Quarterly Statement by the Council of Financial Regulators – December 2022

The Council of Financial Regulators (the Council) held its regular quarterly meeting on Monday, 12 December. Items of discussion included the evolving risks to household and business balance sheets, non-bank financial intermediation, cyber risks and regulatory developments in the payments system, including crypto, stablecoins and financial market infrastructure.

The Council continues to closely monitor the resilience of households to high inflation and rising interest rates, against a backdrop of falling housing prices. Household balance sheets overall remain well placed to manage these pressures, supported by strong labour market conditions and the large saving and equity buffers accumulated during the pandemic. Nonetheless, pressures on household balance sheets will continue to increase as the full extent of the increase in interest rates flows through and inflation remains high. Business insolvencies have recently picked up to near their pre-pandemic level, but remain low overall. Banks remain very well capitalised ahead of the introduction of a new capital framework in 2023, and are well placed to continue to support household and business demand for credit. The Council agencies will continue to closely monitor these developments, along with lenders’ approach to supporting any borrowers facing hardship.

The Council undertook its annual review of non-bank financial intermediation. Non-bank lending for housing has continued to grow briskly, despite the slowing in overall housing credit growth. Non-bank lending standards have been broadly maintained and members agreed that it is important that this remains the case. While the non-bank sector in Australia accounts for a relatively small share of system-wide lending and has limited direct links with the banking system, the Council will continue to monitor the sector closely. The Council also discussed the recent disruptions in the United Kingdom pension fund sector, which highlighted how the embedded leverage in some derivatives can amplify liquidity risks from large movements in asset prices. Members discussed important differences between Australian superannuation funds and pension funds in the United Kingdom, and that APRA’s updated investment governance standards for superannuation funds, which include requirements for strengthened liquidity management practices, commence on 1 January 2023.

The Council discussed the recent cyber-attacks on Optus and Medibank Private and cyber threats to Australia’s financial system. The Council agencies have strengthened cooperation on cyber security over recent years, including through the agreement of cyber-attack protocols, most recently with New Zealand agencies. The recent attacks highlight the potential for spillovers from other sectors to the financial system and the need to continue to strengthen preparedness and broaden cooperation across government agencies. These will be areas of focus for the Council’s Cyber Security Working Group over the coming year. APRA will intensify its supervision of cyber security in the year ahead, including for all entities found not to be meeting the Information Security Prudential Standard CPS 234 as a result of the independent reviews currently underway.

Members discussed a number of issues related to technology and regulation in the financial system, particularly in relation to payments. The Government has in train a large program of work in this area, including related to regulation of the crypto ecosystem, licensing of payment service providers and the perimeter of payments regulation. Members considered approaches to regulating payment-related stablecoin arrangements, including as a type of stored-value facility under the new payments licensing framework. They also discussed arrangements for the ongoing oversight of payments licensees. Consultation on the payments licensing framework is expected to be undertaken in 2023.

Members reiterated their support for the RBA’s research project exploring use cases for a central bank digital currency in Australia. There has been significant interest from industry in participating in the project, with a large number of use cases submitted. The Bank and its partner on the project, the Digital Finance Cooperative Research Centre, are in the process of selecting use cases to take forward to the pilot early next year. Given the pilot phase involves a real claim on the Bank, members addressed some of the regulatory implications that would arise in the testing of some use cases, considering the ring-fenced and time-bound nature of the project.

Council members discussed ASX’s CHESS Replacement and its recent announcement that it would reassess all aspects of the project. Members stressed the importance of the current CHESS system maintaining the level of service, reliability and resilience necessary to support confidence in Australia’s cash equity markets until the CHESS Replacement is operational. ASIC and the RBA will continue to closely monitor ASX’s compliance with its regulatory obligations and hold the ASX publicly accountable. More broadly, the Council reiterated the importance of legislative reform to enhance the agencies’ ability to effectively regulate financial market infrastructures and to promote safe and effective competition for the clearing and settlement of cash equities.

The Council welcomed the Treasurer’s announcement of the Government’s sustainable finance agenda. The Council will continue to monitor risks, coordinate regulatory responses and ensure Australia’s financial system is well positioned to support climate transition-related initiatives outlined by the Government over the period ahead. Building on related workstreams already underway (see Climate Activity Stocktake), the Council will support the Government in: the implementation of standardised, internationally aligned climate-related financial disclosure requirements for large businesses and financial institutions; development of an Australian sustainable finance taxonomy and coordinated strategies to prevent greenwashing; and strengthening international engagement on sustainable finance.

The Council discussed ongoing implications and lessons learned from Russia’s invasion of Ukraine, and endorsed a work program to enhance the resilience of the Australian financial system to geopolitical events.

It also discussed industry’s progress in developing the e-Conveyancing Payments Industry Code, which aims to promote effective competition, improve consumer outcomes and reduce risk in property e-conveyancing. While members welcomed progress on the Code, they urged the industry to complete this work expeditiously.

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.