The government, in its official Response, has adopted all but one of the recommendations made by the Financial System Inquiry (FSI, aka the Murray Inquiry) in some form. We summarise the government’s stated response to each recommendation below and also provide occasional comment where relevant.
The government’s response covers five key areas: resilience, superannuation, innovation, consumer outcomes and regulatory system. We deal with each under the relevant headings.
Recommendation 21 – strengthen product issuer and distributor accountability
Product issuer and distributor accountability to be strengthened via targeted and principles-based financial product design and distribution obligations. *imac view: while the move away from reliance on prescriptive disclosure obligations is welcome, the response will need to tread a fine line between meeting consumer protection and risk management objectives and interference in free markets and product design and innovation. Keep an eye out for the public consultation that is promised and have your say.
Recommendation 22 – introduce product intervention power
ASIC to get a product intervention power to enable it to modify or ban ‘harmful’ financial products where there is a risk of significant detriment. *imac view: this will be a difficult one. The recommendation appears to assume a homogenous investor profile whereas some consumers happily accept greater risk than others and some products are inherently riskier than others. Enhanced disclosure of ‘risks’ is likely to be at least one of the solutions. As with Recommendation 21, the response will need to tread a fine line between meeting consumer protection and risk management objectives and interference in free markets and product design and innovation. Keep an eye out for the public consultation that is promised and have your say.
Recommendation 23 – facilitate innovative disclosure
Regulatory impediments to innovative product disclosure should be removed. Lockstep with this is an initiative to improve disclosure of risk and fees.
Recommendation 24 – align the interests of financial firms and consumers
More will be done (although it is not clear exactly what) to align the interests of financial firms and consumers. The government will take a different approach to retail life insurance than recommended by the FSI; it supports industry reforms announced by the former Assistant Treasurer on 25 June 2015. The life insurance arrangements will be reviewed in 2018 for efficacy. It was also reported that the start of the reforms will be put back to July 2016. Also, ASIC will review stockbroking remuneration models and have power to ban individuals from operating in the industry. *imac view: watch this space as there is already dissent in industry about some aspects of the proposed Life Insurance Framework, particularly around clawback provisions.
Recommendation 25 – raise the competency of advisers
The government will require advisers to hold a degree, pass an exam, undertake CPD, subscribe to a code of ethics and undertake a professional year. The newly introduced adviser register will be enhanced to show if advisers meet the new requirements. Legislation to raise standards will be introduced by mid-2016. Then, the new requirements will be reviewed in 2019 for efficacy. *imac view: higher formal qualifications and raised standards are important steps in the industry becoming a respected profession.
Recommendation 26 – improve general insurance guidance and disclosure
Industry-led initiatives to be supported by the government.
Recommendation 34 – unfair contract terms
Small business will have the same protections against unfair contract terms as other consumers. The government will also consider the PJC findings re using non-monetary default covenants for customer loans.
Recommendation 35 – finance companies
Investment products from ADIs and non-ADIs will be differentiated.
Recommendation 40 – financial advice and mortgage broking
‘General advice’ will be renamed to ‘improve consumer understanding’. Also, new rules will be developed to ensure financial advisers and mortgage brokers adequately disclose relationships with associated entities. *imac view: financial product advice itself needs to be re-defined so it covers a wide ambit of ‘financial advice’, not just product-related advice. Re relationships: advisers and brokers are already required to disclose associations, so it is not clear what changes are anticipated.
Recommendation 42 – MIS regulation
Regulatory framework to be enhanced, with priority on consumer detriment, illiquid schemes, freezing of funds and cross-border transactions and mutual recognition. CAMAC Report will be a government touchstone.
Recommendation 27 – regulator accountability
The government has not agreed to establish a Financial Regulator Assessment Board as recommended by the FSI, agreeing instead to bolstering accountability through the Public Governance, Performance and Accountability Act 2013 and the government’s Regulator Performance Framework. The Financial Services Advisory Council will have revised terms of reference by the end of 2015. A new Statement of Expectations for regulators will be updated in the first half of 2016.
Recommendation 28 – Execution of mandate
Periodic reviews of regulators’ capabilities will be undertaken.
Recommendation 29 – strengthen ASIC funding and powers
ASIC’s enforcement toolkit will be enhanced in relation to AFSL and ACL operators. It is envisaged that ASIC will have enhanced powers to: approve changes of licensee control; consider a broader range of factors in relation to ‘fit and proper’ tests; impose conditions on firms to address concerns re internal systems (including external reviews). The enforcement regime, including penalties and breach notification framework, will be reviewed in 2017.
Recommendation 30 – strengthening focus on competition
ASIC’s mandate will include an express reference to consideration of competition in the second half of 2016. Barriers to cross border trade in MIS will be dealt with through establishing an Asian Region Funds Passport in the second half of 2016.
Recommendation 31 – compliance costs and policy processes
The government agrees to provide industry appropriate time to implement regulatory change. *imac view: more important than the time to implement is the need for government to undertake cost/benefit analyses of proposed changes. There has been, and will continue to be such a large volume of regulatory change, that managing the change adds significant cost to licensees’ businesses.
Recommendation 1 – capital levels
Capital levels for ADIs to be unquestionably strong. This is likely to lead to greater capital adequacy requirements for ADIs.
Recommendation 2 – narrow mortgage risk weight differences
The gap between average mortgage risk weights to be raised to at least 25% from 1 July 2016.
Recommendation 3 – loss absorbing and recapitalisation capacity
Steps to be taken to reduce any implicit government guarantee and the perception that some banks are too big to fail. Greater loss absorbing capital will help facilitate orderly resolution.
Recommendation 4 – transparent reporting
Transparent reporting of capital levels of ADIs against Basel framework is supported.
Recommendation 5 – crisis management toolkit
The government will consult on measures to clarity and strengthen regulatory powers in case of a prudentially regulated entity or market failing, by mid-2016.
Recommendation 6 – financial claims scheme
The government agrees to maintain the ex post funding structure of the Financial Claims Scheme
Recommendation 7 – leverage ratio
A leverage ratio that acts as a backstop to ADIs’ risk-weighted capital positions will be implemented.
Recommendation 38 – cyber security
An updated Cyber Security Strategy will be developed to minimise the risk of a cyber-crisis.
Superannuation and retirement incomes
Recommendation 8 – direct borrowing by superannuation funds
In the one clear dissent from the FSI recommendations, the government does not agree to prohibit limited recourse borrowing arrangements by superannuation funds. The response was based on insufficient empirical evidence as to the risks. *imac view: advisers need to tread carefully when recommending LRBAs. They need to be very clear on the risks and ensure clients’ circumstances and objectives support such a high risk strategy, including that the strategy is affordable.
Recommendation 9 – objectives of the super system
The objectives of the super system will be enshrined in legislation. No timeline provided.
Recommendation 10 – improving efficiency during accumulation
The Productivity Commission will immediately develop and release criteria to assess the efficiency and competitiveness of the super system as well as alternative models for a formal competitive process for allocating default fund members to products. Subsequent to this the Productivity Commission will review the efficiency and competitiveness of the super system.
Recommendation 11 – retirement phase of superannuation
The government supports the development of comprehensive income products for retirement and will facilitate trustees pre-selecting these products for members. More work will be done to remove impediments to income product development. *imac view: consumers are likely to see new product innovations for retirement
Recommendation 12 – choice of fund
Employees will be able to exercise choice of fund even where current enterprise agreements and workplace determination provide a deemed choice. *imac view: this change will have big retail funds champing at the bit to bite into industry funds.
Recommendation 13 – governance of super funds
Legislation has already been introduced to mandate trustee boards to have a minimum of one-third independent directors, including an independent chair. Penalty provisions and criminal sanctions for directors will also be introduced for directors who fail to execute their duty to act in members’ best interests or use their position to further their (or others’) interests to the detriment of members. In addition, board members will need to acknowledge when a director adds an interest to the conflicts register to ensure all directors are aware of interests.
Recommendation 37 – super member engagement
Retirement income projections should be published on member statements for defined contribution schemes where practicable and cost effective.
Recommendation 14 – collaboration to enable innovation
An Innovation Collaboration Committee will be established in conjunction with ASICs Digital Finance Advisory Committee to facilitate innovation.
Recommendation 15 – digital identity
The FSI recommended a ‘voluntary’ system whereby individuals can streamline engagement with government. *imac view: while there may be some efficiency payoffs and potentially good risk management outcomes, Australians showed with the ‘Australia Card’ that they are suspicious of ‘big brother’ type information gathering. Perhaps the advent of tech behemoths Google, Apple et all will have changed consumers’ sentiments.
Recommendation 16 – clearer graduated payments regulations
Powers held by ASIC and the RBA will be clarified to ensure that regulators have the power to regulate new payment systems in a graduated way, such as digital currencies (e.g. Bitcoin) and other payment systems as they emerge. Baseline consumer protections will be included in the ePayments Code.
Recommendation 17 – interchange fees and customer surcharging
Improvements are to be made to improve interchange fee and surcharge arrangements to ensure they are fairer for consumers, merchants and system providers (e.g. merchants only able to pass on reasonable costs of accepting cards). *imac comment: the current arrangements were supposed to result in fairer outcomes for consumers.
Recommendation 18 – crowdfunding
The Minister for Small Business and Assistant Treasurer will consult on draft legislation to facilitate crowdfunding framework by end of 2015. *imac view: while progress is to be lauded, crowdfunding is still shackled by a lot of the financial service laws, e.g. re MIS.
Recommendation 19 – data access and use
The Productivity Commission will review options to improve accessibility to data, taking into account privacy concerns.
Recommendation 20 – comprehensive credit reporting
Industry efforts to implement the CCR regime will be supported but the government won’t legislate for mandatory participation at this stage.
Recommendation 32 – impact investment
Legislative amendments will be developed to provide greater certainty for private ancillary funds wishing to invest in social impact bonds. Impact investing is viewed as having the potential to benefit government and taxpayers.
Recommendation 33 – retail corporate bond market
New laws will be developed to introduce modernised and simplified disclosure for ‘simple’ corporate bonds.
Recommendation 36 – corporate administration and bankruptcy
A current Productivity Commission inquiry into barriers to business set up and closure will inform the government’s response to the FSI recommendation to add flexibility for businesses in financial difficulty.
Recommendation 39 – technology neutrality
Priority areas of legislation and regulation will be amended where necessary to ensure technology neutrality and embed technology neutrality into future legislation. *imac comment: legislation is already supposed to be technology neutral!
Recommendation 41 – unclaimed banking monies
From 31 December 2015, bank accounts and life insurance policies inactive for seven years will be considered unclaimed monies.
Recommendation 43 – legacy products
In light of consumer, constitutional and fiscal issues, the government will facilitate rationalisation of legacy financial products. Currently, some clients could be worse off (e.g. because of tax implications) if they transitioned from a legacy product to a new product. *imac view: legacy products create a lot of drag in the market for both consumers and product providers. The sooner some solutions can be implemented the better.
Recommendation 44 – Corporations Act ownership restrictions
Market ownership restrictions will be considered in the context of the government’s response to the Council of Financial Regulators’ Review of Competition in Clearing Australian Cash Equities.
Three additional recommendations will be actioned.
1. Amendments to the law will be made in the second half of 2015 to help ensure participation in international derivatives markets.
2. Changes to the law will be introduced to help protect client monies held in relation to derivatives.
3. Basic deposit products will be re-defined to provide certainty for businesses and consumers by clarifying how certain term deposit products are treated under the law.
The government’s FSI report is available on the Treasury website.