The Financial System Inquiry (FSI) Report makes a number of very worthwhile recommendations to strengthen the transparency and accountability of Australia's financial system regulators. KPMG supports the FSI's recommendations in this area and see the scope for further enhancing some of the recommendations.
The report recommends establishing a new independent assessor, the “Financial Regulator Assessment Board” (FRAB), to review the performance of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC), as well as parts of the Reserve Bank of Australia (RBA). At the same time, it suggests all regulators increase their use of outcomes-focused performance indicators.
We see this as a desirable development; an important aspect of any regulatory framework is the need for a clear specification of regulatory objectives and effective transparency and accountability of the regulators.
"The FSI rightly emphasises the need for a balanced set of regulatory objectives and strengthened regulator accountability. There needs to be a sustainable balance between financial sector stability and efficiency that meets the longer term needs of the economy and society."
Building on the FSI recommendations, KPMG suggests that consideration be given to extending the FRAB’s jurisdiction to all regulators relevant to the financial system with regard to their respective financial sector regulatory functions. Similarly, the recommended strengthening of regulator objectives could usefully be applied to all of the financial sector regulators. This would enhance the transparency and accountability of the overall regulatory framework for the betterment of financial system outcomes.
Consistent with these goals, we suggest the further development of clear and comprehensive key performance indicators (KPIs) for all regulators to enable stakeholders to better assess the effectiveness of regulatory performance.
The report also suggests that regulators undertake regular reviews of their capability and performance. Again, transparency is key here. Such a review should set out the criteria applied in conducting the review, the results of the regulator’s assessment and the views of the FRAB in relation to such assessments. By sharpening the transparency and accountability around these reviews, their effectiveness can be enhanced.
The FSI report gives due consideration to ASIC and APRA’s funding, recommending greater year-to-year certainty through a medium-term setting of funding levels and more flexibility in how they spend it.
We believe it is sensible to move towards medium-term funding. It assists the regulators to develop longer-term plans and adequately resource their functions. In turn, this allows them greater scope to properly develop and implement regulatory policies, which could be expected to assist in meeting regulatory outcomes.
Another recommendation of the report focuses on strengthening ASIC’s regulatory powers. This reflects a view that ASIC’s powers are overly limited in their ability to respond to misconduct and to monitor and take proactive steps when concerns arise.
KPMG sees merit in this recommendation, subject to ensuring that there is thorough consultation with stakeholders over any extension of ASIC’s powers and a robust framework of accountability in the exercise of the powers. This includes putting a framework in place to reduce the risk of excessive over-reach of powers by ASIC, as with any regulator.
A key theme in the FSI report is the need for greater regulatory attention to competition in the financial sector. Among other things, the FSI suggests that regulators demonstrate how they have considered trade-offs between competition and other regulatory objectives when designing regulations.
KPMG shares the view that the promotion of contestability and competitiveness in the financial system is an important policy goal. We would go further and urge the Government to ensure that regulatory objectives include the promotion of financial system efficiency alongside the promotion of financial stability and investor protection. Striking the right balance here is critical. Australia clearly needs a resilient financial sector, it but it also needs a financial sector that is efficient, dynamic and responsive to the changing needs of the economy and society. Equally, it is important that the financial sector provides an appropriate level of protection to investors, depositors and policyholders, while minimising the risk of moral hazard. Regulatory objectives and performance indicators should recognise and be designed to achieve these outcomes.
A further theme in the FSI report is the need for improved processes for regulatory change, including allowing a minimum period for financial sector participants to comply with new regulatory requirements and regular ex post reviews of the effectiveness of regulations.
We support these recommendations. We also suggest that consideration be given to strengthening the role of the Office of Best Practice Regulation to enhance the scrutiny of regulatory impact assessments. It is critical that for proposed regulations the costs and benefits of alternative options are thoroughly assessed at an early stage in policy development. Following it up with regular ex post independent reviews is clearly worthwhile as well.
Again, these processes need to be transparent. The criteria for cost/benefit assessments for regulatory proposals, and for ex post assessments of existing regulations, should be clear and subject to thorough consultation with all relevant stakeholders.
The implementation of all these recommendations necessitates careful consideration and consultation. As with any new changes, it is critical their design is well thought through, which includes meaningful input from a range of industry and other stakeholders.
This is one of a series of articles looking at the implications of the major Financial System Inquiry recommendations and some of the key issues to be considered.