ASIC and APRA powers should come under scrutiny, says Bowen

Speaking at the FSC Leaders Summit 2017 on Tuesday, Chris Bowen MP, federal member for McMahon and shadow treasurer, said that there needed to be a re-examination of Australia’s “financial and prudential regulation architecture as part of our Royal Commission into banking and financial services”. 

Acknowledging that many delegates at the summit would not be “wildly in favour” of a Royal Commission into banking and financial services, Mr Bowen said that the Labor Party had committed to one because “it is justified”. 

“No one can defend, and I have not seen any bank try to defend, the sorts of poor industry practices which have led to successive scandals,” he said. 

“We need to ensure the regulatory, policy and, frankly, cultural settings are in place to ensure that, to the maximum extent possible, they are not repeated.” 

However, Mr Bowen said that the commission should also deal with the “evolving architecture” of financial and prudential regulation. 

He explained: “I want the Royal Commission to recommend what is necessary to stop banking scandals, but also given our changing circumstances in Australia in recent years, that roles and accountabilities of our regulatory authorities remain transparent and continue to be properly understood and scrutinised.” 

Noting that it had been more than 20 years since the Wallis Inquiry recommended the establishment of the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC), Mr Bowen said that a Royal Commission now would be “a prudent and timely examination of our financial regulation architecture”. 

He said: “Given what has changed over the last couple of years and even in the last 12 months alone, the time is ripe for a proper, considered and comprehensive examination of our institutional arrangements – of the financial system architecture.” 

Stating that this was not a conclusion he had reached “lightly”, and adding that he has “enormous respect for [the] financial and prudential regulators and will continue to do so”, he said he had considered the state of the financial architecture “very carefully and deeply” and come to three reasons for his belief.

The reasons were:

APRA powers ‘more macro than prudential’

Mr Bowen explained: “It is vital that Australia’s regulatory settings are fit for purpose, and that the changing roles and responsibilities of our regulatory agencies are well understood given the risks that are inherent with a highly indebted household sector.”

Touching on APRA, Mr Bowen suggested that its power now was changing to influence more than just prudential regulation but the economy as a whole. 

He said: “APRA is a world-class regulator. Its role is important. But its role is also changing. And these changes are significant. 

“APRA is charged with responsibility for prudential regulation, not macroeconomic stability, nor financial system stability. Yet APRA’s role in helping to manage risks building up in the housing sector has increased relatively dramatically in the past couple of years, with the implementation of macro-prudential policies."

Mr Bowen said that he supports macro-prudential responses, but noted that it is important to understand that "it is arguably more macro than prudential". 

He elaborated: “APRA has a role in helping the RBA manage systemic risk and the risk of volatility in macroeconomic activity, not just health of the balance sheet of particular institutions. 

“As the RBA has maintained historically low official cash rate settings, concerned about weak business investment, and not wanting to add to upward pressure on the Australian dollar, macro-prudential regulation has evolved to facilitate macroeconomic fine-tuning.  

“It seems that macro-prudential regulation today, conducted by APRA, provides a set of monetary policy instruments at least as important as the official cash rate.” 

Touching on the 10 per cent speed limit for investment lending in 2014, Mr Bowen said that the ramification of this was for the banks to charge higher interest rates on investor loans “even as the RBA was reducing the official cash interest rate”. 

He added: “Since then, we’ve seen APRA announce a new round of measures to cap the amount of mortgage lending for interest-only loans, which have seen rapid growth in recent years. And in the recent budget, the use of macro-prudential policies to manage economic risks has become even more pronounced, with the Treasurer announcing he would ‘modernise’ APRA’s powers by explicitly allowing it to differentiate the application of loan controls by location. This is another substantial change." 

Continuing, he said: “APRA’s new tools are not as ‘blunt’ as the cash rate, and they come without the downside risk of affecting foreign exchange markets. But these developments have arguably blurred the lines of institutional accountability in ways that were not anticipated by the Financial System Inquiry, and certainly not contemplated by the Wallis Inquiry many years earlier.” 

Mr Bowen also voiced concern with the “blurring of accountability between APRA and ASIC”.

For example, he noted that APRA’s new Banking Executive Accountability arrangements enable the regulator to remove directors and senior executives from APRA-regulated institutions and penalise banks if they are not appropriately monitoring the suitability of executives, which would have historically been ASIC’s remit. 

“I am not suggesting that more oversight of good conduct is not warranted, or that these new roles can’t complement ASIC's current work. But a stock-take is warranted,” Mr Bowen said. 

“Transparency around who is responsible for monitoring conduct is obviously an imperative and why we are proceeding with Royal commission.”

Mr Bowen concluded that the “unquestionably strong” recommendations, new oversight of non-bank lenders, the rise of fintech and its regulation, and the RBA’s forex code have given him the impression that the “framework of financial and prudential regulation is changing in an ad hoc fashion”. 

“So, there are compelling reasons for a thorough examination of all aspects of financial regulation in Australia," Mr Bowen said.  The Royal Commission will be a good opportunity, a vital opportunity to do so.”

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