Jennifer Stevens 220026334 Why does the Australian Financial System have more than one regulator?

Evaluate this system and compare it with the structure in place in another country.

Financial regulation is necessary to ensure not only the effectiveness and efficiency of financial markets but also to ensure the protection of companies and consumers. The Australian Financial System has more than one regulator in order to protect and maintain its efficient financial environment. There are several reasons and incentives for a well-regulated environment, as stated by Jeremy Cooper in his presentation to the Securities and Exchange Commission of Brazil in 2006. First, regulation is important to ensure that financial services and institutions operate in an honest and fair way while maintaining profitability and success. Second there is the possibility of an increase in financial activity as investors and consumers have an increased level of confidence in a system that is well maintained and regulated. In addition to these reasons, an effective regulatory system can lead to increased international interest in the economy and its markets as they are seen as reliable and safe. The Australian Financial System has developed into what it is today following the Wallis Report. In 1996 Stan Wallis was commissioned to report on Australias financial system in a Financial System Inquiry. Wallis concluded that in order to meet the objectives of financial regulation, which includes the prevention of market failure and efficient operations, three organisations must be given priority. In the Wallis Report, these three organisations were the Corporations and Financial Services Commission (CFSC), Australian Prudential Regulation Commission (APRC) and Australias central bank, the Reserve Bank of Australia. This report was necessary to find a solution to the problems of overlapping, miscommunication and inconsistency that can occur without a clear structure in place. The role of the CFSC was transferred to the Australian Securities and Investment Commission and the APRC became the Australian Prudential Regulation Authority (APRA) in 1998 under the Australia Prudential Regulation Authority Act. Although Cooper speaks of the twin peaks approach in his presentation mentioned earlier, with ASIC and APRA being the main organisations involved in financial regulation, there are really three peaks as specified by Wallis, each with different and important roles in regulation. First, Australias central bank, the Reserve Bank of Australia (RBA) has three main roles. First, it maintains monetary policy, ensures financial stability and the monitors and controls the payments system (Kidwell et al, 2007). The RBA sets and maintains monetary policy by setting the cash rate which is the overnight money market interest rate. The changes in the cash rate that are decided

Jennifer Stevens 220026334 upon on the first Tuesday of every month flows through from large financial institutions through to the individual consumer as the overnight money market rate is used to set the interest rates on loans, deposits and other transactions that are imposed by banks and other institutions. In addition to this the RBA maintains financial stability by issuing currency notes and managing liquidity and also foreign exchange. Thirdly, the supervision of the payments system could be seen as one of the most important function of the RBA when viewing from a regulation angle. Apart from performing a regulatory role, the primary objective of the RBA is to keep inflation low. The second organisation is the Australian Securities and Investment Commission (ASIC). Under the
Australian Securities and Investments Commission Act 2001, ASIC is assigned the role as enforcer of company and financial services laws and to ensure the efficient operations of financial markets. As

per the ASIC official website, there are three main areas of regulation: consumer credit, markets and financial services. By regulating activities relating to consumer credit and the financial institutions that participate in this ASIC helps to ensure that debt is managed effectively and more importantly in a legal manner. Market regulation is necessary to ensure that corporations are acting fairly and transparently. The third area of regulation is in the financial services where ASIC ensures that businesses operating in financial services are doing so in a fair and honest manner. The Australian Prudential Regulation Authority (APRA) is the prudential regulator in the Australian Financial System. It monitors and controls a wide umbrella of organisations including banks, credit unions, building societies, insurance companies and the superannuation industry. APRA is separate from other government agencies and is funded almost entirely the revenue it collects via fees paid by the organisations it regulates. The main function of APRA is to develop and implement prudential regulation and to ensure that the organisations it supervises are complying with these prudential policies and laws (Kidwell et al, 2007). In doing so, APRA ensures that the organisations it supervises are able to meet their financial obligations to the public. One method in evaluating this system is to look at the recent global financial crisis or GFC and its effect on the Australian financial system. The presentation by Dr Ken Henry titled The Australian Financial System Emerging from the Global Financial Crisis in March 2010 made at the Count Financial Canberra Conference, indicates that due to the strength of Australias banking sector and its structure our economy was cushioned from the effects GFC and when compared to other countries we faired rather well. Due to wise decisions made prior to the GFC including the avoidance of high-risk assets and also the quality of our regulatory system, Australia was able to survive the crisis. In particular, the stance taken by the RBA with its decisions on monetary policy including the reduction in the cash rate, kept the economy alive.

Jennifer Stevens 220026334 A second method in evaluating the effectiveness and appropriateness of this system, is to compare it with that of another country. Around about the same time of the Wallis Report, the United Kingdom also faced changes within its financial regulatory system. In 1997 the British Chancellor of the Exchequer (the minister responsible for economic and financial matters) decided to change the regulatory system and centralise the responsibility of supervision of financial institutions and services to the newly established Financial Services Authority (FSA) which became the single regulator for financial services in the UK in 2001. If you were to think of APRA and ASIC as two separate organisations then the FSA would be a combination of the two. The FSAs main functions are the authorisation of market members, enforcement and disciplinary action of fraud and misconduct and the prudential supervision of banks, fund managers, insurance companies and other financial institutions. A similarity between the Australian system and the UK is that the central bank of each plays an important role which cannot be merged with another organisation. Keeping the bank separate from other entities and functions suggests that its purpose is clear and must not be tainted. The Bank of England, not surprisingly, has similar objectives to that of the RBA in that it aims to keep inflation low and to maintain financial stability and liquidity requirements. In conclusion, the Australian financial regulatory system appears to be an effective and appropriate system. The combined roles of ASIC, APRA and the RBA enable the economy to run smoothly without too much interruption. The system meets its objectives of avoiding market failure and performed efficiently by having the three separate organisations which is emphasised by Australias survival of the global financial crisis.

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Reference Kidwell, D., Brimble, M. Beal, D. Wallis, D. Financial Markets Institutions and Money, 2007 John Wiley and Sons Australia, Milton QLD Cooper, J. The Integration of Financial Regulatory Authorities the Australian Experience presented 4 September 2006, The Australian Securities and Investment Commission, Brazil The Wallis Report. Extracts from Australia 1997. Financial System Inquiry Report Canberra, AGPS Chairman: S.Wallis Henry, K. The Australian Financial System Emerging from Global Financial Crisis, 15 March 2010, Secretary to the Treasury, Canberra About APRA, Australian Prudential Regulation Authority, retrieved 10 December 210 from http://www.apra.gov.au/aboutApra/ Who We Regulate, Australian Securities and Investment Commission, retrieved 10 December 2010 from http://www.asic.gov.au/asic/asic.nsf/byheadline/Our+role?openDocument The Banks Strategy Bank of England, retrieved 11 December 2010 from

http://www.bankofengland.co.uk/about/strategy/index.htm