Australia needs to implement a national federated digital identity strategy, establish a private-public sector innovation committee, and make regulation technology-neutral to ensure the country’s financial services sector is not restrained from innovation.
The recommendations were among 44 made yesterday as part of the inquiry into regulation of Australia’s financial services industry, lead by former Commonwealth Bank CEO David Murray.
Notably, the panel scrapped a controversial proposal to license IT providers who serve financial markets in order to mitigate against risks of IT system failures, despite recommending such an approach in its interim document.
The final 320-page Financial Systems Inquiry (FSI) report [pdf] focused on innovation in the financial services industry as a key theme, identifying how technology-related innovation has the potential to transform the sector as long as policy and regulatory settings were amended to ensure technological change was not hindered.
As such, the Murray panel recommended the Government establish a permanent “innovation collaboration” committee made up of private and public sector bodies to ensure timely policy and regulatory responses to innovation in the sector.
“Although the benefits of innovation are difficult to quantify, efficiency gains and improved consumer convenience are evident in a range of areas, such as online banking, payments and insurance," the panel wrote.
“As the pace of technology-enabled innovation accelerates, it is crucial that Government and regulators be aware of, and enable, the benefits of innovation to flow through the financial system while appropriately managing risks.”
The industry is currently suffering from poor government appreciation of - and therefore regulatory impediments to - innovation, an inability to influence Government and regulators in a coordinated way, and a lack of a single point of contact for innovators such as new entrants, the report found.
An innovation collaboration committee in which industry and government work together to identify innovation opportunities would improve the speed with which government and regulators responded to such opportunities, the report said.
A national digital identity framework
The Murray panel reiterated its support for a national federated digital identity strategy as highlighted in its interim report, recommending the Government develop a framework under which both private and public sector bodies could compete to supply digital identities.
The panel suggested one minister be given responsibility for the model, which would be backed initially by a public-private sector taskforce established to develop the detail of the trust framework and standards involved.
A federated national digital identity framework would improve the efficiency of digital identity processes, minimise costs and regulatory burden for financial services firms, and help prevent crime, the report stated.
Banks and other financial services firms are currently required to verify an individual by using government-issued, paper-based credentials such as a passport or drivers license.
The panel argued that a consistent, digital approach to national identity would reduce the reliance on paper-based mechanisms, making it more secure and convenient for consumers and more efficient for government, businesses and individuals by reducing repetitive processes.
The Murray-led panel said previous efforts by industry to co-ordinate on identity - such as the 2006 Trust Centre initiative - had failed primarily as a result of competing commercial interests.
Similarly, no single identity credential exists at the Government level - around 20 government agencies currently manage more than 50 million identity credentials, the panel wrote.
“Australia has no clear strategic vision for digital identity management and, consequently, little coordination and limited ability to attain potential network benefits that would lower costs and reduce duplicative processes.
“Many public sector stakeholders have interests in digital identity management and, although Government has some existing governance mechanisms, the lack of clear ownership of identity policy is impeding progress.”
The Murray panel said the Government already had the building blocks in place to create a national co-ordinated approach.
The Government should draw on the national document verification service, the myGov service portal, the national e-authentication framework, the Finance department’s third-party identity services assurance framework, and the Government’s Vanguard electronic authentication service, among others, to build the national federated digital identity strategy.
Opening up the private sector’s data
While convincing banks and others to share more of their tightly-held data will prove difficult, the Murray panel said, releasing information would improve efficiency and offer benefits to the wider economy.
The panel said while it would not suggest that all or most private sector data should be publicly released, some datasets should be made public in cases where doing so would allow the industry to operate more efficiently.
Financial services organisations could be persuaded to share more of their data through incentives such as data-sharing arrangements, cost-recovery arrangements, and user charges, the panel said.
The Productivity Commission should be tasked with inquiring into the costs and benefits of making more public and private sector data public - keeping in mind privacy considerations - before the end of next year, the panel recommended.
But public sector bodies also need to up their game when it comes to open data, the panel said - Australian governments have only released around 3200 datasets compared to 10,000 in the UK and 200,000 in the US.
“This reluctance could be due to the costs of making data available and usable, and risks around quality assurance. However, these considerations should be weighed against the fact that decisions not to release data prevent public and private sector decisions from being better informed.”
Read on for the panel's views on financial disclosure and the big four's reaction...
Bringing disclosures into the modern era
Antiquated legislation governing how financial services bodies are required to communicate product disclosures to customers is stopping issuers from offering modern approaches and meeting consumer expectations, the report found.
The sector needs more flexibility to provide such information so it is more effectively used - the panel said offering shorter documents and using plain English and graphics would improve consumer understanding.
Financial institutions are currently required to physically or electronically mail sometimes lengthy information disclosures to customers. ASIC along with industry firms AMP and Vanguard recently announced they would work to modernise the approach through a pilot of digital product disclosures.
The Murray panel endorsed the pilot but said the Government should nevertheless move now to remove regulatory impediments to innovative product disclosures, and consider the ASIC test results when they are released.
The Government also needs to adopt a technology-neutral approach to regulation across the wider financial services sector lest it discourage innovation, the panel said.
“Technology-specific regulation can impede innovation by preventing the adoption of best technology or innovative approaches. For example, regulation may entrench the use of cheques or paper-based disclosure documentation, creating inefficient outcomes," the report found.
“Regulation should only be technology specific where selecting a common standard would improve overall system efficiency. Review mechanisms are needed to ensure technology-specific regulation does not become an impediment to innovation over time.”
It recommended the Government establish a working group in partnership with industry to identify areas of regulation that needed to be amended to achieve technology neutrality.
For those limited areas of regulation that may need to remain technology-specific, the Government should implement review mechanisms to ensure such regulation does not impede future innovation, the panel said.
The big four react
Australia’s banks - and the Government - now have until March 31 next year to formally respond to the report.
While the big four said they would need more time to properly digest the 320-page document, the Commonwealth Bank has already endorsed the report a “significant milestone for the industry” and commended the process for being “wide-ranging and consultative".
“Throughout the process we have welcomed the opportunity to work with the inquiry to develop constructive ideas and tangible outcomes to address the opportunities and challenges faced by the financial system,” a spokesperson for the bank said.
“We believe that the Treasurer's decision to now continue the next phase of this consultation is the right approach for achieving the best outcomes for the financial system and all its stakeholders. We look forward to participating fully in this next phase between now and March 2015.”
Westpac said the document marked an important step in the review of Australian financial services sector.
“We are encouraged that the FSI and Treasurer have laid out a sensible timetable for the remaining process to be undertaken, as well as appropriate transitioning to avoid any unnecessary negative impacts on growth and returns,” deputy CEO Phil Coffey said in a statement.