Designing a new financial system that works for all

DAVID Murray’s report could establish the road to reform.

ONE of the things we must never lose sight of when considering changes to the rules and regulations governing our $5 trillion financial services industry is that it exists to serve us. The release yesterday of the interim report of the financial system inquiry, headed by former Commonwealth Bank chief executive David Murray, is a timely reminder there are sensible changes policymakers and institutions need to make following the global financial crisis to ensure our system remains robust. The inquiry is welcome, too, because major changes have not been contemplated since the Howard government’s 1997 Wallis inquiry. Even though our financial architecture weathered the GFC, and Mr Murray finds our system is working well, some renovation is required to improve competition in the sector and so that we can weather future shocks.

The report makes dozens of observations, with a range of reform options canvassed, rather than specific recommendations, so the industry and community groups can make further submissions. While Mr Murray’s initial probe is cautious in most respects, and self-evidently true in its conclusions, some of the thinking reflected in the report suggests that a shake-up may be on the cards. There are the seeds of major changes on consumer protection, financial advice, retirement incomes, self-managed superannuations funds, fees and the availability of finance for small and medium enterprises.

In case anyone needs reminding almost six years after the GFC, finance is the lifeblood of economic growth. It’s been a consistent theme in speeches by Reserve Bank governor Glenn Stevens, who has criticised, at times, the sector’s self-obsessions and shortcomings. In April, Mr Stevens said the inquiry offered an opportunity to distil the GFC’s lessons and to contemplate new challenges such as technological change, global capital requirements for banks and product innovation. “A financial sector that reliably and efficiently offers the services the community needs — the ‘handmaid of industry’ — is a boon to growth and prosperity, and can play an important role in achieving the growth we want to see,” he told an event in Brisbane. It’s a useful framework to contemplate Mr Murray and his committee’s work.

Even though Joe Hockey expressed serious concerns about the industry when he was in opposition, “on balance, the inquiry considers that the banking sector is competitive”. Really? Mr Murray points to net interest margins at near historic lows and the banks’ average return on equity is in line with those achieved by other big Australian companies. The inquiry strongly backs the so-called “four pillars” policy that came out of the Wallis review that blocks bank mergers among the four majors. Given Mr Murray could find no clear evidence of an abuse of market power by the big four, it would be unrealistic to expect the policy would change. This does not mean that the largest banks will not face a different environment, with more pressing capital adequacy requirements. There are also renewed pressures to free up funding for small and medium-sized ventures, which the inquiry supports.

When it comes to the $1.8 trillion superannuation sector, Mr Murray is far less sanguine. He finds that fees and operating costs are too high. “There is little evidence of strong fee-based competition in the superannuation sector,” the report says, adding that there is room for greater efficiencies. In sharp language, Mr Murray supports quick action to stop the rising trend of SMSF borrowing. The growth in direct leverage may create “vulnerabilities” in the superannuation and financial systems. The report is cool on negative gearing, especially of property assets, which could lead to financial instability.

On retirement savings, Mr Murray sees a growing problem that has large implications for our ageing society. The practice of retirees securing a lump sum, only to squander it, and relying on a taxpayer-funded pension, is a threat to the budget. Workers don’t have the skills or knowledge to navigate the risks at this crucial point. Mr Murray has a preference for annuities, which offer longevity protection. He suggests an auction for low-cost accounts, with fund managers pitching for business, to resolve a dispute over how unions and employers choose “default” accounts for millions of workers.

A compromise may be in the offing on the Abbott government’s changes to Labor’s 2012 Future of Financial Advice measures. Although not explicit, the tenor of the Murray report supports the thrust of the FoFA reforms. After a string of scandals involving planners, the report calls for better definitions of financial advice and more consumer-friendly disclosure. The Wallis report’s trust in disclosure regimes now looks overblown. Mr Murray also suggests tougher regulatory oversight and harsher penalties for wrongdoing. A final report will go to the Treasurer in November. Mr Hockey will then get his chance to respond to what should be a blueprint for vast reform. We urge him to keep in mind the true purpose of the finance sector — enabler of prosperity, not an endemic source of crises.