PPSR—supporting innovation in the financial sector

A speech by Gavin McCosker, Chief Operating Officer and Registrar of Personal Property Securities, Australian Financial Security Authority

17 November 2015

Digital disruption for financial services conference, Melbourne

Speaking notes

Thank you.

How many of you have already used the Personal Property Securities Register to help to grow your business?

I’m here to let the rest of you know what opportunities you are missing out on.

To do this, I am going to share with you how we—at the Australian Financial Security Authority—are working to support innovation in the financial sector, with a specific focus on the Personal Property Securities Register—or PPSR for short.

We live in exciting times, where technology is challenging traditional business models— where businesses must swim with the current—or become irrelevant through inaction.

Innovation is not new. It has always produced change. The difference today is the pace of change produced through the use of technology. Businesses that fail to anticipate the emerging needs of their customer base and hold fast to traditional models, will struggle to compete in an environment that increasingly commoditises services.

This is not only a message for business—but based on experience both here and overseas, it is also one for the public sector. Increasing demand for technology based services will continue to shape and re-shape the way the public sector operates and delivers services over the years ahead. As researchers from the London School of Economics & Political Science stated a few years ago:

‘[a] particular characteristic of DEG [Digital Era Government] is that its features are profoundly innovative in the sense that they rely on the emergence not only of new technologies but also new business models and supporting commercial incentives.” [1]

They go on to highlight the challenges this creates and the importance of governments understanding their role.

To put that another way, the disruptive nature of technology requires government agencies to evaluate and distinguish between core and non-core activities. If done well, this leaves the required space for the market to innovate and develop products that serve the public good.

Indeed, it creates the type of environment in which services can be produced that would otherwise be simply beyond the capacity of the public sector to deliver.   

To illustrate what this looks like in practice, I will draw on my role as Registrar of Personal Property Securities in Australia. I believe the operating model used to manage the personal property securities register is an excellent working example of what can be achieved when policy and technology align to deliver outcomes.

For those of you who are unfamiliar with the personal property securities system—it is the centralised means for securing property rights in exchange for finance or the supply of goods. The PPSR is the online register that supports the system and came into effect in January 2012.

So how many of you were aware that Australia now has a world class, centralised system for secured financing arrangements?

The PPSR was a significant micro economic reform for Australia. It was in itself disruptive— as it did away with a wide variety and large number of rules and laws—around 70 pieces of legislation and also around 40 registers in fact. Now you have just one—one place to go to assist with managing your financial risk or to assist in gaining access to finance.  

Now doesn’t that sound a lot more simple?!

The reform largely ignores the arrangement that parties choose for their transaction or even who has title over the relevant property. Rather it focuses on the commercial substance of the transaction to determine whether it should be treated as a security interest.

This was—and has been—quite a radical change to the way property law operates in Australia.

One element of the reform that can be considered disruptive is that it significantly broadened the forms of collateral over which security can be taken—ranging from the full array of highly mobile property—such as motor vehicles, to crops, to the more unusual—such as rare books —through to a wide variety of intangible assets.

Essentially anything you can imagine can now be used as collateral for business—large or small—companies, partnerships or sole traders—to gain access to finance to help grow their business.

Furthermore, as a result of the centralised nature of the PPSR—having replaced 40 odd registers with one—businesses, including the finance sector, can now much more readily assess risk in extending credit or offering finance. Whether it’s a local organisation looking for a credit account at the local hardware; someone wishing to buy a car on finance; or one of the ASX top 100 companies wishing to access finance—you can manage it all in the one place—on the PPSR!

If you are involved in, or wish to be involved in leasing, you also need to be aware of the PPSR. 

The reform has set Australia up to reap the benefits of a modern, centralised, secured transaction regime. Immediate evidence of the benefits of this—when viewed from an international perspective—is Australia’s substantial elevation in the World Bank’s ‘ease of doing business ranking’ attributed to the PPS reform.

The register is also showing very healthy signs of growth in both registration and search activity, which suggests the register is being used as a key business decision making tool rather than simply a ‘tick the box’ part of a transactional process.

Are you one of those using it in your business decision making?

With Australia now having the fundamentals of a world class secured transaction system, I am acutely aware that our operating model must be one that is able to keep pace with the demands of the public and the business community. It is for this reason that it is essential that the model works in partnership with the private sector.

So what does that look like for us and how has it influenced our operating model?

As mentioned earlier, one of the starting points is being clear about what are core public sector responsibilities in relation to the system that is being administered. This helps identify the areas in which the private sector can then be left to compete and innovate in provision of what are deemed non-core public sector services.

It is a matter of striking the right balance between what the public sector must do and what it does not need to do—so that innovation is not stifled. To try to strike the right balance, we at AFSA, have regularly taken a step back to consider the purposes of the systems we administer. This helps us avoid being taken hostage by our daily activities and functions.

The objectives of any secured transaction regime can be distilled down to three basic things:

  • economic enablement
  • financial risk management and
  • consumer protection. 

Understanding these high level objectives assists in identifying the things we need to do as a Government agency to support their achievement.

For AFSA we’ve done this by focusing on the things that public sector can do that make the system something that the business community and public can be confident in; as an absence of trust in the system will erode the reliance necessarily placed upon it.

We have consciously and quite deliberately built and maintained very close engagement with users of the PPS system and through this developed knowledge of the factors that promote confidence. These are:

  • firstly—predictability and certainty in the way the system operates
  • secondly—fairness in the way relevant rules are applied and
  • thirdly—reliability and security in the way information is held.  

It is with these factors in mind that we continuously critically evaluate what it is that we must do as a public sector agency and what can be left to others.

I will briefly discuss what we see as our role in relation to these factors, which will set the scene for where we see our role in promoting innovation by the private sector.

At its heart, the PPS system promotes capital flows, risk management and consumer protection, firstly by giving a means—through making a registration—for parties to publicly record the existence of a security agreement as it pertains to the use of tangible and intangible assets.

Secondly, the system provides a means for that record to be searched by other parties who are interested in finding out whether property might be encumbered. In short, the register is a public noticeboard that when used as intended, preserves the interests of the secured party and protects consumers and suppliers.

In respect to the relationships recorded on the PPSR, AFSA has no direct or specific interest in those relationships other than providing the means through which an official public record of the relationship can be created and searched.

This identifies the first core responsibility of AFSA, namely, ensuring that a register exists that can be considered independent and impartial of the parties that use it. AFSA achieves this by maintaining responsibility and control over the PPSR.

AFSA maintains a number of strategic partnerships which support the PPSR. This is an area we are actively expanding—where it can be demonstrated that AFSA will be able to maintain appropriate levels of security and control over data holdings.

The second area of responsibility that can be seen to reside solely with the public sector is in respect to preservation of the integrity of data and administrative decision making. These can be seen to be core public sector roles, as they involve the exercise of legislative powers that must be applied fairly and without favour.

This supports transparency, which in turn promotes trust; particularly where administrative decisions need to be made that impact one of the parties to a security agreement or a third party who may have placed reliance on a search result from the register.  

Lastly, AFSA maintains a role in ensuring that there is independent and impartial information in relation to how the system operates—though we do not consider that we must be the sole distribution channel for that information. With that in mind AFSA invests time and resources in the development of information products and encourages a range of stakeholders to reuse that information, so that it is accessed and used by those who need it.

Beyond that we believe there is a role for the private sector to deliver services. Although there are a number of statutory obligations we must adhere to as a government agency, within that we are determined to allow the market—where possible—to enable private sector innovators to help shape the delivery of PPSR services so they are delivered in the most efficient way possible. 

From the time that the PPSR went live we have maintained a WebUI interface that is available to be used by individuals and business. However, in parallel with this we have provided the capacity for others to interface directly with the register.

Three and a half years in, there are around 200 whitelisted organisations that have built interfaces directly with the PPSR. This has created a number of opportunities for new businesses to be built around the delivery of PPSR services. AFSA works to encourage this by keeping the barrier to entry as low as possible, while also balancing the security and availability of the system.

Through this we aim to encourage competition in the market so there is incentive to innovate and develop novel applications. On the whole this approach seems to be effective, as there is still a lot of capacity to grow the market rather than just compete over market share.

It has also opened the door to business models that bring together a range of services into the one package. I believe in time it is a model that will also increasingly enable a range of new financial products into the market to support the provision of credit within the economy.

So if you have a government department responsible for streamlining the flow of capital through the economy, who here thinks it would be good idea to make regular adjustments to the supporting technology to help your business operate more efficiently?

In addition to keeping the barriers to entry low, AFSA nurtures competition through a regular enhancement cycle of the existing PPSR. What is included in each release is based on feedback from you—from industry and stakeholders regarding how system functionality can be improved to support product development and efficient business practices.

The benefits of allowing the private sector to develop industry and consumer specific products also helps to keep the cost of service, and therefore the fees for access, as low as possible. In fact we just reduced fees by 15% on 1 July this year!

Our approach allows the private sector to build tools to service high volume and high value users, leaving AFSA to provide equity of access where appropriate. The success of the model can be seen by the fact that over 80% of all PPSR transactions occur via those 200 organisations that have already developed their own interface with the register.

Now I know interest rates are at historic lows now, but who doesn’t want that all the time?  I mean, I am a good customer, I am low risk, so why can’t I get a lower rate than the guy next door at any time?

The further benefit of the current model, other than encouraging innovation to service different market sectors, is that its creates the opportunity for private providers to bring together a range of different tools in addition to the PPSR. An example of this is development of services that collate comprehensive credit reporting information in addition to a PPSR search result.

Over time such private investment in these tools will help promote efficiency, productivity and help to keep interest rates low; the latter obviously influenced by the risk profile of transactions and risk appetite of the financier.

We are working to increase the suite of tools that can be brought together by our recent release of Bankruptcy Register Search as a business to government interface offering. Through this we have opened the door for the private sector to value add by building more comprehensive tools for their clients.   

The next iteration of this—which we are starting to see early signs of—is the use of the PPSR and other related tools to build completely new models for raising of credit. An obvious example of this is peer-to-peer lending. Although business models built on such an approach have been around for a while, the missing piece has been a capacity to adequately manage risks associated with accessing and providing credit. The nature of the PPSR and its capacity to become an integral part of peer-to-peer and other similar models has the potential to more effectively manage those risks, opening the door for entrepreneurial development of these markets.

Although such models may not substantially impact traditional lending, leasing and supply chains in the immediate term—they may well assist in overcoming barriers for some sectors that experience difficulty in raising capital. You may notice one very interesting example on the screen behind me!

Over the next two years, AFSA is committed to building upon the existing operating model. We recognise that key to success is ensuring that the technology used to support the system is able to manage the continued exponential demand for new and innovative services. The biggest risk for organisations private or public, is to fail to initiate and maintain an investment strategy which supports capacity and capability advancement in line with market expectations.

As part of this process, we have focused on not only what stakeholders want now, but we also endeavour to anticipate future demands. With this in mind I would welcome your input regarding functionality gaps that you currently see have an impact on the value of the PPSR in your business, as well as what you see as key to us effectively future–proofing the PPSR.  If you are interested, you can access our current enhancement register via the PPSR website.

For us—as we look at the way the current register operates, we are conscious that it needs to be much more intuitive and that we must continue our focus on the back–end interoperability and interconnectivity solutions to enhance usability. The new Australian Government Digital Transformation Office is proving an invaluable resource for us in this regard. It has produced an excellent set of standards, which emphasise the centrality of the user in service design.

In an online environment we must also see the significant interaction between technology and policy, which if embraced, will enable policy outcomes to be achieved while delivering highly usable products. A great deal of time and expense is incurred when technology based tools are seen as servants of policy rather than facilitators of policy outcomes.

Core to this is solid business intelligence, informing decisions based on actual rather than imagined usage and transactional surveillance to assist with maintaining the integrity of the data holdings. It is for this reason that we have invested time and resource since the PPSR went live, in data analytics. This has set us up well to understand usage patterns and will help us make well informed future decisions.

There are great opportunities that technology brings with it, however, for all sectors including the public sector—it will come with the inevitable pain associated with change.

Over time I believe an increasingly digitised economy will make the lines between the public and private sectors less defined, as the public sector evaluates not just what it is responsible for—but what it must also directly control.

As those discussions mature and evolve, more efficient and effective ways of delivering services to support the public and business community will be developed, along with new and novel ways for the public sector to control those activities with the assistance of the private sector.

As I said at the outset this is an exciting time. What we might consider as novel financial applications now, we will wonder how we ever lived without in a couple of years’ time; while others that looked promising will no longer exist. That’s the nature of innovation—the market will ultimately decide what is beneficial and what is not. It is something that we at AFSA are keen to harvest to ensure the PPS system, and all of our other systems, keep pace with the needs and expectations of those that use it.

So if you are not actively thinking about the PPSR when you are looking at managing financial risk or your growth strategy, will you be left behind? Only time will tell.

Thank you 

[1] Jerry Fishendon and Mark Thompson - 2012 - Digital Government, Open Architecture, and Innovation: Why Public Sector IT will never be the same again at page 5