- Interoperability
Context
10.1Interoperability refers to ‘the ability of a system, product, or service to communicate and function with other (technically different) systems, products or services. Interoperability issues in the digital economy will typically relate to information exchange and data’.
10.2There are a range of sectors in which an incumbent enjoys a monopoly or near monopoly due, in part, to network effects that are exacerbated by interoperability issues. In some instances, a lack of interoperability between incumbents and new entrants (or potential new entrants) acts as a practical barrier to competition.
10.3The Committee heard from Property Exchange Australia (PEXA) and Sympli regarding interoperability efforts in the electronic conveyancing market and from the FinClear Group regarding interoperability in the settlement and clearing of equities.
Land transfer
Electronic conveyancing
10.4The electronic conveyancing (e-conveyancing) market allows parties in a property transaction to electronically prepare and lodge property titles with title registries, transmit settlement funds and pay relevant taxes and duties.
10.5The Committee heard Australia has a total addressable e-conveyancing market of around $300 million.
10.6New South Wales, Victoria, South Australia and Western Australia have mandated the use of e-conveyancing for all mainstream property transactions. Queensland has mandated the use of e-conveyancing for some property transactions. The ACT has not made e-conveyancing compulsory, while Tasmania and the Northern Territory are yet to commence e-conveyancing.
10.7The move to e-conveyancing from the paper-based and in-person conveyancing system has improved efficiency and saved time, increased transparency, reduced fraud and errors, and led to faster and more reliable processing. The Committee heard that a report commissioned by the New South Wales Government in 2018 found e-conveyancing had reduced the time legal practitioners and conveyancers needed to work on a transaction by 60 to 70 per cent. The utility of e-conveyancing was highlighted during the COVID-19 pandemic, as e-conveyancing allowed transactions to still be safely and securely completed, which would have proved difficult under the previous in-person and paper-based system.
10.8The Australian Registrars’ National Electronic Conveyancing Council (ARNECC) is the body established to facilitate the implementation and ongoing management of the regulatory framework for electronic conveyancing of real property in Australia. ARNECC is comprised of the Land Titles Registrars in each state and territory.
Electronic Lodgement Network Operators
10.9Electronic Lodgement Network Operators (ELNOs) provide the networks for e-conveyancing transactions to be undertaken. The registrar in each state and territory will approve an ELNO to operate in that jurisdiction. Currently, there are two ELNOs approved to operate within Australia—PEXA and Sympli.
10.10PEXA is approved to operate in the ACT, New South Wales, Queensland, South Australia, Victoria and Western Australia.
10.11Sympli is approved to operate in New South Wales, Queensland, South Australia, Victoria and Western Australia.
10.12PEXA, the first ELNO, was formed in 2011 by the state governments of Victoria, New South Wales, Queensland and Western Australia, and private investors, including the big four banks. It was the outcome of a 2008 Council of Australian Governments meeting where the Commonwealth Government and state and territory governments agreed to create a national electronic conveyancing network.In 2019, PEXA was sold to private investors—the Link Group, Commonwealth Bank of Australia, and Morgan Stanley Infrastructure Partners.
A highly concentrated market
10.13PEXA has a near monopoly over the e-conveyancing market, with 99 per cent of all digital transactions in New South Wales, Victoria, Queensland, Western Australia, South Australia and the ACT using the PEXA exchange process.
10.14Sympli was created by the Australian Securities Exchange and InfoTrack in 2018 to challenge PEXA’s monopoly. Yet Sympli’s market share remains tiny, less than one per cent in New South Wales and Victoria.
10.15The Committee heard that a key contributor to market concentration in the e-conveyancing sector was the decision by state and territory governments to mandate the use of e-conveyancing at a time when there was no competitor to PEXA.
10.16Sympli noted: ‘The mandating of e-conveyancing in these jurisdictions pre-dates a competitor entering the market, meaning that all financial institutions, lawyers, and conveyancers were required by law to become customers of PEXA’.
10.17Former Australian Competition and Consumer Commission (ACCC) Chair Professor Rod Sims joined Sympli in criticising state and territory governments for the approach they had taken. He told the Committee:
I cannot resist saying this: why in this country in this day and age are we setting up private sector monopolies when there could be competition? We are getting a gun out and aiming it straight at our foot. This is just, I'm afraid, ridiculous. I'm sorry to sound so emphatic. I am annoyed that we are damaging our economy again and again and again by creating monopolies when we don't have to. We all know what happens with monopolies.
10.18The ACCC highlighted PEXA as a salient case study of why, at different stages of privatisation decisions being taken, there must be consideration in advance of a structure that ensures a monopoly is not created at the beginning.
The ACCC think it is a very salient case study. Firstly, because they were services that were originally state government provided or assets and holdings that were put together and privatised without sufficient provision for a regulative framework at the very beginning. So, in effect, PEXA was created, sprung to life, as a privately owned monopoly. While there was policy intend for there to be competition, without that already existing, practically implemented and enforced interoperability obligations, it is very hard—even though Sympli has material shareholders—without strong enforcement and practical obligations to move through the steps to make interoperability accessible and able to work. It is difficult. The ACCC has participated in a sort of observer status, but we think it is a very strong example of why, at different steps of privatisation decisions being made, there must be consideration in advance of a structure that doesn't create a monopoly at the beginning. It commences with at least two participants or grants to them or has a very effective regulatory structure to ensure that interoperability and competition can be achieved in an end-to-end sense.
Interoperability in land settlement
10.19Currently, all parties to a property transaction must use the same ELNO, be it PEXA or Sympli, to complete the transaction because the data used by one network cannot be used by the other network. Sympli described the situation as ‘akin to having one mobile phone to talk to anyone on Telstra and then having separate phones for every other network, like Optus, Vodafone’.
10.20The Committee heard that this had created a network effect in e-conveyancing, where the value of services to users provided by an ELNO increases as more users use that ELNO’s services, and thus benefits PEXA as the incumbent firm.
10.21Sympli told the Committee that this network effect was the biggest barrier to its customer usage today and would likely be the biggest barrier for any other potential market entrant. Until interoperability is realised, Sympli told the Committee, it was very difficult for Sympli or other new entrants to enter the market, which entrenches the incumbent firm’s monopoly.
10.22Without competition in the market, Sympli told the Committee, ‘this entrenched monopoly in our national economy has no real pressure to reduce prices, no drive for service innovation and no urgency to make the network more resilient’.
10.23Additionally, Sympli continued, the current resilience of the e-conveyancing market is limited by its complete reliance on PEXA’s network, presenting a systemic risk.
It's only as resilient as the network is. Today we've got, I suppose, an analogy where we've only got one set of poles and wires and that leads to single point of failure. If any part of that network doesn't work—and that's happened on a number of occasions—it means settlements can't happen and the impact on end consumers as you can well imagine on moving day is usually emotionally and financially distressing.
New entrants like ourselves have completely separate poles and wires, separate connections to banks, separate connections to land registries and revenue offices. So if you think of this as financially important infrastructure for Australia, in today's world 100 per cent of the traffic goes across one network. In a competitive future, we have two equally pervasive networks, so if one had any problems we could move to the other. That is not the case today. I can imagine the future that we should be going towards is to give a fail-safe solution to the most emotionally and financially important transaction of everyday Australians. That resiliency doesn't exist today.
10.24PEXA disputed these claims, telling the Committee that its exchange provided ‘…a reliable, resilient, secure infrastructure to efficiently execute property transactions across the country. System availability was 100 per cent during business hours over the 2023 financial year’.
10.25PEXA added that it takes seriously its responsibility for operating and improving critical infrastructure, including through innovation and collaboration with other parties.
PEXA has continued in collaboration with our customers to innovate and drive further improvements to the PEXA Exchange to make it even more robust and create further efficiencies through the industry. PEXA recognises the responsibility which comes as the operator of critical infrastructure. In addition to our own innovation and development, we also recognise the need to collaborate and allow others to innovate…
Competition in the e-conveyancing market
10.26Interoperability would allow electronic lodgement networks to talk to and exchange information with each other, so that a user of one network could complete a transaction with the user of a different network.Accordingly, interoperability would remove the network effect from the e-conveyancing market.
10.27In support of this argument, Sympli highlighted a 2021 NSW Productivity Commission White Paper Rebooting the economy. The paper cites an estimate that ‘interoperability will deliver a net benefit of $83.6 million to New South Wales over 10 years compared with the status quo’.
10.28PEXA took issue with the NSW Productivity Commission paper, specifically that the paper’s cost-benefit analysis evaluated benefits and costs to the whole of Australia rather than to New South Wales. PEXA told the Committee that the claimed net benefit of $83.6 million to New South Wales over 10 years was inaccurate, while the costs related to interoperability were speculative.
I think we would say in that sense that since that report has come a number of the assumptions on which it was based have proven incorrect. That assumed there would be a relatively low cost to implement, that the time and effort to implement would be small, and that the impact on industry stakeholders outside the ELNOs would be minimal—all of which as we're approaching the first pilot transaction no longer seem to hold true.
10.29PEXA told the Committee it welcomed competition on the basis of ‘fair and considered policy’.
Risks of interoperability
10.30PEXA outlined to the Committee its concerns about current plans for changes to the design of interoperability—that any alterations need to take account of the central importance of the PEXA network, or else risk the reliability, resilience and security of e-conveyancing.
…. Interoperability was not policy when PEXA was founded or when the PEXA Exchange was built. As a result, the design and architecture of the PEXA Exchange did not contemplate interoperability, and the current design of interoperability will cut across many of the aspects of the design of the PEXA Exchange. Given the now critical role of the PEXA Exchange, changes to the exchange and to e-conveyancing policy need to be designed and managed conscious of the importance of maintaining reliability, resilience and security of e-conveyancing as a whole. It is important to note that, while interoperability is now a topical conversation in the context of e-conveyancing policy, it's not a widely used model either here in Australia or internationally. In large part, this is because it's complex to implement, particularly when trying to embed into pre-existing systems, and it's complex to oversee.
10.31In contrast, the Committee heard from Sympli that there were no technological risks from interoperability that could not be managed, and that the bigger risk was to competition if interoperability did not proceed. In this light it advised the Committee that:
We are a small company and it's a tough market, so I think our competitor wants to starve us out.
Current progress towards interoperability
10.32The Committee heard that there was an ongoing process to establish competition between ELNOs in the e-conveyancing market—which will be achieved through the delivery of full interoperability. ARNECC, which is leading the reform, expects full interoperability functionality by the end of 2025.
10.33Sympli, however, was sceptical about the process. It told the Committee there had been continual delays in delivering interoperability, given both the incentives the incumbent was trying to protect and the lack of a credible enforcement regime, where the only sanction currently available to ARNECC was to suspend a network. It stated that:
There is a very large difference between announcing a date and having that date as part of our regulation and that regulation being robustly enforced. In my time as CEO, which is nearly three years, we've had about 10 different date announcements. None of them have been kept because there's nothing in the regulation and there's no enforcement regime to hold to account people in charge of networks: myself, my counterpart and my competitor. The only sanction in today's environment, believe it or not, is the suspension of a network….
It's just not a credible threat. I think our competitor knows that. Until the dates are in regulation and until those dates are enforced using the powers that New South Wales have and the muted national enforcement regime, there's so much incentive in play here from a profit point of view, I think you're going to get the incumbent pushing back on these. So, yes, there's a schedule. It's announced but not regulated, and we need the enforcement powers such that that plan is kept to rather than getting any further delays.
10.34Countering this, PEXA told the Committee that system complexity was the reason interoperability was taking time to implement.
The reality is that interoperability is far more complex to design, execute and build than was represented or assumed at the start. That's why it's taking time. That is also why even to get to this relatively early stage of two pilot transactions in September 2023 our next interoperability program has already had to consider over 120 change requests.
Equities settlement and clearing
10.35Interoperability was also raised as a key issue in the settlement and clearing of equities where the Australian Stock Exchange (ASX), through its subsidiaries ASX Clear and ASX Settlement, is the monopolistic provider of settlement and clearing services for Australia’s cash equity market.
10.36Settlement and clearing services refer to everything that happens after a transaction on financial markets, including the exchange of assets and legal title.
10.37Although the legislation covering settlement and clearing services for Australia’s cash equity market allows for competitors to the ASX, network externalities mean the monopolistic position of the ASX makes it difficult for competitors to emerge. Currently, both participants to a trade must be members of the same central counterparty (CCP), which means a larger CCP can offer its participants wider access to other traders and therefore a deeper market. By allowing a CCP to access another CCP’s participant network, interoperability minimises the network advantages and market power that accrue to large CCPs, fostering greater competition between clearing services.
10.38The Committee did not hear from the ASX as part of the inquiry.
Issues stemming from the ASX monopoly
10.39The Committee heard from FinClear Group, a major technology and financial market infrastructure company, that significant issues stemmed from ASX’s monopoly, including a lack of innovation in important financial market technology, which is causing Australia to fall behind other global financial markets.
Australia was once a leader in financial markets technology. CHESS [Clearing House Electronic Subregister System] was a radical innovation that offered direct name on register and was class-leading at the time. But others have innovated. We haven't in part because of the current monopolistic structure and ownership of key components of our financial market infrastructure. Just as we have ensured that one company does not own or control key parts of telecommunications infrastructure or that access rights are insured for freight infrastructure in mining regions, we need to ensure the same occurs for our financial markets. This involves reforms to market and regulatory structures, both legislative as well as within current regulatory powers, to promote new competitors in relevant parts of the value chain. This includes in our case the issuance of licences for private markets transactions which can over time provide competition to ASX.
…..
Significant issues stem from ASX's monopoly and the problems surrounding the replacement of CHESS. There's a need to address Australia's position in global financial markets. Having led in the early 2000s, we're now falling behind due to the poor technology program associated with CHESS.
10.40The FinClear Group told the Committee that there was clear evidence that moving from a monopolistic arrangement in settlement and clearing services to a competitive market would lead to more efficient technology capability and lower pricing. The FinClear Group added that ‘it's important that when you look at this you look at promoting competition in a proportionate way that doesn't put the financial infrastructure at risk’.
Market licence
10.41The FinClear Group told the Committee that reforms were needed to incentivise the relevant regulators—the RBA and ASIC—to promote competition via new technology capabilities in a proportionate way and as part of their core business, as occurs in some overseas jurisdictions.
There's certainly a willingness to look at new technologies. We've demonstrated that. We've been talking to the RBA and ASIC now for some time about our distributed ledger capability. What we think needs to happen, and what there isn't at the moment, are some sort of incentives for those regulators to promote competition via new technology capabilities.
…
One of the things that we draw attention to is regulators should be encouraged to promote competition, to promote new technology and do that, as I was saying before, on a proportionate approach that doesn't put markets at risk. You're seeing this happen in offshore domiciles, both in the UK and in the EU. You're seeing sandbox capabilities, where the regulators will encourage new technology, particularly distributed ledger, that may disrupt incumbents but they're using it in a very confined space to start with.
10.42The FinClear Group has applied to ASIC for a tier 2 financial market licence in order to provide its distributed ledger system, called FCX, to create a liquid market for private investors – including for venture capital and private equity funds – moving settlement to real-time transactions. The Committee heard that ASIC had been considering the application for over a year which, the FinClear Group said, was a particularly long time in financial markets and demonstrates an inefficient process.
Committee comment
10.43The Committee notes the slow rate of regulatory review and approvals for innovation in this area.
The Committee supports efforts by state and territory governments and other stakeholders to move towards interoperability in land transfer as a key microeconomic reform. The committee supports efforts to increase innovation in financial services, reduce unnecessary delays in approval times for new market entrants, and reduce monopolistic regulatory arrangements. |
10.44That the Government examine removing barriers to entry of providers of settlement and clearing services for equities, to boost competition in the sector.
Dr Daniel Mulino MP
Chair
20 March 2024