What is financial regulation and compliance?

The core elements of Australia’s financial regulatory compliance framework were introduced on July 1, 1998, in response to the Wallis Inquiry.

The recommendations of the inquiry had a profound impact on the stability, competition and efficiency of Australia’s financial system and led to the formation of the Australian Prudential Regulatory Authority (APRA) and a coordinating body known as CFR.

Why is financial compliance important?

Financial compliance is important for several reasons.

Perhaps the most obvious (though underappreciated) reason is that the financial system impacts everyone. Consumers rely on banks to protect their savings and make them available whenever required. They also rely on informed, unbiased advice on financial products such as insurance and investments.

Businesses, on the other hand, need a robust financial system to access funding, manage risk, operate legally, maintain a positive reputation and importantly, secure a competitive advantage.

When financial institutions are inadequately regulated, they undermine the stability and integrity of the system of which they are a part. This subsequently impacts consumers and in severe cases, the broader economy.

A prime example is the 2008 GFC, which forced a drastic overhaul of the global financial regulatory landscape. With substantial input from the International Monetary Fund (IMF), tools and procedures were introduced to make financial systems more liquid, better supervised and less leveraged.

Who oversees financial regulation and compliance in Australia?

In Australia, financial regulation and compliance are overseen by several key regulatory bodies that ensure the continued integrity and stability of the financial system.

Collectively, the four organisations detailed below comprise the Council of Financial Regulators (CFR) – the coordinating body for all financial regulation in the country.

Here is a look at each.

Australian Prudential Regulation Authority (APRA)

APRA is the prudential regulator in Australia. Think of prudential regulation as a legal framework that focuses on the financial stability and safety of relevant institutions and the financial system more broadly.

APRA is sometimes referred to as the country’s financial safety regulator. This is because it strives to ensure that all entities it supervises can meet the financial commitments they make to customers.

In practice, this means that:

• Bank, credit union and building society deposits are safe and available when customers need access to their funds.
• Insurance companies have the financial capacity to pay all insurance claims deemed legitimate, and
• The trustees of superannuation funds manage contributions in their members’ best financial interests.

It is important to note that APRA takes a pre-emptive approach to financial regulation and compliance. For example, it focuses on whether financial institutions have enough capital and liquidity to weather a financial storm and if insurance products are transparent and affordable.

APRA also ensures that such institutions have robust internal controls in place to improve their resilience against cyberattacks.

APRA’s prudential framework

APRA’s regulatory compliance requirements are set out in a framework with three key pillars:

1. Prudential standards – APRA’s prudential standards detail the minimum requirements in key areas such as governance, capital and risk management. Prudential statements are legally binding and all APRA-regulated entities must comply with them.
2. Prudential guidelines – these encompass various best practices and steps that provide clarity on how such entities can comply with prudential standards. They are not legally binding.
3. Reporting standards – reporting standards define when APRA-regulated entities must report and the data that must be included when they do so.

APRA regulates three industries (banking, superannuation and insurance) and each has industry-specific prudential standards, prudential guidelines and reporting standards. Some standards and guidelines are also applicable to multiple industries.

Australian Securities and Investment Commission (ASIC)

ASIC is the primary regulator for financial services, consumer credit, capital markets and corporate governance. The body administers under the Australian Securities and Investment Commission Act 2001 with core tasks that include:

• Maintenance, facilitation and enhancement of the financial system and its entities.
• The creation of a financial system with confident and informed consumers and investors.
• Effective administration of the law with minimal use of procedural requirements, and
• Making information about companies available to the general public as quickly as practicable.

The Reserve Bank of Australia (RBA)

The RBA promotes the general stability of Australia’s financial system by:

• Regulation of the payments system (and other financial market infrastructures).
• Management of the Australian dollar.
• Establishing an official cash rate which influences credit availability and the cost of borrowing.
• Providing liquidity to institutions, and
• Monitoring risks in the financial system such as new payment technologies.

Australian Treasury

According to its official website, Treasury “promotes competitive, efficient markets that work for the good of consumers and investors, a secure financial system and sound corporate practices, and foreign investment consistent with Australia’s national interest.”

Treasury also develops regulatory reforms and policies that increase the resilience of Australia’s financial system.

Financial regulation and compliance processes

The four members of CPR have established a wide range of compliance processes and regulatory requirements that reflect their respective areas of expertise.

In addition to the CPR, three other bodies have the power to enforce compliance, investigate potential breaches and impose penalties. These are the:

1. Australian Stock Exchange (ASX).
2. Australian Tax Office (ATO), and
3. Australian Transaction Reports and Analysis Centre (AUSTRAC).

Just some of these processes are mentioned below.

Licensing and registration

Any person or entity that provides financial services (that is, conducts a financial services business) must hold an Australian Financial Services License (AFSL).

ASIC, the assessor of AFSL licenses, considers whether an applicant:

• Has the required competencies to conduct the specific financial services business in the application.
• Has sufficient financial resources to do so (unless regulated by ARPA), and
• Can meet all other AFS licensee requirements.

Market conduct and consumer protection

ASIC is also the overseer of market conduct and consumer protection. The body’s capacity to maintain the integrity of market conduct is well-known, with a robust framework designed to prevent market manipulation, insider trading and other deceptive practices.

ASIC’s role in consumer protection is also multifaceted. Mandates dictate that financial products be sold transparently with clear and understandable disclosures of risks, fees and important terms.

In addition, ASIC facilitates dispute resolution via the Australian Financial Complaints Authority (AFCA). This scheme enable consumers to fairly and efficiently resolve complaints against financial services providers and if applicable, receive compensation.

Anti-money laundering and counter-terrorism financing (AML/CTF)

Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, AUSTRAC protects Australia’s financial system from criminal abuse.

The Act imposes various obligations on businesses in the financial sector but also on others considered high risk such as bullion dealers, casinos, digital currency exchange providers and remittance service providers.

With serious and organised crime costing our financial system around $60 billion each year, AUSTRAC endeavours to enhance the country’s AML/CTF controls, ensure they are fit for purpose and able to respond to ever-evolving threats.

Some regulatory processes in this context include:

• Customer due diligence – measures such as customer due diligence (CDD) and enhanced due diligence (EDD) require entities to verify customer details before providing financial services. EDD in particular is useful for higher-risk customers.
• Suspicious matter reports (SMRs) – entities must also report any suspicious matters to AUSTRAC promptly. Suspicious matters may include transactions that appear unusual, complex or inconsistent with normal behaviour. Reports must be submitted to AUSTRAC within 24 hours if related to terrorism financing and 3 days for other matters.
• Programs and record-keeping – relevant entities must develop, implement and maintain an AML/CTF program based on their specific risks and operations. This should include risk assessment processes, customer identification and verification, transaction monitoring and employee training. Entities must also maintain details of their AML/CTF efforts if audited by AUSTRAC, with transaction records kept for at least seven years.

Summary:

• Financial regulation and compliance refers to the frameworks and processes that ensure financial institutions and markets operate in a fair, transparent and efficient manner. These systems protect consumers, maintain market integrity and promote financial stability in the broader economy.
• In Australia, financial regulation and compliance are overseen by four bodies that comprise the Council of Financial Regulators (CFR): Australian Prudential Regulation Authority (APRA), Australian Securities and Investment Commission (ASIC), Reserve Bank of Australia (RBA) and the Australian Treasury.
• The four members of the CPR plus AUSTRAC, the ATO and the ASX administer various financial regulation and compliance processes related to their specific domains. These include processes related to licensing and registration, market conduct, consumer protection, anti-money laundering and counter-terrorism financing.