Financial Services and Markets Appendices to the Minutes of Evidence


Note by the Financial Services Authority on the "Wallis Report"

  The Final Report of the Financial System Inquiry ("The Wallis Report") was published in Australia in March 1997. Commissioned by the Federal Treasurer, Peter Costello, in June 1996, the inquiry was charged with providing a stocktake of the results arising from the deregulation of the Australian financial system since the early 1980s. In addition, the Report was to make recommendations on the nature of regulatory arrangements in Australia. A key recommendation was the establishment of an integrated financial regulator. The Australian Prudential Regulation Authority was therefore created on 1 July 1998. Chapter 16.6 of the Report covers the Inquiry's work on the cost of regulation. The Inquiry identified three main costs: the direct (or infrastructure) cost of regulators, the compliance costs of those under regulation, and the allocative efficiency costs of benefits forgone. Analysis naturally centres on the cost of regulation in Australia, but the UK figures among the sample of jurisdictions used in the comparison.

  The Inquiry found that the UK regulators had the lowest direct cost out of the sample of 8 jurisdictions, with 0.40 basis points of financial sector assets for the period 1994-95 (see Figure 16.4). This compared favourably with the United States (0.99 basis points of assets) and Hong Kong (0.51 basis points of assets). Australia was placed at the opposite end of the spectrum (1.13 basis points of assets).

  The Report acknowledged that it is more difficult to assess national aggregates for compliance costs of regulated entities. A comparison of compliance costs in six countries for 1996 was, however, offered (see Figure 16.5). Again, the UK figured at the lower end of the spectrum, with compliance costs of 2.8 basis points of financial sector assets. Only New Zealand had a lower compliance cost than the UK (1.4 basis points of assets). The US had very much the highest compliance costs (10.5 basis points of assets).

  Finally, allocative and other efficiency costs were considered. The Report noted the types of allocative costs which exist, but no comparative data was offered, presumably due to the difficulty in effecting such international comparisons.

26 March 1999

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