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

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

The Inquiry Campbell (30 years earlier): Wallis (1996/97): Outdated regulations Consensus for deregulation Wallis (1996/97): System working fine Considerable resistance to change

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

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

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

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

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

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

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

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

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

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

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

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

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

Options Considered Institution-based regulators (status quo) Structure based on market failures Unified regulator Each had strengths and weaknesses

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

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

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