In its submission to the inquiry, the “twin peaks” regulatory framework established by the 1997 Wallis Report contributed to the “resilience” of Australia’s financial system during the global financial crisis, said the submission.
But the “blurring of responsibilities” between the two regulators reflected confusion among investors about the extent of the “prudential perimeter” as well as the risks and protections of their investments, said Treasury
“Improving the ability to distinguish between entities regulated in different ways is likely to present the lowest cost option for dealing with this issue,” the submission said.
“The alternative, expanding the prudential perimeter to cover a larger range of businesses, is likely to invite regulatory arbitrage and involve significant industry compliance and opportunity costs,” Treasury said.
In practice, the delineation of which institution should be subject to prudential regulation by APRA can be difficult, according to the submission.
The collapses of Trio Capital in 2009 and Banskia Securities in 2012 highlighted the challenge for investors.
“Investors and other consumers of financial products are likely to believe mistakenly that entities subject to quasi-prudential regulation (which is rules-based) are also subject to active supervision – which is a feature of genuine prudential regulation,” the submission said.
When it comes to the independence of both ASIC and APRA – which is necessary for effective regulatory supervision of the financial system – it must be balanced by “accountability”, Treasury said. And while there are mechanisms in place to keep the regulators to account, there is “room to improve” on the issue.
“Developing measures of success would assist regulators, industry and Parliament to identify some of the tensions within the regulators’ statutory objectives,” said the submission.
