Murray report: what really matters for investors

THERE’S crimped banks, limited DIY funds and a ray of light for cash savers.

Investors should prepare now for proposals set to be introduced following the inquiry.

THE release of the Murray ­Report into the financial system will now trigger widespread debate among all concerned. But as the dust settles and we digest the fine details of the recom­mendations it’s clear there are several outstanding issues that deserve immediate attention from ­investors.

1. The report has explicitly recommended the government scrap the recently acquired ability to borrow inside a superannuation fund. This is a major change. The recent surge in investor — as opposed to homeowner — demand in the residential property market may dissipate. Most importantly, it will remove a key ­financing facility for investors ­active in the residential property market. It looks very much as if this measure will pass — you should consider how such a change may dampen prices and activity in areas where investors dominate, such as inner-city apartments. It may also severely restrict your own property plans for a DIY fund.

2. It has been recommended that big banks hold more capital to build a better buffer in the banking system. The amount of cash required to move our big four banks — ANZ, CBA NAB and Westpac — from what’s described as Tier 2 to Tier 1 is more than $20 billion, or one year’s worth of collective dividends from this group. The banks will almost certainly be forced to make this change as regulators are very supportive of the move. It will be done over a number of years. But whatever way the change is introduced, it is a substantial hit to the big four bank stocks. The measure may trim enthusiasm for bank stocks in the coming year, it will almost certainly affect bank dividend policies (they may grow less fast) and we may see the re-­emergence of active and discounted Dividend Reinvestment Programs (DRPs) at the banks.

3. The recommendation from Murray that regulators remove the inherent privileges of the major bank stocks in the finance system should encourage non-banks such as AMP and Suncorp to compete more effectively. It is also a boost for regional lenders Bank of Queensland and Bendigo Bank, which will now get financed on the same terms as their bigger rivals. Regional bank stocks and bank/insurance stocks such as Suncorp carry dividend yields that are competitive with the major banks already. The report clearly improves the outlook for this listed sector.

4. Before the release of the report there were suggestions investors should brace for changes to negative gearing and other tax allowances — this did not occur. The report comments on what it calls ‘‘distortions’’ in the system. This includes the distortion of negative gearing, capital gains tax allowances and importantly the current arrangement of a tax-free retirement system. Murray refers these issues to a forthcoming tax review.

Nonetheless, Murray does very clearly hint to government what his panel thinks about these issues — he says of franking credits, ‘‘the benefits of dividend imputation may have declined as Australia’s economy has become more connected to global capital markets’’. This is an opening for those who wish to phase out franking credits. Similarly, there is an opening for those who wish to stamp out capital gains tax ­discounts (the halving of capital gains tax if you hold an asset for 12 months or more). Murray says ‘‘reducing these concessions would lead to a more efficient ­allocation of funding in the ­economy’’.

5. Industry super funds, which have offered a strong alternative — from a fund performance point of view — to retail funds in recent times, will be forced into a regulatory overhaul if the Murray measures are introduced. This should improve the professional standards of industry fund boards, which have not been run to top standards of corporate governance. Witness the recent claims of leaking of member fund details from Cbus to the CFMEU union in the royal commission.

Reform in this area should also reduce the costs of the selection process for default funds. For investors the main point to note is that an industry funds overhaul might actually ensure the strong returns of the last decade remain sustainable.

6. Investor trust within Australia’s financial system is very low in the wake of scandals at both CBA and Macquarie. Despite the laudable efforts of the Financial Planning Association, a lot more needs to be done. If the Murray regime is accepted there will be higher fines for breaches and greater transparency for financial advice. Remember, though, that financial advice in relation to property is excluded from this regime; that is not something many investors might reasonably be expected to know.

7. There is a ray of light for cash investors buried in the report. In casting doubts on the merits of both franking credits and capital gains tax discounts, Murray implicitly suggests that tax on cash deposits should be eased to benefit those struggling to live off a conservative portfolio where cash is dominating in an era of record low interest rates. Murray says “the relatively unfavourable tax treatment of deposits and fixed income securities make them less attractive as a form of savings ... a more neutral tax treatment would likely increase productivity”. If such a change were made it would immediately improve the level of investments in cash and fixed income, a change that in turn would ensure that Australian investors have more balanced portfolios the next time there is a major global crisis ... good thinking! Let’s hope this suggestion is taken seriously.