The Financial System Inquiry is examining the need for changes to Australia’s financial system, particularly in relation to its accessibility. It is the first investigation in Australia’s financial system since 1996, and is being chaired by former Commonwealth Bank chief executive David Murray AO. Its objective is to lay out a ‘blueprint’ for the financial system for the next decade.
The interim report of the government’s Financial System Inquiry has been released, with its key finding being that “many areas of the financial system are operating effectively and do not require substantial change”.
However, the Inquiry has also suggested the financial sector should proactively protect itself against future financial crises, and noted future budgets will be affected by Australia’s ageing population and stagnating productivity growth.
The report does not make any official recommendations, however the following issues, and in some cases options for their improvement, have been flagged for further examination:
Banking
- Australia’s financial system is highly concentrated, with four banks dominating the financial landscape. Plans that don’t involve taxpayer funds should therefore be prepared, in the event one of them collapses.
- The ‘four pillars’ banking policy, which prevents consolidation through mergers, should be supported. However, there is no evidence Australia’s four largest banks are abusing their competitive position.
- High levels of lending by Australian banks into housing is increasing risk in Australia’s financial system. Advising customers that renting might be more effective than borrowing should be encouraged.
Superannuation
- Superannuation costs have remained relatively high in Australia, despite the increase in funds under management. There is little evidence of fee-based competition reducing costs and fees, and as a result there is scope for improvement.
- The operating costs of Australia’s superannuation funds are among the highest in the OECD, however MySuper reforms, such as auctions for default fund status, may help address this issue.
- The matter of whether or not superannuation funds should be allowed to keep borrowing money should be addressed. While borrowing is of limited practice at present, the number of self-managed funds in particular undertaking it is growing. This could ultimately create vulnerabilities in superannuation and also broader financial systems. Whether or not prohibitions on super funds borrowing money should be re-introduced is an issue bearing further examination.
- The retirement phase of superannuation is underdeveloped in Australia, with few retirees electing to use income stream products. The value of policy incentives that encourage retirees to purchase retirement income products should be examined.
Regulation
- Australia’s regulators are strong and well regarded, and the current ‘twin peak’ regulatory structure, comprised of APRA and ASIC, does not require a wholesale re-ordering. However, they could benefit from more autonomous budgets and funding, and be subjected to more active oversight.
- Current financial disclosure documents are complex, costly and lengthy, often failing to enhance customer understanding. Measures simplifying disclosures – including layered disclosures, where important information is placed at the top in easy-to-understand terms – should be examined.
- The extent of ASIC’s power’s needs further examination, particularly whether it should be given more powers to ban products in preference for default products with simple features and fee structures.
Financial Advice
Financial planning must be examined, particularly in the aftermath of the Commonwealth Bank’s financial planning scandal and the Government’s amendments to FOFA. One idea could be for ‘advice’ to be reframed as ‘sales’ or ‘product information’ in all situations bar those accounting for personal circumstances. Another could be for there to be a public register of financial advisers outlining their credentials. At the very least, minimum education and competency standards for financial advice should be raised. Overall, the quality of financial advice needs to be improved significantly.
Economic Growth
- The issue of access to finance for large and small corporations needs to be examined. Access to finance is a bigger problem for small and medium enterprises, because banks have a more difficult time obtaining information about such businesses. One idea could be for the development of a financial information database, providing key financial information about small and medium businesses so lenders can better judge their position.
- Technological innovation can drive major efficiency gains in the financial system, benefitting consumers. However, access to growing amounts of customer information heightens privacy and data security risks. Therefore, record-keeping and privacy requirements should be reviewed, and data-breach notifications should be made mandatory.
Next Steps
Following this report, the Inquiry will continue to engage with stakeholders, by way of formal submissions and in-person consultations (including public forums and domestic and international stakeholder meetings).
Currently, the Inquiry is calling for second round submissions to gather further evidence, check the validity of the report’s observations and test potential policy options. Submissions in response to the report are due by 26 August 2014, and can be made online.
Going forward, the Inquiry will focus on gathering evidence and opinions relevant to this report’s findings, so that it can make practical policy recommendations to Treasurer Joe Hockey in November.
