Transcript of Question & Answer Session Interest Rate Benchmarks

Female

So, thank you to each of you for outlining those sort of key issues and priorities. I'd like to kick off the Q&A with a question about Australia in a global context and through all of your roles you have that perspective. The Australian banking financial services sector seem to come through the GFC largely unscathed, certainly from a prudential and system stability perspective. Do you think that the industry here failed to see some of the changes that needed to be made following the GFC and so perhaps is behind in some areas from the rest of the world in how it operates? Wayne, you look like you want to answer that question, so I'm going to throw to you.

Wayne Byres

Guy and I were seeing whether the other one would answer it first, but I'm happy to have first go at it. I guess I would make the observation that we, Australia, did come through the financial crisis quite well relative to others, I don't think there's any doubt about that, no one would really dispute that. I think there were three core reasons for that. One was actually the industry was reasonably well managed in the period leading up to the crisis, so that's a good thing. Secondly though, there was a huge amount of public sector support thrown in through government stimulus, monetary policy responses, short-selling bans, there were a whole raft of public sector intervention to help keep the system stable and able to function. And then the third thing was there was just an element of good luck.

And I suspect as we reflect on that, the second and the third issues are often downplayed. And so we should be very comfortable and happy that we survived far better than many other jurisdictions, the cost to the community of the crisis has been far less here than it's been in many other countries, but it's not that the industry did it itself, there was a lot of public sector help and there was just an element of good luck and good luck primarily in the form of the Chinese economy that pulled us forward. So, I do think those two issues around private sector support and an element of luck are often downplayed and so maybe that has left us with a bit of blind spot or a bit of complacency. I don't think there's complacency in the regulatory sector but possibly in the industry, yes.

Guy Debelle

I mean the only thing I would add though is I do think if you look at some things in Wayne's territory around some of the financial regulatory changes in the banking system in terms of things like the LCR, the NSFR, even the yet to be finalised Basel III standards, then APRA has been certainly in the vanguard of doing that and our banking system's adapted to that. So that I think it's – when you say failed to see some of the changes that needed to be made, I mean mostly the global industry failed to see some of the changes. But if you look at where we are today in terms of adjusting business models in response to those changes then I think we're in an okay place. We're not necessarily in the best place, we're in an okay place, the starkest contrast is between here and in Europe. Where I would think a number of those regulatory changes I just talked about are yet to actually take effect in Europe, but they are fully effective here and business models and practices have adjusted to that. So, I think the response here compared to some other jurisdictions has been reasonably timely.

Female

Greg, your view on where we stand now – and I'm not necessarily reflecting on where the regulators stand compared to international regulation, but where the industry is at today compared to overseas?

Greg Medcraft

I agree with Wayne. I think we were very lucky in '07 in that also the other big thing is we had something called superannuation which probably bailed out a lot of the banks because of the ability to issue equity at a discount in addition to the other things that Wayne said. So, in addition to I think good regulation and I think again, as always we're a lucky country. But I think the three things that are critical since then is first of all I think – and Australia's probably not the only one is that I think the social licence has moved and I think the banks have failed to recognise that the social licence has moved and I think that is their big problem. And it's not just an Australian phenomena, it's around the world and that has actually I think resulted in a lower and lower level of trust.

So, I think rebuilding that trust if it can be built is going to be a big challenge because it is quite low. The second thing I think that has changed that's happened in '07 is I think there was something happening in '07 that we didn't notice because actually we had the crisis, but technology was a big inflexion point in '07 because if you think about it '07 was when EmWare was developed which enabled cloud computing. We had Hadoop develop which enabled big data analysis. Google released their android operating system. IBM Watson was launched. Amazon Kindle was launched. Airbnb was started.

So, there was this technological revolution actually that happened starting to really take off in '07 that actually in parallel it was this crisis. And I think really the other big thing that I think challenges the banks or will challenge them is with I guess the lowering of trust, where the technology revolution thrives is where there is a massive deficit of trust. So, I think social licence, the technological revolution I think – and also I think as part of that is frankly the power of the crowd. Today, you cannot hide from the crowd, it's constant and you've just got to get over it and that's the way things are today. So, I do think it is challenging and it has moved a lot.

Female

That's a good segue into a question I've got about the issues of trust. And David in his introduction talked about the Edelman Report and what it indicated in terms of the low levels of community trust and confidence in the sector. I should say there have been small improvements which were pointed out to me over the last year but I suspect it's going to take quite a long time to really rebuild trust. It won't happen overnight. So, what do you think? Actually, I'll start with you, Greg. What is it that the financial services industry could really do more of to restore that trust as quickly as possible but also sustainably.

Greg

Look, I think that certainly have a long way to go and I think about financial advice, responsible lending, general insurance, life insurance, bank bills, FX … So, it's not a particularly pretty report card, I just don't hope there's not another one around the corner. So, I think – and I was saying to David before – I think they always underwhelm in responding. That's their problem, they always underwhelm. And I said to David before, I think you've actually got to do something that they don't expect, something that actually goes, ‘Oh they've changed.' Because at the moment they're actually playing catch up. So, I think if you want to change expectations you've got to go beyond what people expect. Now, what do you need to do? If you push the button there's another slide there and I think it's actually about what good looks like, okay? One of the things we set out for the first time last year in the whatever 20 sectors that we regulate is what we think good looks like. And I think that's how you can improve trust and confidence.

You know, treating customers fairly, making sure that you've got products that actually are properly designed, properly targeted. Thinking about if something goes wrong you'll actually deal with complaints quickly and efficiently. Frankly, it's quite common sense. If you think about summarising it, it's frankly about doing the right thing by your customer. And as I've said to people, I've to the banks, boards, whatever, you've actually got to have a culture your customers can believe in. And what I think their problem today is they keep saying these words but the people of Australia go, ‘Well this is empty.' Like, what about what you've just done? So, I do think it was quite interesting overnight, I think today's Financial Review, the comment by the gentlemen from Bridgewater talking about culture. You know, of course you've got to have a culture of something that people can believe in. That means sometimes challenging the people at the top about what they're doing. So, I do think there's a lot to do in this area and we do need, the biggest asset the banks have is trust.

Female

I'm going to throw the audience in just one moment for questions, so be ready. Any additions to that Guy or Wayne? You know, how can we really have that major step-forward?

Wayne

Well, there's no quick fix here because it's a deep-seated issue now in the view of the community that there is this lack of trust. It's taken a long time to get to this point. There's no quick fix to quickly rectify it. So, the emphasis is more on how do you do it sustainably. And the one thing I'd emphasise that Greg's already touched on is the issue of transparency. So, being willing to transparently talk about problems and what you're doing in response to them rather than hoping that no one finds out. And if you think about many of the issues that are now generating headlines and public debate about it, many of them happened about three or four years ago, no one revealed them, a more proactive approach to saying, ‘We have an issue, we find it, we report it, we fix it and if necessary we compensate whoever lost out.' And doing that in a much more proactive way rather than waiting for someone to find out before we do anything is clearly an essential part of it.

Female

Guy?

Guy

Yeah, and I think that's absolutely the main point, picking up on what Wayne said, being proactive rather than at the moment it's sort of a defensive response which just doesn't help I would say. And the other thing which I think Greg alluded to is that this sort of drip feed of issue after issue after issue just reinforces a belief or the view that's out there. And the constancy of a different issue surfacing with a different dimension across all aspects of what the financial sector does, which I think very much exacerbates the problem. So, no one feels that anything particularly has changed because even if the issue occurred a few years ago it still generates the headlines today and just reinforces that belief. So, it would be very nice to have some comfort actually the cupboard is now bare, not in Wayne's sense …

Female

The other cupboard. The bad cupboard, not the good cupboard.

Guy

Yeah, that there isn't anything more which is going to come and just further undermine that lack of trust in the industry and really making sure, as I said, it's not a defensive response but is actually getting out there in front of it.

Female

Thanks. I'm now going to ask for questions from the audience, so if you'd like to ask a question please raise your hand but remember, wait for the microphone to come to you and do state your name and organisation and please ask a question, don't make a speech. So, we have a question here … We've got the microphone coming right behind you. Thank you.

Male

My name's Edward Buckingham, I head up the Australian Centre for Financial Studies, I'm a professor at Monash University. Greg, I think many of us were both excited and absolutely terrified by the prospect of all this data that you're going to have …

Greg

You can come and share it if you like.

Male

Well, that's where I was going, Greg, because my suspicion …

Greg

Well let's put him down for sharing data. Sorry …

Male

My suspicion is that it's actually going to be too big even for ASIC and I'd like to hear more about what you think about how you're going to govern this? How you're going to marshal the analytical capabilities of industry but also very importantly, the universities which in my opinion are far too focused on the United States and Europe and should be focused on Australian problems. How are you going to go about that?

Greg

So, well first of all, we already deal with masses of amount of data – have a talk to the banks we investigated on BBSW. We have terabytes of data. We're probably one of the leading agencies in Australia in terms of evident services in dealing with masses of amounts of data. So, dealing with data is nothing new. The big problem for us at times is the way the data comes to us because it's not really structured data, it's unstructured data. So, what would make things a lot easier is actually if we had a lot more structured data. But equally if we weren't actually every time we have something where you can actually issue huge amounts of notices to try and – the thing about data – having good data is actually, as I say, being able to remove some of the hay to find the needle. So, having data that actually is real data that we actually can use makes things a lot easier for everyone.

In terms of your question, in terms of use of data and to that point we're rolling out Microsoft dynamic CRM across ASIC at the moment, single database, common names for things, just sort of the fundamental hygiene stuff. And as I said, we are about to release our data strategy which goes to the whole issue of how we intend to govern data. The other thing about our data is actually we're starting to use external datasets rather than even our own data. So, thinking about, you know, how we can get the data that with our own system now we're using say Morningstar data or Bloomberg data and actually bringing that into our analysis, so rather than requesting data. We're getting datasets from people like ATO getting more data. So, rather than trying to recreate the wheel, thinking before we actually – that's why we created the role of Chief Data Officer, actually thinking what do we actually need to request of a party, is there another way of actually getting access to that intelligence or not? But in terms of systems, you know, we actually are doing a fair bit in terms of our – if I break it into e-investigations – so, at the moment we're using a thing called IBM i2, which many of you may know, which actually allows us to essentially take the data we have into effectively a data lake and actually allows us to establish contacts between people, entities or locations.

And that is incredibly efficient, something to connect people like an insider trading that might have taken us six months to see before, recently we had a case that took us two hours to connect the dots and it's visual identification and we'll be giving a presentation on it to parliament in a few weeks' time. At the moment also we're trialling, starting to look at the issue of predictive behavioural data analytics and we're working with suppliers on that. We've got a venture with Data 61 at the moment, academic I guess, where in fact we're actually trialling using machine learning in terms of the funds management sector. In enforcement now basically when we look at data we have for a number of years used Nuix, which is again machine learning technology that actually uses pattern recognition to identify commonality between documents.

So, that's just some examples and one of the other ones we're using at the moment is Red Marker which actually then uses machine learning to actually trawl across the web to identify unlicensed behaviour by accountants for example and then comes back to us. Or we're using Crimson Hexagon which is social media data analytics, it actually can go back 10 years and actually identify your behaviour on social media including if you've removed posts, okay? So, just remind you all, you don't get away with it.

Female

You can run but you cannot hide!

Greg

I guess the key point is there is an amazing revolution happening with data. It's privacy is important. This is about us catching crooks, okay? People that break the law. What we're doing is what other law enforcement agencies are doing, but it's got to have the right governance around it. But what it will mean is actually it means it makes it far faster for us to detect misconduct. So, but as I say, we are working with a lot of academic agencies.

Female

Thanks. Another question from the audience, one back here?

Male

My question is on crypto currencies, as to how we're going to regulate them in future?

Greg

Sorry, I couldn't …

Female

Could you repeat the question?

Male

About crypto currencies how are we going to regulate them in the future?

Female

Crypto currencies and how they're going to be regulated in the future?

Greg

Well, my view is that first of all, I think you saw this week the Chinese have actually banned ICOs and we've said we'll be issuing a paper very soon on ICOs. It's something we've discussed previously at the board of IOSCO and whether in fact they're a financial product depends on what the conditions of the ICO are. But more broadly in terms of digital currencies, my own view is that frankly if central banks issue ultimately their own fiat digital currencies, you know, there's probably a good case to actually ban non-central bank digital issued currencies because what it probably means is they're being used for illicit purposes. So, you know, either for tax avoidance or for organised crime. But as far as strict regulation at the moment, we do regulate them in terms of if there's a trading in on an organised market, but I think it's a work in progress. But I'd say ICOs is something we'll issue some guidance about pretty soon.

Female

Guy, do you have a view on crypto currencies?

Guy

I don't actually quite agree with Greg about, he said earlier about central banks having an account with – everyone in Australia can have an account with the Central Bank. Central Banks were actually created to stop exactly the problem that would result from that when they were created quite a few years ago which is you'd have these massive swings in liquidity in and out of the core part of the system. But that said, I think partly to Greg's point, I think one thing we are looking at quite a bit at the Bank at the moment is around digital currencies as a means of payment rather than as a store of value. And I think at the moment we have a somewhat open mind as to whether that's provided by the private sector or whether there's a role for the public sector to do so in terms of providing a sort of digital token means of exchange. It is something we're very much interested at the moment and seeing how that plays out and there may or there may not be a role for the public sector in doing so but as I said that's very much as a means of payment rather than as a store of value.

Female

There was a question down here I think.

Male

A question for Wayne. The countercyclical buffer is currently set at zero, the bottom of the range. What scenarios and of course hypothetically speaking is APRA looking at that would change that buffer?

Wayne

So the first thing to say is there isn't a sort of mechanical way of responding to that buffer. The buffer is a new part of the Basel framework for those that don't know it that essentially says in good times you should get banks to put a bit more capital away for a rainy day. And broadly speaking it is described as, when would you use it? You would use it in periods of excessive credit growth, broadly defined. What's that mean? Well, that's in the eye of the beholder obviously, what is excessive credit growth. We've been very careful not to prescribe, you know, it is credit growth above ‘x’ per cent.

So we have published though a set of indicators that we look at. Again, it's not formulaic, it's not mechanical but we do look at things, you know, how is housing credit growth going? How is business credit growth going? What's the extent to which there's leverage financing happening. What's happening to asset prices. There's a raft of indicators we look at. Internally we have a sort of a quarterly exercise that we look at those things on a semi-annual basis. We talk about it at the Council of Financial Regulators. And then annually – we've only done one because we've only had it in place for one year, a bit over one year. Annually we put out a kind of report card that says here's our judgement because at the end of the day it's a judgement.

So, the answer to your question, you know, what's the trigger? Well, it will be a sort of judgement of a raft of people looking at a range of indicators rather than credit growth hits this point and it's switched on.

Female

Thank you. One more question. We have time for one more question. Down here.

Male

A question for Wayne. When you mentioned in your speech the role of boards dealing with their executives and you said it's your preference that boards take responsibility for their executives, do you think that is increasingly more important that that's the case particularly in light of what we have seen with CBA over the past month?

Wayne

I'm not going to comment on any individual company. I just think – and the new regime that the government announced is obviously announced some months ago now. So, it is not a response to the most recent issues that have dominated headlines. It's part of this broader issue I think that Victoria started questioning us on about community trust in the financial system and a desire or a perception that accountability in the banking system has not been what the broader community expects it to have been and therefore a political and regulatory response that says we need to do something to kind of reinforce appropriate governance, appropriate structures and appropriate accountability within the banking system.

So, it's not a response to the most recent issue. I think it's really just trying to reinforce good corporate governance, good corporate practice. In fact, not doing anything more than I suspect what has always traditionally been the corporation's job of boards and directors. But it is happening in an environment in which, as I said, there is this concern amongst the community that accountability hasn't been perhaps as clear or at least transparent as it might have been and so there's a desire just to reinforce that and make it a bit clearer.

Female

Thank you. Well, to ensure that we get you all out of here on time we'll finish the questions there and thank the panel very much for their responses. Thank you.