Quarterly Statement by the Council of Financial Regulators – March 2021
The Council of Financial Regulators (the Council) held its quarterly meeting on Friday, 26 February. Discussions focused on the financial sector's role in supporting recovery from the COVID-19 pandemic.
Council members discussed the recovery from the pandemic in Australia, with the pick-up stronger than earlier expected. They welcomed the commencement of Australia's COVID-19 vaccine program and the positive effect this would have on confidence and economic activity. Members also discussed how the winding down of some temporary support programs would affect the finances of households and businesses over coming months, recognising that many had strengthened financial buffers over the past year. Financial institutions and regulators will need to remain vigilant here.
Members discussed credit conditions. Housing credit has picked up a little and is growing at a moderate pace. Commitments for new owner-occupier housing loans have increased strongly in recent months, consistent with most other indicators of housing market activity. There has been some increased availability of mortgage finance recently, though lending standards are generally being maintained at this stage. The Council places a high emphasis on lending standards remaining sound, particularly in an environment of rising housing prices and low interest rates. It will continue to closely monitor developments and consider possible responses should lending standards deteriorate and financial risks increase.
The Council also considered recent trends in lending to businesses, particularly small and medium-sized enterprises. Lending to businesses has been stable in recent months and is around the level seen before the pandemic. Demand for new business loans has been subdued over the past year due to the pandemic. There are some signs that demand is increasing with the improvement in the economic outlook and it is important that borrowers continue to have access to finance on reasonable terms.
Council members discussed the permanent changes to corporate insolvency laws that came into effect from January 2021. These include a new debt restructuring process available for eligible small businesses and, for small businesses unable to recover, a simplified liquidation process. These changes will support the economic recovery. At the same time, members expect there to be a pick-up in business insolvencies this year from the very low levels experienced in 2020 when temporary insolvency relief measures were in place. Council members are tracking the operation of the new arrangements closely.
There remains legal uncertainty about the interpretation of business interruption insurance policies held by businesses affected by the pandemic. The Insurance Council of Australia has sought special leave to appeal a recent decision on a test case to the High Court, and five general insurers have now filed a second test case in the Federal Court of Australia to test the application of further pandemic coverage issues in business interruption policies. Members welcomed the commitment of all general insurers to abide by the terms of the test case protocols, including insurers not a party to the proceedings. In particular, they welcomed insurers' commitment to waiving their rights to deny liability due to an insured's insolvency or delay in lodging a claim due to awaiting the final outcome of the test cases. Treasury, ASIC and APRA will continue to work closely with the Australian Financial Complaints Authority (AFCA) to facilitate a speedy resolution to complaints. ASIC will also continue to monitor statements made by insurers and other licensees about the application of the test cases and will take action if required.
The Australian Competition and Consumer Commission (ACCC) joined members to discuss competition in the financial sector. The agencies recognise the importance of healthy competition and agreed to continue their close cooperation on issues affecting market structure. They welcomed initiatives to enhance competition, including the ongoing implementation of the Consumer Data Right.
Operational risk, including cyber-risk, remains a focus of the Council. Members discussed a recent data breach affecting a number of users of a file-sharing service provided by Accellion, including the Reserve Bank of New Zealand (RBNZ) and ASIC (although there was no access to confidential information held by ASIC). Council agencies have been in close contact with affected entities, including the RBNZ, in order to understand the implications of the breach and any lessons for regulators and regulated entities in Australia.
Members also discussed current reviews of the operational outages experienced by ASX Limited in late 2020. As co-regulators of ASX, ASIC and the Reserve Bank have communicated their expectation that ASX commission an independent expert review of the ASX Trade outage. ASIC is also investigating whether ASX complied with its market licence obligations. ASIC is undertaking a detailed analysis on the market impact of the incident, including participants' ability to access alternative trading venues. The reviews are ongoing.
The Council discussed progress on a review of elements of the regulatory framework for property e-conveyancing, which aims to identify enhancements that would promote consumer protection, resilience and competition in the e-conveyancing market. The review is being undertaken by a working group comprising Council members, the ACCC and state registrars. A number of options are being considered, including the possibility of an industry-developed standard dealing with payment and financial settlement aspects of e-conveyancing. The Council encourages industry participants to work together to explore how a self-regulatory model like this might operate prior to its next discussion of the issue in June.
Other issues discussed by the Council included the two reviews of the Australian payments system that are currently under way and developments in relation to central bank digital currencies, stablecoins, crypto-assets and decentralised finance (DeFi).
The ACCC joined the meeting for selected agenda items.
Council of Financial Regulators
The Council of Financial Regulators (the Council) is the coordinating body for Australia's main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council's objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia's financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.