Consumers should take a degree of responsibility for their decisions and not rely on government backstops when things go wrong or risks will be under-appreciated and underinsurance problems will increase, Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres has said in his last official speech in the role.

Mr Byres says it’s important that “a degree of caveat emptor” remains within the financial system, but in recent years the expectation that governments will backstop bad outcomes seems to have grown in the minds of many in the community.

“Not only is it not always possible, but it risks creating a moral hazard in which the downside from risk-taking is underestimated at best, and ignored at worst,” he said at an event in Sydney yesterday.

“Problems of under-insurance, in all its forms, will only grow, and if the providers of financial services are continually deemed responsible for poor consumer choices, the provision of financial services will inevitably be restrained.”

Mr Byres says almost inevitably things will sometimes go wrong in the financial system and participants will suffer losses, but that may well be the result of having a competitive, efficient and innovative sector “that is not completely drowned in red tape”.

When things do go wrong, sometimes governments feel obliged to provide compensation to those who suffered loss, he says.

“That is a perfectly legitimate decision for a government to make, but it is important that a degree of caveat emptor remains in the design of the financial system,” he said. “No one wants a financial system that resembles the Wild West.”

Laws and regulators protect the community by reducing the probability of bad outcomes and limiting the impact when they occur, but there are limits to what can be achieved, he told the FINSIA-hosted event titled In conversation with Wayne Byres.

“Consumers of financial services still need to take a degree of responsibility for their decisions. Indeed, there are benefits to stability, competition and efficiency when they do,” he said.

My Byres said that in recent times the message to regulators has also been to become tougher and to make use of powers and sanctions strengthened by Federal Parliament.

“APRA has heard that message, but we also seek to be ‘constructively tough’,” he said.

The CBA Prudential Inquiry was an example of an approach that had “pulled no punches” while providing a constructive set of recommendations that provided a clear path to improvement, he told the event.

Mr Byres is leaving APRA at the end of this month after eight years as Chairman and after joining the regulator in 1998.

Over the period, a number of newer risks had become mainstream, including risk culture and incentives, digital finance and crypto assets, cyber security; and climate risks, to name a few, he said.

“Needless to say, APRA has no small agenda before it,” he said.