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The Unpleasant Truth About Australian Banking

In a statement made on 2 September 1997, Treasurer Peter Costello said the Wallis Inquiry found the Australian financial sector's performance was close to the world average, rather than among world's best.' In response the government introduced a package of legislation, establishing regulatory bodies to enforce new industry codes and to monitor compliance with legislative obligations:

The package of Bills before us gives effect to major changes to the structures of regulatory bodies by establishing two mega-regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, lovingly known as APRA and ASIC. The government is therefore changing the regulation of financial services markets - for example, collective investments, superannuation, company law, Corporations Law, payments systems, financial sector shareholdings and banking, and at the same time changing the regulatory bodies themselves.

In doing this, the key recommendations of the Wallis Inquiry and the 'Finding a Balance: Towards Fair Trading' committee were not reflected in the government's scheme. Rather, the government set in motion the creation of regulatory authorities with little to no real powers over the conduct of big business and banking. 

By seeking to keep separate regulation of consumer protection and regulation of prudential supervision, Wallis Inquiry made comprehensive recommendations that could not be contemplated. ASIC, APRA and the RBA were envisaged, together, to uphold a scheme of co-regulation in the banking and finance sector.

Together ASIC and APRA would monitor and enforce compliance with the Code, as well as consumer protection and prudential law. Due to fundamental flaws establishing these Acts, and lack of resources and political will, ASIC and APRA were left with no real enforcement powers within their jurisdictions.

The Financial Sector Reform Act 1998 (Cth)

The following year, the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth), in part, carried out Wallis Inquiry's recommendations creating the government regulator APRA, and expanded the responsibilities of the Australian Securities and Investment Commission. ASIC was designed to oversee enforcement of the system of market regulators, including monitoring compliance with the Code of Banking Practice. This was removed from the jurisdiction of the Australian Payments System Council, noting:

The Australian Securities and Investment Commission has the function of monitoring and promoting market integrity and consumer protection in relation to the payments system by promoting the adoption of approved industry standards and codes of practice, protection of consumer interests, community awareness of payments system issues, sound customer-banker relationships (including through monitoring the operation of industry standards and codes of practice) and compliance with such standards and codes.

With this provision forming part of the Australian Securities and Investments Commission Act 2001 (Cth), ASIC continues to be the monitoring body, bound to ensure compliance with most industry codes.

The APRA Act 1998 and Amendment Act 2003

The general powers of the APRA Act sets out the framework for its operation, as well as establishing its powers and functions. The Act established APRA with three main purposes to:

  1. Regulate bodies in the financial sector in accordance with other laws of the Commonwealth that provide for prudential regulation or for retirement income standards.
  2. Administer the financial claims schemes provided for in the Banking Act 1959 (Cth) and the Insurance Act 1973 (Cth).
  3. Develop administrative practices and procedures to be applied in performing the regulatory role and administration.

In the Second Reading Speech on the Australian Prudential Regulation Authority Bill 1998, Treasurer Peter Costello announced the intention of the legislation was to put in place a structure designed to improve efficiency and competitiveness of the Australian financial system, while preserving its integrity, security and fairness. The government sought to replace various agencies charged with prudential supervision of financial systems within a single regulatory authority.

APRA's jurisdiction would be to supervise:

banks and other deposit-taking institutions; and

life and general insurance companies, and

superannuation funds and retirement income accounts.

APRA was to be an independent regulator like the Reserve Bank, but subject to policy determination powers of the Treasurer in the event of an irreconcilable disagreement with the government. It was emphasised in Parliament that by having a single regulator at arm's length (in the same way as the Reserve Bank operates autonomously of government's decision-making), consumers would be provided stability and independent supervision.

However, the final APRA Act 1998 did not provide the level of independence envisaged.

Lack of an Independent Board

It was suggested that APRA should be accountable through an independent board, and operate under a charter to ensure prudential regulation was balanced with considerations of efficiency, contestability and industry competition. The APRA Bill envisaged the three main functions for the board, which was to:

1.     determine APRA policies (including goals, priorities, strategies and administrative policies); and

2.     ensure APRA performs its functions properly, efficiently and effectively, and

3.     ensure APRA operations are conducted having regard to its purposes.

The APRA Board would comprise nine members: a Chair, CEO, two members (to include either the Governor or Deputy Governor of the Reserve Bank or an officer of the Reserve Bank Service), one member who is an ASIC representative and four other members. The Board briefly functioned like this after the establishment of APRA in 1998, and after the HIH collapse, however a subsequent Royal Commission prompted the revision of its structure through amendments to the Act in 2003.

The present APRA Act provides for a smaller but potentially less independent team, more open to manipulation by a confluence of private and public interests. The APRA members comprise people appointed by the Governor-General on a full-time or part-time basis.

The appointment of the APRA Chair and Deputy arrives directly from the Governor-General, who, by constitutional convention, acts upon the recommendation by the Prime Minister. In essence, the restriction on the number of members narrows the potential for representation from key stakeholder groups and the hierarchy in APRA may now be heavily influenced by the government of the day.

While members are limited to a five-year term, the APRA Bill should be regarded as positive. It reinforces a need for the government of the day to gain influence, as it has the potential to roughly correlate to electoral terms. To guarantee independence from the private sector, the APRA Bill limits the appointment of anyone who is a director, officer or employee of a body regulated by APRA, and the member's appointment is terminated if they become an officer or employee of an APRA regulated body.

However, under the Act, directors, officers or employees of bodies regulated by APRA may be appointed if the Minister considers their performance will not be compromised. While members are required to disclose interests that could conflict with the performance of the functions of office, it does not prevent a member from being involved in dealing with an issue once they obtain consent of the other APRA members.

Subordinate to Government Interests

In the APRA Act, the relationship between APRA and the Minister for Financial Services provides the government greater leverage over internal policy. Under the Act, the Minister is empowered to give APRA a written direction with regard to policies it should pursue or the priorities it should follow.

The Chair is provided an opportunity to discuss with the Minister APRAs proposed direction. However this is a far more interventionist approach than initially envisaged when the APRA Act was put forward in the Bill. It puts in place a less stringent reporting process because the Minister must publish the direction of the board in the Gazette within 21 days after the direction is given. This must then to be laid before Parliament within 15 sitting days.

The ASIC Acts 1998 and 2001

The general powers of ASIC and its responsibilities relate to market integrity and consumer protection. It was established following recommendation of the Wallis Inquiry under guiding principles of competition and consistent regulatory treatment in the industry. The intended function of ASIC is to monitor and promote market integrity and consumer protection in the Australian financial systems and payment systems, as well as the operation and compliance of industry standards and codes of practice.

In the area of banking and finance ASIC is intended to supplement APRAs prudential role by considering the impact on consumers when prudential systems are absent or neglected.

ASIC has a broad range of investigative powers to undertake, as its role is essentially whatever's necessary for or in connection with, or reasonably incidental to, performance of its functions. This includes powers to obtain books and records, examine people and require people to give reasonable assistance to it in connection with an investigation or prosecution.

Senate Committee Report webpage (Sub No. 90): Click Here...

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