract
out' such insurance schemes by simply requiring all deposit taking
institutions to take out private insurance to cover the refund of
deposits in the event that the institution collapses and is put
into liquidation.
Such insurance could be capped at some account balance level,
for social equity reasons of ensuring that insurance payouts do not
disproportionately benefit the wealthy. Other prudential regulatory
measures aimed at deposit protection could be simplified and
relaxed, in order to help institutions pay for such insurance
premiums. Thus, it could be viewed as disappointing that the Wallis
Committee did not investigate these insurance options in much more
depth.
It is interesting to note that deposit insurance could provide a
neat solution to the safety problems surrounding foreign bank
branches in Australia. Such branches could be allowed to accept
retail deposits provided they were insured. This would facilitate
the benefits of the extra competition that branches would bring
while at the same time guaranteeing full security, up to the capped
level, for such retail deposits.
Conduct and Disclosure
1 Corporations Law, market integrity and consumer protection
should be combined in a single agency, the Corporations and
Financial Services Commission (CFSC).
2 The CFSC should have comprehensive responsibilities.
3 The CFSC should administer all consumer protection laws for
financial services.
4 Due diligence defences should apply to positive disclosure
requirements.
5 The CFSC and the ACCC should coordinate examination of
financial exchange rules.
6 States and Territories should retain and review consumer
credit laws.
7 The CFSC should have powers to use a combination of regulatory
approaches.
8 Disclosure requirements should be consistent and
comparable.
9 Profile statements should be introduced for more effective
disclosure.
10 Shorter prospectuses should be encouraged.
11 Financial institutions' financial reports should meet
Corporations Law and prudential requirements.
12 Accounting standards should be harmonised with international
standards.
13 A single licensing regime should be introduced for financial
sales, advice and dealing.
14 The CFSC should have power to delegate accreditation
responsibilities to industry bodies.
15 A single set of requirements should be introduced for
financial sales and advice.
16 Regulation of real estate agents providing financial advice
should be reviewed.
16 Licensing of professionals providing incidental financial
advice is generally not required.
18 Additional prudential regulation of financial market licence
holders is not required.
19 Broader regulation of 'financial products' should replace
current securities and futures law.
20 Prohibitions on retail participation in over-the-counter
(OTC) derivative markets should be discontinued.
21 The CFSC should authorise financial exchanges under a single
regime.
22 Regulation of exchanges should not be excessive compared with
OTC markets.
23 OTC markets may be conducted by appropriately licensed
intermediaries.
24 Exchange clearing houses should be appropriately
authorised.
25 A central gateway for dispute resolution should be
established.
26 Coverage of dispute resolution schemes should be broader.
27 The CFSC should have broad enforcement powers.
28 The CFSC should monitor new technologies.
29 The CFSC should participate in global regulatory
programs.
Financial Safety
30 Prudential regulation should be imposed on deposit taking,
insurance and superannuation.
31 A single Commonwealth prudential regulator, the Australian
Prudential Regulation Commission (APRC), should be established.
32 The APRC should be separate from, but cooperate closely with,
the Reserve Bank of Australia (RBA).
33 The APRC should have comprehensive powers to meet its
regulatory objectives.
34 The intensity of prudential regulation needs to balance
financial safety and efficiency.
35 Prudential regulation of DTIs needs to be consistent with
international requirements.
36 A single DTI licensing regime should be introduced.
37 Deposit taking by unlicensed entities should be restricted
and regulated by the CFSC.
38 The APRC should regulate life companies.
39 Regulation of friendly societies should be transferred to the
Commonwealth.
40 The APRC should regulate general insurers.
41 The APRC should regulate superannuation in accordance with
retirement objectives.
41 Compliance by excluded funds should be monitored by the
Australian Taxation Office.
43 Other APRC regulated institutions should have the right to
offer retirement savings accounts.
44 The APRC should promote more transparent disclosure.
45 The principle of spread of ownership should be retained and
regulation rationalised.
46 The approach to sectoral separation needs to be more
flexible.
47 Mutual entities should be permitted to hold all classes of
licences.
48 New entrants should be subject to minimum capital and other
requirements.
49 Non-operating holding companies should be permitted subject
to certain requirements.
50 Multiple licences and other financial activities may be
permitted.
51 The APRC should be empowered to access operations of other
non-regulated entities in the group.
52 Fundraising by money market corporations should be subject to
CFSC surveillance.
53 Fundraising by finance companies should be subject to CFSC
surveillance.
54 There should be appropriate mechanisms for resolving failure
of DTIs.
55 There should be appropriate mechanisms for resolving failure
of insurance and superannuation.
Stability and Payments
56 The RBA should remain responsible for system stability.
57 The CFSC should be responsible for regulation of financial
exchanges.
58 Regulatory agencies should monitor wholesale markets.
59 The RBA should promote control of domestic and international
settlement risks.
60 Liquidity management responses should remain the
responsibility of the RBA.
61 A Payments System Board should be formed within the RBA.
62 Membership of the PSB should reflect payments system
efficiency objectives.
63 The PSB should set performance benchmarks.
64 The RBA's commercial activities should be clearly separated
from regulatory responsibilities.
65 The Australian Payments System Council should be
disbanded.
66 Rights to issues cheques should be extended.
67 Interchange arrangements should be reviewed by the PSB and
the ACCC.
68 The ACCC should maintain a watching brief over the rules of
international credit card associations.
69 Access to clearing systems should be liberalised.
70 The Australian Payments Clearing Association should continue
its role in clearing arrangements with wider membership.
71 The Trade Practices Act should continue to apply to payments
clearing arrangements.
72 Stores of value for payment instruments should be subject to
regulation.
73 Access to ESAs should be liberalised subject to appropriate
conditions.
74 Highvalue payments settlement providers should be regulated
to the international standard for banks.
75 Non-deposit takers should be able to settle directly consumer
electronic and bulk electronic payments.
76 RTGS system benchmarks should be established.
77 The PSB should issue payments system approvals.
78 The PSB and the APRC should establish close coordination
arrangements.
Mergers and Acquisitions
79 Section 50 of the Trade Practices Act should continue to
apply to the financial system.
80 The ACCC should administer competition laws for the financial
system.
81 The prudential regulator should assess the prudential
implications of relevant mergers and acquisitions.
82 The Trade Practices Act should provide the only competition
regulation of financial system mergers.
83 The 'six pillars' policy should be removed.
84 Merger assessments should take account of changes occurring
in the sector.
85 General foreign investment policy should apply to the
financial system.
Promoting Increased Efficiency
86 Foreign investment regulations for the funds management
industry should be reviewed.
87 Takeover and merger provisions are needed for collective
investments.
88 Superannuation fund members should have greater choice of
fund.
89 Regulation of collective investments and public offer
superannuation should be harmonised.
90 Regulation of trustee companies should be modernised and
applied on a uniform national basis.
91 Legislation should be amended to allow for electronic
commerce.
92 Australia should adopt international standards for electronic
commerce.
93 International harmonisation of law enforcement and consumer
protection should be pursued.
94 Regulators should coordinate on technology.
95 Institutions should have freedom to set fees and charges
based on costs.
96 Governments should examine alternative means of providing
lowcost transaction services.
97 Superannuation funds should not be required to invest in
small and medium sized enterprises.
98 Data collection on SMEs should consider the needs of rating
agencies and fund managers.
99 A working party on positive credit reporting should be
established.
100 Information sharing among group entities should be allowed
unless the customer withdraws consent.
101 The extension of the privacy regime should follow a number
of principles.
102 The Housing Loans Insurance Corporation should be
privatised.
Coordination and Accountability
103 Regulatory agencies should have operational autonomy.
104 Regulatory agencies' charges should reflect their costs.
105 Interest on noncallable deposits should be reviewed.
106 Regulatory agencies should set their charges, subject to
approval by the Treasurer.
107 Regulatory agencies should be offbudget.
108 Regulatory agencies should have boards, with majorities of
independent directors.
109 Regulatory agencies should improve their reporting.
110 A Financial Sector Advisory Council should be created.
111 Regulatory agencies need power to exchange information.
112 The Council of Financial Regulators should coordinate a
broad range of activities.
Managing Change
113 A staged approach to change is required.
114 A panel for uniform commercial laws should be
established.
115 There is a proposed sequence for implementing the
recommendations.
- Australian Financial System Inquiry, Final Report
(Campbell Report), Canberra: Australian Government Publishing
Service, 1981.
- Australian Financial System Review Group, Report
(Martin Review Report), Canberra: Australian Government Publishing
Service, 1984.
- Australia, Parliament of Australia, A Pocket Full of
Change: Banking and Deregulation, Report of the House of
Representatives Standing Committee on Finance and Public
Administration (Martin Report), Canberra: Australian Government
Publishing Service, November 1991.
- Industry Commission, Availability of Capital, Report
No. 18. Canberra: Australian Government Publishing Service,
December, 1991.
- Australian Financial System Inquiry, Final Report
(Wallis Report), Canberra: Australian Government Publishing
Service, March 1997.
- Paul Kelly, 'The Wallis Revolution', Australian, 12-13
April 1997; Tom Burton, 'Wallis: Now for the Hard Yards',
Australian Financial Review, 11 April 1997.
- Andrew Cornell, 'Consumer Groups Rally to ACCC', Australian
Financial Review, 11 April 1997; Bryan Frith, 'Building on ASC
Powers the Logical Post-Wallis Choice', Australian, 11
April 1997.
- The Martin Report, A Pocket Full of Change, Canberra:
Australian Government Publishing Service, November 1991: 236;
Australian Financial System Inquiry, Discussion Paper,
Canberra: Australian Government Publishing Service, November 1996:
207.
- The Martin Report, A Pocket Full of Change, Canberra:
Australian Government Publishing Service, November 1991: 237;
Australian Financial System Inquiry, Discussion Paper,
Canberra: Australian Government Publishing Service, November 1996:
207. See also: Alan Mitchell, 'Foreigners to Inject Competition',
Australian Financial Review, 10 April 1997; Joanne Gray,
'RBA Bites Hard on Prudential Loss', Australian Financial
Review, 11 April 1997.
- The Martin Report, A Pocket Full of Change, Canberra:
Australian Government Publishing Service, November 1991: 227;
Australian Financial System Inquiry, Discussion Paper,
Canberra: Australian Government Publishing Service, November 1996:
211; and Joanne Gray, 'MacFarlane Warns of Wallis Side Effects',
Australian Financial Review, 9 May 1997.
- Tom Valentine, 'Larger Issues Unresolved', Australian
Financial Review, 10 April 1997.
- Toby O'Connor, 'No Bank Fees Please-We're Too Poor',
Australian, 17 April 1997.
- Prices Surveillance Authority, Inquiry into Fees and
Charges Imposed on Retail Accounts by Banks and Other Financial
Institutions and by Retailers on EFTPOS Transactions,
Canberra: Australian Government Publishing Service, June 1995.
- Phil Hanratty, Fees and Charges on 'Budget' Bank
Accounts, Department of the Parliamentary Library, Information
and Research Services, Research Note No. 28, February 1997.
- Editorial, 'Colonial Sets Test for Banks', Australian
Financial Review, 18 April 1997.
- Phil Hanratty, Bank Branch Rationalisation: Should We Allow
or Encourage Limited Cooperation ?, Department of the
Parliamentary Library, Parliamentary Research Service, Research
Note No. 11, November 1996.
- Australia, Parliament of Australia, Treasurer (Peter Costello),
'Release of the Report of the Financial System Inquiry and Initial
Government Response on Mergers Policy', Press Release No.
28, 9 April 1997: 2.
- Ibid: 2.
- Editorial, 'Open Door for Foreign Banks', Australian
Financial Review, 4 April 1997.
- Phil Hanratty, Foreign Bank Policy in Australia,
Department of the Parliamentary Library, Parliamentary Research
Service, Current Issues Brief No. 8, November 1995.
- Phil Hanratty, Inward Direct Foreign Investment in
Australia: Policy Controls and Economic Outcomes, Department
of the Parliamentary Library, Parliamentary Research Service,
Research Paper No. 32, May 1996: 20-21.
- The Martin Report, A Pocket Full of Change, Canberra:
Australian Government Publishing Service, November 1991:
211-213.
- Gillian Garcia, Deposit Insurance: Obtaining the Benefits
and Avoiding the Pitfalls, Washington, DC: International
Monetary Fund, Working Paper No. 83, August 1996: 33.