Financial System is the framework through which the country runs its economic transactions. It serves as the bedrock through which money supply is percolated through the nation’s economic institutions. It is well accepted economic theory that a country’s economy flourishes through its capacity to transpose its money utility from one sector of the economy to another.
This systematic channelization of funds through various economic channels is well-governed through finely drafted laws specially curated in the name of Prudential regulations. As the Financial System is the major driving factor in economic growth, it is to be regulated through unique stream of laws specially directed to govern the robustness of its operations.
For example, consider that you need to finance a home purchase; you start by gathering interested parties alongside you. This could be challenging as it would involve reams of paperwork and require proper storage of the details. The contract formation would then involve the amount of capital repayment and a sound decision of periodical interest repayments.
The biggest barrier to communication of the contractual terms would be the presence of Information Asymmetry. Information Asymmetry occurs when both the contracting parties fail to receive the same set of information to be entered.
However, when the contract is entered through prudential regulations of the respective countries, it ensures a more efficient transfer of funds by mitigating the information asymmetry problem between those within the investing community and the issuers of financial instruments.
This smooth transition of funds happens through its three components:
- Financial Markets
- Financial Intermediaries
- Financial Regulators
Financial Markets, as the name suggests, is the marketplace for trading financial instruments. Enabling the investing community in the secondary market to enter a “Price Discovery” process is one of its economic activities that dispels the Asymmetry of information. Price Discovery means the interactions of buyers and sellers in a common platform to determine the price of the traded asset.
Financial Intermediaries is the financial entity that follows up the work done by Financial Markets by efficiently allocating funds with conditions that make it difficult for the participants of the Financial System to default through carrying out certain processes as described by the Financial Regulators. The different types of markets are money, capital, and derivative markets. Some of the Financial Intermediaries include commercial banks, investment banks, and public financial institutions.
Financial Regulators are those regulatory institutions that provide proper legal channels for the participants of the Financial System to take prudence when engaging with themselves. They are authorised by the government agencies of the respective nations to deliver policies to govern the participants. While the different regulators may overlap with other state agencies regarding their exercise of scope, they usually supersede state agencies.
The Economic Performance of Australia can be viewed easily through tracking the Corporate Plan of the Reserve Bank of Australia (RBA). One can read through the various bulletins released by the RBA as well to understand the economy.
Australia’s Financial System is overseen by five regulators:
- The Australian Prudential Regulation Authority (APRA) – the financial safety regulator.
- The Australian Securities and Investments Commission (ASIC) – the conduct regulator for corporations and financial markets.
- The Australian Competition and Consumer Commission (ACCC) – the competition regulator.
- The Reserve Bank of Australia (RBA) – Australia’s central bank.
- The Australian Transaction Reports and Analysis Centre (AUSTRAC) – Australia’s financial intelligence unit and anti-money laundering and counter-terrorism financing regulator.
These regulators protect the financial wellbeing of the Australian community, but each one achieves this goal differently with a different area of focus.
With a single purpose in formation, these regulators regularly share information and work together to protect Australians’ financial interests. In fact, one of APRA’s strategic priorities is to continue to strengthen its relationships with its peer financial regulators.
The following are the overview of such institutions:
Australian Prudential Regulation Authority (APRA) & Australian Securities and Investments Commission (ASIC)
APRA and ASIC are often referred to as the “twin peaks” of Australia’s system of financial regulation. ASIC is the conduct regulator responsible for detecting and punishing misconduct in the industry and achieving good outcomes for consumers and investors. In contrast, APRA is Australia’s financial safety regulator, focused on the soundness of individual financial institutions.
ASIC also regulates the conduct of Australian companies, financial markets, financial services organisations (including banks, life, and general insurers and superannuation funds), and professionals who operate in those sectors. ASIC is also responsible for regulating consumer credit.
Since 2018, the APRA-ASIC relationship has grown even closer to better address the types of misconduct, poor performance, and weak accountability raised during the Royal Commission’s financial services.
The Reserve Bank of Australia (RBA)
The RBA is Australia’s central bank and is responsible for the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. The RBA does this by setting an official cash rate for the country (known as monetary policy) and overseeing the financial system’s stability.
The RBA also regulates the payments system, provides banking services to government departments, manages Australia’s gold and foreign exchange reserves, and issues the nation’s banknotes. The RBA can provide emergency liquidity support to the financial system in times of stress.
The Australian Competition and Consumer Commission (ACCC)
The ACCC promotes competition and fair trade in markets to benefit consumers, businesses, and the community. It also regulates national infrastructure services.
The ACCC’s primary responsibility is to ensure that individuals and businesses comply with Australian competition, fair trading, and consumer protection laws, particularly the Competition and Consumer Act 2010 (previously the Trade Practices Act 1974).
APRA is engaging more closely with the ACCC to better assess how APRA’s prudential framework impacts competition.
Australian Transaction Reports and Analysis Centre (AUSTRAC)
AUSTRAC is responsible for preventing, detecting, and responding to criminal abuse of the financial system, such as fraud, child exploitation, tax evasion, and other serious and organised crime.
It collects and analyses information from over 15,000 regulated entities. By partnering with law enforcement and national intelligence agencies, this information is used to generate financial intelligence to protect the Australian community from serious and organised crime.
It provides guidance and advice to businesses on how to protect their businesses and the financial system from criminal exploitation.