Financial System Inquiry: The government response

In December 2013 the federal government commissioned a wide-ranging Financial System Inquiry to examine how the financial system could be positioned to best meet Australia’s evolving needs. In December 2014 the Final Report was released. The federal government has finally responded to the report, accepting all but one of the 44 recommendations made.

The recommendations that have been accepted are as follows:

Capital levels: Set capital standards such that Australian authorised deposit-taking institution capital ratios are unquestionably strong.

Narrow mortgage risk weight differences: Raise the average internal ratings-based (IRB) mortgage risk weight to narrow the difference between average mortgage risk weights for authorised deposit-taking institutions using IRB risk-weight models and those using standardised risk weights.

Loss absorbing and recapitalisation capacity: Implement a framework for minimum loss absorbing and recapitalisation capacity in line with emerging international practice, sufficient to facilitate the orderly resolution of Australian authorised deposit-taking institutions and minimise taxpayer support.

Transparent reporting: Develop a reporting template for Australian authorised deposit-taking institution capital ratios that is transparent against the minimum Basel capital framework.

Crisis management toolkit: Complete the existing processes for strengthening crisis management powers that have been on hold pending the outcome of the Inquiry.

Financial Claims Scheme: Maintain the ex post funding structure of the Financial Claims Scheme for authorised deposit-taking institutions.

Leverage ratio: Introduce a leverage ratio that acts as a backstop to authorised deposit-taking institutions’ risk-weighted capital positions.

Objectives of the superannuation system: Seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objectives over the long term.

Improving efficiency during accumulation: Introduce a formal competitive process to allocate new default fund members to MySuper products, unless a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency in the superannuation system.

The retirement phase of superannuation: Require superannuation trustees to pre-select a comprehensive income product for members’ retirement. The product would commence on the member’s instruction, or the member may choose to take their benefits in another way. Impediments to product development should be removed.

Choice of fund: Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid.

Governance of superannuation funds: Mandate a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair; align the director penalty regime with managed investment schemes; and strengthen the conflict of interest requirements.

Collaboration to enable innovation: Establish a permanent public–private sector collaborative committee, the ‘Innovation Collaboration’, to facilitate financial system innovation and enable timely and coordinated policy and regulatory responses.

Digital identity: Develop a national strategy for a federated-style model of trusted digital identities.

Clearer graduated payments regulation: Enhance graduation of retail payments regulation by clarifying thresholds for regulation by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

Strengthen consumer protection by mandating the ePayments Code:  Introduce a separate prudential regime with two tiers for purchased payment facilities.

Interchange fees and customer surcharging: Improve interchange fee regulation by clarifying thresholds for when they apply, broadening the range of fees and payments they apply to, and lowering interchange fees.

Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging.

Crowdfunding: Graduate fundraising regulation to facilitate crowdfunding for both debt and equity and, over time, other forms of financing.

Data access and use: Review the costs and benefits of increasing access to and improving the use of data, taking into account community concerns about appropriate privacy protections.

Comprehensive credit reporting: Support industry efforts to expand credit data sharing under the new voluntary comprehensive credit reporting regime. If, over time, participation is inadequate, Government should consider legislating mandatory participation.

Strengthen product issuer and distributor accountability: Introduce a targeted and principles-based product design and distribution obligation.

Introduce product intervention power: Introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment.

Facilitate innovative disclosure: Remove regulatory impediments to innovative product disclosure and communication with consumers, and improve the way risk and fees are communicated to consumers.

Align the interests of financial firms and consumers: Better align the interests of financial firms with those of consumers by raising industry standards, enhancing the power to ban individuals from management and ensuring remuneration structures in life insurance and stockbroking do not affect the quality of financial advice.

Raise the competency of advisers: Raise the competency of financial advice providers and introduce an enhanced register of advisers.

Improve guidance and disclosure in general insurance: Improve guidance (including tools and calculators) and disclosure for general insurance, especially in relation to home insurance.

Regulator accountability: Create a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates.

Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.

Execution of mandate: Provide regulators with more stable funding by adopting a three-year funding model based on periodic funding reviews, increase their capacity to pay competitive remuneration, boost flexibility in respect of staffing and funding, and require them to undertake periodic capability reviews.

Strengthening the Australian Securities and Investments Commission’s funding and powers: Introduce an industry funding model for the Australian Securities and Investments Commission (ASIC) and provide ASIC with stronger regulatory tools.

Strengthening the focus on competition in the financial system: Review the state of competition in the sector every three years, improve reporting of how regulators balance competition against their core objectives, identify barriers to cross-border provision of financial services and include consideration of competition in the Australian Securities and Investments Commission’s mandate.

Compliance costs and policy processes: Increase the time available for industry to implement complex regulatory change.

Conduct post-implementation reviews of major regulatory changes more frequently.

Impact investment: Explore ways to facilitate development of the impact investment market and encourage innovation in funding social service delivery.

Provide guidance to superannuation trustees on the appropriateness of impact investment.

Support law reform to classify a private ancillary fund as a ‘sophisticated’ or ‘professional’ investor, where the founder of the fund meets those definitions.

Retail corporate bond market: Reduce disclosure requirements for large listed corporates issuing ‘simple’ bonds and encourage industry to develop standard terms for ‘simple’ bonds.

Unfair contract term provisions: Support Government’s process to extend unfair contract term protections to small businesses.

Encourage industry to develop standards on the use of non-monetary default covenants.

Finance companies: Clearly differentiate the investment products that finance companies and similar entities offer retail consumers from authorised deposit-taking institution deposits.

Corporate administration and bankruptcy: Consult on possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty.

Superannuation member engagement: Publish retirement income projections on member statements from defined contribution superannuation schemes using Australian Securities and Investments Commission (ASIC) regulatory guidance.

Facilitate access to consolidated superannuation information from the Australian Taxation Office to use with ASIC’s and superannuation funds’ retirement income projection calculators.

Cyber security: Update the 2009 Cyber Security Strategy to reflect changes in the threat environment, improve cohesion in policy implementation, and progress public–private sector and cross-industry collaboration.

Establish a formal framework for cyber security information sharing and response to cyber threats.

Technology neutrality: Identify, in consultation with the financial sector, and amend priority areas of regulation to be technology neutral.

Embed consideration of the principle of technology neutrality into development processes for future regulation.

Ensure regulation allows individuals to select alternative methods to access services to maintain fair treatment for all consumer segments.

Provision of financial advice and mortgage broking: Rename ‘general advice’ and require advisers and mortgage brokers to disclose ownership structures.

Unclaimed monies: Define bank accounts and life insurance policies as unclaimed monies only if they are inactive for seven years.

Managed investment scheme regulation: Support Government’s review of the Corporations and Markets Advisory Committee’s recommendations on managed investment schemes, giving priority to matters relating to:

• Consumer detriment, including illiquid schemes and freezing of funds.
• Regulatory architecture impeding cross-border transactions and mutual recognition arrangements.

Legacy products: Introduce a mechanism to facilitate the rationalisation of legacy products in the life insurance and managed investments sectors.

Corporations Act 2001 ownership restrictions: Remove market ownership restrictions from the Corporations Act 2001 once the current reforms to cross-border regulation of financial market infrastructure are complete.

One FSI recommendation not accepted

The one FSI recommendation that was not accepted was as follows:

Direct borrowing by superannuation funds: Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.

“The financial system affects all Australians. It plays a vital role across the Australian economy, contributing to productivity and growth,” said the Prime Minister when announcing the acceptance of the recommendations.

“The biggest decisions Australians make in life – buying a home, providing for our retirement, or starting a business – are all supported by our financial system.

“The Government’s response improves our financial system and builds on existing policy. The Government’s financial system agenda will be implemented in stages over the coming years, helping Australia respond to the challenges and opportunities that the future brings.”