OUTLOOK 2022-Australian regulators look to economic recovery in wake of pandemic pain

Australia’s key financial regulators have made a surprise decision to target economic recovery and resilience as one of their principal goals for the year ahead.

The decision to include economic recovery as a core objective marks a radical shift from the post-Royal Commission focus on conduct risk, senior management accountability and enforcement.

In the year ahead, financial regulators will also target cyber resilience and operational risk, amid concerns that systemically important financial infrastructure could suffer a major cyber-attack. The financial crime and anti-money laundering (AML) front, regulators are expected to continue with their enforcement push into areas such as casinos and gaming machine operators.

Financial intelligence teams are expected to heighten their focus on partnerships and information sharing, as well as targeting a surge in fraud against government economic stimulus programs.

Regulators will also pay far greater attention to environmental, social and governance (ESG) issues. This is part of a coordinated international push to increase the focus on ESG, as well as part of an economic attempt to seize a slice of the burgeoning Asia-Pacific demand for ESG-linked financial products.

Navigating the new cyber threat landscape

The Australian Securities and Investments Commission (ASIC) is ramping up its focus on cyber resilience partly in response to the accelerated push towards digital financial services during the COVID crisis. From a regulator’s perspective, the rapid adoption of non-cash payment facilities has been one of the few “bright spots” to emerge from the pandemic.

At the same time this pivot toward digital payments has increased the country’s vulnerability to payment system outages — be they accidental or the result of a determined cyber-attack.

Australia’s open adoption of “economic recovery” is a core regulatory priority sets it apart from the other major regulators across the Asia-Pacific region.

“Part of a regulator’s job is actually to facilitate the economic resilience. We think it’s probably in all our mandates or requirements, one way or another, to do that. At ASIC our vision is really about ensuring there is a fair, strong and efficient financial system for all Australians,” said Cathie Armour, ASIC commissioner.

ASIC’s enabling legislation requires it to facilitate the “performance of the financial system” and to promote confident and informed investors. This has become a more visible priority for the agency under its new chairman, Joe Longo.

“In the pandemic, all of us at ASIC have adjusted our work in a way that’s reflecting desire to achieve that role,” Armour said.

Educating investors

The conduct regulator is also returning to an operating model based around the importance of informed and educated investors. This visible shift in the agency’s mindset is designed to rebalance a regulatory pendulum that had swung too far in the direction of risk minimisation. The new focus on investor education also reflects the fact that ASIC wants to push back against the public perception that the regulator’s job is to prevent investor losses.

ASIC’s promotion of a new financial literary framework is designed to foster an appropriate level of caution and confidence among participants in the financial system.

The financial crime front, regulators have seen a surge in scams and fraud during the pandemic. In the 2020 calendar year, investors lost an estimated A$851 million to scams and frauds. Part of ASIC’s push for investor education is to equip retail investors with better skills to detect and avoid common types of fraud.

The conduct regulator is aiming to adapt its supervision and enforcement activities to ensure that investors and financial service providers are both playing a role in fraud mitigation. ASIC is also reaching out to regulators across the region to coordinate this activity, in view of the cross-border nature of many scams.

Exchanging notes and sharing ideas across APAC

ASIC will be “exchanging notes regularly” with its counterparts across the Asia-Pacific region, particularly in Hong Kong and Singapore. Over the past two years, regulators have seen scams sweep across the region in waves, as perpetrators seek out vulnerable consumers. Regulators are hopeful that by pooling their knowledge they will be able to detect new financial fraud typologies and take pre-emptive action to protect the financial system.

The increase in cross-border collaboration will also assist with efforts to boost economic activity across the Asia-Pacific region in 2022.

“We really benefit from the fact that we exchange notes. As a result we can adjust our regulatory settings, where sensible, to really help firms to operate in the current environment. The pandemic environment is here with us for a while and none of us have perfect insight into whether or when things might change,” Armour said.

Regulators in Australia will continue to foster a robust “regtech” sector in 2022. The various “sandboxes” will continue to grow as local regulators support the push towards innovative solutions such as digital regulation, robotics and machine learning to deal with complex regulatory challenges.

ASIC officials said this would be crucial to help compliance and risk teams manage their growing responsibilities in a volatile and challenging regulatory and economic environment.

Financial crime in the crosshairs

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is expected to continue its close collaboration with other financial regulators throughout the year ahead. The increase in frauds and scams in recent years has narrowed the gap between the regulatory perimeters of the conduct and AML regulators.

On the enforcement front, AUSTRAC is hoping to wind down its intense activity in the banking sector as part of the broader commitment to Australia’s post-COVID recovery. The agency has finalised major actions against Commonwealth Bank and Westpac in recent years and is now looking to finalise its work with the National Australia Bank (NAB). AUSTRAC has confirmed that it does not have any outstanding enforcement issues with the country’s fourth “pillar” bank, the ANZ Banking Group.

The year ahead will likely see some major actions, however, against the country’s largest casino operators. The state-based enquiries and royal commissions against Crown Resorts in 2021 have given the regulator fertile ground for enforcement action. AUSTRAC’s enforcement team are also looking at some of the country’s other major gambling players, including Star Entertainment Group Ltd.

AML compliance teams are expected to have another busy year as they attempt to identify suspicious activity within a radically different post-COVID operating environment for many of their clients. Trade-based money-laundering is also expected to be a top priority for reporting entities in the next 12 months.