CIVMB Glossary v2

Industry Knowledge
Topic 1-1: The industry and economy

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Certificate IV in Finance and Mortgage Broking
Contents
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Overview ........................................................................................................ 1-1.3
Part 1: History and development of FSI ........................................................... 1-1.4
1 The Australian financial system ............................................................ 1-1.4
2 History of FSI in Australia ..................................................................... 1-1.5
3 The Australian lending industry............................................................ 1-1.8
Part 2: Who are the stakeholders in the FSI? ................................................. 1-1.11
4 Financial services providers ............................................................... 1-1.11
5 Service users ..................................................................................... 1-1.16
6 Regulators ......................................................................................... 1-1.18
7 Advisers ............................................................................................ 1-1.19
Part 3: Which services does the FSI provide? ................................................. 1-1.21
8 The primary functions of a financial system........................................ 1-1.21
9 Types of financial services .................................................................. 1-1.21
Part 4: What is the environment the FSI exists in? ......................................... 1-1.29
10 Political ............................................................................................. 1-1.29
11 Media................................................................................................ 1-1.30
12 Environment...................................................................................... 1-1.32
13 Economic........................................................................................... 1-1.34
Part 5: Global economy................................................................................. 1-1.36
14 Top-down analysis ............................................................................. 1-1.36
Part 6: Australia’s economy .......................................................................... 1-1.38
15 The RBA ............................................................................................ 1-1.38
16 The domestic economy ...................................................................... 1-1.39
© Kaplan Education Pty Ltd 1-1.1

Part 7: The business cycle ............................................................................. 1-1.48
17 The four phases of the business cycle ................................................. 1-1.48
18 Characteristics of the business cycle phases ....................................... 1-1.50
19 The duration of the business cycle ..................................................... 1-1.50
Part 8: Sustainability in the FSI ...................................................................... 1-1.51
20 Triple bottom line .............................................................................. 1-1.51
References .................................................................................................... 1-1.54
Suggested answers........................................................................................ 1-1.55
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Overview
As a professional in the financial services industry (FSI), brokers need to have sound
general knowledge of the industry in which you operate and specific knowledge of
issues related to mortgage broking.
As the finance industry in Australia is highly regulated and breaches of legislation can
result in severe penalties, knowledge of and compliance with the various applicable
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laws, regulations and codes of conduct are essential.
Topic learning outcomes

On completing this topic, students should be able to:
• describe the history and stakeholders of the FSI
• explain the role of a mortgage broker within the wider context of the FSI
• describe the phases, characteristics and duration of the business cycle
• apply principles of sustainability to their work practices.

Part 1: History and development of FSI
1 The Australian financial system

An understanding of how the Australian financial system operates is important to
understanding your place and role in the system, and how facets and functions of the
system impact your work and your ability to satisfy client needs.
The Australian financial system consists of individuals, households, businesses and
governments that come together as spenders, savers, borrowers, lenders or investors.
They meet in the financial marketplace and conduct their transactions via financial
intermediaries. The financial system makes the transfer of funds and financial assets
between savers and borrowers possible.
1.1 The primary functions of a financial system

A financial system:
• enables transactions to take place without reliance on the process of barter
(the exchange of one set of goods for another without the use of money or currency)
• facilitates the transfer of funds and financial assets between savers and borrowers
• assists investors to balance risk, liquidity and returns.
It is essential for a financial system to efficiently:
• provide a payment mechanism that is effective and provides certainty
• fully mobilise savings
• channel those savings into fields of investment that generate the highest return
consistent with the risk involved
• offer a suitable range and diversity of financial instruments and intermediaries
• operate at minimum cost of resources used per unit of service provided.
To determine the extent that the Australian FSI meets these essential requirements, it is
necessary to deconstruct the industry’s component parts and analyse the role that each plays.
The four component parts are:
• household financial activity
• financial services providers (e.g. banks, non-bank financial institutions and insurance
companies and private lenders)
• financial services personnel
• regulatory controllers of the FSI.
Figure 1 Components of a financial system

Household activity
Personnel
Providers
Regulatory controls
2 History of FSI in Australia

This section contains a brief history of some of the major developments in financial
services in Australia over recent decades, focusing on the major trends in regulation
and deregulation and the development of Australia’s main financial institutions.
2.1 1960–1970s
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Central banking functions were performed historically by the Commonwealth Bank of
Australia. The Reserve Bank of Australia (RBA) opened for business on 14 January 1960.
It had 1,800 staff from the Commonwealth Bank, including the Governor Dr HC ‘Nugget’
Coombs. The RBA also maintained the same board and, importantly, the same charter as
the Commonwealth Bank.
2.2 1970–1980s
Australia was one of the first countries to embrace financial deregulation, or the process
of removing or reducing state regulations, in the 1970s. The removal of interest rate
ceilings on bank deposits in 1980 marked the start of deregulation. Direct controls over
banks were largely abolished in the early 1980s. By the mid-1980s, Australia had largely
deregulated its financial markets.
2.3 1990s
The ‘four pillars’ policy was adopted by the Keating Government to maintain the
separation of the four largest banks in Australia by rejecting any merger or acquisition
between the four major banks. Originally this policy covered the big four banks
(Commonwealth Bank, Westpac, NAB and ANZ) and two insurers (AMP and National
Mutual). Keating believed this arrangement would ensure a competitive banking market.
2.4 The Wallis Report

In 1996, the Australian Government established the Financial System Inquiry,
with Stan Wallis as chair, to provide a stocktake of the results arising from the
deregulation of the Australian financial system in the 1980s. The resulting report
is commonly referred to as the ‘Wallis Report’.
The Wallis Report proposed some fundamental changes to financial regulatory
arrangements to increase the efficiency and effectiveness of the system and build
on the existing achievements of financial deregulation. Among the major
recommendations, the Wallis Report recommended:
• formation of a single prudential regulator, the Australian Prudential Regulation
Authority (APRA), to provide integrated and consistent supervision of financial
institutions for safety purposes for the entire financial system
• bank supervision be taken away from the RBA and given to APRA
• the Australian Competition and Consumer Commission’s (ACCC’s) role is to prevent
market failure through anti-competitive behaviours
• dismantling of the ‘four pillars’ policy.

Wallis’s three fundamental drivers — changes in customer needs, changes in skills and
technologies, and changes in regulation — were implemented. However, the four pillars
policy remained. The structure of financial regulation was introduced in 1998.
2.5 Present day

The RBA retains its central banking functions, including responsibility for most payment
systems and setting of monetary policy. However, its involvement with the banking
sector has declined compared to previous decades.
Regulation of the financial system in Australia is split mainly between:
• Australian Securities and Investment Commission (ASIC) responsible for:
– market integrity
– consumer protection
– the regulation of investment banks and finance companies
• APRA responsible for:
– the licensing and prudential supervision of authorised deposit-taking institutions
(ADIs)
– life and general insurance companies
– superannuation funds.
All financial institutions regulated by APRA are required to report periodically to APRA.
APRA has issued capital adequacy guidelines for banks, which are consistent with the
Basel II guidelines. Investment banks (that do not otherwise operate as ADIs) are neither
licensed nor regulated under the Banking Act 1959 (Cth) and are not subject to the
prudential supervision of APRA. However, most investment banks are required to
provide statistical information to APRA.
ASIC regulates anti-competitive behaviour.
All of these regulators are independent statutory authorities without direct oversight by
a government department.
For more on these financial institutions see ‘Topic 1-2: Legislation and codes of practice’.
2.6 Financial System Inquiry

A Financial System Inquiry, headed by David Murray, was announced by Treasurer
Joe Hockey in 2013. The Inquiry reported on:
• how the financial system can more efficiently allocate Australian-sourced capital to
minimise exposure to volatility in global capital markets
• how Australia can best balance competition, innovation and efficiency, with stability
and consumer protection
• the role and impact of new technologies, market innovations and changing
consumer preferences
• international integration, including international financial regulation.
Apply your knowledge 1: Issues for the Murray Inquiry

Read the article by Chief Executive Steve Münchenberg of the
Australian Bankers’ Association:
Münchenberg, S 2014, Can Murray inspire conviction and confidence for
our future prosperity? Australian Bankers’ Association Inc., 14 July,
viewed 13 March 2017,
<http://www.bankers.asn.au/Media/ABA-Blog/Blogs/Can-Murray-inspire-
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conviction-and-confidence-for-our-future-prosperity->.
What does the author see as the major issues facing the Murray Inquiry?
Note: You can access ‘Suggested answers’ for this activity at the end of this topic.
Further resources: History of FSI in Australia

• Australia.gov.au n.d., Financial regulation, Australian Government,
viewed 13 March 2017, <http://australia.gov.au/topics/economy-
money-and-tax/financial-regulation>.
• Australian Prudential Regulatory Authority (APRA) n.d.,
APRA fact sheets, APRA, viewed 13 March 2017,
<http://www.apra.gov.au/AboutAPRA/Publications/Pages/APRA-fact-
sheets.aspx>.
• Maddock, R 2014, Appendix A – Financial system issues in the context of
Wallis, Australian Bankers’ Association Inc., March, viewed 13 March 2017,
<http://www.bankers.asn.au/ArticleDocuments/217/Appendix_A__Financi
al_system_issues_in_the_context_of_Wallis.PDF.aspx>.
• Parliament of Australia 1997, The Wallis report on the
Australian financial system: summary and critique [online],
research paper 16, Parliament of Australia, viewed 13 March 2017,
<http://www.aph.gov.au/About_Parliament/Parliamentary_Department
s/Parliamentary_Library/pubs/rp/RP9697/97rp16>.
• Reserve Bank of Australia (RBA) n.d., Fifty years of the Reserve Bank,
RBA, viewed 13 March 2017, <http://www.rba.gov.au/about-
rba/history/anniversary/index.html>.
• The Treasury 2013, Financial system inquiry, media release,
Australian Government, 20 November, viewed 13 March 2017,
<http://jbh.ministers.treasury.gov.au/media-release/023-2013>.

3 The Australian lending industry

The lending market can be divided into two main sectors or markets. These are the:
• retail sector, mainly comprising of individuals who borrow money to fund purchases
of houses, cars or consumer goods
• business sector, or the commercial lending market, where borrowers range from
individuals and small businesses to international corporations. Commercial lending
has a much wider range of purposes, including equipment finance and debtor
funding.
3.1 Credit
Credit refers to a person or entity providing another person or entity with financial
resources that do not need to be repaid immediately. Instead, an arrangement is made
to return the financial resource later, either in one transaction or over a number of
transactions. The provision of the financial resource creates a ‘debt’.
The financial resource does not necessarily have to be money. The debt can be created
through the:
• provision of goods and services (e.g. hire purchase and lease arrangements) or
• non-monetary financial resources (e.g. guarantees and underwriting commitments).
The creditworthiness (or reputation) of the person or entity taking on the debt is
significant and may impact on:
• the terms and conditions that apply to the credit offered
• the amount of return (or interest) the credit provider expects for the degree of
risk involved
• whether credit is indeed available to the particular person or entity.
3.2 Lending
Lending refers to making a wide range of secured and unsecured loans available to
consumers and other borrowers for a range of purposes. Retail lending can include the
provision of funds for the purchase of cars, boats, household items, travel and even
medical or dental expenses. Mortgage lending usually refers to the provision of funds for
houses and other real estate. Forms of lending and loan products are discussed in more
detail later in this topic.
3.3 The lending market in Australia

The Australian Bureau of Statistics (ABS) prepares a number of estimates of the size and
nature of the financial services sector in Australia. Table 1 shows a breakdown of
borrowings in Australia as at May 2014, with a comparison to the previous month.
Table 1 Australian borrowings April/May 2014

April 2014 May 2014 April 2014 to May 2014
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$m $m % change
Trend estimates
Housing finance for owner occupation 16,777 16,804 0.2
Personal finance 8,288 8,348 0.7
Commercial finance 42,094 42,308 0.5
Lease finance 420 420 –0.1
Seasonally adjusted estimates

Housing finance for owner occupation 16,858 16,732 –0.7
Personal finance 7,963 8,689 9.1
Commercial finance 43,753 41,110 –6.0
Lease finance 360 441 22.4
Source: ABS 2015.
As Table 1 indicates, lending for owner-occupied housing forms a significant proportion

of all lending and the majority of retail lending in Australia.
Home ownership in Australia

Australia has a higher rate of home ownership than in many other parts of the world.
In fact, owning your own home has long been thought of as the ‘Australian dream’
and considered an integral part of the Australian lifestyle. Housing satisfies our basic,
essential needs for shelter, security and privacy. The adequacy of housing is an
important component of individual wellbeing.
Data from the ABS show that home ownership rates have been fairly stable for many
decades, at around 70%. In the 2009–10 Household Expenditure Survey and Survey of
Income and Housing (ABS 2012), it was found that an estimated 33% of households
owned their homes outright (i.e. without a mortgage) and 36% were owners with a
mortgage. A further 24% were renting from a private landlord and 4% were renting
from a state or territory housing authority.

Investment in housing
For most people, ownership of real estate also represents financial security.
Many Australians now look to ownership of investment property as a means of
wealth creation, a way of providing for their retirement and, if possible, providing for
their children’s future. Australians continue to hold significant investments in land
and housing.
According to statistics available from the ABS, in the 10 years to June 2009,
around $648 billion was invested in Australian dwellings. This was an increase from
$447 billion in the 10 years up to 1999.
Land and houses are the most significant private assets owned by most Australians,
representing 57% of the total value of all assets owned by the household sector.
Housing has a great impact on the national economy. It influences investment levels,
interest rates, building activity and employment.
From this you can see that the sector you are involved in has great significance in our
personal and economic wellbeing, and that of the country as a whole.
Further resources: Housing in Australia

• Australian Bureau of Statistics (ABS) 2013, Housing and homelessness
statistics, ABS, viewed 13 March 2017,
<http://www.abs.gov.au/websitedbs/c311215.nsf/web/Housing+and+H
omelessness>.
• Reserve Bank of Australia (RBA) 2014, Statement on monetary policy,
RBA, November, viewed 13 March 2017,
<http://www.rba.gov.au/publications/smp/2014/nov/html/index.html>.
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Part 2: Who are the stakeholders in the FSI?

The stakeholders in the FSI include:
• financial services providers
• service users
• regulators
• advisers.
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4 Financial services providers
Financial services providers are entities directly involved in the transfer of funds
between borrowers and savers. They harness the savings of the community,
making these funds available to fuel the economy. They are an essential element in the
efficient allocation of financial resources for productive purposes.
Financial services providers are often referred to as financial intermediaries. This is
because they are essentially creating a marketplace where groups of people with varying
financial needs and requirements gather. This activity creates a mutually beneficial
relationship between borrowers and credit providers, and provides access to markets
that individuals and groups could not otherwise enter.
4.1 Types of financial service providers

The major financial service providers in the Australian FSI are shown in the table below.
Table 2 Types of financial service providers

Financial service provider Description
Banks A financial intermediary that accepts deposits and channels these funds
into lending activities. A bank links together customers with capital
surpluses (i.e. want to deposit funds) with customers that have capital
deficits (i.e. want to borrow funds). In Australia, banks must hold a banking
licence.
Non-bank financial institutions Non-bank financial institutions include:

• Financial institutions such as credit unions and building societies that are
deposit-taking institutions but do not hold a banking licence.
• Other financial institutions such as insurance companies, money market
corporations, fund managers, finance companies, trust companies and
private credit providers, which are generally not deposit-taking
institutions and do not hold a banking licence.

4.2 Banks
Banks have traditionally been the dominant institutions in the financial sector and are
held in a position of special confidence by the public. The collapse of a bank would
undermine public confidence in the entire financial sector and have severe
repercussions. As a measure of protection against a collapse, banks:
• place the interests of depositors ahead of those of shareholders, thus absorbing
some of the risks of default
• spread the risk of loan default among all depositors and shareholders
• pool and utilise depositors’ funds
• use their expertise for conducting transactions.
The payments system

The importance of the banking sector is equally reflected by its role in the payments
system and the scale of banking operations. Banks play an essential role in settling debt
in Australia via cheques or cash.
Banks indirectly bear the cost of organising the distribution of notes and coins to meet
the demand for currency, as well as the associated transport and security costs.
They also have a right to issue cheque accounts. Although non-bank groups are now
able to provide cheque accounts to clients, banks remain the dominant providers of
this facility.
Deposit facilities
Banks are an important repository for savings of both households and businesses.
They offer a diverse range of deposit facilities, such as:
• traditional passbook savings accounts that pay relatively low rates of interest
• term deposits, usually offering slightly higher interest rates
• cash management type accounts offering rates of interest linked to money market rates
• offset accounts, where deposited funds are offset against a client’s home loan for the
purpose of calculating loan interest.
Commercial bill financing

Commercial bills are negotiable, short-term, unsecured promissory notes issued in
bearer form (a security payable to the person possessing it), usually on a discount basis
to raise working capital for any term up to 180 days. Commercial bill financing has been
an increasingly important area of bank activity.
Bank involvement typically takes one of three forms. The bank can
• accept the bill
• endorse the bill, or
• discount the bill.
Borrowers can issue bills without the involvement of banks, but if they arrange for banks
to either accept or endorse the bills, they are normally able to issue them at a
comparatively favourable rate. This is because of the banks’ superior credit rating and
the fact that there is an established liquid market for bank-endorsed bills.
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Borrowing
Individual borrowing needs can be met by many of the same facilities that service their
transaction needs. Credit cards or overdraft facilities can be used for short- and
medium-term borrowings, while long-term borrowings can be met by bank loans
and mortgages.
Many banks have redraw, offset and line of credit facilities linked to mortgages.
This allows the client’s equity in the property to be loaned back to the client as a source
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of credit with the mortgaged property as security. The advantage of this is that while the
money is sitting in the mortgage account, it is reducing interest payments and is still
accessible.
Mortgages have traditionally been made at variable interest rates that fluctuate during
the term of the mortgage according to prevailing interest conditions. Fixed rate
mortgages are popular in a market where rates are rising and are less popular in a
market where rates are falling. By fixing interest rates, clients know exactly how much
they need to repay each month. This provides some protection against a potential
increase in home loan rates.
Insurance
Banks are able to provide the full range of general insurance and life insurance products
to their clients. In some cases, the bank is directly associated with an insurance company
by way of acquisition or merger. In other cases, banks onsell the insurance products of
other organisations. These banks act as intermediaries or agents of the insurance
company, usually receiving a fee for their services.
Savings and investments

Banks offer a wide variety of products and services to short-, medium- and long-term
savers and investors. These range from passbook savings accounts offering low rates of
interest, small fees and significant transaction services to a variety of managed
investments catering for all investor profiles.
Other services offered by banks

Banks may also provide a number of other services, including:
• transaction facilities, such as funds transfer via loans and credit facilities
• non-financial services, such as the provision of safety deposit boxes and travel agency
facilities.

4.3 Non-bank financial institutions

The Australian financial system includes a range of non-bank financial institutions,
such as:
• building societies
• credit unions
• finance companies
• investment banks
• insurance companies.
Building societies
Building societies provide:
• mortgage finance for owner-occupied housing
• funds for the residential investment market.
They collect funds mainly by tapping into household savings. Since the mid-1980s,
building societies have sought to increase the range of services they offer in order to
maintain market share. Examples of new services include the issuing of credit cards and
the provision of current account deposit facilities through the establishment of agency
arrangements with a trading bank. Due to the need to achieve economies of services
and networks, there has been a trend for building societies to merge with existing
banks. Building societies also make use of third-party mortgage origination.
Credit unions
Credit unions are cooperative organisations owned by their members and run on a
non-profit basis. They concentrate on meeting the financial requirements of members,
providing avenues for investment and borrowing.
Credit unions differ from building societies in two main respects:
• Membership is limited to those with some common bond, for example, people
working in the same industry. However, with the amalgamation of different credit
unions, these bonds are less prevalent and most people would now qualify to join a
credit union.
• Lending to members is for more general purposes than housing. Common purposes
include the purchase of cars, holidays and boats.
Finance companies
Finance companies provide various types of loans to consumers and the business sector.
Most loans to consumers are for the purchase of consumer durables over relatively
short terms. Lending to the business sector includes:
• lease financing
• other commercial loans, including loans for non-residential property investment,
generally for short- to medium-term periods.
Finance companies represent an alternative for individual and business savings because
funds required for lending are borrowed from the public, mainly by way of debentures,
notes and deposits.
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As a general rule finance companies are not big credit providers of mortgage finance
for residential purposes. They normally provide finance for consumer goods,
home improvements, commercial property, leasing and factoring. Companies that lend
for residential property usually specialise in non-conforming lending to borrowers who
may not be able to obtain mortgage finance from traditional credit providers
because of credit impairments, such as a history of bankruptcy or loan delinquency,
or other circumstances.
This sector, as with the other sectors of the finance industry, is constantly evolving.
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Many finance companies are owned by one of the major banks and over time some have
been absorbed by the parent bank. Examples of finance companies that are operating or
have operated in Australia include:
• AGC
• Esanda
• Capital Finance
• ORIX Australia
• GE Finance and Insurance.
Investment banks
Investment banks operate in the wholesale space of the financial markets — they are
the intermediaries between companies issuing securities to raise funds and the
investors who buy these securities. They perform an important intermediary role,
channelling sizeable parcels of funds to large private corporations and government
agencies, and are an important channel through which overseas capital is brought
into Australia.
Investment banks deal in private and government securities, acceptance of bills,
underwriting issues of debt and equity capital, and devising innovative finance packages
for corporate clients.
Investment banks are not subject to the same regulation as ordinary banks and do not
accept deposits from the public as ordinary banks do. They derive their income from
fee-based activities or trading securities rather than from a margin between borrowing
and lending costs.
Some Australian banks also function as investment banks. On the other hand,
Macquarie Bank, the nation’s largest Australian investment bank, has significantly
expanded its presence into retail banking activities. Organisations such as
Macquarie Bank constantly review their activities in light of the current and anticipated
economic and financial environment.
Insurance companies
There have been substantial changes to the role played by life insurance companies,
which have occurred primarily through changing legislation, changing needs and
increased competition. This competition has led to a greater variety of products being
offered to consumers than before, for example, investment, retirement and savings
plans, as well as a variety of insurance products for businesses.
See also ‘Insurance’ in Part 3, section 9.3.

5 Service users
5.1 Consumers and customers

According to BusinessDictionary.com (2015), a:
• consumer is a ‘purchaser of a good or service in retail, or the end user, and not
necessarily a purchaser, in the distribution chain of a good or service’
• customer is a ‘party that receives or consumes products (goods or services) and has
the ability to choose between different products and suppliers’.
It is hard to imagine any adult Australian that is not a consumer of the FSI at some level.
For example, all adult persons require at least a bank account to operate in a modern
economy. Most Australians have significantly more complex financial dealings with
credit cards, investments, home loans and superannuation accounts, all of which
requires interaction with the FSI.
Consumer rights in terms of the FSI will be covered in more detail in
‘Topic 1-2: Legislation and codes of practice’.
5.2 Business
Each financial services institution is a business in its own right and subject to the
economic forces and regulations and laws to which all other businesses are subject.
Business is also an important customer of the FSI. Without access to investment capital
and credit, businesses are not able to function. Sufficient working capital allows a
business to:
• pay for short-term liabilities such as purchase of raw materials or payment of pay
salaries, wages and overheads or other operating expenses
• operate smoothly and maintain solvency by providing uninterrupted flow
of production
• maintain a good credit rating, thus enabling further credit where required
• manage through difficult times or emergencies.
Business is an important generator of wealth and employment within the economy of
a country. When businesses are healthy, the economy thrives, providing employment
and opportunities.
5.3 Government
Government’s role in the workings of the financial service industry is as a:
• law and policy maker, enacting legislation that directly influences the FSI. For more
information, see:
– ‘Legislation’ in Part 4, section 10.1
– ‘The Australian Government Treasury’ in Part 4, section 10.2
– ‘Government inquiries and commissions’ in Part 4, section 10.3
• regulator, where government organisations and agencies regulate the businesses in
the FSI. For more information, see ‘Regulators’ in Part 2, section 6.
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5.4 Not-for-profit organisations

A not-for-profit (NFP) organisation is one that uses surplus revenues to achieve its goals
rather than distributing them as profit or dividends. While NFP organisations are
permitted to generate surplus revenues, they must be retained by the organisation for
its self-preservation, expansion, or plans.
NFP organisations may resemble any other type of business in structure.
Typically, a NFP may have a business-like governance structure with a board or chief
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executive officer (CEO). NFPs may employ staff, undertake projects and collect revenue.
However, they may also accept charity donations, use volunteer employees and have a
different taxation status compared to other businesses.
As with any business, NFPs need to have internal financial management policies and
procedures in place in order to be able to meet financial obligations and prevent fraud.
Further resources: Not-for-profit organisations

For more information about the tax status of NFPs, see:
• Australian Charities and Not-for-profits Commission n.d.,
What is a not-for-profit?, Australian Government,
<https://www.acnc.gov.au/ACNC/Register_my_charity/Who_can_regist
er/What_is_NFP/ACNC/Reg/What_is_NFP.aspx>.
• Australian Taxation Office (ATO) 2015, Getting started, ATO, 20 July,
<https://www.ato.gov.au/Non-profit/Getting-started>.

6 Regulators
The table below shows the main regulators of the FSI.
Table 3 Regulators
Institution Description
Auditing and Assurance Standards Board The AUASB is an independent statutory agency
(AUASB) <http://www.auasb.gov.au> responsible for developing standards and guidance for
auditors and providers of other assurance services.
Australian Accounting Standards Board (AASB) The AASB makes accounting standards for the private,
<http://www.aasb.gov.au> public and NFP sectors and participates in the
formulation of international accounting standards. It is
subject to broad oversight by the Financial Reporting
Council (FRC).
Australian Financial Security Authority (AFSA) Responsible for the administration and regulation of
<https://www.afsa.gov.au> the personal insolvency system, proceeds of crime,
trustee services and the administration of the
Personal Property Securities Register (PPSR).
APRA APRA is the prudential regulator of banks,

<http://www.apra.gov.au/Pages/default.aspx> insurance companies and superannuation funds,
credit unions, building societies and friendly societies.
ASIC ASIC is an independent government body that enforces

<http://www.asic.gov.au> and administers corporations law and consumer
protection law for investments, life and general
insurance, superannuation and banking
(except lending) throughout Australia. Their purpose is
to reduce fraud and unfair practices in financial markets
and financial products so consumers use them
confidently and companies and markets perform
effectively.
Australian Transaction Reports and Analysis Australia’s anti-money laundering and

Centre (AUSTRAC) <http://www.austrac.gov.au> counter-terrorism financing regulator and financial
intelligence unit. They oversee compliance by a range of
financial services providers, the gambling industry,
bullion dealers and remittance service providers.
They also provide financial information to Australian
law enforcement and revenue agencies.
FRC <http://www.frc.gov.au> The FRC is a statutory body responsible for providing

broad oversight of the process for setting accounting
standards in Australia and giving the finance minister
reports and advice on that process.
Insolvency notices ASIC publication website for notices on insolvency and

<https://insolvencynotices.asic.gov.au> other matters. It provides a single point for searching
almost all notices on external administration and
company deregistration, formerly advertised in the
print media.
Standard Business Reporting (SBR) SBR is a multi-agency initiative that will simplify
<http://www.sbr.gov.au> business-to-government reporting.
Source: Australia.gov.au n.d.
The roles and responsibilities of regulators will be covered in more detail in

‘Topic 1–2: Legislation and codes of practice’.
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7 Advisers
7.1 Financial planners and advisers

A financial adviser is someone who is licensed to provide financial advice.
A licensed adviser may also be called a financial planner.
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Financial planners and advisers are professionals who provide advice to help
their customers:
• set and achieve financial goals
• make the most of financial assets
• get any appropriate government assistance to which the customer is entitled
• protect the customer’s financial assets.
Further resources: Financial planning changes

Recent changes in the law have changed the rights and responsibilities of
financial advisers. For more information, see:
• Australian Securities & Investments Commission (ASIC) 2016,
Future of financial advice reforms, ASIC, 23 March,
viewed 13 March 2017, <http://www.asic.gov.au/regulatory-
resources/financial-services/future-of-financial-advice-reforms>.
• MoneySmart 2014, Financial advice, Australian Securities & Investments
Commission, 28 April, viewed 13 March 2017,
<https://www.moneysmart.gov.au/investing/financial-advice>.
• The Treasury 2009, Future of financial advice, Australian Government,
<http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=home.htm>.
7.2 Mortgage brokers

There are many financial institutions offering credit and mortgages. Many customers
are confused by the choice and decide to get a finance or mortgage broker to do the
legwork in choosing a credit provider and a mortgage product most suitable for their
circumstances.
A finance broker negotiates with banks, credit unions and other credit providers on
the customer’s behalf to arrange loans or credit packages and arrange special deals.
A mortgage broker is someone who specialises in home loans. Credit providers and
brokers must be licensed to operate in Australia.
Finance or mortgage brokers can:
• offer a variety of loan options or products
• assist a customer to select a loan
• manage the loan negotiation process through to settlement.
The credit provider will often pay the broker’s fee or commission for arranging the loan
based on the product sold. Sometimes a broker will charge the customer a fee directly
(instead of or in addition to the credit provider’s commission).
For more about mortgage brokers see ‘Topic 1-3: Products and services’.

7.3 Stockbrokers
MoneySmart outlines that there are five public share exchanges in Australia. Four of
them directly supervise the companies that issue the shares that trade on their markets.
The fifth exchange, Chi-X, currently only provides the infrastructure for trading shares
already quoted on the Australian Securities Exchange (ASX). The five exchanges are:
• ASX — the main securities exchange in Australia
• Chi-X — an exchange that trades company shares already quoted on ASX but does
not list or supervise the companies
• National Stock Exchange of Australia (NSX) — a securities exchange that lists about
70 small to medium-sized companies
• SIM Venture Securities Exchange (SIM VSE) — an exchange for innovative companies
involved in the clean technology, renewable energy and bioscience field
• Asia Pacific Stock Exchange (APX) — a securities exchange with a focus on growth
oriented companies from the Asia-Pacific region.
A stockbroker is a professional, usually associated with a brokerage firm, who buys and
sells stocks and other securities for both retail and institutional clients, through a stock
exchange or over the counter, in return for a fee or commission.
A customer can invest in stocks and shares by using:
• an online broking service where a customer trades shares based on their own
investment decisions, paying a minimal fee starting at $30 per trade
• a full service broker, providing investment advice and recommendations and
charging a percentage of the value of the sale. The law requires brokers to have
a reasonable basis for any recommendations made and tell customers about any
conflicts of interest.
7.4 Accountants
Accountants are qualified professionals trained in bookkeeping and in preparation,
auditing and analysis of accounts. Accountants prepare tax returns, annual reports and
financial statements for planning and decision making, and advise on tax laws.
For most Australians, an accountant is a registered tax agent engaged to assist them
with their tax return each year. However, accountants can also be engaged to provide
advice on more complex financial situations.
Accountants may also be able to help customers with investment issues provided they
have an Australian financial services licence.
Most businesses require the services of an accountant or bookkeeper because there are
specific laws about the records that businesses need to keep.
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Part 3: Which services does the FSI provide?
8 The primary functions of a financial system

A financial system:
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• enables transactions to take place without reliance on the process of barter
(the exchange of one set of goods for another without the use of money or currency)
• facilitates the transfer of funds and financial assets between savers and borrowers
• assists investors to balance risk, liquidity and returns.
It is essential for a financial system to efficiently:
• provide payment mechanisms that are effective and secure
• mobilise savings
• channel savings into fields of investment that generate the highest return,
consistent with the risk involved
• offer a suitable range and diversity of financial instruments and intermediaries
• operate at minimum cost in terms of resources used per unit of service provided.
9 Types of financial services

The main types of financial services fall into five categories:
• transaction (spending)
• borrowing (credit)
• insurance
• saving
• investment.
9.1 Transaction (spending)

Spending occurs when goods or services are purchased to satisfy an immediate need.
Spending reduces the finances available for other financial activities. Levels of
household spending are influenced by a variety of factors — the main factors are the
level of household income, the cost of the consumer goods and the attractiveness of
alternative activities. There is a direct link between household spending and household
saving, with household spending normally increasing or decreasing in inverse proportion
to saving.
A transaction is an activity involving the purchase of goods or services in exchange for
money or some other form of negotiable entity. Households and individuals have a
variety of transactional needs varying from the immediate need for comfort or
sustenance to the long-term need for security or a permanent residence.

Transactions may be:

• spontaneous
• made in instalments over a period of time
• fully in arrears although the goods or services are available immediately. Payment in
arrears normally occurs with essential services such as gas, water, electricity and
telecommunications, where the user is sent an invoice for previous consumption.
It also includes most hire purchase arrangements, and buying goods through regular
payments over a period.
Transaction services are the lifeblood of the economy, allowing businesses to grow and
prosper, and for money to circulate. Most small businesses rely exclusively on
transaction needs to generate income.
9.2 Borrowing (credit)

In the financial sense, borrowing is obtaining the temporary use of money while
incurring the obligation to pay it back, usually with interest.
Borrowing can be used to finance other types of financial activity. By borrowing,
a particular household transaction may occur sooner than if it were to be funded purely
from income and savings.
Levels of borrowing are influenced primarily by the cost of borrowing, which is normally
measured by reference to prevailing interest rates. Generally, the higher the interest
rates, the lower the levels of borrowing and vice versa, although specific economic
conditions can have an influence on this theory.
The need to borrow money (or obtain credit) normally arises due to a situation where
the individual has:
• not saved sufficient funds to meet the cost of a purchase that they are not prepared
to delay until the funds are accumulated
• the funds available to meet the purchase but the means of accessing those funds is
not available immediately and the purchase is therefore made by means of credit
• both the funds and the means of access available to make the purchase but prefers,
for reasons of their own, to fund the purchase through borrowing.
Borrowing and credit enable individuals to maintain a less volatile consumption pattern.
When there are excess funds, saving and investing is possible. When funds are in short
supply, borrowing is an option. The financial system allows a stable standard of living to
be maintained because needs arising during both the peaks and troughs in income and
expenditure are met.
The diagram below shows that over time, as a household’s consumption patterns
change, such consumption can be funded from either savings or borrowings.
1-1.22 CIVMB_IK_T1-1_v3
Figure 2 Household consumption patterns
Monthly household
expenditure
Expenditure ($)
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Monthly household
income
Time (months)
The availability of borrowing facilities, such as mortgage redraws, overdrafts,

credit cards and personal loans, enables consumers to access cash and/or consumer
goods more readily than if they had to save to pay for their purchases. While this affords
a less volatile consumption pattern, it can sometimes land consumers in financial
difficulty.
9.3 Insurance
Insuring is a method of managing the risk of loss or damage to an individual or property
by transferring the risk to an insurance company in return for payment of a premium.
It allows households to outlay relatively small sums of money on a regular basis to
protect against an event that, should it occur, would result in some degree of financial
hardship.
Insurance is often the only financially viable option for protecting an individual’s assets,
including their life, from the financial consequences of loss or damage. The concept of
spreading risk is the basis on which the insurance industry is founded. By pooling
premiums, a reserve is created to compensate those who suffer a loss. In essence,
insurance allows people to live their lives and conduct their financial affairs in
confidence and with peace of mind because of the protection it affords.
Without insurance, the occurrence of unexpected and tragic events could effectively
leave an individual or business financially destitute. The threat of this possibility would
have a negative effect on the way people conduct their lives and create a large degree of
insecurity, thus affecting their quality of life.
The nature of insurance is to pool premiums to allow claims to be met according to
actuarially calculated probabilities. The result is to create large funds over and above
the amount needed to meet the normal level of claims. These large pools of funds
serve a vital purpose in the financial system as a major source of investment funds.
Insurance companies invest funds in equities, fixed interest, property, cash and
unit trusts, thus meeting the short-, medium- and long-term financial needs of the
community.

Types of insurance
Some insurance is compulsory, such as compulsory third party (CTP) motor vehicle
insurance, while other insurance is voluntary and dependent on individual
circumstances.
Insurance needs fall into one of three categories:
• life insurance (e.g. income protection)
• general insurance (e.g. car insurance and house insurance)
• commercial insurance (e.g. business insurance).
Within each of these categories, there is a range of insurance products covering a
variety of specific risks.
General and life insurance

The table below defines general and life insurance.
Table 4 General and life insurance

Insurance type Description
General insurance General insurance is the purchase of a promise to pay for or make good loss or
damage to persons or property for which one is liable. Although the types of assets
insured may have changed over time, the concept and operation of general insurance
business has largely remained static.
A general insurance contract is usually referred to as a ‘policy’. It contains the terms
of agreement between the insurer and the insured. General insurance includes
• motor vehicle
• domestic home (contents and dwelling)
• personal effects (jewellery and works of art)
• personal liability insurances.
Life insurance Apart from covering property and asset risk through a range of general insurance
products, insurance companies also offer insurance against personal risk,
including the potential loss of income or assets that may arise as a result of illness,
injury or death. These products are collectively referred to as life insurance.
In the event of a successful claim, the benefits range from lump sum payments made
to individuals under trauma and permanent disability insurance to regular monthly
benefits paid for temporary incapacity under income protection insurance.
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Types of life insurance

The table below defines types of life insurance.
Table 5 Types of life insurance

Insurance type Description
Term life insurance This insurance provides payment in the event of the death of the life insured
within a specified term. It is based on an annual premium that contains no
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investment component. When the policy is cancelled or lapses, there is no
surrender (cash) value. A terminal insurance benefit may also be paid if the
insured is diagnosed with less than 12 months to live.
Total and permanent TPD insurance will be paid as a lump sum if the life insured suffers a disability
disability (TPD) insurance and becomes totally and permanently disabled. There may be a limit on the
amount of TPD cover or it may be any amount up to the term insurance sum
insured. TPD insurance is generally taken out with term life insurance
(termed a ‘rider’) and is usually not more than the term insurance policy sum.
Trauma (or critical illness) Trauma insurance is a type of disability insurance and is usually effected as an
insurance extension (or rider) to a life insurance policy. Trauma insurance will provide a
lump sum payment to the policy owner on the diagnosis of one of several
specified medical conditions or injuries (e.g. cancer, stroke, heart attack and
paraplegia). Policies differ in the types of medical conditions covered and their
definitions of these.
Disability income This insurance provides the policy owner with a replacement income after a
(income protection) specified waiting period, for example three months, should the insured be
insurance unable to earn an income due to injury or illness. The maximum benefit
payable is usually 75% of the insured’s gross earnings. Premiums payable are
usually tax deductible.
Whole-of-life insurance This insurance protects the life insured against the risk of premature death
over an entire lifetime. In return for periodic or level premiums, the policy
owner receives the face value of the life insurance contract plus accrued
bonuses on the death of the life insured or on the maturity of the policy.
Thus, there is certainty that if the policy owner continues premium payments,
the insurance company will make a payment regardless of whether the life
insured lives or dies. Whole-of-life insurance has a savings element as well as
an insurance element.
Endowment insurance This insurance is very similar to whole-of-life insurance in that it combines an
insurance element with a savings element. Endowment policies, however,
mature at a date set by the policy owner at the commencement of the policy.
They guarantee a payout on death or to the policy owner if the life insured is
still alive on the policy’s maturity date, which must be set at a minimum of
10 years from the date of commencement. There are many existing
whole-of-life and endowment policies still held by clients, although few
insurance companies currently issue these policies.

Insurance needs
Insurance needs may be short term, medium term or long term as shown in the
table below.
Table 6 Insurance needs

Insurance type Description Examples
Short-term insurance Where the risk is temporary because the • travel insurance
circumstances that create the risk are for a
limited period.
Medium-term insurance Where the insurance contract: • house insurance

• has a fixed term, normally one year • vehicle insurance
• is renewed if the risk continues. • term life insurance
Premiums may rise and fall each year based • trauma insurance
on a variety of circumstances. • income protection insurance
Long-term insurance These insurance policies: • whole-of-life insurance

• incorporate both a life insurance and an • endowment insurance
investment component
• are normally for a term of at least 10 years
• if cancelled prior to the end of the term
may involve some financial loss in the
investment component.
9.4 Saving
Saving is the accumulation of surplus funds as a result of thrift.
Household saving is an essential ingredient in wealth creation, both at an individual and
national level. Increasing the level of household saving is normally a central theme of
government fiscal and monetary policy. Savings provide the lubricant of the economy,
enabling it to operate efficiently and to grow.
The ability of individuals to save is determined primarily by the level of household
income and level of expenditure. Normally, higher income earners are able to set aside
more of their income as savings compared to those who are barely able to purchase
life’s necessities.
The age of the individual also has an influence on the inclination to save, the type of
saving undertaken and the percentage of income set aside for this activity. The nearer
one is to retirement, the greater the percentage of savings required to ensure financial
security in retirement.
Household and individual savings are traditionally fundamental to the financial system.
However, it could be argued that overseas investment and wholesale funding are now
probably just as important. The essential factor is that only through the existence of an
adequate pool of funds, from savings and other sources, can investments be funded and
ensure the growth of the economy.
The table below describes short-, medium- and long-term saving.
1-1.26 CIVMB_IK_T1-1_v3
Table 7 Saving
Saving type Description Examples
Short-term saving Short-term saving normally occurs as an alternative to Short-term saving needs
borrowing/credit to fund a purchase. These items can might include an individual
be purchased on credit but the individual is prepared to putting aside a certain
delay the purchase of the item until they have sufficient amount each week to
cash to fund the purchase. purchase a new suit,
Short-term saving normally occurs through a bank a computer or a
widescreen TV.
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account or similar secure ‘at call’ investment vehicle.
Medium-term Medium-term saving normally takes place in an Medium-term saving

saving interest-bearing deposit account in a bank or similar needs include:
financial institution, although it might also occur • education
through a term deposit or similar product.
• travel
The individual must decide whether they can delay the
• home renovations
purchase of the particular item until they are able to
pay for it in full. • cars.
Long-term saving Long-term saving needs are usually related to saving for Superannuation is the
retirement. vehicle used by most
At 31 March 2014, the Association of Superannuation individuals to
Funds of Australia (ASFA) estimates superannuation accommodate their
assets, including the assets of self managed retirement saving needs.
superannuation funds and the balance of life office
statutory funds, to be $1.84 trillion (ASFA 2014).
These accounts represent a major source of investment
funds within the Australian financial system.
9.5 Investment
Investing is the use of savings to make money grow and/or to increase income through
the purchase of capital goods.
The essential difference between saving and investing is that saving is primarily a result
of restraining from spending, while investing is the utilisation of accumulated funds to
purchase wealth creation vehicles.
Capital formation through transforming savings into the physical investments of the
economy is the central task of any financial system.
Investing involves the purchase of financial assets that are expected to produce a return
or series of returns over time. By investing, an investor hopes that the return they
receive will compensate them for:
• forgoing the use of their funds for immediate consumption
• the eroding effect of inflation, which ‘eats away’ at the value of money
• taking a risk, as most investments do not guarantee returns.
Wealth creation is the major motivation driving financial systems, although how it is
achieved varies considerably.
Different types of investments are classified according to asset classes. Asset classes are
normally divided into four groups:
• cash
• fixed interest
• property
• equities (shares).

Investments may be owned directly in an individual’s name or they may be a managed

investment, often in the form of a managed fund or managed trust, where the investor’s
money is pooled with that of others, normally in more than one underlying asset class.
The table below outlines short-, medium- and long-term investment types.
Table 8 Investment
Investment
type Description Examples of products
Short-term A short-term investment is an investment showing Products available to meet the
investment a return over three years or less. needs of short-term investors are:
Short-term investment needs normally fall into one • savings accounts
of two categories: • cash management trusts
• to accumulate a certain sum of money within a • term deposits
relatively short time, normally less than three
• government (Commonwealth)
years, through regular small investments
and semi-government
• to maximise the growth of a single investment (state government) bonds and
over a period of less than three years. securities
Often it is difficult to determine whether a • company loan securities
short-term investment is actually an investment or (e.g. debentures, secured and
a savings activity. For example, while regular unsecured notes).
contributions made by a young couple to a bank or
Derivative products, such as futures
cash management account to accumulate the
and options contracts, may also be
deposit for a home loan may have the
included in this category. However,
characteristics of an investment, in reality the
these are considered to be more
activity is more like saving. However, it can be
speculative investment products.
viewed as either. The higher the return, the more
likely it is that the activity will qualify as an
investment.
Medium-term A medium-term investment shows a return Investment vehicles to cater for
investment between three and 10 years. It might be to fund a medium-term investment needs
future goal such as the future cost of a child’s include:
university education or future travel. • shares
The main characteristic of medium-term • managed investments
investments is that the funds are normally locked (e.g. public unit trusts)
away for a fixed period so premature access to the
• property.
funds, while possible, is not normally
cost-effective. Some insurance products are also
considered good medium-term
investments such as:
• insurance and friendly society
bonds, or insurance policies
backed by investments that can
offer tax benefits if held for
10 years or more
• endowment insurance.
Long-term Long-term investment needs are typically related Long-term investment needs are
investment to the provision of retirement income at the end of met through the following
an individual’s working life. This is normally funded investments:
through regular payments into superannuation • shares
funds and the purchase of income streams, such as
• investment properties
pensions and annuities either prior or on
retirement. • managed investments
(e.g. unit trusts)
Buying an investment property is a long-term
investment, as are the purchase of a share • superannuation
portfolio or investment in a managed investment • pensions
fund. Traditional life assurance, for example • lifetime annuities (guaranteed)
whole-of-life policies, could also be considered a
long-term investment. • whole-of-life insurance.
1-1.28 CIVMB_IK_T1-1_v3
Part 4: What is the environment the

FSI exists in?
The FSI does not operate within a vacuum — as with all businesses, it is impacted by the
world in which it operates. This section looks at some of the factors within the
environment that affect the FSI and how these impacts are felt. These factors and
influences include:
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• political
• media
• environment
• economic.
10 Political
The government of the day both at the federal and state or territory level has an impact
on the FSI in various ways.
10.1 Legislation
Legislation enacted by parliament can affect directly and indirectly the policies and
practices of the FSI. For example, the Federal Budget legislation, passed annually,
has an impact on most Australian businesses. The Budget has profound macro-economic
implications because it describes:
• the Australian Government's planned operations for the following financial year
• fiscal policy for the forward years
• expected revenues and expenditures
• a political statement of the government's intentions and priorities.
Other legislation can have a direct impact on FSI, such as legislation to create a financial
regulatory body, change or amend regulatory powers for an existing body, or change
financial services practices.
10.2 The Australian Government Treasury

While the Australian Government Treasury, like all departments, is staffed and managed
by public servants, it is presided over by the Federal Treasurer, a member of the
government of the day. Treasury is a powerful department, hence the Treasurer is
typically a senior member of the government and politically powerful in his or her own
right. Politics has a very real and dramatic role in setting the direction of fiscal policy in
Australia.

Treasury acts to:

• anticipate and analyse policy issues with a whole-of-economy perspective
• respond to changing economic events and directions as well as social policy
• set economic policy for both a micro and macro-economic reform
• set tax policy
• support markets and business
• provide payments to state and territory governments.
10.3 Government inquiries and commissions

Federal and state governments launch inquiries and commissions at taxpayers’ expense
to investigate areas of Australian society or economy and make recommendations.
Implementation of the recommendations from the reports of inquiries or commissions
can have far-reaching impacts on Australian society, economy and life for the ensuing
decades.
For more information see:
• ‘The Wallis Report’ in Part 1, section 2.4 or
• ‘Financial System Inquiry’ in Part 1, section 2.6.
11 Media
Mass media is technology by which information can reach large audiences.
Traditional mass media includes television, film, radio, books and newspapers.
Although still very important, the role and influence of these media forms has declined
in recent years with the rise of the internet, websites, mobile phone technology and
social media such as Facebook, Twitter and blogs.
The role of the mass media is to:
• inform people
• break news stories
• provide editorial comment and opinion.
The mass media is a prime source of financial information. Increasing proportions of
various types of media, such as pay and free-to-air TV channels, websites, newspapers,
are devoted to providing up-to-date financial data and business news that may impact
financial trends.
1-1.30 CIVMB_IK_T1-1_v3
Apply your knowledge 2: Financial services in the media

1. Make a list of the types of media outlets where you obtain information
about financial news or matters.
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2. Comment on your preferences for obtaining information from these

sources. Do you find any of these sources more trustworthy, reliable or
convenient than the others?
Note: As this activity requires an independent response there is no suggested answer for this question.

11.1 Social media

Increasingly, all companies use social media to market their products and services,
as well as get feedback from customers about how well their products and services are
liked. Social media provides a key business voice, a customer service channel and a
comprehensive feedback mechanism.
Financial services have tended to be slow adopters of social media platforms.
A 2012 Assetinum survey reports that the majority of banks deal with social media
clumsily. Other financial services companies make better use of social media.
For example, Forbes (n.d.) reports that American Express has three Twitter accounts and
five Facebook pages and 40,000 followers.
Further resources: Social media and FSI

• Assetinum 2012, Social media survey private banks 2012, Assetinum,
<http://www.assetinum.com/en/social-media-private-banking-2012.html>.
• Bender, A 2013, ‘Social media adds spice to financial services, say banks’
[online], Computerworld, 19 June, viewed 13 March 2017,
<http://www.computerworld.com.au/article/465297/social_media_add
s_spice_financial_services_say_banks>.
• Forbes n.d., ‘Eight financial services companies that get social media’,
Forbes.com, viewed 13 March 2017,
<http://www.forbes.com/pictures/mll45ihmk/rt-financial-services-
more-than-customer-service-online>.
12 Environment
Like all businesses and industries, the FSI has an impact on the physical environment
around it.
12.1 Environmental degradation

The United Nations (2004) lists environmental degradation as one of the 10 global
threats to the future safety and security of the planet.
Environmental degradation is the deterioration of the environment through depletion of
resources such as air, water and soil; the destruction of ecosystems; and the extinction
of wildlife. It is defined as any change or disturbance to the environment perceived to be
deleterious or undesirable.
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12.2 Impacts of the FSI on environment

While having a relatively low impact on the environment compared to some industries
or businesses, the FSI nonetheless has an environmental impact. The construction of
residential buildings, commercial buildings and other infrastructure has significant
impact on the environment.
Direct impacts include:
• use of land
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• mining of raw materials for use in building construction or maintenance
• production and use of building materials such as concrete
• use of energy to produce building materials and construct the building
• demolition and disposal of the building at the end of its life span.
These activities, in turn, lead to greenhouse gas emissions and the production of other
wastes.
Indirect impacts depend on a range of factors including:
• location, for example:
– whether the building is in an ecologically sensitive area and how the building
interacts with the local ecology such as waterways or wildlife
– where the building is located
– how close the building is to population centres
– how workers or customers will travel to the building
• the potential life span of the building and the use of the building throughout its
life span.
12.3 What can be done?

The finance sector has the potential to promote the principles of sustainable
development through:
• internal policies and processes, focusing on the adoption of sustainable business
practices such as energy efficiency and recycling programs
• encouraging and supporting the adoption of sustainable growth for all FSI businesses
• developing environmentally responsible products and services
• lending insurance and investment activities to:
– encourage responsible environmental practices in other businesses and
corporations across sectors
– develop new technologies to minimise environmental impacts.
Internationally, financial institutions have responded by:
• actively participating in global forums
• developing and promoting socially responsible investment products
• ‘greening’ internal operations.
For more information see ‘Sustainability in the FSI’ in Part 8.

Further resources
• Freireich, J & Fulton, K 2009, Investing for social and environmental
impact, Deloitte, January, viewed 13 March 2017,
<http://www2.deloitte.com/global/en/pages/financial-
services/articles/investing-for-socialandenvironmentalimpact.html>.
• PricewaterhouseCoopers 2001, The role of Australia’s financial sector in
sustainability, Department of the Environment, viewed 13 March 2017,
<http://www.environment.gov.au/archive/settlements/industry/finance
/publications/role-fin-sector/index.html>.
• United Nations Environmental Programme (UNEP) n.d.,
viewed 13 March 2017, <http://www.unep.org>.
13 Economic
Like all businesses, the FSI is affected by the prevailing economic conditions both
nationally and internationally. In the example below, about the global financial crisis
(GFC) of 2007/2008, economists consider the lending policies of global financial services
institutions to be a cause of the crisis.
13.1 GFC 2007/2008

The GFC of 2007/2008 was considered by many economists to be the worst financial
crisis since the Great Depression of the 1930s, resulting in:
• the collapse of global financial institutions such as Lehman Brothers
• the requirement to bailout banks by national governments across the world
• stockmarket downturns across the world
• severe decline in personal wealth for many consumers, failure of businesses,
widespread housing foreclosures, evictions and widespread unemployment across
many developed economies.
The immediate trigger of the GFC was the bursting of the US housing bubble, where a
rising number of defaults of sub-prime mortgages caused a number of financial
institutions to collapse. Easy availability of credit, lax lending standards and rising
interest rates also contributed.
Davies (2014) reports that ‘the global financial crisis (GFC) or global economic crisis is
commonly believed to have begun in July 2007 with the credit crunch, when a loss of
confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis’.
The downturn in economic activity led to the 2008–2012 global recession and
contributed to the European sovereign debt crisis. The impacts of this downturn
continue to be felt across the world.
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13.2 Australia and the GFC

Australia weathered the storm of the GFC in better condition than most of the
developed economies of the world. Beu (2014) states that ‘by world standards Australia
has responded to the GFC reasonably well through a combination of government
stimulus, a resources boom, a responsive Reserve Bank, and pre-existing prudential
standards.’ However, Australia is not fully recovered from the GFC.
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Apply your knowledge 3: Australia following the GFC
Read the following articles then answer the questions below.
• Beu, A 2014, Australia after the GFC, Canstar, 14 March,
<http://www.canstar.com.au/online-trading/australia-after-the-gfc>.
• Davies, J 2014, Global financial crisis – What caused it and how the world
responded, Canstar, 23 March, viewed 13 March 2017,
<http://www.canstar.com.au/home-loans/global-financial-crisis>.
1. What were the main consequences of the GFC for Australians?
2. What are the current areas of economic concern noted by the authors?

Part 5: Global economy

It is important that lenders develop an understanding of the economic context in which
they, and the industry as a whole, operate.
Key economic concepts that assist in determining the likely impact of economic change
at individual, local, national and international levels are explained below.
14 Top-down analysis
As the term top-down analysis suggests, world economic changes eventually flow
through to affect the Australian domestic economy and the performance of
domestic investments.
This is shown in the figure below.
Figure 3 Top-down approach to economic analysis
International economic analysis
Domestic economic analysis
Market analysis
Market sector analysis
Product and
services
In particular, larger, stronger economies such as the US, China and Germany exert
considerable influence on other world economies, including the Australian economy.
When evaluating the impact of international economic conditions on Australian
performance, economic, political, sociological and regulatory issues are taken into
consideration. These issues may include:
• political conflict and its effect on government policy
• politically induced foreign exchange controls
• barriers to free trade between countries (e.g. tariffs)
• immigration regulations
• economic sanctions
• exchange rates
• inflation rates
• interest rate movements
• currency movements
• US growth and interest rates
• US Federal Reserve policies
• effects of technological change.
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14.1 Globalisation and deregulation

Two major and related economic developments of the 1980s and 1990s were:
• the globalisation of world markets
• moves toward deregulation of financial transactions and trade.
These initiatives were designed to create more freedom of movement of goods and
capital around the world.
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In practice, there are currently three major trading blocs: Europe, the Americas and the
Asia-Pacific region. Within each bloc, efforts have been made to reduce tariffs and other
impediments to trade.
Reducing tariffs under free trade arrangements has had both negative and positive
effects on the Australian economy. On the positive side, it has improved competition
and reduced unit labour costs. On the negative side, it has heavily affected some sectors
of the Australian manufacturing industry, such as textiles and shoes.
For the financial intermediary (i.e. an institution such as Suncorp, which facilitates the
flow of funds from savers to borrowers), the significance of globalisation and
deregulation is in the recognition that changes in the Australian economy and in
financial and investment markets, are often determined by international trends over
which Australians and their government have very little control.

Part 6: Australia’s economy

The FSI exists, and business activity takes place, within an overall economic context.
The state of the economy and financial markets not only affects the tangible elements of
lending, such as interest rates, but also intangibles, such as client attitudes to borrowing
and debt.
In order to practise effectively and to be in a position to answer client questions, it is
important that a lender is well informed about the economic context of the provision of
financial services, including lending.
Every economy has its periods of growth (prosperity) and its periods of decline
(recession). The state of the economy affects jobs, prices, wages, inflation,
interest rates, investment performance and government policy.
The following sections:
• introduce the Australian economic environment
• look at how national market forces impact on the domestic economy to develop
a fundamental understanding of the workings and performance of the
Australian economy as it operates in the larger global context
• provide an overview of the factors impacting the Australian economy
• define the role of the RBA.
15 The RBA
The RBA is Australia’s central bank with responsibility for monetary, financial system and
payments system policies and other financial matters.
The RBA’s main functions are to:
• conduct monetary policy
• work to maintain a strong financial system
• issue the nation’s currency
• develop policy
• provide selected banking and registry services to a range of Australian government
agencies and to a number of overseas central banks and official institutions
• manage Australia’s gold and foreign exchange reserves.
For more information see ‘Topic 1-2: Legislation and codes of practice’.
Further resources: RBA and the Australian economy

Further information on the Australian economy and the role of the RBA can
be found on RBA’s website at <http://www.rba.gov.au>.
• View the video on the role and functions of the RBA at:
<http://www.rba.gov.au/about-rba/videos>.
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16 The domestic economy

Issues to consider when analysing the domestic economy include:
• economic growth and gross domestic product (GDP)
• the balance of payments
• exchange rates and the Australian dollar
• monetary policy and fiscal policy
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• economic indicators
• the business cycle (for more information see ‘The business cycle’ in Part 7).
16.1 Economic growth and GDP

BusinessDictionary.com (2015) defines GDP as ‘the total market value of all final goods
and services produced in a country in a given year, equal to total consumer, investment
and government spending, plus the value of exports, minus the value of imports’.
In other words, GDP is a measurement in dollars of the aggregate goods and services
produced within an economy over a year, excluding income earned outside the country.
Economic growth is measured in terms of the positive change in GDP each year.
A recession, or a period of negative growth and economic decline, is often defined as a
contraction in the GDP for six months or two consecutive quarters.
Economic growth relates to changes in how an economy combines and utilises its
resources in order to increase its output of goods and services (i.e. changes in output,
income, consumption and investment). It also involves changes in the structure of the
economy itself, for example, the relative decline in employment in agriculture and the
increase in employment in the tertiary sector that has been experienced in Australia.
The diagram below shows the components of GDP.
Figure 4 Components of GDP
Personal consumption
(spending on goods and services)
+
Private sector fixed-capital
expenditure
+
Government expenditure
(excluding social security)
+
Export Import
receipts – expenditure
Gross Domestic Product
GDP is one of the main yardsticks by which the health and growth of an economy is
measured.

Ideally, an economy should grow consistently at approximately 3% a year.

This represents sustainable growth that would not exert excessive upward pressure
on inflation through increased consumer demand and a shortage of resources.
The diagram below shows Australian GDP growth and inflation for the period 1994 to 2014.
Figure 5 Australian GDP growth and inflation
Source: RBA 2015.
16.2 The balance of payments

The balance of payments is a summary statement of all domestic economic transactions
a country undertakes with the rest of the world during a given year. These transactions
include payments for exports that lead to an inflow of foreign currency and payments
for imports, which lead to an outflow of foreign currency.
It also includes the movement of money into and out of the country for purposes
such as:
• dividend payments by public companies to overseas owners
• borrowings by government, private companies and individuals from foreign sources
• payment of interest on previous foreign loans.
The balance of payments consists of two accounts:
• current account
• capital account.
In theory, these two accounts should balance.
Current account
The current account is a record of the actual monetary transactions between Australia
and the rest of the world, and the net effect of income received and payments made on
Australia’s foreign investments and debt. Put simply, it is the difference between
incoming money or credits, and outgoing money or debits.
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Capital account
The capital account is the part of the balance of payments relating to investment flows.
It records the movements of loans, investments and other monetary transactions that
are not associated with the production of goods and services. The capital account shows
the change in the nation’s assets abroad and foreign assets in the nation.
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16.3 Exchange rates and the Australian dollar
An exchange rate is the price of one currency in terms of another. Exchange rates are
determined mainly by supply and demand, which reflect trade and other international
payments. Most importantly, it reflects volatile capital flows, which are constantly
shifting around the world in search of the best expected investment returns.
Appreciating exchange rate

An increase in the value of the Australian dollar will normally decrease the price of
imports because the dollar will purchase more foreign currency and hence, more goods.
In turn, lower import prices can mean an increase in demand for imports, lower costs for
companies that use imported inputs, and increased competition for local businesses.
Simultaneously, an increase in the value of the Australian dollar results in higher export
prices because overseas buyers of Australian goods have to pay more of their currency
to buy Australian dollars. To counter the increase in imports, the Commonwealth
Government may discourage excessive demand for them by implementing a tax on
certain imported goods and services. It may also use monetary policy as a means of
reducing money supply, thus dampening consumer demand for goods and services
in general.
In the absence of any other economic changes, appreciation of the Australian dollar will
increase levels of unemployment but could have a positive effect on stemming or
lowering inflation.
Depreciating exchange rate

A fall in the value of the Australian dollar results in an increase in the price of imports.
Simultaneously, it reduces the price of Australian exports on world markets and reduces
the attractiveness of investing in Australia.
There is a direct link between a depreciating exchange rate and rising inflation.
This is because the increased price of imports pushes up local production costs.
Higher production costs result in higher priced consumer goods and services.
Thus, a depreciating exchange rate may result in increased wage demands as families
find it more difficult to make ends meet.
When the value of the Australian dollar falls, foreign debt and the interest owed on
foreign currency loans increases in terms of repayment in Australian dollars. This will
worsen the current account deficit.

16.4 Monetary and fiscal policy
Fiscal policy
The Commonwealth Government exercises considerable influence on the economy,
primarily through fiscal policy.
Fiscal policy refers to government action in relation to its own revenue and spending.
By changing the direction and level of government revenue raising and expenditure,
the government directly influences many aspects of the economy, such as wages,
borrowing and saving, and exports and imports.
Decisions on fiscal policy are not purely economic. They also reflect political and social
imperatives, such as the need to provide support for the elderly and disabled, the need
for people to save for their own retirement, and the need to provide for defence.
In Australia, there is a fundamental underlying consensus about economic policy.
Regardless of which political party is in power, it will pursue low inflation,
low unemployment, strong economic growth, external stability and social welfare.
There will always be a tension between demands to spend and the need to raise revenue,
however, it is only the priorities and the methods that will vary between governments.
The main provisions for the implementation of fiscal policy are usually incorporated in the
annual Federal Budget. The most common means of executing the policies is through
taxation because tax concessions encourage people to save or spend in particular ways,
for example, tax concessions on superannuation are designed to encourage people to
save through this avenue and are usually announced via the Federal Budget.
Budget deficits
A budget deficit occurs when government expenditure exceeds government income and
thereby necessitates government borrowing.
A budget deficit normally boosts total demand and output — government spending and
projects are injections to the economy, which create jobs. Increased employment
generates a circular flow of incomes and stimulates the economy. Where the deficit is a
result of capital investment expenditure, this investment lays the foundation for future
output. The deficit can generally be sustained while it can be financed with interest rates
that do not create inflationary pressures.
As with personal finances, a deficit on current spending may signal poor economic policy.
Budget surpluses
A budget surplus occurs when government income exceeds government expenditure,
enabling the government to repay previously incurred debts.
A budget surplus may be prudent, for example, a government building a large surplus on
its social security fund to meet expected increases in its future age pension costs.
However, a surplus may be undesirable if it removes too much money from the
economy and the circular flow of incomes.
Fiscal policy is said to have ‘tightened’ if a deficit is reduced or converted into a surplus,
or if a surplus is increased. A move in the opposite direction is called a ‘loosening’ of
fiscal policy.
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Monetary policy
Monetary policy is a means of influencing the economy through changes to interest
rates.
The RBA Board’s obligations with respect to monetary policy are set out in the
Reserve Bank Act 1959 (Cth) and relate to the:
• stability of the currency of Australia
• maintenance of full employment in Australia
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• economic prosperity and welfare of the people of Australia.
These objectives are combined into the one practical policy goal of keeping inflation
within the range of 2–3% p.a. Monetary policy aims to achieve this over the medium
term, and the RBA’s major tool in achieving this goal is its ability to set interest rates.
In December 2011, one of the major banks announced that it would review its interest
rates for retail mortgages and small business lending monthly, and would make its rate
decision independent of the RBA’s regular review of its cash rates.
This development is recognition that the RBA’s cash rate alone is not an accurate
reflection of a bank’s funding costs, particularly since the GFC, which has left all banks
with the task of raising funds in volatile global markets and through stronger
competition for deposits. This development may affect the direct impact of the regular
RBA reviews of its cash rates.
Apply your knowledge 4: Monetary policy

To add to your understanding of the impact of the RBA on monetary policy
and exchange rate settings, visit the RBA website at
<http://www.rba.gov.au>. Read the information provided on monetary
policy at <http://www.rba.gov.au/monetary-policy/about.html>.
1. What is monetary policy?
2. What are the objectives of monetary policy?

3. How is monetary policy transmitted to the economy?
4. What is the relationship between monetary policy and debt

management?
5. Who is accountable for monetary policy?
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16.5 Economic indicators

The government and private agencies use economic indicators to help explain what is
happening, and what is likely to happen, in the economy.
Common indicators include:
• the Consumer Price Index (CPI)
• average weekly earnings
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• employment levels
• imports
• exports
• government spending
• company earnings
• domestic savings
• housing construction
• retail sales figures
• business and consumer confidence.
Economic and social indicators are used to provide information about:
• economic growth, using national and international accounts
• labour force and demographic statistics
• consumer spending and investment
• incomes
• industrial production
• prices and inflation
• financial markets
• housing finance.
It is beyond the scope of this topic to discuss all the economic indicators; however,
the CPI is often quoted and it is worth spending some time explaining its significance.
Further resources: Statistics and economic indicators

Visit the ABS website at <http://www.abs.gov.au> for up-to-date statistics
and economic indicators, including:
• key economic indicators
• CPI
• national accounts.

16.6 Consumer Price Index

The CPI is used as the main measure of inflation and changes in the cost of living in
Australia. The CPI is calculated from the cost of a ‘basket of goods and services’, which is
designed to represent the expenditure pattern of average employee households in
Australian capital cities. Periodically, the basket of goods and services is changed to
reflect changes in actual spending patterns.
Inflation and the CPI

Inflation can generally be defined as an increase in the prices of goods and services in
the economy. BusinessDictionary.com (2015) defines inflation as ‘the overall general
upward price movement of goods and services in an economy (often caused by an
increase in the supply of money), usually as measured by the Consumer Price Index and
the Producer Price Index’.
Headline inflation is the published overall inflation adjusted before non-economic
factors, as opposed to underlying inflation, which takes the headline inflation rate
(as published by the RBA) and excludes certain volatile items that are affected by factors
other than general economic conditions, for example, the effect of weather on fruit and
vegetable prices. The resulting underlying rate is based only on items directly related to
the economy.
The diagram below shows Australia’s CPI since 1994.
Figure 6 Consumer price inflation, 1994–2014
Source: RBA 2015.
The RBA’s website at <www.rba.gov.au> provides the latest updated information on the
CPI, including year-end and quarterly change data. The website also provides a useful
inflation calculator.
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The effects of inflation on the economy

The effects of inflation on the economy depend on:
• the rate at which it is occurring
• what is happening to other key economic factors
• what the rate is compared to that of major trading partners
• how the government responds to it.
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Generally, it is accepted that inflation rates consistently above 3% could cause major
economic problems.
High inflation tends to push interest rates up. This is because the government normally
reduces the money supply, and the forces of demand and supply interact to push up the
price of money, or the interest rate.
When interest rates are high, the cost of servicing debt is increased for both individuals
and businesses. To meet these additional costs, businesses must increase prices,
in effect raising the cost of living. As a result, pressure by employees is exerted in an
effort to increase wages in line with the increase in the CPI to match increased living
costs. If Australia’s rate of inflation is above that of its major trading partners, the ability
of domestic firms to compete is reduced because imports can be obtained more
cheaply. Increases in inflation usually cause a decrease in currency value.
Evidence collected during the last decade indicates that due to its effect on consumer
and investor sentiment, periods of high inflation and high interest rates act to reduce
investment and increase savings.
Apply your knowledge 5: The FSI

Read a copy of the report IBSA Environment Scan 2014 on IBSA’s website at
<https://www.ibsa.org.au/sites/default/files/media/IBSA%20Escan%20201
4%20Principal.pdf>.
Answer the following questions based on the information in the report.
1. What is the estimated value of the FSI industry in Australia?
2. What are the trends that will affect the Australian FSI in the immediate
future?

Part 7: The business cycle

The business cycle (or economic cycle or boom and bust cycle) refers to fluctuations
in aggregate production, trade and activity over several months or years in a market
economy. The business cycle is the upward and downward movements of levels of
GDP and refers to the period of expansions and contractions in the level of economic
activities (business fluctuations) around its long-term growth trend.
The recurring or cyclical pattern of the business cycle involving expansion and
contraction is evident in all market-based economies.
An awareness of these fluctuations, and how they affect the domestic economy,
provides lenders with an understanding of broader market conditions and how they
impact on borrowing.
Although economic growth rarely proceeds in a steady and consistent way and the
economic fluctuations that form the business cycle do not follow an exact historical
pattern, there are certainly stages in the growth of an economy that are recognisable as
belonging to one of the phases of the business cycle. The business cycle is of significant
importance to most decision makers in business in Australia.
17 The four phases of the business cycle

Generally, the business cycle consists of four distinct phases, each with its own
particular characteristics:
• boom (or peak)
• contraction (or downswing)
• recession (or trough/depression)
• recovery (or expansion/upswing).
Figure 7 Phases of the business cycle
Boom
Recovery
GDP
Contraction
Recession
A complete business cycle
Time
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The business cycle can also be represented as a series of sequential, cyclical events,
as shown below.
Figure 8 The business cycle

Top of the boom
12 Rising real estate values 1 Rising interest rates
11 Easier money 2 Falling share prices
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10 Rising overseas reserves 3 Falling commodity prices
9 Rising commodity prices 4 Falling overseas revenues
8 Rising share prices 5 Tighter money
7 Falling interest rates 6 Falling real estate values
Bottom of the recession

18 Characteristics of the business cycle phases

The table below shows the characteristics of each of the business cycle phases.
Table 9 Characteristics of business cycle phases

Boom Contraction
• GDP peaks • GDP falls
• Industrial production increases • Consumer sentiment
• High level of employment falls
• Interest rates rise to stem inflation • Consumer expenditure
falls
• Labour productivity falls
• Decreasing prices
• High costs for businesses/companies
• Reducing wages
• Producer prices increase
• Declining investment
• Business optimism peaks then starts to diminish
• Reducing levels of
• Investment activity begins to falter
employment
• Unfavourable international trade figures emerge
• Inflation will occur if supply is not keeping up with demand in the majority
of economic sectors
Recession Recovery
• GDP flattens • GDP rises
• Most industries experience excess capacity • Reducing unemployment
• Reduced secondary industry output (primary industry output may actually • Rising wages
increase) • Consumer
• Unemployment levels peak demand/spending
• Consumer demand falls increases
• Low profit expectations and general business pessimism, leading to lack of • Increasing investment
investment opportunities • Increasing business costs
• Preference for high levels of liquidity • Rising prices
• Interest rates fall
• Low investment levels
• Low level of overseas investment due to lack of confidence in the economy
• Where there is a severe recession lasting at least three consecutive years
(i.e. economic activity fails to increase) it is known as a ‘depression’
19 The duration of the business cycle

Although Australia’s post-war business cycles have tended to last around four to
five years, business cycles are rarely, if ever, identical either in duration or intensity.
In recent years, economic growth in Australia has continued for longer than would
generally be the case for a business cycle. This may be the result of more skilled and
effective government economic policy or due to the growth of the services sector,
or a combination of both.
Some experts are even arguing that the traditional business cycle is outmoded.
Others suggest that it still operates but the severities of its swings are far less than
previously experienced.
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Part 8: Sustainability in the FSI

Like all corporations, those in the FSI must provide service and value to their customers,
as well as being a good corporate citizen in the communities that they serve.
This may mean a number of things including developing, publishing and adhering to
policies on:
• responsible lending and investment practices
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• responsible business practices and purchasing
• reduction in energy
• responsible use of resources
• minimisation of environmental impacts
• financial or practical support for charitable or community organisations.
In some cases, corporations may be signatory to significant international agreements or
global agreements promoting responsible business practices.
Further resources: Global agreements and initiatives

Follow the links below for more information:
• International Labour Organization (ILO) n.d., Declaration on fundamental
principles and rights at work, ILO, viewed 13 March 2017,
<http://www.ilo.org/declaration/lang--en/index.htm>.
• Organisation for Economic Co-operation and Development (OECD) 2014,
Guidelines for multinational enterprises, OECD, viewed 13 March 2017,
<http://www.oecd.org/corporate/mne>.
• Principles for Responsible Investment (PRI) n.d., viewed 13 March 2017,
<http://www.unpri.org>.
• United Nations Global Compact Network Australia n.d.,
viewed 13 March 2017, <http://www.unglobalcompact.org.au>.
• United Nations Global Compact n.d., viewed 13 March 2017,
<http://www.unglobalcompact.org>.
20 Triple bottom line

The term triple bottom line (TBL) refers to a business philosophy that supports:
• consumer satisfaction
• environmental sustainability
• business profitability.
Sustainability has been an often mentioned goal of businesses, non-profit organisations
and governments in the past decade, yet measuring the degree to which an organisation
is being sustainable or pursuing sustainable growth can be difficult.
The idea of TBL reporting was first used by John Elkington in 1994, who wrote a book on
this topic in 1998, Cannibals with Forks: The Triple Bottom Line of 21st Century Business.
TBL reporting has since gained momentum in all industries and sectors, not just NFP and
government organisations. The premise behind TBL is that companies are accountable
to their stakeholders, not just its shareholders, and they need to manage the three
bottom lines of ‘people, planet and profits’.

20.1 TBL sustainability framework

Many businesses and NFP organisations have adopted the TBL sustainability framework
to evaluate their performance. A company can focus not only on the primary concern of
earning a profit but also on the additional elements of people and the environment.
The term ‘people’ refers to both employees of the company as well as stakeholders in
the community.
TBL strategies provide methods for a company to achieve improvements in these
three areas. TBL reporting makes companies accountable for economic, social and
environmental effects of doing business. This is a popular form of accounting for NFP
companies and government organisations to show a commitment to corporate social
responsibilities. For these types of organisations, social and ecological performance is
just as important as financial performance.
Companies can help the environment, or at least reduce the harm they inflict on the
environment through managing the consumption of energy, reducing paper usage and
waste, increased recycling, reducing water and energy consumption and avoiding
production of harmful items such as chemicals or weapons.
The TBL includes the impact of a business on the community. A business can assist
members of the community by providing scholarships to students, purchasing or donating
equipment such as computers to schools, and donating money to community projects.
Challenges
There are challenges to putting the TBL into practice, such as
• measuring the three categories
• finding applicable data
• calculating a project or policy’s contribution to sustainability.
Despite these challenges, however, the TBL framework allows organisations to evaluate
the ramifications of their decisions with a much broader perspective.
TBL and the FSI

In the FSI, many financial institutions have adopted some form of sustainability strategy and
taken a long-term view on the issues that will affect their future prosperity. These financial
institutions have become more aware of the issues that impact on their customers,
employees and the broader community, and their responses to those issues are still evolving.
Many aspects of sustainability are already embedded in many activities of these
organisations, for example, a lender’s principles of doing business and how they conduct
themselves in the areas of governance and ethics, employment practices, customer practices,
care for the environment, community involvement and supply chain management.
Many institutions have adopted the approach of systematically identifying and responding to
the issues that are most important to their business and stakeholders, and have commenced
sharing their knowledge and experience. Many also see that there are emerging issues that
present both risks and opportunities for their businesses and stakeholders into the future.
Their new strategic focus is therefore to anticipate and shape the most pressing emerging
societal issues to make a meaningful difference. This means encouraging debate,
identifying emerging trends and issues early, working to have a positive impact though their
actions, raising awareness and challenging everybody to do more.
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Further resources: Triple bottom line

• Department of the Environment and Heritage 2003,
Corporate sustainability – an investor perspective: the Mays report,
Department of the Environment, viewed 13 March 2017,
/publications/mays-report/index.html>.
• Environment Australia 2003, Triple bottom line reporting in Australia –
a guide to reporting against environmental indicators, Department of
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the Environment, June, viewed 13 March 2017,
/publications/indicators/index.html>.
Apply your knowledge 6: Applying sustainability principles

What are some of the ways that sustainability principles can be applied in
your workplace? Detail practical solutions where possible.

References
Assetinum 2012, Social media survey private banks 2012, Assetinum,
<http://www.assetinum.com/en/social-media-private-banking-2012.html>.
Association of Superannuation Funds of Australia (ASFA) 2014,
Superannuation statistics, ASFA, viewed 13 March 2017,
<http://www.superannuation.asn.au/resources/superannuation-statistics>.
Australia.gov.au n.d., Financial regulation, Australian Government,
<http://australia.gov.au/topics/economy-money-and-tax/financial-regulation>.
Australian Bureau of Statistics (ABS) 2012, Household expenditure survey and survey of
income and housing, user guide, Australia, 2009-10, cat. no. 6503.0, July, ABS, Canberra.
Australian Bureau of Statistics (ABS) 2014, Lending finance, Australia, cat. no. 5671.0,
February, ABS, Canberra, viewed 13 March 2017,
<http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/5EC054348FB8B
1CBCA257CD90011FE07?opendocument>.
Beu, A 2014, Australia after the GFC, Canstar, 14 March, viewed 13 March 2017,
<http://www.canstar.com.au/online-trading/australia-after-the-gfc>.
BusinessDictionary.com 2015, viewed 13 March 2017,
<http://www.businessdictionary.com>.
Davies, J 2014, Global financial crisis – what caused it and how the world responded,
Canstar, 23 March, viewed 13 March 2017,
<http://www.canstar.com.au/home-loans/global-financial-crisis>.
Elkington, J 1998, Cannibals with forks: the triple bottom line of the 21st century
business, New Society Publishers, Gabriola Island, BC, Canada.
Forbes n.d., ‘Eight financial services companies that get social media’, Forbes.com,
viewed 13 March 2017, <http://www.forbes.com/pictures/mll45ihmk/rt-financial-
services-more-than-customer-service-online>.
Reserve Bank of Australia (RBA) 2015, Chart pack: Australian GDP growth and inflation,
RBA, 6 May, viewed 13 March 2017,
<http://www.rba.gov.au/chart-pack/au-gdp-growth.html>.
1-1.54 CIVMB_IK_T1-1_v3
Suggested answers
Apply your knowledge 1: Issues for the Murray Inquiry

The need to balance the lessons of the past with the economic opportunities and
challenges of the future.
1-1
Help to safeguard economic growth and living standards of ordinary Australians.
Recommending reforms that make sure good ideas get funded, businesses grow,
and Australians have financial and economic security.
Apply your knowledge 2: Financial services in the media

1. Examples include:
• The Australian Financial Review (website or newspaper)
• Business Spectator (http://www.businessspectator.com.au)
• Bloomberg (website or pay TV channel)
• Free-to-air TV channels news or specialist business programs such as
The Business on the ABC
• News radio programs or channels such as ABC News Radio.
2. As this activity requires an independent response there is no suggested answer for
this question.
Apply your knowledge 3: Australia following the GFC

1. • Stockmarket downturn to historic lows.
• Pre-retirees, retirees and investors hard hit by low returns and low interest rates.
• Selling investments at low prices.
• Low returns meant that people relying on interest from investments depleted
their ‘nest eggs’ because they were unable to replace investments with salary.
• Increased government debt due to the government stimulus packages.
• Historically low interest rates.
2. • The S&P/ASX 200 Index currently sits at 5410, well up from its 2009 low but also
well down from its 2007 high.
• NAB’s most recent business confidence survey shows a fall in business conditions
in February 2014 — that is, despite the official cash rate still remaining at a
historic low of 2.50%.
• Unemployment is at a decade high of 6% — still low by global comparison but
creeping upwards. In January 2008, for example, the ABS reported approximately
502,000 people as unemployed. In January 2014 that number was almost
773,000 people. That represents a real human cost of ongoing economic caution.

Apply your knowledge 4: Monetary policy

1. The RBA is responsible for formulating and implementing monetary policy.
Monetary policy decisions involve setting the interest rate on overnight loans
in the money market. Other interest rates in the economy are influenced by this
interest rate to varying degrees, so that the behaviour of borrowers and lenders
in the financial markets is affected by monetary policy (though not only by
monetary policy).
2. • Stability of the currency of Australia.
• Maintenance of full employment in Australia.
• Economic prosperity and welfare of the people of Australia.
3. Movements in the cash rate are quickly passed through to other capital market
interest rates such as money market rates and bond yields. These interest rates are
also influenced by the risk tolerance of investors and preferences for holding funds
in a form that are readily redeemable. The cash rate and other capital market
interest rates then feed through to the whole structure of deposit and lending rates.
In Australia, most deposits and loans are at variable or short-term fixed rates,
so there is a high pass through of changes in the cash rate to deposit and
lending rates.
4. Sound financial policy requires that the government fully fund any budget deficit by
issues of securities to the private sector at market interest rates, and not borrow
from the central bank. In Australia, it is effectively achieved by agreement between
the Treasury and the RBA.
5. The RBA Board makes decisions about interest rates independently of the political
process — that is, it does not accept instruction from the sitting government on
interest rates.
Apply your knowledge 5: The FSI

1. $5.6 trillion dollars
2. • The rise of the economic power in emerging Asian markets.
• Growth of superannuation, shift away from bank deposits.
• Increasing customer expectations in regard to simplicity, transparency and speed
of transactions.
• Use of ‘big data’ for business development.
• Harmonisation, standardisation and globalisation of markets and
regulatory environments.
• Management of natural capital risks.
1-1.56 CIVMB_IK_T1-1_v3
Apply your knowledge 6: Applying sustainability principles

This answer depends on your workplace and the type of industry in which you are
involved. However, some of the general principles are outlined below.
Work planning incorporating TBL principles, including:
• Considering the impact of current decisions on future generations.
• Accounting for the cost of waste and waste management in all purchases.
1-1
• Costs are considered in terms of environmental, economic and social impacts.
For example, to determine the true cost of a car, accounting might include the
resources used to make it, the working conditions (salary, safety etc.) of the people
who made it, the recyclability of its parts, the resources required to run it over time
and the pollution/carbon dioxide it will emit over the period of use.
• Implementation of recycling and waste management programs including paper,
plastic, printer cartridges, e-waste etc.
• Ensuring that you make sustainable use of all materials. Maintain resources to meet
current needs while preserving the environment and ensuring future generations can
meet their needs.
• Maintaining as small a carbon footprint as possible.
• Providing information to all workers about minimising waste.

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Industry Knowledge

Topic 1-1: The industry and economy

Certificate IV in Finance and Mortgage Broking

Part 1: History and development of FSI ........................................................... 1-1.4

1 The Australian financial system ............................................................ 1-1.4

2 History of FSI in Australia ..................................................................... 1-1.5

3 The Australian lending industry............................................................ 1-1.8

Part 2: Who are the stakeholders in the FSI? ................................................. 1-1.11

4 Financial services providers ............................................................... 1-1.11

5 Service users ..................................................................................... 1-1.16

6 Regulators ......................................................................................... 1-1.18

7 Advisers ............................................................................................ 1-1.19

Part 3: Which services does the FSI provide? ................................................. 1-1.21

8 The primary functions of a financial system........................................ 1-1.21

9 Types of financial services .................................................................. 1-1.21

10 Political ............................................................................................. 1-1.29

Part 5: Global economy................................................................................. 1-1.36

14 Top-down analysis ............................................................................. 1-1.36

Part 6: Australia’s economy .......................................................................... 1-1.38

15 The RBA ............................................................................................ 1-1.38

16 The domestic economy ...................................................................... 1-1.39

© Kaplan Education Pty Ltd 1-1.1

Part 7: The business cycle ............................................................................. 1-1.48

17 The four phases of the business cycle ................................................. 1-1.48

18 Characteristics of the business cycle phases ....................................... 1-1.50

19 The duration of the business cycle ..................................................... 1-1.50

Part 8: Sustainability in the FSI ...................................................................... 1-1.51

20 Triple bottom line .............................................................................. 1-1.51

References .................................................................................................... 1-1.54

Suggested answers........................................................................................ 1-1.55

Topic learning outcomes

© Kaplan Education Pty Ltd 1-1.3

Part 1: History and development of FSI

1 The Australian financial system

1.1 The primary functions of a financial system

Figure 1 Components of a financial system

2 History of FSI in Australia

2.4 The Wallis Report

© Kaplan Education Pty Ltd 1-1.5

2.5 Present day

2.6 Financial System Inquiry

Apply your knowledge 1: Issues for the Murray Inquiry

Further resources: History of FSI in Australia

© Kaplan Education Pty Ltd 1-1.7

3 The Australian lending industry

3.3 The lending market in Australia

Table 1 Australian borrowings April/May 2014

Seasonally adjusted estimates

As Table 1 indicates, lending for owner-occupied housing forms a significant proportion

Home ownership in Australia

© Kaplan Education Pty Ltd 1-1.9

Further resources: Housing in Australia

Part 2: Who are the stakeholders in the FSI?

4.1 Types of financial service providers

Table 2 Types of financial service providers

Non-bank financial institutions Non-bank financial institutions include:

© Kaplan Education Pty Ltd 1-1.11

The payments system

Commercial bill financing

Savings and investments

Other services offered by banks

© Kaplan Education Pty Ltd 1-1.13

4.3 Non-bank financial institutions

© Kaplan Education Pty Ltd 1-1.15