Murray Inquiry: Banks spared as report focuses on super system

DAVID MURRAY has laid down an impressive blueprint for a more competitive banking system.

THE Murray Committee has laid down an impressive blueprint for a more competitive banking system with the most radical changes to hit the two decade-old superannuation system.

The report provides a well balanced blueprint for financial innovation which, if implemented by the government, will improve the financial service sector’s ability to service the economy well.

It has some radical plans like adoption of the KiwiSaver pooling model for retirement default funds and bits that every sector will impose on self interest grounds.

But on balance the committee has done a great job and backed its ideas with strong analysis that makes its case compelling.

The big banks don’t have too much to fear from the plans, although inquiry chairman David Murray makes clear he doesn’t agree with their claims to be in the top quartile of global banks as far as regulatory capital goes.

Murray puts the majors more in the second tier and wants them to be in the top tier.

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Treasurer Joe Hockey has said he will open the report to consultation. The big banks won’t like attempts to narrow the gap with the regionals, nor the claim that the big four present a potential systemic problem because of their massive market power.

On regulation Murray has been less specific, as advertised, but there is no doubt he wants more regulation now to prevent more on the future.

This is not as heinous as the banks claim, being in line with G20 recommendations, and in any case a 1 per cent increase in regulatory capital translates into just 10 basis points more on a mortgage.

Murray is worried the smaller banks will be forced up the risk spectrum if the system is left alone.

He wants the government to fast-forward progress towards a national system of digital identities so everyone has his or her identity. He talks up the need to foster innovation, and suggests some ideas of his own — like social impact bonds where private money is used to fund the likes of jails against a recognised recidivism benchmark.

Pioneered in the US and Britain, the bonds are aimed at relieving the burden on taxpayers to fund such ventures.

The committee is appealing to parliament to start behaving like adults and come to a bipartisan policy on superannuation, starting with a definition for what the system is intended to achieve. Its idea is that superannuation is a retirement income substitute to complement or supplement the pension system.

Murray outsources some decisions to the coming tax review but suggests it is better to adopt Ken Henry’s plan of maintaining a consistent tax rate of say 15 per cent on both retirement and accumulation funds. For a conservative committee it has come up with some radical plans, but this one is common sense and undoes the damage caused by Peter Costello’s generous retirement perks.

Just for good measure, Murray wants a special levy to hit big superannuation balances. Another rational revolutionary measure is to ban borrowing from all self-managed super funds, which is a common theme from many in the industry. Excessive borrowing in self-managed funds is a time bomb waiting to blow up, in part because many are run by less than sophisticated trustees.

To manage the transition to retirement income Murray has borrowed the KiwiSaver model under which a public tender will select, say, a dozen default funds that will have a mandated retirement income plan. The idea is to pool savings used for income and help pay for those who live longer by leveraging the pool, with those who die after, say, 10 or 15 years forfeiting their money.

Murray rightly wants to remove the superannuation scheme from the industrial relations ­system and to increase transparency with a mandated independent chair and a majority of independent directors.

He wants the Productivity Commission to start working on a replacement for the MySuper system because he is not so sure it is achieving the system savings it is meant to produce.

Once again this is sound policy. Rather than scrapping the system now, as Finance Minister Mathias Cormann attempted with the Future of Financial Advice, he is saying let’s give it a chance but benchmark the system while we try to think up a better plan.

If much of the super changes look to go in favour of the integrated players, led by the banks, there are recommendations which the banks won’t like, including the continued support for Fair Work Australia in selecting default award funds.

Murray wants more consumer choice, which, like motherhood, can only be supported, but much depends on education to ensure the punters know what they are getting.

To keep the regulators in check, he wants a new independent agency to monitor APRA, ASIC and the Payments Board and to do annual reports on their performance.

This makes sense but once again, at a time when ASIC is under fire, the report recommends major new powers for the regulator. This includes the right to intervene and pull products from the market if it had concerns.

This sweeping power is part of a regime aimed at putting more responsibility on product issuers to sell the right products to the right people. This makes more sense on paper than it does in reality because it is open to so much debate.

Certainly no one will dispute the recommended ban on upfront commissions for life insurance and their replacement with more level payments over the course of a policy.

This is not quite the level payments plan some in the industry want but it certainly gets rid of the industry’s the most pernicious fees.

Stockbroker churn has also attracted the committee’s attention.

Murray wants transparency on advisers to ensure they disclose their corporate owners so, say, a colonial planner would let the client know he or she works for Commonwealth Bank.

He also wants the industry to better align itself with the needs of the customer. This is something the industry has failed to achieve in the past.