The Financial System (Murray) Inquiry – the Government announces its response

Publication 20 October 2015


This morning, the Federal Treasurer Scott Morrison and the Assistant Treasurer Kelly O’Dwyer announced the Government’s response (Response) to last December’s Final Report of the Financial System Inquiry or ‘the Murray Inquiry’ (see the Response here and our update on the Final Report here).

This update is only a summary of the contents of the Response; more considered analysis from our industry experts will follow over the coming days and weeks.

The Government appears to have accepted almost all of the Inquiry’s recommendations and has also proposed additional measures that are consistent with the Inquiry’s underlying philosophy.  

The Government’s financial system program will be implemented in stages over the coming years and will involve further detailed consultations with stakeholders.

Five distinct strategic priorities

The program is made up of five distinct strategic priorities that deal with the challenges before us:

  1. The resilience measures aim to reduce the impact of potential future financial crises by ensuring Australia is better able to weather them and lessen their cost to taxpayers and the economy.
  2. The superannuation and retirement incomes measures aim to reduce the costs of the superannuation system to consumers, encourage the development of new retirement products, and, in doing so, boost retirement incomes.
  3. The innovation measures will unlock new sources of finance for the wider economy and support competition and better facilitate technology-led innovation.
  4. The consumer outcomes measures are designed to give consumers confidence to participate in the financial system and the confidence that they are being treated fairly.
  5. The regulatory system measures aim to make regulators more accountable for their performance, more capable and more effective.

The specific measures in relation to each priority area are as follows (with brief editorial comments from us):

Specific measures: Resilience

To date:The Australian Prudential Regulation Authority (APRA) released an international capital comparison study on 13 July 2015.  On 20 July 2015 APRA announced an increase to mortgage risk weights for our larger banks which will improve the resilience of the banking system to crises and promote competition. The major banks have subsequently undertaken capital raisings to increase their capital ratios.
By end-2015:Develop legislation to facilitate participation of Australian entities in international derivative markets and better protect client monies.
By mid-2016:Consult on measures to ensure financial regulators have the tools they need to manage any future financial crisis.
By end-2016:APRA to take additional steps to ensure our banks have unquestionably strong capital ratios. 
Beyond 2016:APRA to ensure our banks have appropriate total loss-absorbing capacity and leverage ratios in place.

In responding to the Final Report’s specific recommendations, the Government has expressly agreed that:

  • the capital ratios of Australian banks should be unquestionably strong. This will ensure the financial system remains resilient during difficult times and will maintain investor confidence
  • the gap between average mortgage risk weights should be narrowed. This will aid competition in the banking sector
  • steps should be taken to reduce any implicit government guarantee and the perception that some banks are too big to fail. Should an Authorised  Deposit-taking Institution (ADI) fail, greater loss absorbing capital will facilitate orderly resolution
  • transparent reporting of the capital levels of Australian banks against the Basel framework will support Australian banks to access funding in international markets
  • regulatory settings should provide regulators with clear powers in the event a prudentially regulated financial entity or financial market infrastructure fails. This will ensure the smooth functioning of our financial system and promote a resilient financial system
  • the Financial Claims Scheme for ADIs will be maintained and the Government will not proceed with the bank deposit tax and the associated Financial Stability Fund proposed by the previous Government
  • there may be situations when a risk weighted approach to capital requirements may lead to insufficient levels of capital and that a backstop would help to reduce systemic risk associated with over leveraged banks
  • an updated Cyber Security Strategy that is able to minimise the risk of a cyber-crisis in Australia is important for the resilience of the financial system

Specific measures: Superannuation

By end-2015:Develop legislation to improve governance and transparency in superannuation. Progress the Retirement Income Streams Review. Task the Productivity Commission to immediately develop and release criteria to assess the efficiency and competitiveness of the superannuation system and to develop alternative models for a formal competitive process for allocating default fund members to products.
By end-2016:Develop and introduce legislation to enshrine the objective of the superannuation system. Consult on legislation to facilitate trustees of superannuation funds providing pre-selected comprehensive income products for retirement.
Beyond 2016:Implement legislation to introduce director penalties. Consult on legislation to improve member engagement, consistent with the recommendations in the Inquiry. Monitor leverage and risk within the superannuation system.

In responding to the Final Report’s specific recommendations, the Government did not agree with the Inquiry’s recommendation to prohibit limited recourse borrowing arrangements by superannuation funds, but otherwise agreed:

  • to enshrine the objective of the superannuation system in legislation to reduce the tendency to use superannuation as a political football
  • to task the Productivity Commission to immediately develop and release criteria to assess the efficiency and competitiveness of the superannuation system, which will be broadly aimed at reducing fees and costs charged to consumers
  • to task the Productivity Commission to immediately develop alternative models for a formal competitive process for allocating default fund members to products should the industry fail to deliver the efficiency savings to consumers by 2020
  • to support the development of comprehensive income products for retirement and will facilitate trustees pre-selecting these products for members, which should re-ignite innovation in the development of new retirement products
  • to extend the choice of fund arrangements to more employees by removing the deemed choice for certain enterprise agreements and workplace determinations, which will further lessen the ties of superannuation to the industrial relations process
  • with the need to improve the governance of superannuation funds and the Government will push ahead with the independent director reforms introduced earlier this year, which have been the subject of much debate within the industry
  • that where practicable and cost effective, retirement income projections should be published on member statements

The Government will also explore additional measures, not mentioned in the Final Report, to improve the efficiency and competitiveness of the current system. While MySuper has been a strong step in the right direction, the Response states that more needs to be done to reduce fees and improve after-fee returns for fund members.

Specific measures: Innovation

To date:Passed legislation to extend the period before unclaimed banking monies in the banking and insurance sector are captured from three to seven years.
By end-2015:Consult on legislation to support crowd-sourced equity funding. Consult on crowd-sourced debt financing. Task the Productivity Commission to review access to and the use of data.
By mid-2016:Develop legislation to ban excessive card surcharges and better protect consumers using electronic payment systems. Develop legislation to reduce disclosure requirements for issuers of ‘simple’ corporate bonds. Establish the Innovation Collaboration Committee.
By end-2016:  Give legal effect to the Asian Region Funds Passport initiative. Consider technology neutrality in financial sector regulation.
Beyond 2016:Facilitate rationalisation of life insurance and managed investment scheme legacy products. 

In responding to the Final Report’s specific recommendations, the Government has expressly agreed:

  • to establish an Innovation Collaboration Committee that will be linked with ASIC’s Digital Finance Advisory Committee
  • that a national digital identity strategy will help to streamline individuals’ engagement with Government and provide efficiency improvements
  • that a graduated regulatory regime will support innovation. APRA, ASIC and the RBA will review the framework for payments system regulation and develop clear guidance to better facilitate the use of new payment system technology, such as the blockchain technology that underpins some digital currencies (e.g. bitcoin)
  • to take action to improve interchange fee and surcharging arrangements to achieve a more efficient system and fairer outcomes for consumers, merchants and system providers
  • to develop a regulatory framework to facilitate crowd-sourced equity funding through the 2015-16 Budget
  • to improve the use of data and will task the Productivity Commission with reviewing options to improve accessibility to data, taking into account privacy concerns and other existing Government processes
  • to support industry efforts to implement the Comprehensive Credit Reporting (CCR) regime, but it will not legislate for mandatory participation at this stage
  • that impact investing has the potential to benefit government and taxpayers and will develop legislative amendments to provide greater certainty for private ancillary funds wishing to invest in social impact bonds
  • to develop legislative amendments to modernise and simplify disclosure requirements for large corporates issuing ‘simple’ corporate bonds to the retail market
  • to consult on possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty and notes the Productivity Commission is undertaking an inquiry into barriers to business set up and closure, which released a draft report in May 2015
  • to amend priority areas of legislation and regulation to be technology neutral. Technology-specific regulation can impede innovation and competition by preventing the adoption of the best technology or the most innovative business models.  However, technology neutrality may not be sufficient to facilitate tech-led innovation for some start-ups and new entrants because of existing substantive regulatory barriers to entry, which should be addressed as part of this reform process.
  • to implement the recommendation to define bank accounts and life insurance policies as unclaimed banking monies only if they are inactive for seven years in the 2015–16 Budget. This change, in conjunction with a number of other improvements to the unclaimed banking monies provisions will commence from 31 December 2015
  • to facilitate the rationalisation of legacy products, in light of consumer, constitutional and fiscal issues. However, the mention of a ‘no worse-off’ test may not facilitate effective rationalisation and will be met with resistance from industry  
  • to consider market ownership restrictions in the context of its response to the Council of Financial Regulators’ Review of Competition in Clearing Australian Cash Equities

Specific measures: Consumer outcomes

By end-2015:Develop measures to address the misalignment of incentives in life insurance.
By mid-2016:Develop legislation which provides a professional standards framework for financial advisers. Consult on development of accountabilities for issuers and distributors of financial products and ASIC product intervention powers.
By end-2016:Develop legislation to give ASIC the power to ban individuals from managing financial firms. Consult on strengthening ASIC’s enforcement tools in relation to the financial services and credit licensing regimes. ASIC will review remuneration arrangements in the mortgage broking industry.
Beyond 2016:  Consult on and develop legislation to enable innovative disclosure for financial products and to improve the regulation of managed investment schemes. ASIC will review stockbroking remuneration arrangements.

In responding to the Final Report’s specific recommendations, the Government has expressly agreed:

  • to create a targeted and principles-based financial product design and distribution obligation
  • to provide ASIC with a financial product intervention power to enable it to modify, or if necessary, ban harmful financial products where there is a risk of significant consumer detriment.  There will be some concern that this power will stifle innovation because of the potential for regulatory intervention in the product development process  
  • that regulatory impediments to innovative product disclosure should be removed. The Government notes efforts led by ASIC and the industry to promote innovative product disclosure. With the benefit of information received from these processes, it will develop legislation to remove any regulatory impediments identified when those processes are complete in 2017
  • that more can be done to better align the interests of financial firms and consumers. However, the Government intends to take a different approach to that recommended by the Inquiry by supporting the industry-led proposed reforms to remuneration for retail life insurance
  • to develop legislative amendments to raise the professional, ethical and educational standards of financial advisers by requiring advisers to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year
  • to support industry-led initiatives, including supporting specific proposals put forward by industry, to increase guidance and disclosure in general insurance, recognising that work is already underway
  • as set out in its election commitment, to provide small businesses with the same protections against unfair terms as those that currently apply to consumers.  Legislation to extend unfair contract term protections to small businesses was introduced to the Parliament on 24 June 2015
  • with the need to clearly differentiate financial products.  The Government supports APRA improving product differentiation for retail consumers, while at the same time noting that the sensitivities of potential adjustments for particular sectors will need to be considered.
  • to rename ‘general advice’ to improve consumer understanding. The Government will consult with a wide range of stakeholders and conduct consumer testing before finalising the new term
  • to develop legislative amendments to enhance the regulatory framework for managed investment schemes, drawing on the Corporations and Markets Advisory Committee report and a forthcoming Senate Committee Inquiry report

Specific measures: Regulatory system

By end-2015:Complete a capability review of ASIC. Complete consultation on industry funding arrangements for regulatory activities undertaken by ASIC. Appoint new members and revise the Terms of Reference of the Financial Sector Advisory Council.
By mid-2016:Update the Statement of Expectations for APRA, ASIC and the Payments System Board to provide additional guidance about the Government’s expectations for their strategic direction and performance and improve regulator accountability. Consider ASIC capability review and, as appropriate, develop legislation to enhance operational capabilities of regulators.
By end-2016:Introduce competition into ASIC’s mandate, which should enable ASIC to better facilitate technology-led innovation by start-ups and new entrants in the same way as in the UK.
Beyond 2016:Commence a review of ASIC’s enforcement regime. Task the Productivity Commission to review the state of competition in the financial system.

In responding to the Final Report’s specific recommendations, the Government has expressly agreed:

  • with the Inquiry’s objective of strengthening the regulator accountability framework, but does not support the creation of a new Financial Regulator Assessment Board
  • to periodic consideration of regulators’ capabilities. The Government commenced a capability review of ASIC in July 2015 and will undertake other capability reviews as appropriate
  • to strengthen ASIC’s enforcement tools in relation to the financial services and credit licensing regimes, by developing legislative amendments to enable ASIC to:
    -  approve changes of licensee control;
    -  consider a broader range of factors in determining whether an applicant satisfies the ‘fit and proper’ test to be granted a licence; and
    -  impose conditions on firms to address concerns about internal systems relating to serious or systemic conduct (including external reviews).
  • to implement periodic reviews of competition in the financial sector.  The Government will task the Productivity Commission to review the state of competition in the financial system by the end of 2017, three years after the completion of the Inquiry. Subsequent periodic reviews will be undertaken as appropriate
  • to provide industry appropriate time to implement regulatory change. This will be reflected in Statements of Expectations to the regulators

Additional measures to those suggested in the Final Report were announced as follows:

  • the Government will develop legislative amendments to clarify domestic regulation to support globally coordinated policy efforts and facilitate the ongoing participation of Australian entities in international capital markets
  • the Government will develop legislative amendments to improve protections for client monies held in relation to derivatives
  • the Government will develop legislative amendments to amend the definition of a basic deposit product in the Corporations Act 2001.

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