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The Interim Report released by the Financial System Inquiry (Inquiry) on 15 July 2014 is a weighty tome (460 pages) published under the authority of the chairman of the Inquiry, former Commonwealth Bank of Australia (CBA) CEO David Murray (the ‘Report’). Due to the length of the Report, this article will not go into extensive detail into its themes and content but instead will provide a summary of its purpose and main observations. This article gives a more detailed report about the key observations of the Report.
Will the Report have a similar significant impact on the financial services system?
At this stage, the answer is likely to be no. This is because in producing the Report, the Inquiry discusses the financial system from nine different perspectives and makes 28 observations about how the system is working. Actual recommendations will be made in a final report due in November. Breadth and procedural issues aside, the overall theme of the Report is that there is no real apparent push for a significant shift in policy or regulation.
If the banks were looking to one of their own, David Murray, to instigate a radical reform of the ‘four pillars policy’ via the Inquiry, they will be left disappointed by the views of the Inquiry so far. Unsurprisingly, the Inquiry does not see any urgent need for an overhaul of the banking sector or the introduction of changes that would allow a merger between the big four banks. The Report states that the banking sector is ‘competitive’, although concentrated, and that any reform to allow the big banks to merge would reduce this (healthy) competition.
The Inquiry does refer to post-GFC domination of the large banks but does not suggest changes are needed to allow smaller lenders to re-enter the market. One area which the Inquiry observes does require feedback on is the need for the regulation of credit card and debit card payment schemes for competition to lead to more efficient outcomes.
The Inquiry recognised the work already done by the Senate Economics Committee in its report on ASIC’s performance (ASIC Report) before the Report was released. The Inquiry does not take a position in respect of any specific changes to ASIC’s enforcement powers, instead listing a number of options. Some of the proposals regarding the ‘regulatory architecture’ in the industry include:
- moving ASIC and Australian Prudential Regulatory Authority (APRA) to a more autonomous budget and funding process;
- conducting periodic, legislated, independent reviews of the performance and capability of regulators;
- improve the oversight processes of regulators; and
- enhance the role of ASIC and APRA’s Statements of Expectations and Statements of Intent.
The Report identifies scope for greater efficiencies in the superannuation system. The Report notes that competition in the superannuation sector has led to:
- feature rich, but more costly, superannuation products; and
- high demand for liquidity from superannuation funds, which may be reducing after-fee returns to members.
The Inquiry is seeking views on: replacing the mandatory inter-fund portability timeframe of three days (the time period within which super funds must process a transfer request) with a longer time period, a staged transfer of member balances, or moving from the current prescription-based approach for portability of superannuation benefits to a principle-based approach. The Inquiry also seeks inputs on:
- self managed super funds (SMSFs) and whether they should be subject to limitations on their establishment (due to a link between issues related to the quality of financial advice and the growth in SMSFs);
- reducing barriers to entry for superannuation funds to invest in various markets including infrastructure and corporate bonds; and
- ways to adjust the retirement income system to better assist individuals to meet their income and risk management needs (especially at the drawdown phase).
The Inquiry looked at the impact of technology on the financial services sector. The Inquiry seeks input on the establishment of a central mechanism or body for monitoring and advising the Government on technology and innovation.
The Report also observes that the rise of e-commerce and widespread internet connectivity exposes financial institutions to increased cyber-crime. The Inquiry seeks feedback on:
- reviewing and updating the Government’s 2009 Cyber Security Strategy to reflect changes in the threat environment, improve cohesion in policy implementation and progress public-private sector collaboration; and
- developing a national strategy for promoting trusted digital identities, in consultation with financial institutions and other shareholders.
The Report notes the security and privacy risks associated with the increased use and amount of customer data capable of being stored by financial institutions. Although ‘information analytics’ conducted by banks on such data has the capacity to benefit customers with the development of better products, the Inquiry is concerned that the benefits might be undermined by mis-handling of the data. The Inquiry seeks views on:
- conducting a review and assessment of the new privacy requirements (under the Privacy Act 1998 (Cth) (Privacy Act)) in 2016, two years after their implementation, to consider whether their impacts appropriately balance financial system efficiency and privacy protections;
- reviewing record-keeping and privacy requirements that impact on cross-border information flows and explore options for improving cross-border mutual regulatory recognition; and
- implementing mandatory data breach notifications to affected individuals and the relevant Australian Government agency under the Privacy Act.
This is not the Final Report and as such, its content is only useful as a guide as to what reforms the Inquiry might actually propose to the Government in November. The Inquiry has four months until it produces the Final Report; perhaps by then they will have received the strong feedback they are seeking, enabling them to make forceful recommendations.
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