The government is inviting submissions on the draft terms of reference to ensure that the FSI does not fail to consider potentially significant issues. Now is the time to think about what you might like the FSI to consider.
Much has been learned and written about financial systems since the Wallis Inquiry. The system and its efficiency and stability are not just about banks, how they are owned and organised, how big they should be and how many of them there are. It is about government and the role that sound public finances and implicit support play in the stability of the system. It is about non-bank financial intermediaries and the role they play in providing or provoking competitive services. It is about capital and derivatives markets and how they provide funding and negotiate and disseminate, and potentially obscure, risks that otherwise would rest in the banking system. It is about savings pools outside the banks, in Australia especially the vast pools of money channelled into superannuation, increasingly in self-managed form, and the ends to which those savings are deployed. It is about financial market infrastructure, including payment systems, clearing houses, trading and settlement of securities. Above all it is about how all these elements are connected, both within Australia and globally, and how they and the entire system behave, both in favourable conditions and in times of disturbance.
Almost as complex as the system are the fundamental questions of regulatory policy and how to reconcile competing objectives: what is more important, stability or competition? In a time of crisis, does the need for stability trump the usual rules for disclosure to securities markets, potentially inflicting losses on investors in those markets? What are the implications for Australian sovereignty and independence of action? We are a capital importing nation. How are we best protected against disturbances abroad? To what extent are we free to assert our own patterns of regulation, in a world of global standards designed to solve problems different from our own? Will regulation domesticate our financial system? In seeking to insulate our system from the wider world, do we magnify the risks to the system from a disruption in the domestic economy?
Almost all of these issues are distilled in superannuation. Access to superannuation money is likely to prove irresistible. But it will come at a cost – more prescriptive regulation and less self-determination for retirees. At the heart of this is the question – whose money is it? This question is most acute in the self-managed fund sector.
The impact of taxation upon the allocation of capital will also be considered. Is the differential tax treatment of debt and equity appropriate? Does it disadvantage Australia’s financial institutions in raising capital, particularly in offshore markets? Should the FSI consider proposals for deductible capital? Is the current treatment of financial services for GST purposes appropriate?
There has already been much discrete inquiry and commentary on proposals on aspects of these topics – the Johnson Committee, the Treasury Discussion Paper on Crisis Management, the Inquiry into the Superannuation System, the previous government’s Competitive and Sustainable Banking System proposal, the Basel inspired re-write of prudential standards, all of which we have written about in previous publications.
There has also been an avalanche of new financial services regulations since the Wallis Inquiry particularly post the global financial crisis. In some cases the new regulations cover behaviour that was already covered by existing laws, and post the financial crisis, court cases and regulatory action have successfully used the existing laws to punish bad behaviour. Ideally the FSI could refresh the principles underpinning the development of new legislation and the review of existing legislation so that a policy objective is achieved without overburdening the financial system with multiple compliance obligations all directed at achieving the same policy outcome.
The scope of the FSI is much broader than for previous enquiries, and allows the FSI to consider all the big questions that affect the financial system as a whole. No form of financial activity would be beyond its remit: businesses involved in banking, finance, insurance, securitisation, superannuation, derivatives, hedge funds, payments, clearing and settlement, and their customers, could all be affected by the results of the FSI. Laws are up for review, including corporations and tax laws, each as they may affect the efficient and effective allocation of capital in the financial system.
It will be a huge task for the FSI to assess the submissions and evidence and come up with recommendations. If you have a business that has a stake in the outcome, now is the time to think about what you might like it to find. The terms of reference are open for comment until Thursday 5 December 2013. Commenting on them is one way of securing a hearing for the matters that most affect you.