Following a period of consideration, the Federal Government has now responded to the Financial System Inquiry report released on 7 December 2014. More than 180 written submissions were received as a result of the consultation.
The Government has agreed with all but one of the Murray Financial System Inquiry recommendations and an agenda has been set to action the recommendations.
One of the more controversial initiatives is a requirement for financial advisors and mortgage brokers to disclose their relationships with associated entities. Further, ASIC will be reviewing remuneration arrangements in the mortgage broking industry while at the same time ASIC’s enforcement powers will be strengthened.
Importantly for the many providers of loans to self-managed super funds, the Government does not propose to ban limited lending to super funds.
Below we provide a full summary of the response.
Consumer outcomes measures
Although the Government acknowledged that consumers are responsible for their financial decisions, the response stated that consumers should be treated fairly when purchasing financial products and services.
By the end of 2016, ASIC will review remuneration arrangements in the mortgage broking industry. Legislative requirements for financial advisers and mortgage brokers to disclose their relationships with associated entities will also be introduced. This is an important initiative for the many financial advisors and mortgage brokers who are owned or partly owned by banks and other large financial institutions. Gadens will be closely monitoring for the release of this legislation.
The Government aims to lift the standard of financial advisors by introducing legislation to provide a professional standards framework for financial advisers. The details of the new standards will be set by an independent, industry funded body to be recognised in the legislation. The legislation will then be reviewed in 2019.
There are also plans to undertake extensive stakeholder consultation in relation to the accountability of issuers and distributors of financial products in relation to their offerings, to ensure that the obligations enhance consumer protection without placing an undue burden on the industry.
The proposed consultation will also include discussions around the development of a new ASIC product intervention power that could be used to modify products, or even remove products deemed undesirable from the marketplace. This power will need to strike the right balance to ensure that industry innovation is not stifled.
The Government also plans to develop legislation to reduce and improve disclosures for financial products and to improve the regulation of managed investment schemes.
The response acknowledges that superannuation is the largest financial asset many Australians have after the family home, and is the second largest part of the financial system (with over $2 trillion in assets). As millions of Australians rely on their superannuation to provide income in retirement, the system must be competitive, efficient, transparent and subject to the highest standards of governance.
Currently, the system is fragmented, costly, complex and lacks member engagement. The Government aims to improve efficiency and competition through the introduction of new legislation between now and the end of 2016 (and beyond), including introducing further penalties for non-compliance and monitoring leverage in the system. The Government will not ban limited recourse borrowing by super funds.
The response states that Australia’s financial sector regulatory framework needs to be stronger than those of comparable economies, due to a concentration of risk in the system. Banks provide nearly 90 percent of domestic credit, and mortgages account for around 60 to 70 percent of domestic lending.
The proposed measures include a requirement for Banks to hold more capital, and take greater responsibility for their own resilience, the aim being to ensure that the system can maintain its core economic functions in a financial crisis. Regulatory changes will take into account developments in both Australian and international financial regulatory frameworks.
The report acknowledges that innovation in the financial sector has the potential for huge opportunities if properly harnessed, and that policy must facilitate this rather than act as a blockage.
By the end of 2015:
- The Government will consult on the development of legislation to set up the framework for a crowd sourced equity funding market in Australia.
- The Productivity Commission will be asked to examine the scope to broaden access to, and use of, data, so that firms can identify new opportunities, develop innovative products and lower costs.
The Government also plans to establish an Innovation Collaboration Committee by mid-2016 to allow innovators to be directly involved with the development of policy. The role of the ICC will be to assist to ensure that laws and regulations are technology-neutral, so that innovation and competition are not impeded by preventing the adoption of the best technology.
There are also plans to phase in a legislated ban on excessive card surcharges to ensure fairer outcomes not only for consumers, but also merchants and system providers. The ACCC will be responsible for enforcing these rules.
Regulatory system measures
The response notes that businesses often struggle to implement regulatory changes in timeframes provided by regulators. To address this issue, as well as strengthen the accountability of the regulators, the Government will review the Statement of Expectations for APRA, ASIC and the Payments System Board and increase requirements for the regulators’ annual reports.
The Government is already undertaking a capability review of ASIC, and will review its enforcement regime in order to ensure that it provides a credible deterrent for poor behaviour and breaches of financial services laws. A proposal that ASIC’s regulatory activities be funded by industry is also currently subject to consultation.