Do we need dual regulators in financial services? Synergies in establishing a single regulator *.(Australia. Prudential Regulation Authority, Australia. Securities and Investments Commission)

* Do we need both APRA and ASIC?

* A recap of the history of regulators in financial services sector

* How are financial services regulated in other countries?

Since July 1998 Australia has had a variety of regulators involved in the regulation of financial services. The present system is the result of the Australian Federal Government commissioned report into the financial system, which is known as the 1997 Wallis report. (1) It is not a surprise that the financial services sector in 2006 stands at over $2 trillion and that over half Australia's adult population owns shares! (2) In particular, the specific area of superannuation (or pensions, as it is known internationally) accounts for over $800 billion alone. (3) Many individuals, as well as corporate employers, are carefully attuned to the importance of superannuation and the changes that came into place with the Federal Government's WorkChoices and indeed SuperChoices (4) legislation in 2005. It is thus paramount that the government, employers and individuals, as well as other stakeholders, have confidence in the efficient and effective operation of the regulators.

Recently, in the Australian Financial Review, in an article titled, 'Regulatory double act under fire again', Stewart Oldfield stated that the 'pressure is growing for a review of the country's dual financial services regulatory regime, with federal opposition becoming the latest body to question the overlap between Australian Prudential Regulation Authority and the Australian Securities and Investments Commission ... Zurich Financial Services Group chief executive Tom Brown said last year that Australian business would be better served by a single, merged regulator'. (5)

This begs the important question whether it is necessary to have the Australian Prudential Regulatory Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA), the Australian Taxation Office (ATO), the Foreign Investments Review Board (FIRB) and the Australian Competition and Consumers Commission (ACCC), to name a few Commonwealth bodies!

It can be argued that it is time to rationally review this structure based upon a nine-year-old report, which has observable flaws identified by the media, industry and academics. The purpose of this article is to provide an opportunity to recap the history of the multitude of regulators that work in the space of financial services and to examine other international alternatives. Or, to look at it another way, can we ask the question: 'Do we need dual regulators in financial services or are there synergies in establishing a single regulator'?

The stakes in the financial services industry in Australia

It is easy to underestimate the importance of financial services in Australia. Axiss Australia states that '[t]he rapid growth in Australia's compulsory pension savings, have contributed to a strong, sophisticated and innovative financial sector'. (6) In fact, financial and insurance industries are the third-largest sector in Australia's economy: 8.5 per cent or $62 billion of GDP. (7) To put this into context, financial services represent over twice the value of agriculture, fishing and mining combined. From 1985 to 2004, according to the Australian Bureau of Statistics, the average growth rate of the financial services and insurance sector stands at 5.3 per cent, well above the all-industries average of 3.6 percent. (8)

This has a particular degree of importance in the area of superannuation and the long-term savings plans of all Australians. APRA makes the point in its statistics that the '[t]otal estimated superannuation assets increased by 6.7 per cent in the September 2005 quarter to $791.5 billion. This is a 22.4 per cent increase over the 12 months to September 2005'. (9) The political importance of confidence in the securities markets is reflected in the ASX annual report for 2004 which stated that '55% of the Australian adult population, or approximately eight million people, owned shares directly or indirectly (via a managed fund or self-managed superannuation fund). This was a significant increase from 51% in 2003 and 50% in 2002.' (10)

Background to the current regime

Australia's current regulatory trio governing and overseeing the financial sector was the product of the 1997 Wallis report and the Commonwealth Department of Treasury, Financial Markets and Investment Products--Corporate Law Economic Reform Program Proposals for Reform Paper No. 6 (usually known as 'CLERP 6'). (11) This regulatory structure was founded on the rationale of dividing regulatory territory along functional lines. The thrust for this change had come about with the Commonwealth Treasurer's initiative in 1996 to review the regulatory landscape in view of financial deregulation in the 1980s and incorporated the challenges confronting this sector amidst global financial competition. The objective was to clearly devise a regulatory regime to enhance Australia's financial sector's competitiveness.

The predecessors of the Wallis report were the Campbell report in 1981 and Martin report in 1991. (12) The Martin report was commissioned to review the performance of the sector since deregulation prompted by the Campbell report; it noted that the anticipated benefits were not completely realised. (13) In 1993 Harper and Leslie argued that the some of the failures of deregulation promoted re-regulation and the creation of the Australian Financial Institutions Commission. (14) They stated that '[f]inancial deregulation may not have been a speculator success, but relative to the alternative of …