Australian Financial Regulatory Frame work
The Australian financial system is regulated by 3 different agencies, The reserve bank of Australia, the Australian prudential regulation authority and the Australia securities and Investment Commission. In the 1980’s after the deregulation of the financial market by the government, efficiency increased exposing the industry to greater influence from the domestic and global market forces. Then prompting In 1997 the recommendation of financial system Inquiry (by The Wallis Committee) resulted in the federal government making changes to the regulatory structure of Australia’s Financial system set in place in 1998 resulting in further efficiency.
The reform continued with the Financial services act 2002 – harmonising the current regulatory framework with these three regulators.
RBA – The Reserve Bank of Australia
The Reserve Bank of Australia is the central and federal government bank, Introduced in 1959 after the ‘reserve bank act’. The Reserve Bank doesn’t deal with the general public and has a different function to all other banks.
The reserve bank has strong regulatory powers over financial Institutions and the overall financial system in Australia. Its primary responsibility is to conduct monetary policy with such decisions made by the reserve bank board.
Monetary policy part of macroeconomic policy is used to influence the business cycle and credit cost and availability and target the inflation rate. The aimed inflation rate set 1992 by the R.B and government is currently at 2-3% and it is the responsibility of the R.B to keep the inflation rate between here through its use of interest rates ultimately effecting spending patterns and the business cycle. There is currently a inflation crisis where Australia’s inflation is at 4.5% - this puts great pressure on the reserve bank and the conduct of monetary policy to increase interest rates in dampening the economy. The Reserve bank is heavily focused on long-term economic goals and stability.
The Objectives/goals:
- Ensure stability of the Australian currency.
- Maintain full employment in the economy.
- Ensure high standards of living in Australia.
- Keep stable/low inflation between 2-3% **
Responsibilities of the Reserve Bank of Australia.
1.Control of note issue & the distribution of currency.
The RB manages the manufacturing of money ‘note printing Australia’ and has the power to issue currency at any point in the year into the economy to accommodate for surplus demand for money supply.
the Reserve Bank Act 1959 confers on the Reserve Bank of Australia (RBA) the responsibility for the production and issue, reissue and cancellation of Australia's notes.
2.Banker to Banks – Exchange settlement accounts
All commercial banks have special accounts with the Reserve Bank known as exchange settlements. Hence they ‘settle(pay) debts’ between them. E.g Westpac and commonwealth bank has an exchange settlement with the R.B- if you are with Westpac and receive a commonwealth cheque – The cheque goes through to the R.B and then into your Westpac account.
Essentially the here the reserve bank Regulates the money flow between banks.
It is also used in the selling and buying of government securities (Like bonds and loans).
3.Conducting Monetary policy on behalf of the federal government
In conducting and formulation of monetary policy on behalf of the government the RB changes the levels of interest rates on saving and borrowing in order to effect economic activity and keep a low inflation rate. This means adjusting the ‘cash rate’ of investment known as open (or domestic) market operations – but that’s another story.
Objectives of monetary policy:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
For a first in 7 years interest rates were cut by the Reserve bank on september first 2008. Pleas see the attatched link
4.Stability of the financial system
The RBA has the responsibility of maintaining overall stability within the Australian Financial system. Though since the Financial deregulation in 1983 the RB’ role of the supervision of banks (Prudential supervision) has been taken over by APRA- This meant Banks had more freedom in decisions involving their assets and liquidity ratios. The Reserve bank still overseas long-term stability in prevention of financial crisis.
5.Regulation of the payment system
The reserve bank shares the obligation of the payment system with the ‘payment systems board’ to ensure efficiency and surety that money owed from credits, travellers cheques and electronic cash etc is paid in the appropriate timing.
6.Holding reserves of foreign exchange and gold.
The RB is a major participator in the financial market and is actually in charge of Australia’s foreign reserves, (currencies) for International transactions in the Forex market. It also holds Australia’s gold assets. The banks also intervenes with the Foreign reserves to stabilise the forex market.
7.Economics and financial advisers for the government.
The RB advises the government on financial and economic issues. The relationship of the RBA with the Government is one of independence with consultation, as outlined in Consultation with Governmentand Accountability to Parliament. (Click on the Links) The bank accords with the economic objections of the Commonwealth government. And has great power over economic/government policy and their formulation and adoption; primarily monetary policy.
The Reserve bank operates as bank to the commonwealth government, it may lend short-term funds known as treasury notes of long-term funds known as Government Bonds. The Bank with the treasury plays a huge role in the budget, as its supply and holder of money.
It also provides regular publishes of current operations and research and statistics on financial aggregates and the level in growth of e.g. the money supply. On the RBA website rba.gov.au various reports and statistics are set.
Government Office = Canberra
Other offices = Sydney, New York, London.
APRA – Australia Prudential Regulation Authority
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.
APRA Took over the Reserve Banks role of prudential regulation after the ‘Reserve Bank Act’
Established 1998 July 1. APRA Still works in close coherence with the RB.
APRA has the responsibility of regulation of All deposit-taking Institutions (ADI)
It has two major roles:
1. Regulate financial industries, ensuring client needs are met and superannuation funds are paid – ((becoming a bigger problem with the baby boom generation (majority of the workforce) are ageing and finding they don’t have enough superannuation.)) – ensure funds meet withdrawals and that risk management is effective. – the approach is primarily risk based.
2. Asses and sort out financial institutions (ADI’s), APRA positions financial institutions in time of economic difficulty and assists with them– now with high inflation and interest rates etc...
APRA also act as the national statistical agency for the Australian financial sector and play a role in preserving the integrity of Australia’s retirement incomes policy.
ASIC - Australian Security and Investment Commission
ASIC is responsible for the supervision of operators of financial markets. Primarily ASIC ensures everything within the financial market is secure; financially and legally. It has the power to investigate and act in such situations of unethically illegal practices.
ASIC also advise the Government on changes to licensee operating rules and on application. Its responsibility is to ensure fair/transparent and efficient markets and company behavior, and resolve disputes.
Characteristics.
- ASIC is an independent commonwealth government body organisation, set up under and administer the Australian Securities and Investments Commission Act (ASIC Act), and carries out most of their obligations under the Corporations Act.
- ASICS and APRA work really closely together both with high priorities for the retiring ‘baby boomer’ generation- Playing a mojor role the new initiatives of ASIC for the comming 12 months, click on the link below to see all 6.
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/2007_Senate_Standing_Ctee_Economics_ASIC_opening_statement.pdf/$file/2007_Senate_Standing_Ctee_Economics_ASIC_opening_statement.pdf
Regulation
- Corporate regulation – ensuring that company leaders/directors are completing their duties with the best interest of their company and with integrity.
- Market regulation – assess equity and efficiency of markets
- Financial services regulation** - License and monitor financial firms – commonly dealing with superannuation, managed funds, shares and company securities, derivatives, and insurance.
ASIC’ is there to protect consumers Protecting consumers and Investors against misleading or deceptive conduct affecting all financial products and services, including creditis a huge role. – providing their website ‘Fido’ for financial advise and tips to the public. Fido helps to understand consumers rights and responsibilities when committing to a financial service and avoid scams.
http://www.fido.gov.au/fido/fido.nsf
http://www.asic.gov.au/asic/asic.nsf
The difference between ASICS and APRA is that APRA regulates immediately financial institutions to ensure consumer exploitation isn’t occurring and they are efficient whereas ASCIS looks directly after consumer, providing information and help for things such as scams, it monitors company behaviour.
Which laws does ASIC administer?
ASIC administers the following legislation (or relevant parts of it), as well as relevant regulations made under it:- Corporations Act 2001
- Australian Securities and Investments Commission Act 2001
- Insurance Contracts Act 1984
- Superannuation (Resolution of Complaints) Act 1993
- Choice superannuation Legislation 2005.
- Superannuation Industry (Supervision) Act 1993
- Retirement Savings Accounts Act 1997
- Life Insurance Act 1995
- Medical Indemnity (Prudential Supervision and Product Standards) Act 2003.
Other regulators also administer some parts of these Acts. For example, parts of the last four Acts dealing with prudential regulation are administered by the Australian Prudential Regulation Authority (APRA).
