Of general interest is the new report published in Australia on 14 December 2014, as a result of an inquiry launched in 2013 by Treasurer Joe Hockey, and charged with examining how the financial system could be positioned to support Australia's economic growth and to better survive global financial crises.

The 320-page Murray Report was produced by the former chief executive officer of the Commonwealth Bank of Australia, David Murray, and makes 44 recommendations relating to the Australian financial system, including advising on the level of capital banks should hold, minimum standards of education for financial advisers and the level of fees imposed by pension (superannuation) funds.

It found that: “taxation and regulatory settings distort the flow of funding to the real economy; it remains susceptible to financial shocks; superannuation is not delivering retirement incomes efficiently; unfair consumer outcomes remain prevalent; and policy settings do not focus on the benefits of competition and innovation. As a result, the system is prone to calls for more regulation”.

New style regulation

The Report recommends the establishment of a permanent public–private sector collaborative committee, the ‘Innovation Collaboration’, to facilitate financial system innovation. This is similar to the ‘Innovation Hub’ initiative by the UK’s Financial Conduct Authority (FCA), indicating that a close monitoring of UK developments will provide valuable insights into the future of regulation in Australia.

The Report’s explicit and implicit endorsement of the UK approach also extends to its recommendation to introduce the UK FCA-style product intervention powers into the Australian regulator’s toolkit. By making issuers and distributors of financial products more accountable for design and distribution, the Report believes that such conduct regulation will lead to positive consumer outcomes and strengthen consumer confidence and trust in the system. These powers include bans on specific products, product terms, distribution channels, mandated warnings and product labelling.

Intervention powers of this sort could mean a new era of conduct regulation in Australia, where the focus of regulation will shift from enforcement action to preventative action by the Australian Securities and Investments Commission (ASIC).

The report makes several observations in relation to pensions (“super”) funds and these are summarised below:

  • Borrowing prohibition - the proposal to remove the exception to the borrowing prohibition may have the unintended consequence of closing down the market for instalment warrants and other structured products that involve in-built forms of leverage, as well as closing down the residential property asset class for self-managed super funds
  • Improving efficiency - Murray clearly has reservations about the effectiveness of the Stronger Super reforms to bring down fees. While recognising that those reforms should be allowed to run their course, the Report recommends that a Parliamentary Committee inquiry should commence as early as next year to test the design features for a new competitive tender process for the super industry. The successful bidders will be a smaller number of super funds (with no hint as to the number) that will receive the super guarantee contributions of new entrants. The catch is that those funds must also offer the same fees and other features to their existing members. This recommendation could result in massive industry consolidation as funds seek to gain the necessary scale in order to compete on fees and brings Australia more in line with compulsory pension regimes overseas.
  • Retirement phase of super - tilting the retirement product bias away from account-based pensions towards a default income stream chosen by trustees will be welcome by the super industry. However, as many of the submissions pushed for some element of compulsion, it is arguable that the Report does not go far enough. Rather, the Report encourages the development of retirement income products with pooled longevity risk protection and the removal of tax and other barriers to the development of such products. While these recommendations are welcome, it is unclear whether they will change consumer behaviour as consumers will continue to be able to choose to take their super benefits as lump sums, and then fall back on the age pension.
  • Majority of independent directors - the Inquiry is strongly supportive of a governance model of a majority of independent directors for public offer super funds as well as introducing civil and criminal penalties for director misconduct and recommends that equal representation (the current model) be restricted to defined benefit funds where employers bear the investment risk.
  • Taxation of super - the Report dodges the bullet on tax reform and leaves it to the Tax White Paper to recommend changes to the taxation of super. In its sights will be the concessional contribution caps and the taxation of earnings in the retirement phase (which are currently tax free) as well as the taxation of high super balances.