Financial System Inquiry
Shaping the future: the Government’s response
On 20 October 2015 the Federal Government released its formal response to the Financial System Inquiry (the Inquiry). As anticipated, nearly all 44 recommendations made in the Inquiry’s Final Report have been accepted by the Government, with the Government also including several additional measures.
The one recommendation which was formally rejected by the Government was prohibiting Self-Managed Super Funds (SMSFs) from borrowing to invest. There are no planned changes to the current regime on limited recourse borrowings by SMSFs, but the Council of Financial Regulators and the Australian Taxation Office have been tasked to monitor leverage in the sector and report in three years’ time.
Several initiatives aligned with the Inquiry’s recommendations commenced prior to this formal response. Examples include: the 2014 Cyber Security Strategy; increases to mortgage risk weights; the establishment of ASIC’s financial adviser register and Digital Finance Advisory Committee; and consultations to progress crowd-sourced equity funding, innovative disclosure and removing barriers to business set up and closure.
More powers to ASIC, higher bank capital and review of competition in superannuation are all now formal Government policy.
Banks should expect requirements around recapitalisation capacity in resolution, in line with emerging international practice aimed at addressing “too-big-to-fail”. Total loss absorbing capacity (TLAC) rules are currently being finalised for globally systemically important banks, which will likely mean consideration will be given to local implementation of such rules.
The superannuation sector will likely face new criteria for determining default funds, a task given to the Productivity Commission to foster competition and better returns. Improving retirement income product choice, penalties for super fund directors who fail to act in the best interests of their members and enshrining the objectives of the superannuation system into legislation are some of the other reforms the Government intends to implement. The Government re-confirmed its governance reform of superannuation, which means having a minimum of one third of trustee directors on boards being independent.
Competition is not only being considered in the superannuation space. By 2016 the Government intends to explicitly include competition in ASIC’s mandate and also commence a Productivity Commission review of competition in the financial system.
With regards to payments, the Government has announced it will legislate to ban excessive surcharge fees and has made the ACCC responsible for enforcing these rules. What is less clear is the Government’s approach to interchange fees, leaving it to the Payment Systems Board to identify policies to address current problems.
Actions to enhance consumer outcomes include the introduction of legislation requiring financial advisers to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year. In seeking to better protect consumers from harmful financial products, the Government will give ASIC new product intervention powers and place a financial product design and distribution obligation on issuers and distributors.
Innovation featured strongly in the Government’s response. Technology neutrality will be embedded in all future legislation and rule making, and existing legislation reviewed through this lens. The development of a national digital identity framework, a review on how best to access and use data and a discussion paper on impact investment are other examples of future Government initiatives.
The Government’s response to the Inquiry shows a clear determination to implement reforms. A timeline for adoption and next steps has been formulated with multiple work streams running through to the end of next year and beyond. While the high level policy has now been determined, attention and debate will now turn to the detail, ensuring a continued robust policy debate through 2016 and beyond.