Financial Sector Shake-Up

Financial Sector Shake-Up

There is a lot of hype around the rumoured trade negotiations held by Prime Minister Tony Abbott with selected members of the World Trade Organisation (“WTO”). According to leaked WikiLeaks documents, the Abbott government is pressing ahead with secret trade negotiations aimed at fundamentally deregulating Australia’s banking and finance sector.

Australia’s ‘four pillar’ block

The “four pillars” policy was implemented by the Australian Government to maintain the separation of the four largest banks in Australia by rejecting any merger or acquisition between the four big banks.

Adopted by the Labour Government in 1990, the policy covers the four big banks: Commonwealth Bank, Westpac, National Australia Bank and ANZ. The arrangement was designed to ensure some level of competition in a small national market. The Australian Prudential Regulation Authority (“APRA”) sits behind the banks, applying rules shaped by a global template that is modified for domestic conditions. The Foreign Investment Review Board screens foreign investment generally and any deal on national interest groups can be blocked or approved by the Treasurer.

Trade in Services Agreement (TiSA)

Fifty WTO members, including Australia, Canada, Japan, South Korea and the European Union (representing its 28 member countries) are engaged in the TiSA negotiations, which began in Geneva in 2012. WTO negotiations on the General Agreement on Trade Services, involving all 159 WTO members, have been slow. The TiSA enables a minority of mostly richer countries to negotiate behind closed doors.

Details of the TiSA negotiations show Australian trade negotiators are working on a financial services agenda that could end the Australian Government’s “four pillar” banking policy. If successful, this would effectively preclude an Australian government blocking foreign takeovers of Australian banks.

Another key provision in the leaked draft text involves a United States proposal for a “standstill” on financial regulation, which would prevent governments from introducing new regulation in the future. Therefore, if Australia agrees to these provisions, a future government would be unable to introduce stronger regulation to protect consumers.

Also in the draft are US and European proposals for participating countries to allow financial service providers from other participating countries the right to establish or expand within their territories, “including through the acquisition of existing enterprises”.

A significant concern about the TiSA negotiations stems from the apparent loosening of Australia’s privacy laws. The US has proposed measures that would allow Australian customers’ financial data to flow freely to other TiSA countries. Adding to that concern is the secrecy surrounding the negotiations, which are taking place outside of the WTO and therefore not subject to WTO transparency practices.

There has been little parliamentary comment on Australia’s apparent participation in the negotiations. Whilst declining to confirm the legitimacy of the leaked documents, Trade Minister Andrew Robb has dismissed experts’ warnings that the proposed changes could harm Australia’s autonomy over its financial sector, saying the TiSA negotiations are a ‘key focus’ of government policy. Further, Robb said Australia wanted to open new opportunities for its services sector.

Regulation of the Australian financial sector

There is a lot of scepticism about the push towards deregulating financial services. Deregulation of financial systems, especially in the US, was a major cause of the global financial crisis. Financial institutions were operating without adequate consumer protections, investing in risky financial products and engaging in national and international mergers. The TiSA proposals contradict the global trend in regulation of financial services, which have been fiercely resisted by global banks.

In response to an inquiry into financial products and services, the former Labour Government introduced Future of Financial Advice (“FOFA”) reforms. FOFA imposes stringent obligations on financial providers aimed at improving the quality of financial advice in Australia and enhancing retail investor protection. Originally intended to commence on 1 July 2012, the Australian Securities and Investment Commission (“ASIC”) applied a 12-month facilitative approach, pushing the mandatory compliance date to 1 July 2013. With the subsequent change of government, proposed amendments to FOFA were introduced by the new Liberal Government, which still remain unpassed. The suggested amendments are intended to relax the strict limitations imposed by FOFA legislation in its current form.

The proposed bill of amendments was referred to the Senate Economics Legislation Committee (“Committee”). On 16 June 2013, the Committee provided a report recommending that subject to suggested changes, the bill should be passed by Parliament. On 20 June 2014, the Australian Minister for Finance, Mathias Cormann, released a statement outlining the Government’s response to the Committee’s report. Cormann indicated that Government intends to proceed with its proposed amendments to FOFA. Key changes are to be effected as soon as possible, with certain changes to be implanted via regulations set to commence on 1 July 2014.

What TISA means for Australian financial advisors and consumers

If the TiSA negotiations proceed to fruition, the deregulation of financial activities is likely to have serious consequences for both financial advisors and consumers.

The reforms are likely to be a welcome relief from the strict limitations currently governing their operations. On a local scale, deregulation would presumably expand investment opportunities and allow banks to retain a greater commission.

However, deregulation reduces investment protection. By reducing the limits placed on financial providers, there is the risk that investments will be steered towards entities that provide a greater reward for the financial advisor, rather than investing in the best interests of the consumer. This, in turn, may result in the Australian financial market being more vulnerable to a future global financial crisis.

Ultimately, the impact of TiSA negotiations and the proposed reforms to FOFA legislation will remain unclear until the above measures are fully considered and implemented.