Gerard Henderson:
[Indistinct] The Honourable Dr Daniel Mulino makes a welcome return to the Sydney Institute. He was here a bit over a few years ago as I recall. Now he’s got so many degrees, I’ve got to summarise them. [Indistinct] lawyer, in the public sector [indistinct] a member of the Legislative Council of Victoria 2014 to 2018 and then the Member for Fraser since 2019, and of course before I do his formal titles, he’s written a couple of books, the Microeconomics of Aging and Future of Welfare in Australia. On the second topic, Dr Mulino [indistinct] Assistant Minister for – the Assistant Treasurer and the Minister for Financial Services is going to talk on the topic of regulation and financial services. Daniel Mulino, you’re very welcome.
[Applause]
Daniel Mulino:
Thanks very much, Gerard. Can I begin by acknowledging the traditional owners of the land on which we meet and pay respects to elders past, present and emerging. And yes, Gerard, it was a couple of years ago when I was here to launch the book, Safety Net, and the other book, as you rightly identified is the Macroeconomics of Aging, which I think there’s one review on Amazon, by a close friend of mine, and it says, ‘A real page‑turner’. And I think that’s very much in the eye of the beholder. [laughter]
But Gerard, and Anne and Jacqueline, it’s great to be back, and really wonderful to be back in a forum where it’s possible to present and debate ideas, and that’s a really valuable thing, and particularly at a time when so much discussion is highly polarised, I think this is always a forum where there’s a genuine engagement and an engagement in good faith on issues even where we don’t agree. So it’s wonderful to be here tonight.
Now I wanted to talk tonight about regulation in the financial services sector, and some of the observations that I’m going to make are about regulation more generally, but I think observations on these kinds of matters make a bit more sense when they’re contextualised.
I think it’s fair to say that as Michelle Grattan’s observed, productivity is on every galah’s lips or beak in the pet shop at the moment, just as microeconomics was back in the day. But regulation is a very important strand of that for many people, and when we go back to the 3‑day Economic Reform Roundtable late last year, which I think was a very constructive and important forum for giving real impetus to a lot of significant reforms in Australia, one of the days was dedicated to regulation, and some of the usual topics came up; the speed of approvals, the clarity of regulation, and so forth, and I’ll touch on some of that.
But, and I hope I’m not verballing that group of illustrious people, but I think one of the things that most people agreed with is that especially in complex areas, especially in areas where there’s a lot of dynamic change, we need to think about better regulation, not deregulation for its own sake, and I think for me, better regulation takes us back to thinking about the original purpose of regulation in different contexts. For me better regulation is about getting the design right, targeting real risks, removing pointless complexity and building systems where consumers can participate with confidence.
In the context of the financial services sector, it’s about ensuring that the financial services sector supports productivity and growth while keeping people’s savings and retirement outcomes front and centre.
So today I want to start with a little bit of the economic thinking on regulation and how that has evolved over time, and then after thinking about that, I want to make some observations with that in mind about the Shield and First Guardian collapses, which for me are really central challenges to getting some of the regulatory trade‑offs right in our investment and superannuation systems, and then I’ll finally finish with a few of the other issues in the financial services sector that we’re working on.
So when it comes to the way economists think about regulation, I think it is important to go back to the primary goal, and that’s why for me it’s useful to think about better regulation rather than deregulation per se, because most regulation starts with a really important public policy goal behind it. It might be public safety, it might be consumer protection, particularly of vulnerable consumers, it might be creating trust and stability and predictability. In many contexts regulation can correct market failures or align practices with broader societal goals.
And so I think it’s really important to go back to those goals and clarify exactly what it is that we’re seeking to achieve through regulation, and sometimes we might feel that that original policy goal is obvious, but I feel that quite often it’s actually really important to go back and really clearly clarify what it is we’re seeking to achieve. Only then can we figure out whether regulation is well defined.
I think in financial services in particular, it’s really clear – it’s really important to remember that in all markets we need both a supply side and a demand side, and I think in many markets regulation for consumer protection is important, but for financial services in particular, consumer protection features prominently because of the complexity and dynamic change we see in a lot of products and services.
And so the way that regulation affects consumer confidence is absolutely key. Of course it’s absolutely critical when we’re thinking about regulation that we make sure that in addition to the ways in which it achieves that primary underlying public policy goal, that we do so without unnecessary impediments to innovation, without unnecessary cost through red tape, without unnecessary uncertainty.
And so that’s often the debate that we get into with regulation where regulation might start with a good purpose, but then over time there might be additions to that regulation, that regulation might creep, and so it’s worth periodically coming back to thinking about whether we can achieve that underlying goal with less cost and with more certainty.
Recently at parliament I attended the launch of the ACCI red tape report, which focused on trying to measure a lot of the costs associated with regulation, and a lot of the discussion there was on this trade‑off where we’re wanting to maintain the original policy goal while at the same time reducing any unnecessary costs.
When I was thinking about the economic theory underlying regulation, and this is over simplifying things, but that’s what economists sometimes do, not necessarily by assumptions in this case, but by quoting just 2 economists, but I’ll quote, firstly, or cite Pigou, and when you think about Pigou, he thought about regulation in terms of trying to correct market failures, and so he’s famous for designing taxes or subsidies that try to correct a negative externality, so if society imposed a tax that exactly offset a negative externality in the market, we’d get back to somewhere approaching what a perfectly competitive market would have been had there not been the market failures, and we can think of all sorts of contexts where Pigouvian taxes have been suggested.
But I really raise that as one of the archetypes in that that is the kind of regulation where government is stepping in to try to achieve an outcome that is socially optimal as positive by trying to correct market failures where the societal benefit is what’s driving it.
And the other famous economist I thought that is worth citing, almost as a bit of a precautionary tale if you will, is George Stigler, who in his 1971 paper, The Theory of Economic Regulation, cited the possibility of regulation as being proposed by self‑interested parties, and so obviously that’s a theory of regulation where sometimes regulation might be advocated for and achieved by an incumbent trying to achieve regulation but trying to impede or prevent new entrants, as just one example.
And so George Stigler’s theory of regulation is a little bit more pessimistic, and in a sense there’s a way in which we might think about both Pigou and Stigler in terms of what kinds of regulation do we think actually arising in our society, I don’t think there’s a real question as to which one we prefer. I think we’d obviously all prefer the Pigouvian kind of regulation where it’s motivated by and designed in favour of public interest, but I think the fact that regulation could potentially take either of these forms, I think begs the question. we should look at regulation periodically and make sure that regulation takes the form more of the public interest motivation and that regulation is designed more in the broader public interest rather than other kinds of interests creeping in to regulatory design.
And obviously the theories of regulation are much, much deeper and wider than that, but I just pose Pigou and Stigler as in a sense 2 extremes to think about when we think about, firstly, what kinds of regulations we want to see, and secondly, what are the dangers we fear might creep into the system.
I think it’s worth having a little bit of a look at regulation in Australia’s financial system over the last century or so. It’s changed a lot, as has the sector itself.
During the 1930s our financial system consisted of a few players, the Commonwealth Bank, Trading Banks, State Saving Banks, Life Office and Pastoral Financial Offices. And I think it’s worth noting that many of those big players were public sector players, so they had a big role in the way that the sector was regulated, a lot of it was government‑provided or government owned.
Over the decades there were structural changes and a broadening and diversification of financial instruments and techniques. Building societies, financial companies, finance companies, credit union and superannuation funds all came into the role.
For me at least it’s quite interesting to look back at different parts of Australian history and to see how prominent mutuals and credit unions have often been in our financial services sector. I think we often assume that it’s always been big corporates, but in fact a lot of the financial services history has quite a lot of ebbs and flows and periods when other forms were very prominent.
And then there was a big push towards financial deregulation in Australia, which began in the early 1970s, and then of course saw significant further changes in the 1980s.
Then there was the Wallis Inquiry in the 90s, a major turning point in regulation. It found the financial services sector with its great complexity of products and services, that it required specialised regulation, especially as consumers faced significant adverse consequences when choosing the wrong product or when financial promises might be broken.
And then there was the GFC which caused extreme stress in global financial markets and banking systems between mid‑2007 and early 2009. Australia and many of our peers responded to that with much stronger banking regulations, and we also strengthened lending standards to make the financial and private sectors more resilient.
The Financial System Inquiry in 2014, was another milestone. It made recommendations for the sector to become more resilient, and also a number of recommendations in relation to our retirement income system, ways in which to promote innovation and ensure the fair treatment of consumers.
And then most recently there’s the Hayne Royal Commission, which placed a much greater, or a significant emphasis on consumer outcomes and particularly vulnerable consumers. It often – it found that in many contexts consumers lacked the capacity to undertake well‑informed choices and found that in some instances laws were broken without organisations being held to proper account.
And following on from the Royal Commission we saw, after a review in between, the Compensation Scheme of Last Resort and the Financial Accountability Regime.
Now I raise all of those different steps, and of course you could do a much more in‑depth and nuanced speech on that history, but I raise all of that to say that one thing I think at that stands out is there in a sense have been deregulatory and regulatory impulses that have gone back and forth to some degree. One can, to some degree, think of this as a bit of a pendulum that has swung back and forth.
The other thing that I think is perhaps just as important is that, as I mentioned earlier, there have been times where mutuals and building societies played a very prominent role, other times, like now, where it’s more driven by corporates, and in a sense the regulatory system has to adjust to those ebbs and flows, and I think has.
The other thing I would say is that, what I think has changed over the course of the last century, and I didn’t extract this so obviously, but is that I think in many contexts people have been exposed to increasingly complex services and complex choices, and I think that has in many contexts raised questions over how much we want to respond to that through empowering choice and how much we want to respond to that through setting up guardrails. That, I think, has been a trend in our financial services in many areas.
And I think when I talk about Shield and First Guardian later on, one of the real challenges at the moment is that while I think many of us are correctly in favour of choice in principle in many contexts, there are real questions around how much people can exercise those choices in a way that benefits them and is truly well‑informed.
So I think that context is really important, because we don’t just have a financial services sector, we have one which has a history, and we have one which won’t just stay the way it is; it’s going to evolve. And we’ve already seen all sorts of ways in which it’s evolving in the trading system with wallets, with stablecoin, we see it evolving through after that, or a significant proportion of our society either in retirement or approaching retirement, we see it evolving with the use of AI in all sorts of ways.
So for me our history of the financial services sector is really important, because it’s the context in which we need to think about what kinds of regulation are fit‑for‑purpose.
So that broad context then takes me to 2 recent collapses, which aren’t the only thing going on in the financial services sector, but they’re very important, because I think they draw together the strands in a lot of areas of policy, and they go to the heart of a lot of the trade‑offs that we face when we’re trying to design regulation. And that was the Shield Master Fund and First Guardian Master Fund collapses.
So ASIC and APRA are obviously undertaking a significant number of actions as we speak in relation to this, so I don’t want to get into all the details of the status of those actions, but more to step back and to have a think about what we know about those collapses and what that suggests about how we can move forward with financial sector regulation. And getting financial sector regulation set correctly is foundational to some of the most important aspects of our safety net. It includes the retirement income system, the ways in which we invest for our working lives. Getting regulation settings correct in relation to some of the matters I’m about to raise, I think are foundational questions for the welfare of many people in our society.
What we know from the liquidators and from the investigations that have occurred, it is that many of the transactions that occurred with Shield and First Guardian, which ultimately involved losses of over $1 billion, were not genuine, arm’s length commercial transactions.
We also know that they involve many vulnerable people. In total these collapses placed more than $1 billion of funds at risk with around 12,000 investors involved.
But I think in addition to the pain that it has caused those individuals, and I’ve met with a number of victims, it raises the question of systemic risks that we need to grapple with to make sure that these kinds of events are less likely to occur in the future.
There is a real human dimension to these collapses. A number of people who lost funds in these collapses were near retirement, were at a point in their life where it’s very difficult to make up the losses, and this is something which we need to guard against going forward given the number of people that we know are approaching retirement now and will in the coming decades.
One of the things that I think is critical about thinking about the First Guardian and Shield collapses is that we need to think about this as an ecosystem, because it was really not a failure in any one part of the financial services sector that led to this.
The starting point, it appears, and I think I can say this with a degree of confidence – I always want to caveat things with ‘alleged’ given there are all these court actions underway, but I don’t think there’s any doubt that the starting point was aggressive behaviour by lead generators. Lead generators acting on internet sites, lead generators acting through call centres who made unsolicited calls, but often informed by very sophisticated models of persuasion and informed by sophisticated models where they obtain information about individuals they were reaching out to.
These lead generators then referred people on to financial advisers, and many of those financial advisers recommended that people roll their superannuation, sometimes out of – or many times and most times out of safe products, MySuper products, that they roll them out of that into options available on a platform, quite risky‑managed investment schemes or sometimes into SMSFs.
And it’s really that whole chain that matters, because in this case I think it’s likely that when we see the full cause of all of these legal actions play out, we’re going to see that there was failures at multiple steps in that chain; in the lead generators and their behaviour, in some of the behaviour of financial advisers, in some of the behaviour of platforms, and in the behaviour of the managed investment schemes that a lot of these funds went into.
And so that word ‘ecosystem’ is really important because when we’re thinking about how to improve regulation in this sector, we’re going to have to think about the regulation of each of these parts of the financial services sector and how they all interrelate with each other; how people are contacted, how trust is created, how financial advice is delivered, how platforms create a wide range of options for people and then make investing almost frictionless at times, and then what happens when things go wrong.
And that brings us to a central tension in a lot of financial service regulation at the minute, which is how do we support consumer choice and how do we balance consumer choice and market efficiency, and in a sense I think we need to think about this in terms of building in a safe level of friction.
A well‑functioning market needs choice and competition and low‑cost access. We want households to be able to compare products, switch easily and to benefit from innovation, and in the case of their retirement products to benefit from the possibility of higher returns.
But there is also a difficult truth here, which is that in a range of contexts, when the system because frictionless in the wrong places and in the wrong ways, it can become a fast lane to harm.
So I think the question isn’t whether we have friction or no friction, the question is where the system should be frictionless and where it should slow down a bit.
Good friction can do a few things: it can slow high‑risk decisions based on poor quality or misinformation, especially where decisions are difficult to reverse, and especially in this context where they involve people’s retirement savings, in surfaces meaningful information at the point consumers are deciding, not buried in a disclosure pack that people may not read in some contexts, and it tests legitimacy, not by adding red tape, by ensuring basic checks can’t be bypassed.
Now of course there’s bad friction as well. Bad friction can do the opposite; it keeps people stuck in expensive products, it can make switching harder than it should be when people want to make a well‑informed choice and change products for good reason, and sometimes it can protect incumbents rather than consumers, the point Stigler made in 1971.
So better regulation is about being intentional, removing bad friction that props up inefficiency and sometimes adding a bit of sand in the wheels where that is better for the overall system.
And I can draw parallels here in a number of other contexts, I would argue. One is scams, where the work of the government in the previous term, I would argue that it’s world‑leading. My predecessor, Stephen Jones, brought in the Scam Prevention Framework towards the end of last term; we’re now working on codes in order to give effect to that.
That’s an example of where, where the payment system has been moving towards frictionless and immediate transactions, and for good reason that was something which the sector was heading towards, because there had been a lot of unnecessary delays in peopling getting their money a few decades ago, but there is now benefit in slowing things down a little so that banks can, for example, reach out to people if there are a lot of red flags on a transaction and ask if they really want to undertake this.
This morning I spoke at a banking conference, and I relayed the example of an elderly couple that came into my electorate office last Friday who had wanted to undertake a transaction based upon a deep fake video, which they didn’t realise was deep fake at the time. They called up their bank in order to undertake the transaction, and the bank pushed back, and they got upset, and this often happens, and in the end there was a bit of discussion and the transaction didn’t happen.
One of the members of the couple who wanted the transaction to occur asked the other person in the couple to try through a different route, and it got locked in that route, and then their suspicion was raised, and they had another look at it.
By the time they came into my electorate office, we had a discussion with them and confirmed pretty quickly that this high‑profile person in a deep fake video would not be recommending investing in this product. It’s an example of where a little bit of friction has led to a much better outcome.
But again, I just return to the original policy impulse that I touched on earlier, which is that if we go back 30 years, quite often people might see payments delayed by a number of days. You might be a vulnerable person who’s waiting for a payment to come through, and if it doesn’t come through on the Friday afternoon, you spend the whole weekend without money. So there’s good reason why we would try to speed up transactions.
So what we needed to do, I think, is to figure out a way where we get the optimal speed, where we balance the convenience, we balance people getting access to their funds, but we put a bit of sand in the wheels so that we can protect people.
I just wanted to talk about a few of the areas where I think First Guardian and Shield is going to raise public policy questions.
One is around governance and accountability for managed investment schemes, and this is an issue which has been on the public agenda for a long time. It’s a complex issue. We’ve released a discussion paper which sets out some options for how to control related party transactions, improve governance and improve data reporting.
We know that managed funds, managed investment schemes in particular, play a very important role in collective investments. They play a critical role across our economy, but there is also a risk here in that for retail investors to go into MISes often creates risks that are disproportionate to the potential gains. We need to figure outweighs in which retail investors can go into MISes, but where there are sensible guardrails.
The second stand‑out issue is lead generation, and this is where people can be reached out through a call centre and find themselves on a poorly regulated website making recommendations. This is an area where consumer harm can start well before the product itself is purchased. It can start at the first contact, the first promise, the first referral, the first free review. So we’re going to also consult on additional proposals to curb inappropriate lead generation.
The third area is the role of platforms which play such a critical role in enabling choice in our system. Again it’s a question of enabling the right choice but making sure that platforms undertake the right due diligence and that platforms stand behind the products that they have on their systems.
And then, fourthly, there’s the Compensation Scheme of Last Resort. And this has become a pivotal part of the broader financial sector reform question in that it provides a back‑stop for people, up to $150,000 in compensation if they take their case to AFCA and win, but the party against whom they take that case can’t pay. This is the system saying we’re going to have your back for up to $150,000. It doesn’t provide automatic full compensation, but it provides a significant amount of compensation, and for many investors will give them at least their capital back.
One of the challenges with the CSLR at the moment is that it’s struggling under the weight of collapses that have occurred even before we get to First Guardian and Shield, and so the CSLR is something which has bipartisan support . It was recommended by the Royal Commission and then the Ramsay Review, Josh Frydenberg introduced legislation including a CSLR of almost the same characteristics than the one that was eventually passed in the previous term by my predecessor, but it’s another example of where there are trade‑offs and where regulatory design will need to be revisited.
And finally, there’s the trade‑off with access to advice and guidance, where we need to get people more access to financial advice, or at the very least guidance, but understanding that we need to make sure that guardrails are in place before we expand that access. This is particularly important given how many people are retiring in the near future.
So I think this is a critical area of regulation design more generally. Regulation featured very prominently in the 3‑day Economic Reform Roundtable, I’m sure many of you are aware it featured in relation to the EBPC Act, the National Construction Code, it features in the trade‑offs that I’ve just outlined in financial services; that we have regulation that is more often than not there for very good reason, but we need to make sure that it is fit‑for‑purpose, and that we are willing to, when circumstances change, step back and revisit whether the trade‑offs are well designed.
I wanted to touch on very briefly just a couple of other areas where regulation is changing. One is digital asset platforms and tokenised asset platforms, which is a booming area of investment in Australia, and asset trading. This is an area where many other jurisdictions passed legislation in recent years. Millions of Australians are already using or investing in digital assets every year. We can’t just pretend this activity doesn’t exist, and with the rise of stablecoin, and the rise of tokenised assets, whether it comes to physical goods or bonds, we know that these markets are going to grow incredibly quickly.
We have introduced legislation to the parliament that will see the regulation of these 2 types of markets, making participation safer and more secure, and I would argue making innovation more likely.
They bring digital asset platforms into a regulatory framework which is well known, which is the AFSL licence, not to smother innovation, but to provide certainty. And this really matters for productivity. It reduces unnecessary compliance costs, clarifies examinations for businesses and supports integration with the broader financial system.
And I just wanted to add one point when it comes to these areas that are very new and dynamic, and that’s that broader concept, which I think is critical in many areas of regulation but financial services in particular, which is this notion of the sandbox, which is where there is rapid innovation and where even the people in charge of the innovation don’t necessarily understand its trajectory or its full impacts, but where there is the real prospect of consumer harm.
The sandbox allows the jurisdiction to begin to regulate, particularly in relation to the clear consumer harms without smothering what is highly innovative and potentially productive, and this is an area where Australia already has a sandbox, but there is a review underway to see whether or not we need to expand that sandbox in different areas to bring us in line, for example, with the UK and Singapore.
Superannuation is another area where balance really matters. For the past 30 years, super has focused on the accumulation phase, which makes perfect sense. That’s why we’re fostering an environment where funds can innovate and deliver better retirement income solutions for their members.
So this includes work recently undertaken by the Treasurer, but with me providing assistance as the Assistant Treasurer, that includes the Retirement Reporting Framework and the best practice principles for superannuation retirement income solutions.
Our retirement income system is in many ways the envy of the world, it is world‑leading on many fronts. But I think there’s also an acknowledgement that when it comes to the retirement phase there is room for us to strengthen the offerings that are available, but also our understanding of consumer preferences and consumer experiences. So I believe that these are really significant steps forward, collecting better data on the retirement phase, and as a first step, developing principles that I think will really usefully guide the sector.
And finally, I just wanted to touch on the fact that in the financial services sector, we’re also working on things that are more concrete, you might say, than the high‑level Pigou versus Stigler debate, which is things like how do we better align and integrate the work of regulators?
We rightly, I believe, have multiple regulators in financial services. I think there are different critical roles. There’s an importance in having a competition regulator, in having a prudential regulator, in having a conduct regulator, in having a regulator such as AUSTRAC dedicated to our payments system and a lot of the risks there, in having an independent umpire in AFCA, and others.
But what’s clear is that a lot of them for good reason are collecting data, for example, but often on slightly different timelines or slightly different asks. And so one of the things we’re looking at, which I think is a good first step, is to ask, are there ways we can align the asks, and even align the definitions of what’s being asked for. I feel that this is actually going to lead to better quality data, but also a red tape reduction cost.
And so this for me is one of those ones where in terms of some of the complex trade‑offs I was touching on earlier, this is low‑hanging fruit in that I feel that there’s ways in which we can improve the quality of our intelligence and at the same time lower the burden on the financial services sector, which obviously should ultimately pass through to consumers.
So just to bring it all together, I think whether it’s in tech innovation, superannuation or regulatory coordination, the principle is the same. I do feel that we have to return periodically to the core underlying principle of what is it we’re trying to achieve with regulation, and I think we need to be striving to achieve that Pigouvian outcome, which is to achieve the societal optimum wherever possible.
We should be cautious about regulation that’s not well‑designed, of course as Stigler would warn, but I think we need to have the light on the hill, if you will, clear. We need to make sure that regulation targets real risks, removes unnecessary friction and encourages responsible innovation, all while keeping consumers at the centre of the system.
So thanks very much to the Sydney Institute for the chance to be here tonight. I’ve touched on a few of the most topical issues in my portfolio, and hopefully at the same time have shed a little bit of a light on some of the regulatory challenges that I think government here and everywhere is facing at the moment.
[Applause]
Henderson:
[Indistinct]. They’re very busy people, and we’re very grateful to [indistinct]. So we’re going to questions, [indistinct], and everyone’s got to keep their comments brief and to the point. I’ll just come back here. There is an argument too, I mean moving slightly across from your role in financial services, your role as Assistant Treasurer, I mean there’s the Hayne recommendations, a number of people say there’s far too many. You’d be aware of industrial relations, if organisations are to [indistinct] various companies in Australia from universities to the ABC can’t pay their staff correct payments because the situation is just so complex that even they can’t do it now with many, many staff. Is there a general problem in the country with too much regulation in your area of financial services [indistinct]?
Mulino:
I mean, look, I wouldn’t accept a proposition that was that broad. I think when you think about our society, I would say that the vast majority of regulation in Australia achieves in broad terms what it sets out to. I think it protects the environment, I think it protects consumers, and I think it builds confidence in markets relevantly to my area.
I think it is important to step back a bit and to acknowledge that broad proposition because I think, as I said earlier, for me, I don’t think we’re at a time where a big wave of deregulation is what we need. I feel that we do really need to make sure that our regulation is properly designed, and that to me is the way I think it’s useful to think about it.
Of course if we were to look at the full gamut of regulation, we could pick certain areas where it has become overly complex and then we could argue that it should be pared back or better designed.
But I think if you were to pose the general question, you know, I think I’d be cautious about making, you know, a strong conclusion.
Henderson:
Question up the back.
Speaker:
I’ve got a question about – you spoke about the principles that underlie regulation, and regulation is designed to control general behaviour in the same way that speed limit controls general behaviour on the roads but doesn’t control the bloke who wants to do a 100‑kilometre‑an‑hour burn‑out. Shield and First Guardian appear to be straight‑up fraud, and isn’t the risk that you’ll create a set of additional regulations on advice, managed investment schemes, platforms, which add say a mere one basis point to the cost of those 3? That’s a cost of 88 [indistinct] 500 million per year [indistinct].
Mulino:
Sorry, just to clarify, your question is, would the cost of that additional regulation – you’re saying it may not be worth it –
Speaker:
Yeah.
Mulino:
Because they’re not going to stop the underlying –
Speaker:
Shield and First Guardian have been extremely rare, that sort of cost would be ongoing.
Mulino:
Yep. Well, look, firstly, you know, I don’t think I would say that collapses of that sort are so rare that I would just say the status quo is fine, we can just accept them happening at the rate they’re happening.
Secondly, I would say that when you look at the industrial scale nature that was Guardian and Shield, and some of the drivers of it like lead generation, I feel that we need to address some of those in a better way than we currently are, and particularly in light of the fact that we have so many people approaching retirement, or people who might be vulnerable in retirement. So I think those risks warrant a regulatory reset.
And thirdly, I would say that one of the key attributes of our financial markets generally, but of our super system in particular, is trust and confidence in that system is incredibly important, and I think if we were to just say we’re going to accept either the current frequency of collapses and just let the cards fall as they may, or even, frankly, the risk of those collapses becoming more frequent, I think there’s a real risk that would undermine confidence in the system in a problematic way.
I mean you raised a question before getting on to that specific, which is about the speed limit, and I think, again, any kind of regulation has to grapple with how much compliance is going to be realistic, and you know, given likely compliance how do I set up the regulation.
So I don’t think anybody would suggest that we shouldn’t have speed limits because a tiny minority break them. I mean that would seem to me to be an extreme response to speed limits, and similarly, I believe in the context of financial regulation, firstly, we should be able to develop regulations that are not overly costly, but secondly, I’m confident that if we design the regulations right, they will impact behaviour and materially reduce the harm.
And finally, I would simply say that we shouldn’t – and we’re talking about harm, like the one person breaking the law – I think we also need to take into account the fact that at the moment the harm from these breaches is extremely significant, I would say, and so I think a system which involves a small cost, a regulatory cost across the system that can materially reduce that harm, I think if it’s well‑designed would be a trade‑off that’s worthwhile.
Henderson:
There’s a question down the back.
Speaker:
Minister, thanks for tonight. One of the previous ways that of deregulation in Australia looked at regulatory impact statements, that is look at the conflicting possible [indistinct] of regulation and the cost impacts before a decision is taken. I think that that’s no longer commonly used in decision making in Canberra. Would you like to comment?
Mulino:
Well, look, this is the problem with stepping outside your portfolio. But my – look, I thought that RISes were still, you know, reasonably common, and look, I certainly support the broader notion that we should be undertaking rigorous analysis of the trade‑offs.
I mean certainly I support the broad notion that when government is either introducing new regulation or thinking about how to re‑design existing regulation, you should at the very least identify the trade‑offs, where possible I think you should try to quantify them. And look, I lot of government work that I see does go into that. I mean I was recently looking at the RIS framework, so look, I thought that it was still in play, but look, I certainly support that kind of analysis.
Henderson:
Question there.
Speaker:
Hi. Firstly, thank you, Minister. You touched on introducing friction through the ecosystem. So I was just wondering, how do you anticipate planning infrastructure when you’re [indistinct] financial services regulation?
Mulino:
Yeah. So look, I think – well, when it comes to scams, for example, a lot of the friction at the moment is being put in place by the banks themselves, because of course, even though I think the ecosystem is the right approach, in that we often see digital platforms and telcos as well as banks involved, and I think most other countries have gone down the path of regulating banks exclusively, many of them are now looking at our approach, and I think will ultimately go down the Australian approach.
I think some of the friction that I was talking about there involved, the bank itself before it actions a transaction, if there’s a lot of red flags, reaching out to the customer and saying, ‘Are you sure you want to do this?’ If this is a transaction, that looks totally different to the patterns the person has undertaken in the past, if it’s a major transaction, and then if talking it through with that person there appear to be some red flags, are there ways we can kind of say to the person, ‘Why don’t we try and do some due diligence with you?’
Now as I said, in the example that I gave, and I’ve also been talking to banks, and I’ve been to one of these [indistinct] centres myself, look, customers understandably get angry at this, but for me, I think we need to figure out a balance where we use that kind of proactive intervention.
Now so with scams I think it’s mostly there at the minute. I think one can imagine we will ultimately want to see interventions through other parts of our system, like in the digital platforms proactively reaching out and finding videos where it’s not the famous person who has been deep faked and hasn’t been given the blue tick, or whatever it might be.
In terms of the payment system, my thinking there of a good example would be the whole kind of AML/CTF space where, when we think about the payment system overall, we want the payment system to be rapid, but I think a number of people, a number of regulators and experts and industry participants have said, if we want to better detect fraud, if we want to better build in protections, are there minor frictions we can include in that system, while maintaining the broader goal that we’ve had for some time now to speed things up.
And this is something that the Reserve Bank has talked a bit about more generally, but certainly at the House of Economics public hearings, which I chaired until taking on this role, that they had been at the heart of speeding things up, but they have now said that we need to think a little bit about sand in the wheels, and I think they use that term intentionally to indicate, we’re not talking about a dramatic slow‑down, we’re not talking about somebody having to wait the whole weekend for their payment, it’s about balance.
Henderson:
[Indistinct] question.
Speaker:
Hello Minister. You talked very eloquently about [indistinct] investors who have low financial literacy and many to be protected ‘cause their vulnerable to all the things you talked about. There is a cohort of investors though, who we all make our own decisions about our risk return trade‑off, and sometimes people might be thinking, ‘I would like higher return, I’ll take it even when the index is going to be’ –
Mulino:
Yep.
Speaker:
– ‘give me investment into my super’, and in taking that higher return, you take the higher risk and you get your fingers burnt. Philosophically, how do you think about when the investor is actually responsible for their own decisions and they just kind of made the wrong call?
Mulino:
Well, I think in the situation as you describe it, where it’s a well‑informed investor where they’ve knowingly made a bit of a choice to take on some more risk with the hope of higher returns, I don’t think there’s just about anybody that would say the Compensation Scheme of Last Resort is for those situations. I think the Compensation Scheme of Last Resort is there for situations where somebody has acted fraudulently or if somebody has clearly breached their duties.
And so the idea of the CSLR is where an AFCA determination is made against somebody, that they’ve been phoenixed, bankrupt or whatever, that, you know, this is there as the back‑stop.
I think the situation that you’ve talked about where somebody who – I use the word ‘sophisticated’ guardedly in that that’s an officially defined term in the legislation, but a knowledgeable, you know, well‑informed investor who chooses to leave a very heavily vetted, heavily regulated product, and invest in something with more choice, more flexibility, I think will so long as they’re making the choice in an informed way, so long as the various professionals they’re relying on act according to their duties, so long as all of those things are complied with, I think then, you know, the investment returns in a sense are what they are, and my sense is that that’s broadly accepted as a kind of backdrop of the regulatory regime, and that the CSLR in particular should be focused on cases where there’s fraud or a breach of duty.
Speaker:
Minister, I’m told to have a quick question that you can answer yes or no. And that is, are you willing to be a whistleblower of your regulators who are ethically buying to the systemic conflicts of interest which created the billion dollars loss for the customers, and [indistinct] APRA and company directors [indistinct] conflicts of interest [indistinct] and the stock exchange, that [indistinct] trading [indistinct] on the other side of the equation. Is it [indistinct]?
Mulino:
So, look, I don’t often quote the standing orders of the House of Representatives, but the speaker often tells us that, I think it’s Standing Order 104A, but I’m probably going to get that wrong, means you don’t have to answer any question with a yes or no answer. So I’m going to cite the defence of the speaker.
Henderson:
We follow that here.
Mulino:
But in all seriousness, can I say that since I’ve been in this role, and look, I’m not here to say that the regulators are perfect or the regulators have done everything right, but since I’ve been in this role, which is a little over 10 months, you know, in relation to First Guardian and Shield ASIC has undertaken a huge range of action, they’ve devoted dozens of people to those actions, they included actions against the 4 platforms, they included actions against a research house, against a number of financial advisers, and against many individuals, and those involved in the governance of the managed investment schemes.
What we’ve seen out of that is still to be determined in its fullness. We have seen agreements reached with Macquarie and Netwealth which will see over 40 per cent of the investors get all their capital back. So that’s a very welcome development, and those agreements I don’t think would have been achieved without the thorough work that ASIC achieved.
Now, you know, I’m open to people who have ideas around how we can strengthen the governance or the way in which the regulators regulate different parts of the sector, and so would be happy to kind of discuss afterwards any suggestions you’ve got about how this could be strengthened. And that is going to be a part of moving forward, it’s the laws, but it’s also the way they’re applied, the way the regulator is resourced, the data they receive, their relationship with the sector. That is something that is a part of the mix, and I’m happy to engage further.
Henderson:
Second last there.
Speaker:
Thank you, Minister, that was most comprehensive, and obviously you’ve got your work cut out. I’m just interested in the idea of regulation and given this fear of being unsafe and this community feeling that regulation makes their world safe. I’m thinking of financial issues, the war against tobacco has ended up with the worst of all possible results; criminal gangs and bad – [indistinct] tobacco to Australians all over the place and regulate tobacco moving offshore, health, whatever.
But in the financial area the Hayne Royal Commission came off the back of a really big moment of bad –
Mulino:
Yeah.
Speaker:
– [indistinct]. But it came with regulations that possibly were overdone. Now to what extent can we stop the feeling of being unsafe and being in a community crisis situation among the general population so that we then design regulation that is more in tune with the good of the future. I mean the tobacco – it was predicted, and it happened.
Mulino:
Yeah. I mean, look, there’s a lot of dimensions to that question, and it’s a very deep question. The risk in some contexts, where the government regulates, and this is not exactly to your point, but before getting on to your point, there is a risk in some contexts where, where you regulate, is there a risk that people might feel that if, ‘I was advised by an entity or an adviser who was given the tick by the government, and if I was investing through a vehicle that has been given an AFSL licence and a product that has been given the tick’, does that mere act of the government having regulated these things mean that it’s totally safe?
And so there are some people that have suggested to me that you’ve got to be careful in the way that you frame the regulation that occurs, and I think that for me, good regulation is going to achieve a good balance between the burdens on the sector versus the amount of consumer protection you achieve.
But in a sense, I think it’s important to convey to consumers that even in a regulated area, that there should always be a bit of buyer beware, and what we don’t want in a sense is in some contexts for the fact that there has been some regulation to give people the sense that there is no risk.
The other difficult issue in my area, but I think in a lot of areas, but in my area, is that there are some parts of the financial services sector that are quite heavily regulated. So if you invested in MySuper product, there’s a different level of regulation than if you invest in a platform on to a MIS each of which are regulated.
I mean they have, you know, the platform has regulations and the MIS has an RE, the MIS has to have a certain structure, but in a sense there’s different levels of protection, and one of the things that some people say in financial services, in super in particular, is that consumers should be aware of when they’re swimming in and out of the flags.
The difficulty is, because most parts sector are regulated but in different ways, it’s not clear what that means in financial services. There’s no kind of totally in the flags where there’s zero risk, and there’s no outside – or there’s very little that’s totally outside the flags.
And so I think that all that we can do moving forward, I think, is to define regulation in a way which reflects that complexity. In a sense for me that complexity comes from choice, and in a world of choice, I think we rightly – I think MySuper was a very, very positive development in super, we’ve created this space where there is a lot of vetting, there is a lot of protection, but in a world where there’s choice you can move out of that into different types of things of varying levels of risk, and I think part of the challenge is just making sure that that in those different areas we get the balance right.
Henderson:
I’ve got a quick question and answer. You’re in the job 10 months, and a term of 36 months, this term of government. What would you like – do you think you’d be able to come back and say in 2 years’ time that you’ve actually achieved what you spoke about tonight? Just very briefly?
Mulino:
Oh, look, it’s too long a story. [laughter] Look, I think if we can move the dial on some of these reforms, for me that would be a significant thing in terms of a system which is maturing, a system that’s moving more towards retirement, I think getting that balance and protection right.
One of the first things that I was involved in earlier in the term was Pay Day Super, another part of the super regulatory scheme. Now that was really the Treasurer’s bailiwick, and I was again providing assistance, but I’ve got some of the responsibility for the more administrative sides now taking the parts of the economy that aren’t there and helping them migrate across.
So one of the things about the Assistant Treasurer role, and sometimes this is not necessarily the most high‑profile or sexy part, but you actually get to make sure that the implementation of these occurs.
I mean second last observation would be that there’s a lot of parts of what I do that relate to particularly vulnerable people, and 2 of examples that I’ve worked on recently relate to victims of family violence where they’ve made a nomination that the perpetrator of that violence should be the beneficiary. So we’re trying to figure outweighs that trustees don’t necessarily have to make that this person, but it’s a complicated set of regulations, in that it puts the trustees in an awkward position sometimes, and a related reform revolves around victims of child abuse, and, and then being able to access the super accounts of perpetrators where they’ve potentially gone bankrupt.
And then the final point I was going to make is around insurance. Insurance was one of the key things I talked about in the book Safety Net, and the now the insurance sector is partly in my portfolio responsibilities, so general insurance and life insurance. For me one of the big challenges we’re facing with insurance, it’s an exciting area like many others for innovation, but is that as insurance becomes more individualised and granular, in many contexts, whether it be flood insurance or life insurance for people with significant risks, we’re seeing a lot of people excluded from insurance, where insurers are able to identify that risk at a very granular level, and I think there’s a real challenge and a need for government to work with the sector to make sure in a way that is sustainable for the overall kind of pool, but where we can enable pools to work in a way that they have for a long time, where the most vulnerable can be included in pools, but in a way that is affordable and sustainable. So that to me is one of the other big policy areas.
Henderson:
Thanks. You’ve got a busy 24 months. Look, we’re very grateful, and as I said, Ministers in governments are very busy people, and the Minister’s come here tonight and given a speech, and taken questions and responded, and it’s really nice, I was just going to say well done and thank you.