- "The regulatory architecture developed after the Wallis Inquiry is reasonably effective" but some adjustments are required (CEDA transcript). In other words "the house design is ok, it's just that some taps don't work well" (CEDA speech).
- Two key areas require adjustment:
- The consequences of actual and perceived implicit Government support to the banking sector in the Global Financial Crisis (GFC), including the associated moral hazard and market distortions, need to be addressed.
- Disclosure and financial literacy are necessary but incomplete measures to ensure fair outcomes for consumers. Measures need to be taken to improve the culture of firms in the financial sector which includes imposing additional obligations on product issuers and distributors.
- An effective financial system must be efficient, resilient and fair.
- Mr Murray was not prepared to identify the 'top 4' recommendations when asked at the CEDA lunch. He indicated that the report should not be unbundled – recommendations are linked and interdependent.
The Murray Inquiry has taken a different approach to previous inquiries. While the Campbell Report was about opening up the economy and the Wallis Report took a principles-based approach to regulatory architecture, the Murray Inquiry is outcomes focussed. It is more about resetting than rebuilding. The Inquiry is in effect asking in relation to each part of the sector: What outcomes do we want to achieve and how do we get there?
The Report makes 44 recommendations in 350 pages with almost every part of the industry affected. Major recommendations and observations include:
- Consumer protection: Impose new scalable duty on all product issuers and distributors to consider the type of consumer whose financial needs would be addressed by the product and how it should be distributed. Specific reference to CFDs, hybrid securities, consumer credit insurance and credit cards.
- Product intervention power: Give ASIC the power to ban products for up to 12 months, with the Government able to extend the ban after that. This power is not expected to be used frequently but the Inquiry believes it is important not only to protect consumers but also to ensure there is not a race to the bottom where clearly inappropriate or undeliverable products are developed.
- Competition: Update ASIC's mandate to require it to take competition issues into account and to report on this. Three yearly external review of competition in the sector every three years.
- Vertical integration: This is not an issue according to Mr Murray at the CEDA lunch – the question is whether the right level of information, advice, guidance or assistance is provided at the right time for the particular product or situation.
- Regulators: Annual review by new Financial Regulator Assessment Board (FRAB) ) to assess performance and promote accountability, including the use of ASIC's proposed product intervention power.
- Data: Sharing of private sector and government data should be encouraged and facilitated.
- Innovation: Establish permanent public-private sector committee, called Innovation Collaboration.
- Tax: The Report makes observations on tax issues that should be addressed as part of the Tax White Paper in 2015, including ensuring tax neutral treatment of different savings vehicles, capital gains discount concessions and negative gearing of property investments, the investment bias created by dividend imputation, interest withholding tax and facilitating use of corporate vehicles for managed funds.
- Banks: Additional minimum capital requirements for all Australian ADIs, not just the majors, with a strong preference for common equity. Banks capital ratios should be "unquestionably strong" and in the top quartile internationally. A fall-back leverage ratio (that is, not risk weighted) to be imposed. APRA to decide how and when new requirements will apply. APRA also to develop, to assist orderly resolution of failing banks, a new graduated framework for loss-absorbing capital and recapitalisation in line with emerging international practice (including as recently proposed by the Financial Stability Board and G-20 for globally systemically important banks).
- Superannuation: Unless a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency (ie. lower fees and better returns for members), introduce a formal competitive process to allocate new default fund members to MySuper products. Include retirement income projections on member statements. Reimpose the ban on all borrowing by superannuation funds, including limited recourse arrangements.
- Superannuation governance: Require a majority of independent directors and an independent chair for public offer superannuation funds. Align the director penalty regime with managed investment schemes and strengthen the conflict of interest requirements.
- Retirement incomes: Require superannuation trustees to develop and pre-select for retiring members a comprehensive income product for retirement (CIPR) which includes a regular and stable income stream, manages longevity risk and provides flexibility. Remove impediments to development of CIPRs.
- Payment systems: Reform and simplify regulatory system and regulate customer surcharging.
- General insurance: Insurers should guide consumers as to likely replacement value for home insurance and provide up-to-date information about building costs and building code changes and improve disclosure for insurance products generally.
- Life insurance: Upfront and ongoing commission rates should be the same.
- Financial advice: Three problems: firms need to take more responsibility; too much reliance on disclosure and financial literacy and ASIC needs to take a more proactive approach to regulation.
- Managed investments: Government review of CAMAC recommendations should prioritise arrangements for restructuring or winding up failed schemes, particularly common enterprise schemes, and elements of Australian regulation that impede other jurisdictions recognising the equivalence of our regime.
- Financial markets: Reduce disclosure requirements for retail bonds, at least as issued by the ASX top 150.
- Stock broking: ASIC should review effect of commission 'grid' remuneration structures.
There are many other recommendations and we will be releasing a detailed report on the Final Report shortly. If you would like to receive a copy of our detailed report, please register your interest via email. In the meantime, we you can contact any member of our FSI team about any aspect of the Report.
In his release which accompanied the Final Report, The Treasurer, Mr Joe Hockey, indicated that the Government will be consulting with industry and consumers on the FSI recommendations before releasing its response. The consultation period ends on 31 March 2015.