Sunday is D-day for the FSI inquiry. The Financial System Inquiry will establish a direction for the future of Australia’s financial system. The Inquiry will lay out a ‘blueprint’ for the financial system over the next decade. So in preparation, its worth reflecting on how we got to this point. The earlier Campbell inquiry in 1981 was all about the entry of foreign banks into Australia, deregulation of the financial system and the floating of the Australian dollar. In 1997, the Wallis Inquiry, changed the regulatory environment with APRA looking after prudential regulation and ASIC for consumer protection and business conduct.
Since then the world has changed, with significant industry consolidation, globalisation, the growth of superannuation, new payment systems, and a massive swing towards mortgage lending. In addition the regulatory focus has been on financial system stability, which stood Australia in good stead through the GFC. However, banks are holding less capital today than before the GFC and internationally there is a focus on banks being too big to fail leading to a requirement for new more onerous capital requirements. In Australia we have a cadre of very profitable banks at a competitive advantage to the rest of the market. As a result, it could be argued that consumers and small business customers are not getting the products and services they should, and whilst the banks have inflated their balance sheets with mortgage lending, its not economically productive.
In additional the fast emerging digital landscape has to potential to disrupt products and services across a wide spectrum.
So, the current review was tasked with considering a wide range of issues, including how Australia should funds its growth, local and international competitiveness and the availability of financial services products and capital for users at the right price, quality and safety.
A review panel oversaw the inquiry. It was chaired by the former Commonwealth Bank of Australia chief executive David Murray. He was the inaugural chairman of the Australian government Future Fund board of guardians between 2006 and 2012. Other members include Professor Kevin Davis, Craig Dunn, Carolyn Hewson and Dr Brian McNamee.
There were a vast number of submissions to the inquiry. Many incumbents argued for little change, the regulators pointed to the financial stability exhibited through the GFC (and argued for more regulatory funding), whilst others were more critical, and advocated significant structural change. There is a complex set of interactions in the financial services sector, and many opinions.
In the interim report a number of key issues surfaced. For example, the major banks exposures to the mortgage market could create risks in terms of financial stability in a housing downturn. The recent APRA stress tests made the same point. The big four have significant advantages over smaller players. There were important discussions about the question of banks being too big to fail (meaning they would require public money to bail them out in a down turn). The report also looked at the payments system and the role of emerging technology and superannuation and financial advice were also discussed.
So what might be on the agenda of the final report? Here is my shortlist (against which I will be checking the released documents later).
- Capital buffers to be raised to reduce the competitive gradient between larger and small banks, and adjusted also for investment housing lending
- Competition rules to be tweaked to reduce the too big to fail problem (probably too hard to break up the existing large integrated financial services players) and to encourage new players
- Reduction or removal of credit card surcharging
- Changes to financial advice regulation
- Leverage rules for Self Managed Super Funds to be trimmed back
- Opening up of the payments systems
- Use of superannuation funds to more directly power growth
- Incentives for lending to SME’s
- Changes to the regulatory environment, with a stronger emphasis on consumer protection, to balance financial stability
It is likely that the recommendations contained in the report will go through further iteration before they are implemented. We shall see.
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