Regulatory Approaches to Systemic Risk Monitoring in Contemporary Retail Credit Markets

The pace of financial innovation in the Australian retail credit sector is ongoing, as is pressure on existing regulation. While new legislative and prudential regulatory measures are designed to address such pressure, there has been little consideration given to how such regulatory changes address the issue of systemic risk emanating from operational business associated with new products. This paper examines the role of complaints as a mechanism to uncover systemic risk in the Australian retail credit sector. Drawing on qualitative content analysis of sector complaints institutional reports for the period 2021-2025, the paper details the extent to which operational failures recur within complaint fields as an identifiable risk rather than as part of a formal regulatory preventative framework. The governance themes that emerge from the complaints institutional reports include containing complaints within the firm’s boundaries, customer stress in hardship reviews, system level policy divergences. The sequence in which firms respond to customer complaints. The author argues that the metaphoric of detection drift captures the shift in the sector from formal preventative regulation to the occurrence of complaint escalation and thus risk discovery. While using complaints for risk discovery affords the regulator some ‘risk-based learning’, it has the effect of producing a significant amount of detection drift (i.e. delays, uneven levels of detection and exposure to risk). To redress this risk, the author argues that there is a need for better integration of complaints, data analytics with on the ground prudential regulation and firm wide governance arrangements to ensure the ongoing stability of the retail credit sector in the face of financial innovation.