Quarterly Statement by the Council of Financial Regulators – September 2021

The Council of Financial Regulators (the Council) held its quarterly meeting on Friday, 24 September. Key items of discussion were the pandemic and recovery, housing market risks, recent reviews of payments system regulation and agencies' work on the financial risks associated with climate change. The Australian Treasurer and representatives of the Australian Competition and Consumer Commission attended for parts of the meeting.

Since the previous Council meeting, outbreaks of COVID-19 have led to lockdowns and disruption of economic activity in several states and territories, delaying the economic recovery. However, the financial system remains strong, and is well placed to continue to support the economy. The Australian and state governments have provided financial support to many households and businesses, which is providing an offset to the decline in income. Lenders have also offered temporary loan repayment deferrals, supported by regulatory measures. Members expect the economy to rebound as vaccination rates increase and restrictions are eased, although acknowledged the uncertainties.

The Council continued its dialogue on housing credit conditions and associated risks. Housing credit growth picked up over the first half of the year among both owner-occupiers and investors. The recent lockdowns have reduced transactions and new listings, but prices are still rising briskly in most markets. Commitments for new housing loans remain at a high level, suggesting that credit growth is likely to remain relatively strong. The Council is mindful that a period of credit growth materially outpacing growth in household income would add to the medium-term risks facing the economy, notwithstanding that lending standards remain sound. Against this background, the Council discussed possible macroprudential policy responses. APRA will continue to consult with the Council on the implementation of any particular measure. Over the next couple of months, APRA also plans to publish an information paper on its framework for implementing macroprudential policy.

The Council discussed a number of developments in payments system regulation. These included progress of the Reserve Bank's Review of Retail Payments Regulation and the recommendations of the final report of the Government's Review of the Australian Payments System (Farrell Review). A key focus of the Farrell Review has been to consider whether the regulatory architecture of the payments system is fit for purpose and able to respond to advances in payments technology. Treasury is currently consulting on the recommendations, prior to the Government finalising and releasing its response by the end of the year. In addition to the Council's discussion, members are providing input to the consultation bilaterally.

The Council also discussed the Reserve Bank's work on central bank digital currencies (CBDCs), including its recently announced participation in Project Dunbar – a collaboration with the Bank for International Settlements Innovation Hub and several central banks to develop prototype shared platforms for cross-border transactions using multiple CBDCs.

Separately, the Council agreed to refocus some working group activities in order to prioritise work considering regulatory arrangements across the spectrum of crypto-assets, including stablecoins.

The Council discussed the annual stocktake of climate change-related initiatives undertaken by member agencies. These activities aim to improve the ability of Australian corporates and financial institutions to manage the financial risks associated with climate change and to provide high-quality comparable disclosures on these risks. Focus areas of the Council agencies include: using scenario analysis to measure the exposures of financial institutions and the financial system to climate-related risks; setting supervisory expectations for the management of climate-related risks; improving the quality, consistency and breadth of climate risk disclosures; and monitoring the development of taxonomies used to define what is a ‘sustainable’ activity or financial product. Climate-change related issues have gained increasing prominence in the international forums in which Council agencies participate, and agencies are also increasing their efforts to understand the implications of emerging global frameworks and standards for Australian entities. Members agreed to make the stocktake available on the Council's website.

The Council discussed the insurance industry's progress with testing the validity of business interruption insurance (BII) claims for businesses affected by the pandemic. The Council noted that the first test case relating to policy exclusions referencing the repealed Quarantine Act 1908 was finalised in favour of policy holders in June 2021. A judgement for the second (and final) test case is expected in coming weeks and an appeal hearing to the Full Federal Court has been set aside for early November 2021. The most optimistic scenario remains for the second test case to be fully resolved by the end of this year. The Council noted that insurers should be taking steps now to ensure that once legal certainty is obtained, they contact affected policy holders and settle valid claims quickly and efficiently.

The Council discussed coordination and regulatory arrangements for cyber security. Agencies are working on a cyber-attack communication and coordination protocol. They are also engaging actively with the Department of Home Affairs on the application of Australia's ‘critical infrastructure’ regime to the financial sector. Further, they are engaging with both the Department of Home Affairs and the Department of Industry, Science, Energy and Resources on options to uplift cyber resilience across the economy included in recent public consultations. Finally, the Council was briefed on the Reserve Bank's submission to the inquiry into the adequacy and efficacy of Australia's anti-money laundering and counter-terrorism financing regime.

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.