Australian Government Response to the Financial System Inquiry

The Australian Government released its response to the Financial System Inquiry this morning. On first glance some of the key outcomes are below.

Of the 44 recommendations from the inquiry, the government has agreed with all but one.  The only one they disagreed with was the recommendation to prohibit limited recourse borrowing arrangements by superannuation funds citing limited data to justify significant policy intervention.

The Government has broken down the focus into five distinct stages.  These are outlined below with the key changes

RESILIENCE

  • To ensure the banking system is more stable by holding more capital, addressing risk weights, leverage, loss absorbency and the regulators crisis management powers.
  • The measures are expected to reduce the advantages the larger banks have over their smaller counterparts, increasing competition and leading to better outcomes for consumers.

SUPERANNUATION

  • Focus will be on boosting efficiency and competitiveness in the superannuation system.
  • Productivity commission to immediately develop alternative models for a formal competitive process for allocation default fund members to products
  • Legislation to be developed to allow trustees of funds to provide pre-selected retirement income products to help guide members at retirement and improve outcomes for retirees, including through increased private retirement incomes, increased consumer choice and better protection against longevity risk

INNOVATION

  • Develop a crowd sourced equity funding market in Australia to support the funding needs of early stage innovators
  • Working on proposals for trusted digital identities, Asia Region Funds Passport and ‘simple’ corporate bonds
  • Develop plan to ensure that laws and regulation are technology neutral – when implemented this will have a major deregulatory impact
  • Legislated ban on excessive card surcharges
  • Address problems with interchange fees and provide clarity around what constitutes “excessive customer surcharges on card payments”
  • Broaden access to and use of data – expand data sharing and supports a comprehensive credit reporting regime,

CONSUMER OUTCOMES – DIRECTLY AFFECTS FINANCIAL ADVICE

  • Do more to lift the standards of financial advisers, including by placing this activity on a professional footing for the first time.
  • Consult with stakeholders on the development of a new ASIC product intervention power that could be used to modify products or if necessary, remove harmful products from the marketplace
  • Address the misalignment of incentives by reducing and improving the disclosure of conflicted remuneration in life insurance, stockbroking and mortgage broking.

REGULATORY SYSTEM  

  • Review ASICs enforcement regime to ensure it provides a credible deterrent for poor behaviour and breaches.
  • Begun a Consultation on a model whereby ASIC’s regulatory activities would be funded by industry
  • Strengthen focus on competition n the financial system by explicitly included consideration of competition in ASICS mandate
  • Tasking the Productivity Commission to examine the state of competition in the financial sector in 2017.

Overall, the majority of these outcomes will make the operating environment for the banking sector challenging from an investors perspective.  For the full report, please follow this link.