The Treasury – Page 7 – Digital Finance Analytics (DFA) Blog

Morrison’s budget switch points at infrastructure boom

The government has bent to calls from experts and Labor by clearing away the accounting impediments to a big spend on infrastructure.

In a speech on Thursday, his last before he hands down the May 9 budget, Treasurer Scott Morrison promised to change how the budget reports the deficit.

Instead of reporting the ‘underlying cash balance’ (which counts “good and bad debt”) prominently and burying the ‘net operating balance’ (which only counts “bad debt”), Mr Morrison said he will put them side by side from now on.

“While the net operating balance has been a longstanding feature of our budget papers … it has not been in clear focus. This change will bring us into line with the states and territories, who report on versions of the net operating balance, as well as key international counterparts including New Zealand and Canada.”

In this context, “good debt” is borrowings for economy-boosting capital expenditure, such as roads and trains that reduce the time it takes to get to work, while “bad debt” is borrowing to cover the cost of defence and welfare.

As an example, in the latest MYEFO budget update, the projected underlying cash deficit for 2017-18 was $28.7 billion but the net operating deficit was only $19.2 billion.

Mr Morrison’s pledge was a marked reversal on his comments late last year when he said the government would only take on “so-called good debt” for infrastructure spending once it had brought “bad debt” under control.

The Coalition will soon, perhaps in the next six months, be forced to administratively lift the $500 billion gross debt ceiling to allow the government to keep borrowing. Nevertheless, the government will heed the calls of experts for debt-fuelled stimulus.

Various expert bodies, including the Reserve Bank, have been prodding the government to take advantage of record-low borrowing costs to renew Australia’s public infrastructure.

In his farewell address, former RBA governor Glenn Stevens said the economy would only be pulled out if its malaise if “someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend”.

“Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending,” Mr Stevens said.

“The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.”

Credit ratings agencies, the International Monetary Fund and the OECD have also encouraged infrastructure spending.

And in a discussion paper last year, Labor’s shadow finance minister Jim Chalmers called for consultation on the “optimal budget presentation for intelligent investment in productivity enhancing infrastructure assets” and the idea of splitting out “spending on productive economic assets such as infrastructure from recurrent expenditure”.

Labor took a very different line on Thursday, with Shadow Treasurer Chris Bowen accusing the government of employing accounting “smoke and mirrors” to hide its economic mismanagement.

Anthony Albanese, the opposition’s infrastructure spokesman, welcomed the change but accused the government of wasting the last four years coming to the decision.

“Treasurer Scott Morrison’s declaration today that at a time of record low interest rates it makes sense to borrow for projects that boost economic productivity is precisely what Labor, the Reserve Bank and economists have been saying for years,” Mr Albanese said.

He warned the government’s “ill-advised” decision to create an infrastructure unit within the Department of Prime Minister and Cabinet, rather than relying on the independent Infrastructure Australia, risked pork barrelling.

“Creating another bureaucracy to sideline the independent adviser makes no sense. The government should have already learned that lesson from its creation of the Northern Australia Investment Facility, which was announced two years ago but has not invested in a single project.”

ABC 7:30 Does Good and Bad Debt

So the latest pivot from the Government is a focus on the “good and bad debt” as an apparent key to growth, with housing affordability now becoming more of a side show as the realisation dawns that they cannot solve that equation. This segment discusses the issue, and includes a contribution from DFA.

New Superannuation Income Stream Rules

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has released draft superannuation income stream regulations and a draft explanatory statement for public consultation.

The regulations continue the implementation of the Government’s superannuation reforms and introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement. The regulations are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products.

Closing date for submissions: 12 April 2017

The purpose of Schedule 1 to the Regulations is to introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement. The new rules are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products. The overarching goal of the rules is to provide flexibility in the design of income stream products to meet consumer preferences while ensuring income is provided throughout retirement. Superannuation funds and life insurance companies will receive a tax exemption on income from assets supporting these new income stream products provided they are currently payable, or in the case of deferred products, held for an individual that has reached retirement.

A contract for the provision of an annuity benefit, or the rules for the provision of a pension benefit (the governing conditions) will need to meet four key elements of the standards in subregulation 1.06A(2). These elements are:

A requirement that benefit payments not commence until a primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65.

A requirement that benefit payments, of at least annual frequency, be made throughout a beneficiary’s lifetime following the cessation of any payment deferral period.

A rule ensuring that, after benefit payments start, there is no unreasonable deferral of payments from the income stream.

Restrictions on amounts that can be commuted to a lump sum or for rollover purposes based on a declining capital access schedule commencing from the retirement phase.

Item 18 of Schedule 1 inserts a formula that will restrict the maximum commutation amount that can be accessed after 14 days from the retirement phase start day, on a declining straight line basis over the primary beneficiary’s life expectancy. The maximum commutation amount will be worked out by dividing the ‘access amount’ by the primary beneficiary’s life expectancy on the retirement phase start day and then multiplying this by the remaining life expectancy less one year at time of commutation. Life expectancy will be rounded down to a whole number of years. The maximum commutation amount will also be reduced by the sum of all amounts previously commuted from the income stream prior to the time of the commutation.

Item 11 of Schedule 1 will insert a definition to determine the value of the ‘access amount’ on the retirement phase start day for the income stream or at a point in time after the retirement phase start day. The access amount will be the maximum amount payable on commutation of an interest on the retirement phase start day as determined by an annuity contract or pension rules. Any instalment amounts paid for an interest in a deferred superannuation income stream after the retirement phase start day will then be added to the access amount at the point in time that an instalment is paid.

External Dispute Resolution Review Extended

In a statement from the Independent Review Panel: Professor Ian Ramsay (Chair), Julie Abramson and Alan Kirkland, the terms of reference have been extended.

They will now be tasked with the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and also consider the merits and issues involved in providing access to redress for past disputes.

Whilst we think dispute resolution is part of the problem, we think SME banking issues are more systemic, so other steps also need to be taken. Also note the consultation period is passed, so the public are not able to comment on these revised terms!

The Government has released the report of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Inquiry into small business loans, and as a result of this report has expanded the terms of reference for the review of the financial system’s external dispute resolution (EDR) and complaints framework (EDR Review).

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has today released amended terms of reference to include:

the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and

consideration of the merits and issues involved in providing access to redress for past disputes.

In order to fully consider the amended terms of reference, the Panel intends to release a separate issues paper on the additional matters and will seek the views of stakeholders.

The Government has provided a three-month extension to the initial reporting date of end March 2017 to enable the Panel to consider and consult on the issues contained in the amended terms of reference. The Panel will provide a separate report on the additional terms of reference by the end of June 2017.

Public consultation on the EDR Review Interim Report, released on 6 December 2016 and available on the Treasury website, closed on Friday, 27 January 2017. The Panel will still provide the Government with a final report on the issues contained in the original terms of reference by the end of March 2017.

There are two big political problems buried in the latest budget update

From The Conversation.

Whether or not we end up in surplus in five years’ time, yesterday’s Mid Year Economic and Fiscal Outlook (MYEFO) exposes nasty political problems for the Turnbull government in the here and now.

Real GDP growth for 2016-17 has been sensibly but shockingly revised down to 2% – the lowest outcome since the global financial crisis, the second lowest in 16 years and the third lowest since the long upswing began in 1991/92. Sensible, because we know, from the third-quarter GDP numbers and other indicators this year, that the upswing in residential investment has peaked before (and perhaps well before) an upswing in business investment has begun.

Shocking, because if labour productivity continues to run a little above 1% – as it has for the last four years – the implied growth in employment of 1% or so will probably not be enough to stop unemployment rising. The MYEFO projects the unemployment rate in the June quarter next year at 5.5% – lower than today and lower than the average of 5.8% over the last four years.

Yet, at 2.6% year average GDP, growth in those four years has been markedly stronger than the 2% MYEFO now projects for 2016-17. Even with the projected decline in the participation rate, the MYEFO unemployment forecast will be a struggle.

Disappointing GDP growth is political problem number one for Malcolm Turnbull and Treasurer Scott Morrison. Problem number two is the implacable persistence of substantial federal deficits.

These deficits limit the government’s response to problem number one. In 2012-2013 government receipts were 23.0% of GDP, payments 24.0% of GDP, and the deficit 1.2% of GDP. Labor lost office a little over nine weeks after the end of that fiscal year.

In these latest projections for the 2016-17 Budget, four years on from 2012-2013, receipts are expected to be 23.3% of GDP, payments 25.2% of GDP and the deficit 2.1% of GDP. Compared to 2012-13, receipts have increased 0.3% of GDP, spending 1.2% of GDP and the deficit 0.9% of GDP. Receipts are up, but spending is up even more and so is the deficit.

There are plenty of reasons for this woeful fiscal performance, mostly to do with modest increases in profits and wages and the tax-minimisation policy of former Treasurer Peter Costello. But these reasons are not ones that square with Treasurer Morrison’s rhetoric, or which can any longer be laid at the door of the previous Labor government.

Nor does the MYEFO give any confidence that the troubles of the Turnbull government will soon be eased. The path to the return to surplus depends completely on increasing tax revenue.

Spending as a share of GDP is now, according to these MYEFO projections, locked in at 25.2% of GDP right through to the end of the forward estimates period (and beyond the next election) in 2019-20. The projected decline of the deficit arises only because tax receipts are expected to increase over that period by 1.6% of GDP.

A slow economy, a rising tax take, perhaps rising unemployment, and not much room to move. 2017 won’t be cheerful for the prime minister or treasurer – or for the rest of us.

Author: John Edwards, Nonresident Fellow at the Lowy Institute for International Policy and Adjunct Professor with the John Curtin Institute of Public Policy, Curtin University

MYEFO – Will Mortgage Rates Rise?

The MYEFO was released today. In essence, it has quite an optimistic tint, but fundamentally growth is too weak, so incomes, business investment and tax takes will be depressed. Whilst there is some chance of a “free-kick” from some commodity prices, the outlook is not great, and net government debt has yet to peak. The cost of debt will rise as shows by the yield curve assumption which has lifted compared with 2016 PEFO.

“The Government’s interest payments and expense over the forward estimates mostly relate to the cost of servicing the stock of Commonwealth Government Securities (CGS) on issue, and are expected to increase over the forward estimates as a result of the projected rise in CGS on issue”.

The key question is how will this translated to the mortgage rate, which we know will be rising through 2017, as global capital markets reprice yields post the Trump election? We think this will help to lift rates higher still.

The big risk is a AAA downgrade. Such a move would lift the costs of funding for the banks, and this would need to be passed on to consumers and small business customers. The probability has firmed for a downgrade, and so the expectation must be that mortgage rates will rise further and faster than previously expected. We still expect rates on average to be 50 basis points higher this time next year. Our mortgage stress analysis shows that some households are already under the gun.

Whilst there is certainly a chance the RBA may want to cut rates to assist next year, we still think this is unlikely, given the housing boom in the eastern states and the clear limitations of monetary policy when rates are this low. In any case the cash rates and mortgage rates have become decoupled.

Here is the ABC’s MYEFO summary:

Budget deficit this financial year has shrunk by $600 million to $36.5 billion
Deficits over the four year forward estimates have grown by more than $10 billion
The Government is still projecting a return to surplus in financial year 2020-21
Net debt as a proportion of economic output will peak at 19 per cent in 2018-19
Real economic growth estimates have been revised down slightly
MYEFO says “commodity prices remain a key uncertainty”
Estimated tax receipts are down by $3.7 billion since the pre-election budget update
Tax receipts are predicted to be $30.7 billion lower over four years
Tax receipts are down despite recent bounces in key commodity prices
Sluggish wage growth and and non-mining company profits are dragging down tax receipts
The Government has confirmed it is scrapping the Green Army program, saving $224 million
MYEFO reveals extra staff for crossbenchers and other politicians will cost $35.8 million over four years
The Government is closing the Asset Recycling Fund
A Commonwealth penalty unit will rise from $180 to $210

More broadly, the MYEFO says:

Household consumption is expected to continue to grow at a moderate rate, supported by further employment growth and low interest rates. The household saving rate is expected to continue to decline over the forecast period as consumption growth outpaces the modest growth in disposable incomes.

Dwelling investment is forecast to grow by 4½ per cent in 2016-17 before easing to ½ per cent in 2017-18, as the current pipeline of construction — which is evident in the data on building approvals and commencements — is completed.

Business investment is forecast to fall by 6 per cent in 2016-17 and to be flat in 2017-18. This reflects further large forecast falls for mining investment of 21 per cent in 2016-17 and 12 per cent in 2017-18. The impact of this decline in mining investment on the economy is expected to diminish over the forecast period.

Employment growth is expected to be supported by continued economic growth and subdued wage growth. Employment is forecast to grow at a slightly more moderate pace of 1¼ per cent through the year to the June quarter 2017, reflecting more subdued employment growth over recent months and slower output growth. Following the recent highs, which saw almost 300,000 jobs created in 2015, employment growth has been slower in 2016. Employment growth is expected to increase to 1½ per cent through the year to the June quarter 2018 as economic growth strengthens.

The unemployment rate has declined since its recent peak of 6.3 per cent in July 2015. The unemployment rate is forecast to remain around 5½ per cent in the June quarters of 2017 and 2018. While the unemployment rate has fallen, the underemployment rate has remained elevated. These developments suggest that spare capacity remains in the labour market. The forecast for the participation rate has been revised down since the 2016 PEFO and it is expected to be 64½ per cent in the June quarters of 2017 and 2018.

Consumer price inflation is low reflecting subdued wage growth and other factors such as heightened competition in the retail sector, slower growth in rents and lower import and petrol prices. There is also a subdued inflationary environment globally.
Consumer prices are expected to grow by 1¾ per cent through the year to the June quarter 2017, before picking up to 2 per cent through the year to the June quarter 2018. This is lower than forecast at the 2016 PEFO.

Wage growth has also softened since the 2016 PEFO, in line with weaker consumer price outcomes and other factors such as spare capacity in the labour market. As with consumer prices, wage growth is expected to increase gradually over the forecast period to be 2¼ per cent through the year to the June quarter 2017
and 2½ per cent through the year to the June quarter 2018.

Nominal GDP growth is forecast to be 5¾ per cent in 2016-17 and 3¾ per cent in 2017-18. The forecast for 2016-17 is stronger than the 2016 PEFO forecast, with higher commodity prices providing an offset to weaker wage growth and domestic price
pressures.

More Messing With Super?

Yesterday the Treasury released, late in the day, a consultation on the “Development of the framework for Comprehensive Income Products for Retirement“. The framework appears to open the door to new products, which offer significant opportunities for industry players to invent yet more fees and charges. Just remember the biggest killer on superannuation in the accumulation phase is the level of fees and charges. We fear this exercise will open the door to more income flows to industry participants in the income draw-down phase of retirement, and raise more disclosure questions. This could be exacerbated if distributed via Robo-advice platforms.

Bear in mind also that superannuation savings is a relatively small proportion of total household assets – property being the largest element (thanks to the massive rise in value), according to the ABS.

The paper says the CIPRs framework is not intended to encourage annuities over other products; compel retirees to take up a certain retirement income product; or replace the need for financial advice. We shall see.

The Government agreed to support the development of more efficient retirement income products and to facilitate trustees offering these products to members, in response to the Financial System Inquiry.

These products were labelled by the Murray Inquiry (Financial System Inquiry) as ‘Comprehensive Income Products for Retirement’, or CIPRs; however the Government proposes to use ‘MyRetirement products’ as a more consumer‑friendly and meaningful label.

The MyRetirement framework is intended to increase individuals’ standard of living in retirement, increase the range of retirement income products available, and empower trustees to provide members with an easier transition into retirement. Through this framework, the Government is aiming to increase the efficiency of the superannuation system so it can better achieve the proposed objective of superannuation, which is to provide income in retirement to substitute or supplement the Age Pension.

The Government has released, for public consultation, a discussion paper that explores the key issues in developing the framework for Comprehensive Income Products for Retirement, or MyRetirement products. Views are sought from interested stakeholders, in particular on:

the structure and minimum requirements of these products;

the framework for regulating these products; and

the offering of these products.

The Government is committed to consulting extensively with stakeholders on this framework.

A public consultation process will run from 15 December 2016 to 28 April 2017.

The discussion paper covers a lot of ground, in this complex policy area.

WHAT IS A COMPREHENSIVE INCOME PRODUCT FOR RETIREMENT (CIPR)?

It is envisaged that a CIPR would be a mass-customised, composite retirement income product (for example, combining a pooled product with a product that provides flexibility), which trustees could choose to offer to their members at retirement.

The offering of a CIPR would provide an ‘anchor’ to help guide individuals in their retirement income decision-making. Importantly, an individual would have the freedom to choose whether to take up the CIPR or take their retirement income benefits in another way.

Under the CIPRs framework although different product providers (for example, life insurance companies) could administer the underlying component products, trustees would offer a single income stream to their members.

If a trustee designs a product that: meets the proposed minimum product requirements; is in the best interests of the majority of their members; and offers the product in line with the offering requirements, it is proposed that the trustee will receive a safe harbour. The safe harbour would protect the trustee from a claim on the basis that the CIPR was not in the best interest of an individual member. This is intended to provide legal certainty for trustees in undertaking the CIPR offering.

PROPOSED STRUCTURE AND MINIMUM PRODUCT REQUIREMENTS OF A CIPR

Ensuring all CIPRs meet minimum product requirements is a key way to achieve good outcomes for consumers and to increase comparability between products.

The paper seeks feedback on possible minimum product requirements of this composite product, such as requiring a CIPR to:

deliver a minimum level of income that would generally exceed an equivalent amount invested 1.in an account-based pension drawn down at minimum rates, with recognition of the benefit of a guaranteed level of income where relevant;

deliver a stream of broadly constant real income for life, in expectation (in particular, to manage 2.longevity risk); and

include a component to provide flexibility to access a lump sum (for example, via an 3.account-based pension) and/or leave a bequest.

PROPOSED REGULATION OF CIPRS AND TRUSTEES

The paper also seeks views on how to regulate both trustees and CIPRs, in addition to regulation of the proposed minimum product requirements outlined above.

Trustees could choose to design a single mass-customised CIPR that would be in the best interests of, and offered to, the majority of their members. However, trustees would not be required to design and/or offer a product that is in the best interests of any particular member. In designing the product, trustees would need to consider whether it is in the best interests of members to outsource the administration of underlying component product(s) where the trustee does not have the necessary skill set or scale to administer the underlying component product(s).

As is currently the case, trustees and other product providers such as life insurers could also create new retirement income products that are tailored to particular member segments or individuals, rather than to the majority of the membership. These products could be offered via personal financial advice (including through robo advice) where the adviser is required to consider the individual’s circumstances and needs. Individuals could also purchase these products via direct channels. If these products are certified to meet the proposed minimum product requirements of a CIPR, it may be appropriate to allow a label to be attached indicating that the product ‘meets the minimum product requirements of a CIPR’.

WHAT THE CIPRS FRAMEWORK IS NOT ABOUT

It is important to debunk some myths about the CIPRs framework. The CIPRs framework is not intended to:

encourage annuities over other products;

compel retirees to take up a certain retirement income product; or

replace the need for financial advice.

EXAMPLES

Below are three illustrative examples of possible CIPRs: ‘the cut’, ‘the stack’, and ‘the wrap’.

For ‘The cut’ CIPR, the deferred longevity product component could represent as little as 15 to 20 per cent of an individual’s total superannuation balance and still provide a higher and more stable

income than an account-pension drawn down at minimum rates. The large account-based pension component provides a high degree of ‘flexibility’, thereby efficiently managing the concern about dying early and forfeiting an individual’s superannuation savings.superannuation savings.

‘The stack’ CIPR would provide an individual with the flexibility to access ‘lumpy’ income throughout retirement from an account-based pension component drawn down at minimum rates. Compared to ‘The cut’, a larger proportion of the individual’s total superannuation balance would go towards a longevity product component.

‘The wrap’ CIPR represents a combination of ‘The cut’ and ‘The stack’ CIPRs and in doing so, delivers a balance of their benefits. ‘The wrap’ provides longevity risk management (through the deferred longevity product), higher income than an account-based pension drawn down at minimum rates, and provides a degree of flexibility to access ‘lumpy’ income throughout retirement.

FEES AND CHARGES

Increasing the fees charged on a CIPR, post-commencement
Currently, fees for annuities and defined benefit pensions are essentially ‘locked in’ at the time of purchase due to the guaranteed level of income these products provide. However, for an account-based pension component or a group self-annuitisation component of a CIPR, there is a risk that increases in administration fees would decrease income in retirement. Individuals would not easily be able to change CIPRs in response to an increase in fees.

One option may be to restrict administrative fees from increasing over the life of a CIPR, although there is a risk that if administrative costs increased substantially accumulation members may need to cross-subsidise members in the pension phase.

Another option may be to rely on the income efficiency concept. However, given that administration fees would have a small effect on efficiency as compared with bequests and capital costs, there would need to be a large increase in fees before income efficiency is affected.

An alternative option could be to allow trustees to increase fees so long as there is no differentiation between the fees paid by existing members and new members of the CIPR. This would ensure trustees continue to face competitive fee pressure.

Trustees could lose the right to offer a CIPR to new members if they increased their fees only for existing members.

This paper also seeks alternative ideas on how to protect individuals from significant increases in fees that would erode retirement incomes.

TIMETABLE

In due course, consultation will also be undertaken on exposure draft legislation and regulations to give effect to the CIPRs framework.

It is envisaged that the CIPRs framework would not commence until trustees and other product providers have had sufficient lead-time to develop appropriate products. Given a commencement date for alternative income stream product rules of 1 July 2017, and the Government is currently reviewing the social security means testing of retirement income streams, the CIPRs framework is not expected to commence any earlier than mid-2018.

The Government could, at a later date, and following an appropriate transition period, consider whether certain trustees should be obliged to offer CIPRs to any of their members. Given this, it will be important for the current proposed CIPRs framework to be sufficiently robust to accommodate a potential change in trustee obligations down the track.

Transitioning Regional Economies – Study TOR

The Productivity Commission has been tasked to undertake a study on the transition of regional economies following the resources boom.

Background

The transition from the mining investment boom to broader-based growth is underway. This transition is occurring at the same time as our economy is reconciling the impacts of globalization, technological and environmental change.

By its nature, the geography of our economic transition will not be consistent across the country.

The combination of forces driving the transition of our economy will unavoidably create friction points in specific regional areas and localities across the country, while being the source of considerable growth and prosperity in others.

The different impacts across the geographic regions of the Australian economy occur because of variable factors such as endowments of natural resources and demographics. Some regions may also have limited capacity to respond to changes in economic conditions; for example, due to different policy or institutional settings.

Scope of the research study

The purpose of this study is to examine the regional geography of Australia’s economic transition, since the mining investment boom, to identify those regions and localities that face significant challenges in successfully transitioning to a more sustainable economic base and the factors which will influence their capacity to adapt to changes in economic circumstances.

The study should also draw on analyses of previous transitions that have occurred in the Australian economy and policy responses as a reference and guide to analysing our current transition. The Commission should consult with statistical agencies and other experts.

In undertaking the study, the Commission should:

Identify regions which are likely, from an examination of economic and social data, to make a less successful transition from the resources boom than other parts of the country at a time when our economy is reconciling the impacts of globalization, technological and environmental change.

For each such region, identify the primary factors contributing to this performance. Identify distributional impacts as part of this analysis.

Establish an economic metric, combining a series of indicators to assess the degree of economic dislocation/engagement, transitional friction and local economic sustainability for regions across Australia and rank those regions to identify those most at risk of failing to adjust.

Devise an analytical framework for assessing the scope for economic and social development in regions which share similar economic characteristics, including dependency on interrelationships between regions.

Consider the relevance of geographic labour mobility including Fly-In/Fly-Out, Drive-In/Drive-Out and temporary migrant labour.

Examine the prospects for change to the structure of each region’s economy and factors that may inhibit this or otherwise prevent a broad sharing of opportunity, consistent with the national growth outlook.

Process

The Commission is to undertake an appropriate public consultation process including consultation with Commonwealth, State and Territory governments, as well as local government where appropriate.

The final report should be provided within 12 months of the receipt of these terms of reference, with an initial report provided in April.

New Draft Financial Product Design Obligations Tabled

The Treasury has released its proposals today.

“The measures outlined in this paper are aimed at improving accountability for financial products in our system throughout the whole product lifecycle. Importantly, product issuers will be required to target the distribution of their products to the consumers that are most likely to have their needs addressed by the product. In addition, ASIC will be empowered to take direct action to address problems where they identify the risk of significant consumer detriment”.

The proposals relating to product design and distribution obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans). ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations.

However, the product intervention power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).

So combined they may have significant impact on the industry.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government accepted the FSI’s recommendations to introduce:

design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and

a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).

This paper seeks feedback on the implementation of these measures. In order to assist interested parties in providing feedback, the Paper outlines proposals to illustrate how the measures could operate in practice. This approach recognises that many of the elements of the measures are interrelated and so to provide feedback people need to be able to view the measures holistically.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Wednesday, 15 March 2017 . The responses received will inform the development of draft legislation which will be subject to public consultation.

Outlined below are the proposed positions on the nine key implementation issues for the measures.

Design and distribution obligations

Issue 1: What products will attract the design and distribution obligations?

Summary of proposal: The obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans).

Issue 2: Who will be subject to the obligations?

Summary of proposal: ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations. ‘Issuers’ are the entities responsible for the obligations under the product. Examples of issuers include insurance companies and fund managers.

‘Distributors’ are entities that either arrange for the issue of the product to a consumer or engage in conduct likely to influence a consumer to acquire a product for benefit from the issuer (for example, through advertising or making disclosure documents available). Distributors that provide personal advice will be excluded from the distributor obligations. Examples of a distributor include a credit provider that offers its customers consumer credit insurance or a fund manager that distributes its products using a general advice model.

Issue 3: What will be expected of issuers?

Summary of proposal: Issuers must: (i) identify appropriate target and non-target markets for their products; (ii) select distribution channels that are likely to result in products being marketed to the identified target market; and (iii) review arrangements with reasonable frequency to ensure arrangements continue to be appropriate.

Issue 4: What will be expected of distributors?

Summary of proposal: Distributors must: (i) put in place reasonable controls to ensure products are distributed in accordance with the issuer’s expectations; and (ii) comply with reasonable requests for information from the issuer related to the product review.

Product intervention power

Issue 5: What products will attract the product intervention power?

Summary of proposal: The power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).

Issue 6: What types of interventions will the Australian Securities and Investment Commission (ASIC) be able to make using the power?

Summary of proposal: ASIC can make interventions in relation to the product (or product feature) or the types of consumers that can access the product or the circumstances in which consumers access it. Examples of possible interventions include imposing additional disclosure obligations, mandating warning statements, requiring amendments to advertising documents, restricting or banning the distribution of the product.

Issue 7: When will ASIC be able to make an intervention?

Summary of proposal: In order to use the power, ASIC must identify a risk of significant consumer detriment, undertake appropriate consultation and consider the use of alternative powers. ASIC must determine whether there is a significant consumer detriment by having regard to the potential scale of the detriment in the market, the potential impact on individual consumers and the class of consumers likely to be impacted.

Issue 8: What will be the duration and review arrangements for an ASIC intervention?

Summary of proposal: An intervention by ASIC can last for up to 18 months. During this time, the Government will consider whether the intervention should be permanent. The intervention will lapse after 18 months (if the Government has not made it permanent). ASIC interventions cannot be extended beyond 18 months. ASIC market wide interventions are subject to Parliamentary disallowance. ASIC individual interventions are subject to administrative review.

Issue 9: What oversight will apply to ASIC’s use of the power?

Summary of proposal: Interventions made by ASIC in relation to an individual product or how a specific entity is distributing a product will be subject to administrative and judicial review. Market-wide interventions subject to Parliamentary oversight including a 15-day Parliamentary disallowance period. The Government will review ASIC’s use of the power after it has been in operation for five years.

Review into Dispute Resolution and Complaints Framework – Interim Report

The Treasury released the interim report today, containing a number of recommendations for consideration. Interested parties are invited to lodge written submissions on the issues raised in this Interim Report by 27 January 2017. The expert panel led by Professor Ian Ramsay has recommended a review of the existing financial ombudsmen system but says there is no need for a specialised tribunal to resolve financial disputes.

By way of background, on 5 May 2016, the Minister for Small Business and Assistant Treasurer, the Hon Kelly O’Dwyer MP, announced the establishment of an independent expert panel to lead the review into the financial system’s external dispute resolution and complaints framework.

The expert panel is be chaired by Professor Ian Ramsay, with Mr Alan Kirkland and Ms Julie Abramson as members. A final report is to be provided to the Minister for Revenue and Financial Services by the end of March 2017.

The purpose of this Interim Report is to make draft recommendations for changes to the EDR framework and seek further submissions and information on those draft recommendations prior to providing a final report to government. Submissions received in response to the Issues Paper have informed the draft recommendations.

The Panel has found that the existing industry ombudsman schemes are a cornerstone of the EDR framework and perform well against the Review’s core principles. However, there is scope to improve outcomes for consumers, in particular by addressing problems caused by the existence of two industry ombudsman schemes with overlapping jurisdictions.

The Panel’s draft recommendation is that there should be a single industry ombudsman scheme for financial, credit and investment disputes (other than superannuation disputes) to replace FOS and CIO.SCT has strengths, including its unlimited monetary jurisdiction, but the rigidity of the statutory model makes it more difficult to match the industry ombudsman schemes in terms of flexibility and innovation. This is a significant problem as existing pressures on SCT will continue to grow as the superannuation system matures and an ever increasing number of Australians enter the drawdown (retirement) phase.

The Panel’s draft recommendation is that SCT should transition into an industry ombudsman scheme for superannuation disputes.
The Panel considered the merits of moving immediately to a single industry ombudsman scheme to cover all disputes in the financial system, including superannuation disputes. On balance, the Panel’s view is that it is preferable to initially introduce an industry ombudsman scheme focused exclusively on superannuation disputes, given the significance of the change relative to the status quo. Once both of the new ombudsman schemes are fully operational and have garnered strong consumer and industry support, consideration should be given to further integrating the schemes to create a single scheme covering all disputes in the financial system.

The Panel also made other draft recommendations to address gaps in the EDR framework. These include:

that the monetary limits and compensation caps for the new scheme for financial, credit and investment disputes be increased (relative to the existing limits and caps imposed by FOS and CIO), including for small business disputes; and

that there be enhanced accountability and oversight over the two new schemes, including through strengthening the Australian Securities and Investments Commission’s powers.

The Panel’s view is that these draft recommendations represent an integrated package of reforms to address shortcomings in the current EDR framework and ensure that the framework is well-placed to address both current problems and withstand future challenges.

In its Issues Paper, the Panel sought views on an additional statutory body for dispute resolution. The majority of submissions did not support this proposal. Having considered the views expressed in submissions and for reasons outlined in the body of its Interim Report, the Panel is of the view that an additional statutory dispute resolution body is not required.