Financial System Inquiry
Shaping the future: Deloitte response to the Interim Report
Our submission to the Interim Report outlines five central sets of considerations that Deloitte thinks should be central to the Inquiry’s final recommendations.
The David Murray Financial System Inquiry, as indicated by the Interim Report August 2014, is focussing on how the financial system has evolved since the Wallis Inquiry. It considers the lessons from the GFC, and how to modify the regulatory framework to best cope with future challenges.
A central theme of the Interim Report is the role that regulation plays in encouraging effective competition in the financial sector. This has clearly guided the Inquiry’s thinking throughout the considerations and questions the Interim Report poses.
Deloitte supports the Inquiry’s focus on competition as a cornerstone for the regulatory framework, matched with suitably well-crafted prudential and consumer protection rules.
Technology, an ageing population, and further globalisation are set to result in profound changes in the economy and society over the next 10-20 years, and the nation will gain most from these changes if we have a robust financial system that can facilitate change.
Accordingly, Deloitte’s response to the Interim Report has been prepared with an emphasis on the nature of possible future developments and their implications for regulation.
Our response includes:
- An overview of five central sets of considerations that Deloitte thinks should be central to the Inquiry’s final recommendations (see below)
- A presentation of six future scenarios that have been developed as a way of testing possible pressures for the regulatory system going forward
- Responses to select policy options and requests for information set out in the Interim Report.
The Interim Report was released on the 15 July and responses were submitted 26 August with the final report and recommendations are due to Treasury in November 2014.
The Deloitte Financial System Inquiry team is ready to assist you think through the ramifications of this comprehensive Inquiry, and provides insights in the sections below.
1. Australia’s Financial System
It is important that the Inquiry focus on the benefits that are being engendered by the expansion of financial services, especially in terms of access to credit, advice and retirement incomes tailored to the individual, in assessing the costs of financial services.
2. The regulatory framework - putting principles into practice
While the Interim Report supports sound regulatory principles, and acknowledges the growth of prescriptive regulation and a compliance culture, it does not explore how regulation may be more effectively implemented and enforced.
We encourage the Inquiry to explore how the implementation and enforcement of principles-based regulation can be enhanced and strengthened.
The Council of Financial Regulators has been effective in coordination across regulators however it is not a natural forum for considering the accountability of regulators.
3. Competition as a Cornerstone
The major parts of Australia’s financial system are neither concentrated nor integrated to levels that should be a concern from a competition perspective. The trend towards greater concentration reflects the benefits consumers derive from accessing a bundled set of services and thus the presumption should be that this is likely to be accompanied by an improvement in welfare. The main competition issues for the future should centre on barriers to entry, including regulatory barriers. Technology will act to reduce most entry barriers over time.
To the extent that there is any perceived funding advantage attributed to the presence of an implicit government guarantee for systemically important banks, such effect should be addressed through ensuring all institutions regardless of size can be resolved in an orderly manner reducing the likelihood of recourse to taxpayer funds.
Smaller players should be encouraged and supported in the transition to the IRB approach, and analysis and implementation of measures to make the RMBS market more liquid should be considered. The issue should not be addressed through additional measures on the SIBs.
The regulation of interchange fees for four-party payment card schemes has led to the creation of essentially identical products that are able to avoid the fee regulation. This regulatory arbitrage is now driving outcomes in the market. Competitive neutrality can most easily and efficiently be restored by removing the caps on interchange fees.
4. Focus on Consumer Outcomes
Recommendations aimed at cost reduction should focus on
- Reducing compliance costs
- Simplification, including opt-out arrangements for basic retirement income products
- The use of technology. Any such recommendation needs to be mindful of trade-offs with benefits.
Individual preferences and needs are unique. Legislation should rely less on mandating universal solutions and more on nudging individuals and institutions toward better consumer outcomes.
The challenges facing retirees need be considered in an integrated manner including superannuation and other forms of savings, and health and aged care costs.
5. Systemic issues
Australia’s legal framework and record of close, effective supervision means that our prudential standards should be no more onerous than those operating internationally.
Australia’s financial system should be able to manage the shift to a progressively large share of assets being held by superannuation funds. The challenge will be for suitable intermediation to support the different activities in the economy. While it will be important to monitor shifts in funding over time, the low levels of direct gearing, if maintained, and long term focus will help to alleviate risks to financial stability.