The Australian Government this week released its long-awaited official response to the Financial System Inquiry (FSI). The response accepts almost all of the FSI's recommendations, which were published in its final report on 7 December 2014, and include a number of reforms that will lead to significant changes in the financial services industry. This particularly includes superannuation, financial advisors and of course, banking capital requirements.
Below is an overview of some of the key recommendations of the Murray Report that have been adopted by the Government across the various subject areas.
Banking resilience measures
Perhaps the most important recommendation to be adopted is the resilience measures, which will require banks to hold more capital, and will address risk weights, leverage, loss absorbency and regulators' crisis management powers. While the major banks have already undertaken capital raising during 2015 in response to a tightening by the Australian Prudential Regulation Authority (APRA) of mortgage risk weights, the adoption of this recommendation will see additional steps taken by APRA to ensure that Australian banks are well-placed to weather any future financial crises. This will likely involve further capital raising in the near future.
There are likely to be some fundamental changes to the Australian superannuation system in the coming years, as the objective of the superannuation system will be enshrined in legislation, providing a framework for discussions with industry, regulators and the community about the fundamental purpose of superannuation.
The Productivity Commission will be tasked with assessing the efficiency and competitiveness of the Australian superannuation system as a whole, and developing alternative models for a formal competitive process for allocating default fund members to products.
In addition, the Government has agreed to support the development of comprehensive income products for retirement, and the pre-selection of these products by trustees for members approaching the retirement phase. This is likely to spark a rapid expansion of the income product market, as the range of these types of products available now is relatively limited.
Interestingly, the only recommendation that was not adopted by the Government was in relation to direct borrowing by superannuation funds. While the Murray Report recommended prohibiting limited recourse borrowing arrangements by superannuation funds, the Government has determined that policy intervention on this issue is not required at this time, characterising concerns as "anecdotal". Instead, the Government has tasked the Council of Financial Regulators and the Australian Taxation Office with monitoring leverage and risk within the super system, and reporting back after three years.
Focus on innovation
The Government has agreed with all recommendations from the Murray Report in relation to innovation. This includes the establishment of a new "Innovation Collaboration" committee to facilitate financial system innovation and timely policy and regulatory responses. It also includes a new "digital identity strategy" to assist with streamlining individuals' engagement with government, and the development of legislative amendments to modernise and simplify disclosure requirements for large corporates issuing "simple" bonds to the retail market.
One of the higher profile recommendations that has been adopted is the plan to legislate a ban on credit card surcharges charged by merchants when accepting cards.
In welcome news to financial product issuers who utilise digital and other forms of innovative disclosure, the Government has agreed that regulatory impediments to innovative product disclosure should be removed. While ASIC has already released guidance in relation to digital disclosure specifically, the Government plans to develop legislation to remove further regulatory impediments identified by ASIC and industry.
The Government will also introduce legislative amendments designed to raise the competency of financial advisors. A new, industry-funded body will be set up and tasked with developing new professional, ethical and education standards.
In addition, legislation aimed at enhancing the regulatory framework for managed investment schemes will be developed, drawing upon the Corporations and Markets Advisory Committee report, as well as a forthcoming Senate Committee Inquiry report. Indications are that the reforms will target consumer detriment (including illiquid schemes and freezing of funds), cross-border transactions and mutual recognition schemes.
On the regulatory side, the Government has agreed to strengthen the regulatory accountability framework, but has stopped short of adopting the recommendation to create a new Financial Regulator Assessment Board. The Government has however agreed to periodic consideration of regulators' capabilities.
While of course the devil will be in the detail, and it remains to be seen how the Turnbull Government will prioritise the implementation of these reforms (noting that much of the Government's response was actually coordinated by the now disposed Joe Hockey and Josh Frydenberg), it is clear that these recommendations create new opportunities for innovative business in the financial services industry.