Much of the impact to the major banks from Malcolm Turnbull’s overhaul of Australia’s financial system has already been factored in.
The big one is the stricter requirement to hold more capital but this is already in play and has meant a round of major capital raisings as the banks shore up their cash holdings, making them safer.
However, there are other measures within the Financial System Inquiry recommendations which will further impact the banks.
These include stricter regulation of financial planners and a crack down on fees charged to manage superannuation funds.
While banks lend money and pay people to keep deposits with them, they are increasingly involved in another growing pot of money — superannuation.
The big four banks get about a third of the $30 billion in fees generated from the $2 trillion in superannuation money, according to research by Rainmaker commissioned by Industry Super Australia.
The superannuation funds, financial services companies and individual financial planners will also see major changes to their work from the financial system overhaul.
There will be a cost to strengthening the banks, making them more resilient to any future crisis.
Steven Munchenberg, CEO of the Australian Bankers’ Association, says the banks support the objective for the financial system to be unquestionably strong.
“Higher capital requirements will contribute to making an already safe system safer, but there will be costs across the system,” he says.
He says the financial system inquiry has already delivered good for savers and retirees with the removal of a proposed tax on bank deposits and the reversal of the time that money can be held in bank accounts without being deemed to be unclaimed from three to seven years.”
Evan Tsipas, a principal at accountancy firm RSM Bird Cameron, says the cost of making the financial system resilient is borne by shareholders.
“When banks raise capital by issuing additional shares because their hand is forced by APRA, future profits are divided into an increasing number of shares,” he says.
“If profits are not growing at a faster rate than shares are being issued, earnings per share may fall, putting downward pressure on the share prices of the banks.
“Unfortunately for bank shareholders, we may see some further capital raisings in 2016, especially if we see a slowdown in the economy, which could see a rise in loan provisions.”
The Turnbull government accepted the idea that a tighter rein needs to be kept on the fees generated from superannuation.
The idea is to improve after-fee returns for fund members. There’s a big spread of fees charged by those, including banks, who manage super funds. There’s a difference of 1.36% between the fees charged by funds: 0.48% to 1.84%.
The Productivity Commission will develop criteria and then assess how efficient and competitive the superannuation system is.
It will also try to develop alternative models for allocating default fund members to products.
Most people don’t make an active choice of funds – they typically drop into a default fund. This means they don’t necessarily get the fund which is right for them.
The government has also not agreed with the inquiry’s recommendation to prohibit limited recourse borrowing arrangements by superannuation funds. But it will be keeping on eye on this trend.
Brad Eppingstall, a director at accountancy firm RSM Bird Cameron, says the Council on Financial Regulators and the Australian Tax Office have been asked to look at borrowing by super funds and to report back in three years.
This gives certainty for the next three years that superannuation funds can borrow for asset purchases.
“Borrowing for asset purchases, particularly property, lets SMSFs (self managed super funds) acquire assets that were otherwise out of reach and potentially lets SMEs own their business premises in their SMSF and lease back to the business,” he says.
The government committed to legislation to lift education standards of financial advisers and to create an independent education standards body to oversee the financial planning industry.
Mark Rantall, CEO of the Financial Planning Association, says higher education standards are a win for consumers and pave the way for increased professionalism in financial planning.
A person can only call themselves a financial planner/adviser if they are on an official register. And you’ll need to tick off five things to become a financial planner.
Financial planners already have continuing education available, but it appears that this requirement will be enshrined in legislation.
“We are delighted that the Government has listened, will consult further and then legislate to put in place needed measures to meet the financial needs of all Australians,” Rantall says.
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