Presentation on theme: "PAGE 1 Martin Foo | FSC Deloitte Future Leaders Award Program 1997: THE WALLIS INQUIRY The origins of ‘Twin Peaks’ in Australia APRAASIC ‘Twin Peaks’ regulatory."— Presentation transcript:
PAGE 1 Martin Foo | FSC Deloitte Future Leaders Award Program 1997: THE WALLIS INQUIRY The origins of ‘Twin Peaks’ in Australia APRAASIC ‘Twin Peaks’ regulatory architecture
PAGE 2 Martin Foo | FSC Deloitte Future Leaders Award Program DAVID MURRAY, THEN AND NOW How times have changed Savings and loan (S&L) associations, or ‘thrifts’, are the equivalent of building societies in the UK and Australia. [$160 billion]
PAGE 3 Martin Foo | FSC Deloitte Future Leaders Award Program FINANCIAL SYSTEM INQUIRY: INTERIM REPORT Twin Peaks has proven “robust and effective”
PAGE 4 Martin Foo | FSC Deloitte Future Leaders Award Program Martin Foo | The Treasury FSC Deloitte Future Leaders Award Program 13 October 2014 W HO W ATCHES THE W ATCHERS ? A F INANCIAL R EGULATORY A RCHITECTURE FOR THE P OST- L EHMAN W ORLD
PAGE 5 Martin Foo | FSC Deloitte Future Leaders Award Program PRESENTATION OVERVIEW HISTORY: How did we arrive at Twin Peaks? GLOBAL COMPARISON: What are the alternatives to Twin Peaks? CASE STUDIES: AIG, FSA, US Treasury Blueprint REFINEMENTS: Optimal structure for the future CONCLUSIONS: Six propositions
PAGE 6 Martin Foo | FSC Deloitte Future Leaders Award Program IT’S SHORTER THIS TIME, I PROMISE! Argumentum verbosium
PAGE 7 Martin Foo | FSC Deloitte Future Leaders Award Program THE HISTORY OF FINANCIAL REGULATION Financial institutions operate under State legislation Banking Act 1945: First attempt at (partial) prudential regulation Federation Huddart, Parker & Co Pty Ltd v Moorehead Uniform Companies Acts of the six States Interstate Corporate Affairs Commission (ICAC) National Companies and Securities Commission (NCSC) Australian Securities Commission (ASC) Australian Stock Exchange (ASX) Australian Financial Institutions Commission (AFIC) APRA ASIC Insurance and Superannuation Commission (ISC) PRUDENTIAL REGULATION BUSINESS CONDUCT AND MARKETS REGULATION
PAGE 8 Martin Foo | FSC Deloitte Future Leaders Award Program REGULATORY FRAGMENTATION 51. Legislative powers of the Parliament The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: (xiii) banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money; (xiv) insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned; Supervisory boundaries are determined by the distribution of Constitutional powers
PAGE 9 Martin Foo | FSC Deloitte Future Leaders Award Program WHAT IS A BANK? Is there a functional difference between banks, building societies and credit unions?* “… to give an inclusive and exclusive definition of such a conception as banking is almost impossible” – JUSTICE OWEN DIXON (1947) * Most judgments took the view that ‘banking’ was defined primarily by the acceptance of deposits. Perhaps the only genuine difference between banks and building societies / credit unions, in terms of activities they undertook, was that the latter had been excluded from direct participation in the payments system. But from 1997, building societies and credit unions were able to issue cheques in their own right.
PAGE 10 Martin Foo | FSC Deloitte Future Leaders Award Program CASE STUDY 1: PRUDENTIAL SUPERVISION IN THE U.S. The US Treasury’s “Blueprint for a Modernized Financial Regulatory Structure”
PAGE 11 Martin Foo | FSC Deloitte Future Leaders Award Program PROPOSITION 1 Financial institutions that undertake similar activities should be regulated in similar ways. Why? Administrative efficiency Competitive neutrality Economic function matters more than legal identity Flexibility to respond to non-traditional entrants (e.g. supermarkets, tech companies)
PAGE 12 Martin Foo | FSC Deloitte Future Leaders Award Program GLOBAL COMPARISON: PRUDENTIAL SUPERVISION Prudential supervision of banks, insurers and securities firms (including private pension funds) pre-GFC* Single prudential supervisor (33%) *For a dataset of 85 countries analysed by the IMF, based on data in Central Banking Publications (2004).
PAGE 13 Martin Foo | FSC Deloitte Future Leaders Award Program GLOBAL COMPARISON: PRUDENTIAL SUPERVISION Prudential supervision of banks, insurers and securities firms (including private pension funds) pre-GFC* One agency supervises two sectors (26%) Three or more prudential supervisors (41%) *For a dataset of 85 countries analysed by the IMF, based on data in Central Banking Publications (2004).
PAGE 14 Martin Foo | FSC Deloitte Future Leaders Award Program CROSS-SECTOR CONSOLIDATION The emergence of financial conglomerates (e.g. the Big Four banks) and the ‘blurring of boundaries’ Source: Macroeconomics, 2014, Review of the Major Banks’ Control of the Wider Financial Sector Superannuation funds management Big four banks’ share of industry FUM % % Life insurance Big four banks’ share of industry premium and investment revenue % % Financial planningand advice Big four banks’ share of industry revenue % %
PAGE 15 Martin Foo | FSC Deloitte Future Leaders Award Program INTEGRATED PRUDENTIAL SUPERVISION Is one watchdog better than three? NUMBER OF FULLY-INTEGRATED SUPERVISORY AUTHORITIES WORLDWIDE Australia Japan South Africa Denmark Korea, United Kingdom Netherlands Norway Year of Establishment
PAGE 16 Martin Foo | FSC Deloitte Future Leaders Award Program CASE STUDY 2: AIG AND REGULATORY ARBITRAGE The Financial Crisis Inquiry Commission’s findings on the Office of Thrift Supervision (OTS)
PAGE 17 Martin Foo | FSC Deloitte Future Leaders Award Program PROPOSITION 2 A single agency should regulate deposit-taking institutions, insurers and private pensions.* Why? Economies of scale Clear accountability Prevalence of conglomerates that operate in multiple sectors Consistent with international trends (e.g. EU Financial Conglomerates Directive)** * In Australia, health insurers are not (yet) regulated by APRA. Self-managed superannuation funds are regulated by the ATO. ** Foreign companies doing business in Europe are required to have the equivalent of a “consolidated supervisor” in their home country.
PAGE 18 Martin Foo | FSC Deloitte Future Leaders Award Program GLOBAL COMPARISON: BUSINESS CONDUCT REGULATION Five different approaches, for selected high-income countries WHICH AGENCY IS RESPONSIBLE FOR CONDUCT REGULATION? Source: Melecky, M. and Podpiera, A.M., 2012, Institutional Structures of Financial Sector Supervision, Their Drivers and Emerging Benchmark Models; author’s own research * No agency with statutory responsibility for business conduct regulation of the banking sector. ** In the United States, the Consumer Financial Protection Bureau was officially opened in July Twin PeaksCentral bankUniversal regulator (integrated prudential and business conduct regulator) Sectoral prudential supervisors (‘lead regulator’ for each sector) N/A* – Ombudsman, complaints board, financial consumer agency** Australia Belgium Netherlands New Zealand United Kingdom Czech Republic Ireland Germany Hungary Iceland Japan Korea Poland Switzerland Italy Israel Luxembourg Portugal Spain UAE Austria Canada Denmark Greece Singapore Slovak Republic Sweden
PAGE 19 Martin Foo | FSC Deloitte Future Leaders Award Program PROPOSITION 3 A single agency should be responsible for business conduct regulation, but not necessarily financial consumer protection too. Why? Administrative efficiency Prevalence of conglomerates that operate in multiple sectors But: synergies associated with placing conduct regulation and financial consumer protection in the same agency may be overstated
PAGE 20 Martin Foo | FSC Deloitte Future Leaders Award Program THE UNIVERSAL REGULATOR MODEL E pluribus unum? Universal Regulator (Integrated Prudential and Conduct Regulation) Separate Prudential and Conduct Regulation No. of Countries25101 Examples (G20) Germany Japan Korea United Kingdom (1998–2012) Argentina Australia* Brazil Canada China France India Indonesia Italy Mexico Russia South Africa Turkey United States * Interestingly, the former Minister for Superannuation and Corporate Law, Senator Nick Sherry, floated the idea of merging APRA and ASIC before the 2007 election.
PAGE 21 Martin Foo | FSC Deloitte Future Leaders Award Program DIFFERENT REGULATORY CULTURES Two heads are better than one APRA Focus on rehabilitation Maintenance of financial health ASIC Focus on enforcement Establishment of a credible deterrent
PAGE 22 Martin Foo | FSC Deloitte Future Leaders Award Program CASE STUDY 3: FINANCIAL SERVICES AUTHORITY (FSA) Prudential regulation plays second fiddle
PAGE 23 Martin Foo | FSC Deloitte Future Leaders Award Program PROPOSITION 4 Prudential supervision and conduct regulation responsibilities should continue to be housed in different agencies. Why? Clarity of purpose Respond to differing forms of market failure Prevents the subordination of one form of regulation to the other
PAGE 24 Martin Foo | FSC Deloitte Future Leaders Award Program REGULATORY COORDINATION Key relationships between CFR agencies and other entities* APRA ASIC MOU RBA Treasury ACCC ATO AUSTRAC Director of Public Prosecutions MOU CFR MOU Financial Distress Management Payments System Board ASX | Chi-X MOU Ex-Officio Appointment Breach Notification Agreement PHIAC MOU Transfer of Functions MOU Standard Business Reporting MOU Financial Reporting Council MOU Australian Bureau of Statistics MOU Coordination Committee Board Membership * Representative sample only. APRA and ASIC have MOUs with approximately 14 domestic bodies apiece.
PAGE 25 Martin Foo | FSC Deloitte Future Leaders Award Program PROBLEM 1: REGULATORY OVERLAP (AND UNDERLAP) How should APRA and ASIC coordinate? ASIC thought it could rely on APRA, says Knott The Age, 15 November 2002 Big banks want Murray inquiry to cut regulatory uncertainty The Australian Financial Review, 15 April 2014 ASIC plans call for ‘super-regulator’ The Sydney Morning Herald, 16 September 2009 APRA and ASIC have case to answer on Trio Capital Super Review, 17 May 2012 Prudential role for ASIC may be considered by parliamentary inquiry Money Management, 30 April 2009
PAGE 26 Martin Foo | FSC Deloitte Future Leaders Award Program PROBLEM 2: MOUs DON’T ALWAYS WORK Trans-Tasman relations: The introduction of a deposit guarantee in Australia
PAGE 27 Martin Foo | FSC Deloitte Future Leaders Award Program PROBLEM 2: MOUs DON’T ALWAYS WORK Trans-Tasman relations: The introduction of a deposit guarantee in Australia
PAGE 28 Martin Foo | FSC Deloitte Future Leaders Award Program PROBLEM 3: ARE WE OVER-REGULATED? The costs of implementing Basel III $228m
PAGE 29 Martin Foo | FSC Deloitte Future Leaders Award Program PROPOSITION 5 The Council of Financial Regulators should be given statutory recognition and serve as a forum for resolving regulatory overlap – and the ACCC should be made a permanent member. Why? Enhanced inter-agency coordination Democratic accountability (rather than clubby cooperation) Greater focus on systemic stability Reduction in the dominance of the RBA Higher priority on competition
PAGE 30 Martin Foo | FSC Deloitte Future Leaders Award Program FINAL REMARKS: PROPOSITION 6 Sound regulatory architecture is a necessary but not sufficient condition for a well-functioning system. Why? Regulation involves considerable unpredictability Many other factors, including regulatory culture, funding and management – as well as broader elements like macroeconomic fundamentals and corporate governance – matter
PAGE 31 Martin Foo | FSC Deloitte Future Leaders Award Program THANK YOU FOR LISTENING Who Watches the Watchers? A Financial Regulatory Architecture for the Post-Lehman World FSC Deloitte Future Leaders Award Program Final Presentation – 13 October 2014 Martin Foo Phone: (02)
PAGE 32 Martin Foo | FSC Deloitte Future Leaders Award Program ACKNOWLEDGEMENTS The author would like to thank FSC and Deloitte staff for organising the FSC Deloitte Future Leaders Award Program, as well as judges and fellow participants, in what has been a motivating and rewarding journey. Thanks are also due to Kate for her unwavering encouragement and support. The views expressed in this presentation are the author’s own and should not be attributed to the Treasury or the Australian Government. PowerPoint slides based on templates by DesignDistrict
PAGE 33 Martin Foo | FSC Deloitte Future Leaders Award Program REFERENCES Abrams, R.K. and Taylor, M.W., 2000, Issues in the Unification of Financial Sector Supervision, IMF Working Paper. Access Economics, 2009, Navigating Reform: Australia and the Global Financial Crisis, Published by FINSIA. APRA and ASIC, 2010, Memorandum of Understanding Between the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. Aylmer, S., 1997, Commonwealth Bank Doubt Over Wallis Plan, The Age, 24 April. Republished in CEDA Bulletin, July 1997, p. 11. Bakir, C., 2009, The Governance of Financial Regulatory Reform: The Australian Experience, Journal of Public Administration, Vol. 87, No. 4, pp. 910 – 922. Barth, J.R., Caprio, G. and Levine, R., 2013, Bank Regulation and Supervision in 180 Countries from 1999 to 2011, NBER Working Paper. Berg, C., 2008, The Growth of Australia’s Regulatory State, Institute of Public Affairs. Bird, J., 2012, Regulating the Regulators: Accountability of Australian Regulators, Sydney Law School, Legal Studies Research Paper. Black, J. and Jacobzone, S., 2009, Tools for Regulatory Quality and Financial Sector Regulation: A Cross-Country Perspective, OECD Working Papers on Public Governance, No. 16, OECD Publishing. Blees, W., 2010, Prudence Pays, Risk Australia, Spring Issue. Blinder, A.S., 2013, After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, Penguin Books. Bora, B. and Lewis, M.K., 1997, The Australian Financial System: Evolution, Regulation, and Globalization, Law and Policy in International Business, 28, 3, pp. 787 – 811. Boyd, T., 2014, APRA Warns Hockey, Australian Financial Review, 30 June, p. 1. Brown, E.F., 2010, A Comparison of the Handling of the Financial Crisis in the United States, the United Kingdom and Australia, Villanova Law Review, Volume 55, No. 3, pp. 509 – 576. Carling, R.G., 2012, Regulation or Strangulation? Banking After the Global Financial Crisis, The Centre for Independent Studies, CIS Policy Forum 23.
PAGE 34 Martin Foo | FSC Deloitte Future Leaders Award Program REFERENCES (CONT.) Carmichael, J., 2002, APRA – The Way Forward, Address to CEDA Conference, 22 November. Carmichael, J., 2014, Implementing Twin Peaks: Lessons from Australia, Institutional Structure of Financial Regulation: Theories and International Experiences, Chapter 5, Taylor & Francis. Carmichael, J., Fleming, A. and Llewellyn, D.T. (eds), 2004, Aligning Financial Supervisory Structures with Country Needs, World Bank Institute. Chaaya, M., 2011, The Regulation of Trustee Governance in Australia: Time for a Rethink?, IPEBLA 13 th International Conference, 23 May. Chapman, G. (Senator), 2001, Speech to the Senate, 21 June, 4.05pm. Available via Commonwealth Hansard. Cihak, M. and Podpiera, R., 2006, Is One Watchdog Better than Three? International Experience with Integrated Financial Sector Supervision, IMF Working Paper. Cooper, J., 2006, The Integration of Financial Regulatory Authorities – The Australian Experience, Paper presented to the Comissão de Valores Mobiliários (Securities and Exchange Commission of Brazil) 30th Anniversary Conference, Rio de Janeiro. Economics References Committee, 2014, Performance of the Australian Securities and Investments Commission, The Senate. Eisenbeis, R.A., 2009, What We Have Learned and Not Learned from the Current about Financial Reform, The Australian Economic Review, Vol. 42, No. 4, pp. 457 – 469. Enriques, L. and Hertig, G., 2010, The Governance of Financial Supervisors: Improving Responsiveness to Market Developments, European Corporate Governance Institute, Law Working Paper No. 171/2010. Erskine, E., 2014, Regulating the Australian Financial System, Australian Centre for Financial Studies, The Funding Australia’s Future Project. Ferguson, A., Butler, B. and Williams, R., 2013, Scrutinising ASIC: Is it a Watchdog or Dog with No Bite?, The Age, 23 November. Ferran, E., 2014, Institutional Design for Financial Market Supervision: The Choice for National Systems, University of Cambridge Legal Studies Research Paper Series, Paper No. 28/2014.
PAGE 35 Martin Foo | FSC Deloitte Future Leaders Award Program REFERENCES (CONT.) Flamee, M. and Windels, P., 2009, Restructuring Financial Sector Supervision: Creating a Level Playing Field, The Geneva Papers, 34, pp. 9 – 23. Gadinis, S., 2013, From Independence to Politics in Financial Regulation, California Law Review, Vol. 101, pp. 327 – 406. Group of Thirty, 2008, The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace. Haldane, A.G., 2012, The Dog and the Frisbee, Speech given at the Federal Reserve Bank of Kansas City’s 366th Economic Policy Symposium, “The changing policy landscape”, Jackson Hole, Wyoming, 31 August. Hill, J., 2012, Why Did Australia Fare So Well in The Global Financial Crisis?, Sydney Law School, Legal Studies Research Paper. HM Treasury, 2011, A New Approach to Financial Regulation: Building a Stronger System. International Monetary Fund (IMF), 2012, Australia: Financial System Stability Assessment, IMF Country Report No. 12/308. Jones, R.M., 2010, Back to Basics: Why Financial Regulatory Overhaul is Overrated, Entrepreneurial Business Law Journal, 4, No. 2, pp. 391 – 406. Lui, A., 2012, Single or Twin? The UK Financial Regulatory Landscape after the Financial Crisis of 2007–2009, Journal of Banking Regulation, 13, pp. 24 – 35. Macroeconomics, 2014, Review of the Major Banks Control of the Wider Financial Sector, Report Commissioned by Customer Owned Banking Association. Maddock, R., 2014, Red Tape in Finance and its Discontents, Economic and Political Overview 2014, CEDA, pp. 48 – 55. Maddock, R., Dimasi, J. and King, S.P., 2014, Rationalising Rustic Regulators, Monash Business Policy Forum. Masciandaro, D., Nieto, M. and Quintyn, M., 2009, Financial Supervision in the EU: Is There Convergence in the National Architectures?, Journal of Financial Regulation and Compliance, 17, No. 2, pp. 86 – 95. Mees, B. and Ramsay, I.M., 2008, Corporate Regulators in Australia ( ): From Companies’ Registrars to the Australian Securities and Investments Commission, Melbourne Law School, Centre for Corporate Law and Securities Regulation.
PAGE 36 Martin Foo | FSC Deloitte Future Leaders Award Program REFERENCES (CONT.) Melecky, M. and Podpiera, A.M., 2012, Institutional Structures of Financial Sector Supervision, Their Drivers and Emerging Benchmark Models, Munich Personal RePEc Archive. Mwenda, K.K., 2006, Legal Aspects of Financial Services Regulation and the Concept of a Unified Regulator, The World Bank. Owen, N. (Justice), 2003, The Failure of HIH Insurance, HIH Royal Commission, Vol. 1. Pan, E.J., 2010, Four Challenges to Financial Regulatory Reform, Villanova Law Review, Vol. 55, 3, pp. 743 – 772. Pan, E.J., 2011, Structural Reform of Financial Regulation, Transnational Law and Contemporary Problems, Vol. 19, pp. 796 – 867. Pellerin, S.R., Walter, J.R. and Wescott, P.E., 2009, The Consolidation of Financial Regulation: Pros, Cons, and Implications for the United States, Economic Quarterly, Vol. 95, No. 2, pp. 121 – 160 Productivity Commission, 2011, Identifying and Evaluating Regulation Reforms, Productivity Commission Research Report. Quintyn, M., Ramirez, S. and Taylor, M.W., 2007, The Fear of Freedom: Politicians and the Independence and Accountability of Financial Sector Supervisors, IMF Working Paper. Surowiecki, J., 2008, Parsing Paulson, The New Yorker, April 28. Surowiecki, J., 2010, The Regulation Crisis, The New Yorker, June 14. The Department of the Treasury (US), 2008, Blueprint for a Modernized Financial Regulatory Structure, United States of America. The Financial Crisis Inquiry Commission, 2011, The Financial Crisis Inquiry Report, United States of America. The Treasury, 2012, Strengthening APRA’s Crisis Management Powers, Consultation Paper. Thomson, D. and Abbott, M., 2000, Australian Financial Prudential Supervision: An Historical View, Australian Journal of Public Administration, 59(2), pp. 75 – 88. Turner, A., 2009, The Turner Review: A Regulatory Response to the Global Banking Crisis, Financial Services Authority. Weber, R.H., Arner, D.W., Gibson, E.C. and Baumann, S., 2014, Addressing Systemic Risk: Financial Regulatory Design, Texas International Law Journal, Vol. 49, pp. 149 – 200. World Bank, 2013, Global Financial Development Report, The State as Regulator and Supervisor, Chapter 2.