Regulators on LIBOR, bank culture and the BEAR
Australia’s key financial services regulators remain committed to evolving their supervisory approach to industry issues, working to prevent problems rather than waiting for them to happen and find fault after the event.
Speaking at The Regulators, a FINSIA event held in Sydney's Ivy Ballroom on Friday, Guy Debelle, Deputy Governor of the RBA, Wayne Byres, Chairman of APRA and Greg Medcraft, Chairman of ASIC, covered a range of issues in outlining the regulatory landscape over the next 12 months.
Debelle kicked off by outlining recent developments with interest rate benchmarks, which he described as “at the heart of the plumbing of the financial system”.
Issues around the London Inter-Bank Offered Rate (LIBOR) and other benchmarks that have arisen over the past decade have necessitated an ongoing global reform effort to improve the functioning of interest rate benchmarks.
“To prevent LIBOR from abruptly ceasing to exist, the FCA has received assurances from the current banks on the LIBOR panel that they will continue to submit their estimates to sustain LIBOR until the end of 2021,” he said.
“But beyond that point, there is no guarantee that LIBOR will continue to exist. The FCA will not compel banks to provide submissions and the panel banks may not voluntarily continue to do so.
“This four year notice period should give market participants enough time to transition away from LIBOR, but the process will not be easy. Market participants that use LIBOR, including those in Australia, need to work on transitioning their contracts to alternative reference rates.”
This is also an issue in Australia, where Debelle estimated that financial institutions have around $5 trillion in contracts referencing LIBOR.
“We are well advanced in changes to enhance the longevity of the Bank Bill Swap Rate (BBSW). While these changes entail some costs, the cost of not doing so would be considerably larger,” he said.
APRA’s Wayne Byres clarified the regulator’s proposed role in the Banking Executive Accountability Regime (BEAR) after some in the industry questioned whether aspects of the new accountability regime would change the nature of APRA supervision.
“APRA has long had an interest in establishing appropriate accountability frameworks for regulated institutions. Therefore, the BEAR can be seen as a strengthening of the existing prudential framework. Although there are a range of new elements, it is not new territory,” he explained.
Given the legislation is still being drafted, Byres added that it was difficult to be precise about how the new regime would work.
“But the core objective – establishing clearer accountabilities for, and expected standards of behaviour by, senior executives within banks – is difficult to argue against,” he said. “Indeed, once the new framework is put in place for banks, APRA intends to think about whether some of the concepts within the regime have broader application.”
Byres said that APRA intended remaining a supervision-led regulator, working to prevent problems rather than simply wait for them to happen and find fault after the event.
“If we are successful in that approach, the new powers granted to APRA should only need to be used rarely. That should not be interpreted as saying we would be reluctant to use them,” he said.
“But the goal must be that, with clear boundaries and obligations set out by the regulatory framework, Boards and executives conduct their affairs in such a manner that intervention by APRA is not needed.
“It is a much better outcome, for example, that Boards hold their executives to account for poor outcomes than have to rely on the regulator to do it for them. My observation is that this has been the experience in the UK, where a similar regime is already in place.”
Data and digital disruption
ASIC’s Greg Medcraft updated the audience on the regulator’s work with data and digital disruption.
“Digital disruption to business models is also part of the world we live in. We are very much in the 4th Industrial Revolution,” he said.
“In my view, regulators must seek to create the right environment to encourage fintech and innovation, while also ensuring people can maintain trust and confidence in markets.”
Referencing ASIC’s Corporate Plan 2017-18 to 2020-21, Medcraft said the regulator had identified digital disruption and cyber resilience in financial services and markets as a key long-term challenge.
Specifically, he said ASIC would be monitoring accountability across digital platforms and excuses blaming the technology for poor outcomes - “the algorithm ate my homework” - would not be tolerated.
Asked to comment on how the banking sector can restore trust, Medcraft said there was “a long way to go” and that banks needed to recognise that “the social license has moved”.
“Today you cannot hide from the crowd,” he said. “There is a long way to go … it isn’t a particularly pretty report card (in terms of the number of bank scandals) and I just hope there isn’t another one around the corner.”