Presentation to the Y2k Infrastructure Forums John F. Laker Assistant Governor (Financial System) Deputy Chair Payments System Board (speaking on behalf of the Council of Financial Regulators)

Introduction

• I welcome the opportunity to talk about the Year 2000 preparations of the Australian financial system, from the perspective of the financial regulators.
• A smoothly functioning financial system is vital to public confidence and to the health of the economy as a whole. For this reason, financial regulators in Australia – members of the Council of Financial Regulators – have been closely monitoring the Year 2000 progress of financial institutions, and in the payments system which links them, since early 1997.
• Our assessment is that the Australian financial system is ready for the Year 2000 and its preparations rightly enjoy a world-class reputation.

The financial regulators

• Before explaining how we have formed this assessment, let me introduce the Council of Financial Regulators.
• The Council is an umbrella body for Australia's three main financial regulatory agencies: the Reserve Bank of Australia (RBA), which chairs the Council; the Australian Prudential Regulation Authority (APRA); and the Australian Securities and Investments Commission (ASIC).

The responsibilities of these agencies under Australia's new regulatory structure are as follows:

• The Reserve Bank has a mandate to safeguard the stability of the payments system and of the overall financial system. It is also responsible for Australia's currency note issue, ie, for the provision of cash.
• APRA is an integrated regulator responsible for the prudential supervision of individual financial institutions: banks, life and general insurance companies and superannuation funds and, since 1 July this year, building societies, credit unions and friendly societies as well. APRA has inherited these responsibilities from a number of predecessor agencies
• ASIC administers the Corporations Law, regulates securities markets and has responsibility for consumer aspects of insurance, superannuation and banking.

Role of the Council

• In dealing with the Year 2000 issue, the Council is acting as a co-ordinating body with the aim, mainly, of:
• The Council has provided detailed information on Year 2000 progress in the financial sector, through our booklet Year 2000 Preparations in the Australian Banking and Financial System. The fourth edition will be published shortly.
  • encouraging a consistent approach to supervising Year 2000 preparations across the financial sector; and
  • co-ordinating the regulators' involvement with domestic financial industry groups.
• In the same spirit, the Council has been actively encouraging financial institutions to disclose the measures they are taking to address the Year 2000.

Supervision of individual institutions – APRA

• Let me turn now to what the financial regulators themselves – particularly APRA and the Reserve Bank – have been doing. I would like to start with APRA, which focuses on individual institutions.
• It must be said straight away that the primary responsibility for ensuring that a financial institution will continue to operate successfully on and after 1 January 2000, rests with the board and management of that institution. It does not rest with APRA.
• APRA's role is to make a judgment as to whether each institution has an adequate Year 2000 program supported by its board and senior management, and is devoting sufficient resources to ensure it will be Year 2000 compliant.
• To do this, APRA has been collecting comprehensive information from a range of supervised institutions and has been closely monitoring their Year 2000 progress. This started in early 1997.
• APRA has also played a role in raising institutions' awareness of Year 2000 issues. This is especially important where there are a large number of smaller institutions, particularly the superannuation area.

APRA's powers

• APRA has considerable powers over the institutions it supervises. These powers range, in the extreme, from merging or winding-up an institution, to more temporary measures such as restricting its operations so as to minimise the possible impact on others.
• These powers apply equally to small superannuation funds as to large banks.
• APRA will use these powers if it has serious concerns that an institution's Year 2000 preparations are inadequate and pose risks, as the case may be, to its depositors, policy holders, fund members, other customers or wholesale market counterparties.
• Over the course of the last twelve months, APRA has met with a small number of banks because of its concerns about their Year 2000 progress. Having done so, it is not expecting to have to take any further steps.

Supervision of banks – APRA

• Banks account for over three-quarters of total deposits in Australia and play a pivotal role in the Australian payments system. For these reasons, APRA's most intensive supervision of Year 2000 preparations has been directed at banks.
• Significant progress has been made:
  • With only very limited exceptions, banks have now completed the remediation and testing of all their critical information systems. In those exceptional cases where testing is yet to be finalised, APRA is satisfied that there are adequate fall-back arrangements in place to ensure that it will be 'business as usual'.
  • There will also be a 'freeze' on changes to banks' critical systems over the latter months of 1999 and around 29 February 2000 to ensure that no errors are introduced.
  • Banks have almost completed their contingency plans to deal with the unexpected – such as problems with their main suppliers. Banks are also thoroughly testing their existing back-up arrangements to ensure that essential data, such as account information and customer records, will not be lost.
  • Banks have also made considerable progress in assessing the Year 2000 preparations of their customers.

Supervision of other financial institutions - APRA

• APRA is also closely monitoring the Year 2000 progress of the other deposit-taking institutions – building societies and credit unions. It does so mainly through a program of quarterly progress returns and on-site visits.
• As with the banking sector, the vast majority of these institutions have already completed the remediation and testing of their critical systems and are now well into the contingency planning phase. APRA is regularly reviewing the progress of the small number of institutions yet to complete their system testing.
• APRA has also been closely monitoring the Year 2000 preparations of life and general insurance companies, superannuation funds and, now, friendly societies.
• The focus of these institutions has also now moved from remediation and testing, to contingency planning. In the superannuation industry, where the large number of funds makes on-site supervision of all funds impractical, APRA is continuing to encourage institutions to adopt 'best practice' in addressing the Year 2000 issue.

Payments system - Reserve Bank

• Next, let me explain what the Reserve Bank and others have been doing to ensure that the linkages between financial institutions are ready for the Year 2000. These linkages – which we describe as the payments system – allow institutions to exchange value with each other. They are the essential plumbing of our financial system.
• The Reserve Bank, through its Payments System Board, has a mandate to maintain the safety and stability of the Australian payments system, and it owns and operates the core 'high-value' system for the final settlement of transactions between banks. All the retail payments systems with which we are familiar are private-sector owned and managed.
• A comprehensive program to test the Year 2000 readiness of the Australian payments system got underway in October last year. The program was managed by the Australian Payments Clearing Association. Reserve Bank staff was involved at senior level and, where necessary, the Reserve Bank lent its support to ensuring that deadlines were met.
• Banks, building societies and credit unions, as well as key payment service providers, participated in this industry-wide testing. They could only do so if they could confirm that their relevant internal systems were Year 2000 ready. The testing covered the clearing of cheques, direct debits and credits, debit and credit cards in ATM and EFTPOS systems and the exchange of high-value payments. Importantly, it included the posting of these transactions to the appropriate customer accounts.
• The testing program was successfully completed, on time, by 30 June – a considerable achievement for all concerned. Because of this effort, the Australian public can expect that their electronic payments mechanisms, such as ATMs, EFTPOS and credit cards, will continue to work as usual over the New Year period.
• The Reserve Bank is now working closely with the industry on contingency planning, to ensure that the payments system is prepared for any unexpected disruptions.

Availability of cash - Reserve Bank

• In a recent statement, the Governor of the Reserve Bank has offered the following commonsense advice to those who might have worries that there will not be enough cash available to meet demand:
  • do not fear that there will not be enough cash to go around. There will be. The Reserve Bank has printed, and is carrying in stock, enough notes to meet any conceivable demand;
  • remember that we will only be dependent on high-tech systems such as ATMs and EFTPOS for the first three days of the New Year. After that, banks, building societies and credit unions open their doors again; and
  • even in those three days, credit cards can, if necessary, still operate in their traditional paper-based mode and cheques can be used as normal.
• The Governor added " the public should view the New Year as just another long weekend. That is what I will be doing".
• The Reserve Bank has also been working closely with banks and other financial institutions to ensure that they will have adequate liquid assets for the New Year period. We have announced that, if we need to be, we will be more flexible in our domestic market operations as the New Year approaches. All in all, financial institutions will not have to curtail their normal activities because of concerns that there will not be adequate liquidity in the financial system.

Disclosure

• Drawing all the strands together, the Australian financial system has a positive story to tell on Year 2000. The Council of Financial Regulators has been encouraging banks and other financial institutions to tell this story – to disclose their progress towards achieving Year 2000 readiness.
• For its part, the Reserve Bank has spoken to the banks, building societies and credit unions to make sure they were communicating with their customers in clear language to reassure them that their deposits were safe. The response has been uniformly positive.
• More generally, the Council believes it is essential that all the major infrastructure providers disclose their Year 2000 readiness in a clear and readily understood manner. In this way, any uncertainties in the minds of the Australian public can be dispelled by hard facts. After all, we are at the point in our Year 2000 preparations where the possibility of a public over-reaction could loom larger than the Year 2000 problem itself. The Y2K Infrastructure Forums are an important initiative in this regard and one the Council has been pleased to support.
• The media also has an important role to play here. A responsible presentation of the facts and issues raised by the Year 2000 problem will ensure that the Australian public as a whole – and Australian businesses – can make well-informed and sensible plans for the New Year and beyond. It is too easy to raise false concerns which might encourage some in the community to respond in ways which ultimately prove self-defeating, for themselves and others.

Key message

I want to conclude with a message from the Governor's recent public statement – a message which we would like to see etched into the thinking of the Australian community as it looks forward to the Year 2000. It is this:

"the simple fact is that [customers'] deposits are safe and their records are not at risk from Year 2000 related problems".

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