Normal.docx

Normal.docx

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IssuesintheFinancialSystemAddressbyBillBeerworthtotheAustralianInstituteofCompanyDirectorsPerthWednesday11December19962INTRODUCTIONTheFinancialSystemInquirypublishedafewweeksagoaDiscussionPaper,detailingthekeyissuesandregulatoryoptionsbeingconsidered.Itisintendedtocontributetopublicdiscussionofpossiblereformsinourfinancialsystem.OurDiscussionPaperdoesnotprovidepreliminaryordraftrecommendations.Essentiallytherearetworeasonsforthis.Firstly,itisunnecessaryforthesakeofthisstageofpublicdiscussiontheoptionsandargumentsareclearenoughfromthearrayofsubmissionsmadetotheInquiry,andfromthewaywehavedescribedthemintheDiscussionPaper.IwouldliketoemphasisethatwearemeetingtheTreasurerscommitmenttoanopen,publicprocess.OurDiscussionPaperdrawsonmorethan260submissions,mostofwhichhavebeenmadepublic,includingthroughtheInternet.TheDiscussionPaperisthebasisforpublicconsultationswhichweareholdinginmainlandcapitals,andforanyfurtherwrittensubmissionswhichpeoplewishtomakebythe13thofJanuary.ItisavailablethroughGovernmentbookshopsandthroughtheInternetontheInquiryshomepage.Itindicatestotheinterestedpublicwhatweseeastheissues,andwherewearefocusingourfurtherresearchbeforemakingourrecommendations.ThesecondreasonwhywehavenotputdraftrecommendationsintheDiscussionPaperisthatwehavewantedtousealloftheavailable9monthstoformourrecommendations,andnotshortenthatperiodto5months.WewillmakeourrecommendationsintheInquirysFinalReport,whichwewillsubmittotheTreasurerbytheendofMarch,asrequested.BACKGROUNDTOTHEINQUIRYIwouldliketodrawyourattentionforamomenttothebackgroundinwhichweareinquiringintoAustraliasfinancialsystem.ThebasicobjectivesofourInquiryaresimilartothoseoftheCampbellInquiryathebeginningofthe1980s.BothInquiriesaddressefficiencyintheinterestoftherestoftheAustralianeconomy,competitionconcerns,consumerinterestsandtheregulatoryframework.However,thesituationbeforetheCampbellInquirywascharacterisedbythefairlyobviousineffectivenessofsomeprice-controlregulations,andsomefairlyobviousstructuralinefficiencies.ThesituationbeforethisInquirywasdifferent.Therewerelessobvious,butstillpressing,reasonsforreviewarapidlychangingenvironment,aninsufficientlycoordinatedregulatoryframework,andconcernsaboutAustraliasstandinginregionalandglobalmarkets.3AnotherfactorinthesituationbeforethisInquirywasanon-goingpublicdebateabouttheeffectsofthefinancialderegulationofthe1980s.Theyareanimportantpartofthe1990ssituation,whichourInquiryisaddressing.Ananalysisoftheeffectsofthe1980sderegulationandthelessonstobelearntfromitthestocktakeincludedinourtermsofreferenceiswelladvancedandwillformpartofourFinalReport.ACHANGINGSYSTEMForalongtimethefinancialsystemhasbeenshaped,orreshaped,byglobalisation,technology,evolvingprofilesofwhatconsumersneed,andnewformsofcompetition.Butinrecentyears,someofthesechangeshaveaccelerated.Theapplicationofnewtechnologymayrevolutioniseourfinancialsystemmorequicklythansomeexpect.Mostoftheforeseeabledevelopmentsinvolveexistingtechnologies,andtheirimpactinsomeothercountriesisalreadymoreadvancedthaninAustralia.Notallofthemrelyoncustomersacceptingnewtechnologiesalotofwhatishappeningisinthebackoffice.Thishelpsustoknowtheoutlineofwhatislikelytohappenhereasthefinancialsystemdevelops.Itisclearthatwemustrespondandensurethatwetakethegreatestpossibleadvantagefromthepotentialbeingunleashed.Anotherimportantdriverofchangeinthefinancialsystemischangeintheprofilesofconsumerage-groupsandneeds.Australiaisfacinganupwardshiftintheageprofileofthepopulation.Butunlikemostcomparablecountries,wefacethiswitharelativelylowrateofnationalsavings.Thispresentsanobviouschallengeinthefuturefundingofagrowingproportionofretirees.Thatfundingmustrelylessontransfersthroughgovernmentandmoreonpeoplesownsavingsforretirement.Fromthisperspective,whileitisvitalthatoursavingsratebeincreasedovertime,itisalsoimportantthatthefinancialsystembeasefficientaspossibleatinvestingsuperannuationsavings,andthatinvestmentproductsbedevelopedthatfulfiltheneedsofthosesavingfortheirretirement.Thisisoneaspectofamoregeneralfact.Thefinancialsystemstandsbetweensavingsandinvestment,anditscostandperformancehelpdeterminethegainswemakethroughouttheeconomyfromtheprocessesofsavingandcapitalaccumulation.Therealcostsofthisprocessoffinancialintermediationarehidden.Nonetheless,thesecostsareextractedfromhouseholdandbusinesssavingsinthecourseoftheirbeinginvested.Evenasmallimprovementincost-efficiencyinourfinancialsystemcanbeexpectedtohavesubstantial,widespreadeffects.TheexperienceofachangingfinancialsystemisbynomeansuniquetoAustralia.Othercountrieswithdevelopedfinancialsystemsarefacingthesamechanges,andarethinkingsimilarlyaboutthebestpoliciesandregulatoryresponses.Mostcountriesarealsoseekingthebenefitsofincreasingexposuretoglobaltradeandinvestment.Theyrealisethatfinancialsystemscontributetothecompetitivenessof4nationaleconomies.Thisparallelprocessofchangeandreforminothercountriesenforcestheneedforustostriveforworld-bestpracticeintheAustralianregulatoryframework.Wecouldsumupthesituationbysayingthereare3keyreasonsforwantingtoimproveourfinancialsystem:

theneedtoobtainthebenefitsofnewtechnology;theneedtoincreaseinvestmentreturnsthroughmoreefficientmanagementoffinancialresources;andtheneedtocompeteglobally.KEYGOALSANDMEANSWeseeasourkeygoaltheidentificationofmeanstoincreasetheefficiencyoftheAustralianfinancialsystem,withoutcompromisingitssafetyandstability.Inimportantareas,Australiaislaggingbehindthemarketperformanceofsomeothernations:

manyproductsorservicesaremoreexpensivethanthoseabroad;andrapidinnovationisoccurringinsomebutnotallareas.Webelievethekeystoincreasingtheefficiencyofthefinancialsystemaregreatercompetitionandcontestabilitywhichmeansmorevigorouscompetitionamongexistingparticipantsandmoreopportunitiesforcompetitionfromnewparticipants.Wearelookingforwaystobringthisaboutthroughmoreefficientregulation.Oursearchforincreasedefficiencyinthefinancialsystemismotivatednotbytheinterestsofparticipantsinthefinancialindustry,butbytheprospectthatamoreefficientfinancialsystemwouldbringgreaterbenefitstocustomers.Improvementsinfinancialsystemefficiencywouldbenefitcustomersthroughlower-costfinancialintermediation,addingtothereturnsforsaversorreducingthecostsforborrowers;throughincreasedeconomicgrowth;throughgreaterchoiceinproductsandservices;andthroughawiderarrayofchannelsforaccesstofinancialservices.WhiletheDiscussionPaperdoesnotcontainrecommendations,youwillfindinitaclearidentificationofthepriorityissuesasweseethem.Letmesummarise6ofthesepriorityissues,andthen,fortheremainderofthisaddress,saysomethingabouteachofthem.5PRIORITYISSUESThepriorityissuesare:

stimulatingcompetitionandinnovation,achievingmorecompetitivefinancialmarketsinAustralia,achievingmorecost-effectiveconsumerprotection,preservingsystemicstabilityandclarifyingdepositorprotection,maintainingindustrystructuresforcompetitionandefficiency,andachievingbetterperformanceandco-ordinationoftheregulatoryarrangements.STIMULATINGCOMPETITIONANDINNOVATIONThefirstoftheseissuesisaboutaskinghowcompetitionandinnovationintheAustralianfinancialsystemcanbestimulated,withoutcompromisingthesafetyofthefinancialsystem.Wehaveseveralareasinmind.Oneistheareaoftraditionalbankingactivities,includingthepaymentssystem.TheDiscussionPaperasksaboutthefeasibilityofapolicyofallowinganincreasedrangeofinstitutionstoprovidesomeorallofthecorefinancialservices.Ourregulatorystructureisacreatureofhistory.Itslicensing,ownershipandprudentialrulesarelargelybasedoninstitutions,andseparateinstitutionsforbanking,insuranceandsecuritiesdealing.Thismaybeinadequateforlikelymarketdevelopments,withmoreinstitutionsofferingproductswhichcombinedifferentservices,andmoreinstitutionswantingtocross-selltheproductsorservicesofdifferententities.ThisisthefrequentlymentionedissueofConvergence.Withthisinmind,weareexaminingtheimpactoftheregulatorysystemoncompetitionamongthetraditionalfinancialinstitutions,andtheextenttowhichitrestrictspotentialcompetitorsnotablythefirmswhichoperategloballyinprovidingselective,specialisedservices.Onepolicyoptioninthisareawhichweareexaminingistorelaxsomeoftheownershiprestrictionsonbanks.Anotherisallowingdirectnon-bankaccesstothepaymentssettlementsystem,subjecttoappropriateprudentialtests.Andafurtheroneistomakeabetteraccommodationoffinancialconglomerates.EachoftheseoptionshasbeencanvassedinsomeofthesubmissionsmadetotheInquiry.6ACHIEVINGMORECOMPETITIVEFINANCIALMARKETSWesharetheconcernsexpressedinrecentpublicdiscussionabouttheinternationalcompetitivenessofAustralianfinancialservicesind