Key Points:

The Financial System Inquiry is intended as a sweeping review that will tailor Australia's financial system to current and future challenges.

The Federal Government has announced a "root and branch" review of Australia's financial system, charged with examining how the financial system should be positioned to best meet the nation's evolving needs and support economic growth. Proceeding from the Government's broader deregulation agenda, the Financial System Inquiry (FSI) aims to develop recommendations that will foster an "efficient, competitive and flexible financial system" consistent with principles of "financial stability, prudence, integrity and fairness".

On 20 November 2013, Treasurer Joe Hockey MP and Prime Minister Tony Abbott MP announced the appointment of Mr David Murray AO, former Future Fund Chairman and Chief Executive Officer of Commonwealth Bank, to head the Inquiry. Also comprising four eminent Australians from the finance, business and academic sectors, the Committee will draw upon the expertise of a Special External Council of five international business people in relation to matters of international competitiveness and offshore regulatory frameworks.

Background

Dubbed the "Son of Wallis" or "Granddaughter of Campbell" Inquiry (after the major banking investigations of 1997 and 1981 respectively), the FSI will report on the developments in Australia's financial system in the 16 years since the Wallis Inquiry.

Dealing with broadening markets and technological changes, the 704-page Wallis Report made recommendations for Commonwealth regulation of corporations, financial market integrity and consumer protection, and for the establishment of a single prudential regulator for the entire financial system. It advocated more efficient pricing of fees and charges by financial institutions, and the abolition of the prohibition on mergers between, and foreign takeovers of, the four big banks. The Report prompted extensive reform, of which the current financial system is a product. The global financial crisis fostered a further wave of new financial regulations.

With the explicit 2010 expiry date of the Wallis recommendations, and recent changes in the domestic and global financial landscapes, the FSI is intended as a sweeping review that will tailor Australia's financial system to current and future challenges. At a time when domestic savings are meagre and Australia's banks are heavily reliant on offshore wholesale funding, the FSI has been tasked with considering how the financial system could more efficiently allocate domestically-sourced capital to insulate Australia against the vicissitudes of global capital markets.

Superannuation, for example, is a key issue. Addressed in only four pages of the Wallis Report (the compulsory charge having been introduced a mere four years prior), Australia's superannuation pool now sits at $1.6 trillion, outstripping bank deposits at $1.3 trillion. It may therefore be apt for the FSI to consider the structures that will make available surplus funds for infrastructure investment and the banking industry.[1]

The industry's regulatory structure also requires review in light of technological developments, such as the e-payment systems advanced by companies like PayPal and Google.

Draft terms of reference

The Inquiry's draft terms of reference will be finalised and announced mid-December 2013. Amongst its charges, the FSI will be asked to:

  • Refresh the principles underpinning a well-functioning financial system: including how to best balance competition, innovation and efficiency with stability and consumer protection;
  • Consider emerging opportunities and challenges that are likely to drive further change in the financial system: such as new technologies, market innovations, international integration, changes in the way Australia sources and distributes capital, changing organisational structures in the financial sector, corporate governance structures and developments in the payment system;
  • Recommend policy options that: promote competition, stability, efficient capital allocation and access to services; support individuals and businesses to manage their finances; and foster dynamic and innovative financial service providers. In considering efficient capital allocation, the FSI will take account of the regulation of companies through corporations law, and examine the taxation of financial arrangements, products and institutions (producing observations that could inform the Tax Policy White Paper).

In reaching its conclusions, the FSI will consider, but not make recommendations about, the objectives and procedures of the Reserve Bank.

Timeline

The FSI will involve an extensive period of consultation, during which the Committee may invite submissions and seek information from any person or bodies. The Inquiry is expected to publish an interim report by September 2014, and deliver the final report to the Government by November 2014.

Thanks to Elodie Cheesman for her help in preparing this article.