Summary of the Government response in relation to innovation
The Government has released its response to the Financial System Inquiry (better known as the "Murray Inquiry"). Further to our earlier report on the innovation and technology aspects of the Murray Inquiry (which can be found here), the following summarises the Government's response on these specific aspects.
The Government Response largely accepts the recommendations of the Murray Inquiry (but since a number of the recommendations foreshadow or require additional consultation, development or other process requirements, exactly what "acceptance" means or how certain recommendations will be implemented lacks clarity).
There are broad overarching statements in the Government Response recognising the need to stimulate innovation in the financial system, facilitate entry of disrupters into the market and unlock new sources of finance for the wider economy. A number of timeframes are also included which indicate the objective of implementing most recommendations by the end of 2016.
Key innovation/technology takeaways
Before considering what is in the Government Response it is worth noting that, while the final report of the Murray Inquiry raised issues with respect to digital/crypto-currencies and the use of cloud technologies, these subject areas are not directly addressed in the Government Response.
Key points and themes:
- Collaboration: The Government agrees to the establishment of a permanent public-private sector collaborative committee, the 'Innovation Collaboration', to "facilitate financial system innovation and enable timely and coordinated policy and regulatory responses" with further plans to link that committee to ASIC's Digital Finance Advisory Committee to avoid unnecessary duplication for industry. The Government Response does not provide clarity on expected or desired participation or other issues (for example, the mitigants against the risk that forums which attempt to provide for discussions on innovation run the risk of becoming little more than an opportunity to discuss sanitised and generic technology and trends so that the collaboration in fact leads to innovation which in turn leads to implementation).
- Crowdfunding: The Government agrees to develop a regulatory framework to facilitate crowd-sourced equity funding through the 2015-2016 budget, including by consulting on legislation to support crowd-sourced funding by the end of 2015 and tasking the Productivity Commissioner to review access to and the use of data. A "watch this space" area.
- Digital identity: The Government has recognised the challenge of a person's digital identity and agrees that a national digital identity strategy will help to streamline individuals' engagement with government and provide efficiency improvements. The Government agrees with the recommendations in the final report of the Murray Inquiry, acknowledging that a public-private sector response is needed. However, the Government Response does not further clarify how such an arrangement will work except for noting that "the Digital Transformation Office will work across government and with private sector to develop a Trusted Digital Identity Framework". In other words, another "watch this space" area.
- Payments: While much of what has caused recent disruption in the payments space relates to technological innovation, the Government agrees that a graduated regulatory regime will support innovation. The Government envisages a need to review the framework for payments system regulation and clarify the powers of APRA, ASIC and the RBA. Interestingly, the Government agrees to strengthen consumer protection by mandating consumer protection provisions in the ePayments Code, "subject to the code being fit for purpose and technology neutral".
- Technology neutrality: The Government agrees to amend priority areas of, and ensure future legislation and regulation is, "technology neutral" (the Murray Inquiry noted that some processes, for example, bankruptcy and insolvency, require paper-based or physical processes). The potential impacts of this could be significant - for example, while some have been suggesting that backers of "robo-advice" for financial products and services should be subject to a specific regulatory regime, a technology neutral approach would result in regulation under the existing regimes. However, the existing regime in terms of financial advice is an area where the Government Response also anticipates a much higher degree of transparency and responsibility with respect to the provision of financial advice to protect consumers. Will digital "robo advice" solutions relying on customer input, search engines and algorithms meet enhanced regulatory requirements?
- Data access: The Government agrees to improve the use of data, taking into account privacy concerns and other existing Government processes, to unlock significant efficiency improvements in the financial system. At one level, this is not contentious. At another, this highlights issues with respect to data access including, the potential for private sector data to deliver competitive-advantages; the potential introduction of a mandatory data breach notification regime; the commercial and legal hurdles in implementing such a regime, including the requirement of section 51(xxxi) of the Australian Constitution that any acquisition of property is "on just terms"; etc. The Government has tasked the Productivity Commission to review and consider how best to provide for broader data access.
- Cyber security: The position in the final report of the Murray Inquiry is agreed, namely, that "an updated Cyber Security Strategy that is able to minimise the risk of a cyber-crisis in Australia is important for the resilience of the financial system". The Government has already announced a review of the Cyber-Security Strategy which is one step toward the establishment of a formal framework for cyber security. This also needs to be seen in light of other cyber initiatives such as the establishment of CERT, the national Computer Emergency Response Team, for critical infrastructure (which includes the financial system).
- APRA: Regulator accountability and capabilities are agreed in the Government Response as needing strengthening. The Government will look to update the Statement of Expectations for APRA (and ASIC and the Payments Systems Board it should be noted). While this will likely be at the strategic end of the spectrum, if and how changes in strategic expectation trickle down to existing and future technology-relevant regulatory requirements such as prudential standards remains open.
The Government Response was always likely to anticipate the need for further work to advance the acceptance and implementation of the recommendations set out in the final report of the Murray Inquiry. However, given the extent of further work anticipated, and outside a very general acceptance of most recommendations (and therefore acceptance of a significant change in the regulation of Australia's financial system), the Government Response does not provide the level of detail that many participants in the industry will be hoping emerges in the short to near term.