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

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

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Outdated regulations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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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