The Murray Financial System Inquiry: Here's The Initial Reaction

Getty/ Ethan Miller

David Murray’s long-awaited inquiry into the Australian financial system was released this morning with 44 recommendations, addressing everything from bank culture to superannuation, credit card surcharges, taxation, financial advice, cyber security and even crowd funding.

Treasurer Joe Hockey has now opened consultation on the report’s recommendations until March 15 next year.

Here’s what a range of stakeholder have to say in reaction:

Steven Münchenberg, CEO, Australian Bankers’ Association, said the report’s recommendations “need to be assessed against the benchmark of whether they enable the financial system to support national prosperity”.

“The ABA welcomes proposals to improve product disclosure for consumers and strongly supports improving the quality of financial advice, including raising the professionalism of the financial advice industry and building confidence and trust in the financial services industry,” he said.

Münchenberg said “the industry will assess proposals to strengthen competition further against the broader needs of the economy. Improvements in the capabilities and accountability of regulators should aim both to make regulators effective and to minimise the costs of regulation on consumers and businesses. Enhancing the role of technology, including through trusted digital identities and better product disclosure will bring greater competition and innovation to banking.”

He said the ABA supported the recommendation to remove the tax on savers proposed by the previous Government to pre-fund the deposit guarantee.

“The question we, and the Government, must ask on each of these recommendations is simply, does it help or hinder our future economic growth? A careful analysis of each recommendation on this basis is now needed,” Münchenberg said.

The banking industry will make a formal submission to the Government on the recommendations.

Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Global Research said the recommendations were largely expected, but perhaps surprisingly, did not recommend that the prudential regulator be given more tools (despite macro-prudential tools being discussed in the interim report).

“The word ‘macro-prudential’ appears only once in the final report, in the title of a referenced paper,” he said.

“All in all, and much as expected, the recommendations appear less far-reaching than those in previous major financial system inquiries. There also remains significant uncertainty about which, if any, of the recommendations will be adopted by the government”.

Bloxham says the inquiry “clearly recognises that Australia’s significant foreign funding requirement remains a vulnerability for the local financial system. Also, given the large proportion of bank exposure to housing assets – mortgages are around 60% of bank assets – much of the focus on financial resilience was on risks associated with bank’s mortgage books.”

He says recommendations such as the greater capital requirements, adjustments to risk weighting models, and recapitalisation arrangements, leverage ratios and ‘bail in’ bonds, aligned with international practice could also have implications for lending rates charged by Australian banks as the seek to maintain profit margins.

He believes banning self-managed superannuation funds from using leverage to buy assets, including housing, could see some reduction in investor demand for housing.

“The report also suggested that the current capital gains tax arrangements could be leading to distortions in the residential property market and thus increasing financial risks. It also suggested that the current dividend imputation credit arrangements may not be as beneficial as in the past, as the financial system has become more globalised. Although tax reform is somewhat outside the scope of the financial system inquiry, these suggested tax system adjustments may feature in the government’s forthcoming white paper on tax reform,” Bloxham said.

Craig James, chief strategist, CommSec pointed out the inquiry was both long overdue and also has a long way to go before the Government endorses and adopts any of the recommendations, which means minimal short-term impact on the sharemarket.

“The Inquiry has struck a good balance on recommendations that seek to improve efficiency without imposing major new burdens on financial providers,” he said.

“Most interest is in the recommendations dealing with capital levels of banks; banning borrowing by superannuation funds; improving interchange fees and surcharging standards; addressing developments like crowd-funding; improving competition in superannuation to reduce fees; and recommendations 21-26 that seek to improve outcomes for consumers in terms of aspects like product design or financial advice.”

Yasser El-Ansary, CEO, Australian Private Equity and Venture Capital Association Limited (AVCAL) said they were looking for a better framework for the deployment of private capital in Australian business.

“We’re encouraged by the Inquiry’s recognition of the need for a more efficient and competitive retirement investment framework which is underpinned by a focus on net investment returns for fund members,” he said.

AVCAL welcomed the following key recommendations:

• Setting a clear objective for the superannuation system to provide income in retirement to substitute or supplement the Age Pension, and introducing a framework to facilitate the more efficient allocation of retirement savings to provide for higher and more enduring income in retirement.

• Introducing a legislative mechanism to examine whether policy proposals are consistent with the objectives of the superannuation system.

• Formation of a permanent public-private sector Innovation Collaboration Committee to enable effective policy and regulatory responses to innovation.

• Reforms to remove obstacles to SME financing, including a regulatory framework to facilitate equity crowdfunding.

• Better targeted tax settings for startups and innovative firms to facilitate innovation, including recognition of the significant barrier to fundraising caused by existing tax uncertainty around Venture Capital Limited Partnerships, and the benefits of more flexible access to R&D tax offsets to help reduce firms’ cash flow constraints, particularly for new ventures.

David Whiteley, CEO, Industry Super Australia says super fund members are “big winners”.

“Today the FSI has recommended maintaining a strong selection process for the safety net where super funds are chosen on the basis of long-term investment returns, after fees,” he said.

“Industry Super Australia also congratulates the FSI for emphasising the importance of long-term investment, including in infrastructure, as a key driver of productivity and economic growth.”

But Whiteley ISA does not support the mandating of majority “independent directors” on the boards of super funds.

Dante De Gori, GM, policy and conduct, Financial Planning Association said many key recommendations aligned with the FPA’s 10-point plan.

“We are pleased to see a number of the recommendations handed down in today’s report support the financial planning industry,” he said. “We are particularly pleased to see this response to calls for greater clarity and distinction between general – or product-related – and personal advice.

“We note the recognition that while financial planners play an important role in making recommendations that are in the clients best interests, they do not develop financial products and therefore can’t be responsible for their failure.”

He singled out the following in the final report as aligning with the FPA’s submissions and plan:

Better product regulation
• The need for ASIC to have the tools to better prevent bad products entering the market, as well as introducing new accountability obligations on product manufactures. This includes the recommendation to strengthen product issuer and distributor accountability and the introduction of product intervention powers.

• The recommendation that the removal of regulatory impediments such as tax settings for income streams, in order to provide industry with greater scope for product innovation.

General Advice
• The term ‘general advice’ should be renamed to remove confusion and uncertainty with this term.

Financial Planning Standards
• Financial planner education standards should be raised to a relevant tertiary degree requirement.

• ASIC to be provided with enhanced powers to ban individuals, including officers and those involved in managing financial firms.

• An enhanced Adviser Register, which the Government is already committed to implementing.

Tighter controls on remuneration
• The government consider removing the stockbroker exemption from the ban on conflicted remuneration implemented by the FOFA reforms.

Regulator performance
• The introduction of more effective accountability measures for regulators to better ensure they meet performance indicators and implement their mandates.

• A recommendation to the improvement of ASIC’s funding model by requiring a cost-recovery model from industry and to increase ASIC’s powers against AFSL and ACL holders.

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