Quarterly Statement by the Council of Financial Regulators – June 2021

The Council of Financial Regulators (the Council) held its quarterly meeting on Friday, 11 June. Topics covered included housing market risks, financial risks from climate change, financial market infrastructure (FMI) developments, cyber risk and the regulatory arrangements for e-conveyancing. The Australian Competition and Consumer Commission (ACCC) attended for selected agenda items.

Members discussed developments in household borrowing and the housing market. Housing credit growth has picked up and a further increase is expected over the months ahead. Over the past few years owner-occupiers have accounted for most of the increase in household borrowing. The demand for credit by investors has been subdued, but is now increasing. Housing markets are strong across Australia.

Council members reiterated the need for lending standards to remain sound in an environment of low interest rates and rising housing prices. There have been signs of some increased risk taking recently, but overall lending standards in Australia remain sound. APRA has written to the largest Authorised Deposit-taking Institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders' risk appetites.

Council members are also paying close attention to the implications of trends in household debt. They discussed the risks that could build if growth in household borrowing substantially outpaced that in income, as well as potential policy options to address these risks.

The Council discussed financial risks arising from climate change. Two current initiatives will help to increase the preparedness of Australian financial institutions to manage these risks. First, APRA has released a draft prudential practice guide on climate change financial risks, which will apply to ADIs, insurers and superannuation funds. The guide sets out high-level principles for how APRA expects institutions to evaluate and mitigate financial risks related to climate change. Second, Council agencies are collaborating on APRA's climate change financial risk vulnerability assessment of the five largest Australian ADIs. This will model institutions' exposures to physical and transition climate change risks. APRA intends to publish aggregate findings by around the end of the year. Council members also discussed how the attitudes of investors to climate change risks were changing and the importance of appropriate disclosures.

The Council discussed a number of matters related to the oversight and regulation of FMIs. Members welcomed the acceptance by the Government of the Council's recommendations on enhancements to the licensing regimes for FMIs and stronger supervision and enforcement powers for ASIC and the Reserve Bank. The reforms also include the introduction of crisis management and resolution powers over Australian clearing and settlement facilities. Council members will continue to engage closely on the development of the legislative reform package. The Reserve Bank updated members on its review of governance arrangements for the ASX clearing and settlement facilities and capacity enhancements to ASX's CHESS settlement system.

The Council discussed the recommendations of a review of the regulatory framework for property e-conveyancing, conducted by a working group comprising Council agencies, the ACCC and state registrars. The working group identified areas where current arrangements could be strengthened to ensure effective competition, improve consumer outcomes (including through innovation) and reduce risk. The Council and the ACCC support addressing these areas through a self-regulatory regime. An industry code will be jointly developed by the e-conveyancing platform providers and financial institutions under the governance of an industry steering committee facilitated by AusPayNet. The Council expects the industry to have completed the code by September 2022, subject to any necessary authorisations by the ACCC.

The Council discussed recent developments impacting the affordability and access to liability insurance products, especially for small business and regulated entities. Members also discussed Government and Reserve Bank reviews of the payments system, progress on a new cross-agency response protocol for cyber security incidents, lessons from the recent exit of a small ADI, and regulatory coordination.

In conjunction with its quarterly meeting, the Council hosted its annual meeting with other Commonwealth regulators of the financial sector. This included representatives from the ACCC, the Australian Taxation Office and the Australian Transaction Reports and Analysis Centre (AUSTRAC). Participants discussed the pandemic and recovery, along with priorities for a working group considering the regulatory implications of stablecoins – a type of crypto-asset that aims to maintain a stable value against one or more currencies or assets. The working group will continue to examine the regulatory arrangements for stablecoins and the risks and benefits that would arise should there be broader adoption by Australian users.

Participants also discussed Australia's role in the G20 Roadmap for Enhancing Cross-border Payments, which aims to address key challenges in international payments – high costs, low speed, limited access and insufficient transparency. A range of Australian policy and regulatory agencies are involved in progressing Australia's contributions to the Roadmap, and will continue to coordinate. A related issue has been the withdrawal of banking services (‘de-banking’) from payments and other financial service providers. Participants discussed trends and drivers of decisions to ‘de-bank’ these providers. They agreed that agencies would undertake further work to explore the underlying causes and examine possible policy responses.

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.