The combined forces of changing customer needs, technology driven innovation and regulatory change (discussed in the three preceding chapters) are imposing substantial change on the landscape of the Australian financial system.
For the purpose of its task, the Inquiry considers it unnecessary to predict precisely the future shape of the industry. To do so accurately would be impossible. Rather, it has confined its analysis to identifying the broad directions of change which are now under way.
Four broad changes are identified.
Increased competition will result in the rationalisation of pricing and costs. There will be no room in a competitive market for non-commercial mispricing. Competitors with high cost structures will also be forced to rationalise their operations in order to remain competitive.
The Australian economy and its financial system are now closely linked to international markets. Financial services participants in Australia face increasing competition from offshore providers and are simultaneously pursuing international opportunities themselves.
Increased conglomeration and further market widening will continue to challenge traditional institutional and regulatory boundaries. New competitors are also emerging from outside the finance industry. As competition intensifies, many firms will seek to specialise in those activities they perform best, causing the value chain to disaggregate. Alliances, joint ventures and outsourcing are likely to become commonplace.
Markets are increasingly challenging intermediaries for the provision of finance and the management of risk. Large corporations have had access to financial markets for some time, but developments in securitisation now allow markets to provide finance to retail borrowers. An increasing range of risks can be managed through an array of market based instruments, while the needs of savers are also increasingly being met through financial market products. Balance sheet intermediaries will continue to perform an important role in meeting the financial services needs of their clients, but the form of their participation is likely to change.
The Changing Financial Landscape
This chapter presents a broad outline of changes in the financial system which the Inquiry considers should be taken into account in designing the regulatory framework. The analysis is based on the forces which have shaped and are continuing to shape the financial system and on the way in which institutions and markets have responded to them. In doing this, the chapter considers the likely effects on the financial system of the major forces for change introduced in the preceding three chapters.
To meet its Terms of Reference, the Inquiry does not need to predict precisely the future form and structure of financial institutions and markets. Indeed, it is impossible to do so. A wide range of strategies will be undertaken by different participants and it is not the role of the Inquiry to pick the winning strategy.
The Inquiry’s task is to ensure that the regulatory framework is able to accommodate outcomes determined in competitive markets. To do this, the regulatory framework must comprehend the potential benefits of changes in the operations and structures of institutions and markets and must address any risks inherent in these changes. Importantly, the framework must have the flexibility to respond to developments as they occur.
Thus, the Inquiry has confined its consideration to forming broad judgments on the likely scope and nature of change, and has limited its time horizon to the next decade or so (say, to 2010). It has identified four main elements which are changing...