Key Points:

The Financial System Inquiry says the Australian financial system is operating effectively and not requiring broad systemic change, but does need a refresh to allow it to continue to meet future challenges.

The Commonwealth Government's Financial System Inquiry (FSI), chaired by former Commonwealth Bank chief executive David Murray, today released its Interim Report.

The FSI was set up in 2013 as part of the Commonwealth Government's deregulation agenda and was asked to report on four key considerations:

  • the efficient allocation of Australian sourced capital to minimise exposure to volatile global markets;
  • balancing competition, innovation and efficiency with stability and consumer protection;
  • the role and impact of new technology, innovation and changing consumer preferences; and
  • international integration, in particular international financial regulation.

After seven months of deliberations and considering submissions, the Report has identified a series of challenges which the Australian financial sector will need to confront in the future in order to grow, remain productive and continue to meet the Australian public's needs in the wake of a changing financial climate. These challenges include:

  • future financial crises;
  • technological advances in financial services;
  • pressure on the budget as a result of Australia's ageing population; and
  • ensuring that higher productivity growth is facilitated through funding the economy more efficiently, finding new business and using new technology.

Priority issues identified by the FSI Interim Report

Nine priority issues relating to how well the Australian financial system is prepared to meet the challenges outlined above have also been identified:

  • competition and contestability;
  • funding Australia's economic activity;
  • superannuation efficiency and policy settings;
  • stability and the prudential framework;
  • consumer outcomes and conduct regulation;
  • regulatory architecture;
  • retirement incomes and aging;
  • technology opportunities and risks; and
  • international integration.

Superannuation

As noted above, one key area of focus identified by the FSI was the Australian superannuation sector, suggesting this could be an area where greater efficiencies could be achieved. Three key matters the FSI addressed in the Report were fees charged by superannuation funds, retirement savings risk and borrowing by superannuation funds.

The Report states that Australia's financial system has grown significantly since the Wallis Inquiry was released in the 1990s, largely as a result of the growth in the superannuation sector.

Despite this growth, the FSI observed that superannuation fees remain high, due in part to the Australian superannuation sector having the highest operating costs of any member counties of the Organisation for Economic Cooperation and Development.

While the recent MySuper reforms are tipped to lower superannuation fees, this will nevertheless need to be assessed further in the coming months and years.

The FSI has also questioned the borrowing permission of superannuation funds saying that, the growth in self-managed superannuation funds has advanced the historically limited practice and opened the superannuation system to new vulnerabilities. Though the Report stopped short of suggesting a prohibition on borrowing, it seems that the FSI may be considering this as a possibility.

Lastly the Report suggested that the retirement phase of superannuation remains underdeveloped and does not meet the risk management needs of many retirees. Though there are regulatory and other policy impediments to developing income products that benefit retirees, this remains a key area for improvement.

Going forward: submissions sought on the issues in the Interim Report

While the FSI made a series of policy selections for consultation in respect of the Report, these are only draft recommendations and the FSI is now seeking submissions in order to prepare its final report.

For those wishing to make submissions, they can be made online, with the closing date for submissions being 26 August 2014.

The FSI is expected to release its final report in November of this year