The final report of the Financial System Inquiry has just been released by Treasurer Joe Hockey.
The 320-page document is the end result of the inquiry headed by David Murray, the former CEO of the Commonwealth Bank.
Murray says sustaining confidence in the Australian financial system, and funding the sustainable economic growth of Australia, has been central to the work of the inquiry.
Treasurer Hockey emphasises that this is a report to government and not by government. No decisions have been made and submissions on this final report are open until the end of March.
The inquiry made 44 recommendations. Here are the key points:
Australian banks should not be seen as “never fail” institutions where depositors are never exposed to a loss, according to the inquiry. There’s been a view for many years that the Federal Government would always bail out the banks in a crisis.
However, the inquiry says the banks should be required to hold more capital to make them less susceptible to extreme events, such as a GFC or recession.
The Australian financial system can’t be made bulletproof, but there are measures needed for further protection. The inquiry recommend lifting the capital ratio requirements to 10% to 11.6%, from around 8.3% currently.
The inquiry says fees charged against retirement funds have not fallen by as much as expected. A major reason for this is a lack of competition between super funds.
There’s a difference of 1.36% between the fees charged by funds: 0.48% to 1.84%.
A formal competitive process to allocate new default members to MySuper products is recommended.
It also recommends a full inquiry by the Productivity Commission to determine whether further reform is needed.
Murray’s report sounds a warning about borrowing by super funds: “Although the level of borrowing is currently relatively small, if direct borrowing by funds continues to grow at high rates, it could, over time, pose a risk to the financial system.”
The inquiry recommends abolishing direct borrowing by super funds.
“A well-developed crowdfunding system can aid broader innovation and competition in the financial system,” the inquiry says. This is aimed at small-to-medium enterprises and will give startups more funding options. The inquiry recommends that regulations be put in pace to facilitate new types of funding, using both debt and equity, emerging from technology.
Enable financial services companies to innovate will increase competitive tension and deliver greater efficiency and better services to consumers. Part of the package of recommendations includes establishing digital identities to fight identity theft and money laundering
The inquiry wants to make ASIC stronger with better funding and regulatory tools. This should be funded through industry via fees and levies.
The inquiry wants to ensure people aren’t sold financial services, including insurance and financial planning products, they don’t need, don’t understand or don’t do what they are meant to.
Currently ASIC can only take action after a breach of the law. Murray wants ASIC to have new power to intervene earlier in the creation of financial productions, before potential damage to those sold the products. Part of this should be to require minimum education standards of financial advisers.
The report canvasses the financial services industry culture which has led to several scandals ,including the Commonwealth Bank’s wealth divisions, which gave poor advice to its customers.
“Since the GFC, a persistent theme of international political and regulatory discourse has been the breakdown in financial firms’ behaviour in failing to balance risk and reward appropriately and in treating their customers unfairly”.
The inquiry doesn’t believe this idea of culture can be regulated via penalties. “industry should raise awareness of the consequences of its culture and professional standard,” it says.
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