Regulator - November 2009

​We predicted in the last edition of Regulator that Australia’s membership of the G20 could heighten the risk of our government supporting hardline financial sector reforms for reasons of global politics, not local realities. That scenario inched a step closer this month, with APRA putting its head above the regulatory parapet to propose an overhaul of prudential rules. Of course, the thing about parapets is that once you stick up your head, you risk getting fired upon.

Needless to say, the major banks didn’t waste any time shooting off a few rounds in the direction of APRA. Westpac CEO, Gail Kelly warned that such a move would create systemic risks, including a slowdown in lending. Noting the relative health of Australian banks through the GFC, Ms Kelly argued that our banks should be excluded from such changes. Over at ANZ, CEO Mike Smith invoked the “if it aint broke, don’t fix it” mantra.

It's not difficult to see why the banks are concerned. Australia is a capital importing nation in an extremely competitive global market and with a relatively concentrated marketplace for lenders; any move to tighten prudential rules will affect our lenders disproportionately and impact adversely on their ability to fund the real economy.

It’s a high price to pay for the failures of other regulatory systems. As former Westpac CEO, David Morgan, noted in an Australian Financial Review opinion piece last week: “The fact is 40 or so large global institutions screwed up but most others didn’t (including Australian banks). Now there is a real risk that all banks within the G20 will be saddled with wide-ranging new global standards.”

The prospect of global standards was also canvassed at APEC, during a session entitled “Regulating the Global Economy for Global Growth”, involving government and private sector officials from China, Hong Kong, the US, Pakistan and Korea. According to a summary note published after the session by the Singapore Institute of International Affairs, the participants agreed “that an international regime with broad and uniform regulatory principles is essential to not undermining governance efforts by ensuring that capital operates in a consistent environment globally”.

There is a “one-size-must-fit-all” sentiment to this dialogue that, in our view, does not auger well for Australia. Won't each of our major banks be “systemically significant” and therefore subject to the increased capital and liquidity requirements, and any possible leverage ratios, that will only apply to a smaller proportion of banks in other countries? Won't our companies be subject to the tough corporate governance reform measures enacted internationally, including in relation to executive pay, even though the pay scales of our executives are different?

All the more reason for local market stakeholders to stay closely engaged with the domestic regulatory reform process and continue to have a say in relation to it. While there is a need for global consistency in some respects, as we clearly cannot allow another GFC-style crisis to occur, the Australian market is different and global changes must be implemented with reference to that fact.

Given the import of the global landscape, this edition features analysis and updates covering a range of key territories. Ian Paterson shares his perspectives on the regulation of systemically important banks, Jim Boynton, Betsy-Ann Howe and Andrew Clements report on their recent discussions with regulatory contacts in Europe and the US, Nicola Wakefield Evans and Hayden Flynn provide a round-up of Asian regulatory developments and Malcolm Brennan in our Canberra office writes on recent changes to the Foreign Investment Review Board regime. Closer to home, Shannon Finch reflects on ASIC's review of regulations for capital raisings and Michelle Levy and Michael Mathieson analyse the regulatory framework for default superannuation arrangements. Finally, Tim Bednall contributes this month with an update on the passage through Parliament of the Termination Benefits Bill and finds it characterised by uncertainty in a number of respects.

A heads up that in the December edition we will review the recommendations of the Ripoll Inquiry into financial products and services in Australia. The Joint Committee on Corporations and Financial Services is due to report to Parliament on 23 November.

Readers of Regulator have been active since we launched this publication in sharing their thoughts on the issues we raise - thank you and please keep it coming. This is a fast moving space and our goal is to keep you ahead of the regulatory curve.

Best wishes

Stuart Fuller

Managing Partner (Practice)