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Financial Regulators Focus on Emerging Trends and Risks

The Council of Financial Regulators (CFR) has been actively engaged in addressing emerging trends and risks in the financial sector. In its latest meeting, the CFR discussed a range of topics, including climate change, sustainable finance, and consumer protection.

Climate Change and Sustainable Finance

Impact on the Financial System

The CFR emphasized the importance of addressing the impact of climate change on the financial system. The Australian Prudential Regulation Authority (APRA) is leading a Climate Vulnerability Assessment (CVA) to estimate the impact of two potential climate scenarios on Australia’s five largest banks.

Analysis by Reserve Bank: The Reserve Bank has also published analysis assessing the climate risk to the Australian banking system.
Development of Sustainable Finance Taxonomies: The CFR welcomed the development of sustainable finance taxonomies, which establish standards for investors to assess the sustainability credentials of specific projects and financial products.

ASIC is encouraging listed companies to use the Task Force on Climate-related Financial Disclosures recommendations as a framework for voluntary climate-related disclosures.

Consumer Protection

Mitigating Greenwashing Risks

ASIC has been focusing on improving consumer outcomes by changing industry practices to mitigate the risk of “greenwashing.” The regulator is conducting targeted surveillance of financial products to identify misleading statements relating to environmental, social and governance claims, particularly across social media.

Derivatives and Financial Markets Infrastructure

Regulatory Developments

The CFR also discussed regulatory developments related to financial market infrastructures (FMIs) and the phasing-down of the Committed Liquidity Facility (CLF). APRA expects banks to purchase high-quality liquid assets necessary to eliminate the need for the CLF by the end of 2022.

Use of Derivatives by Superannuation Funds: In addition, the CFR reported on its forthcoming work on the use of derivatives by superannuation funds. The report is expected to cover the operational capability of funds to properly manage large volumes of derivative transactions, prudential implications for individual funds and member outcomes, and broader implications for financial system stability.

International Cooperation

Engaging with Other Regulators

The CFR continues to engage with other regulators in Australia and New Zealand through the Trans-Tasman Council on Banking Supervision (TTBC). The TTBC agreed its work plan for 2022, which includes continued information-sharing on key issues such as housing markets and climate-related risks to the financial system.

Conclusion

The CFR’s latest meeting highlighted the importance of addressing emerging trends and risks in the financial sector. The regulators’ focus on climate change, sustainable finance, consumer protection, derivatives, and financial market infrastructure demonstrates their commitment to ensuring the stability and integrity of the Australian financial system.