Following the Murray Inquiry into the Australia's financial system in 2014, the government (finally) released its responses to the recommendations put forth by David Murray and his team this morning.
Here are 10 key takeaways from the government's announcement.
- Bank capital levels must be 'unquestionably strong' – That'll likely mean the major banks, such as Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA), will be forced have CET1 ratios (capital buffers against market crashes) in the top quartile of international banks.
- Narrower risk weightings for all banks – Currently, the 'Big Five' banks have an advantage over regional banks like Bank of Queensland Limited (ASX: BOQ) and Bendigo & Adelaide Bank Ltd (ASX: BEN) because they use different risk models for their loans. Basically, current rules allow major banks to lend more because they use their own models to gauge risk. We discussed this problem in detail here.
- Direct borrowing is OK! – The government did not agree with the inquiry's recommendation to remove direct borrowing against superannuation funds for risky assets like an investment property. Remember, the government must win votes. Fortunately, the government has asked regulators to monitor the situation closely and report back in three years.
- All hail, the superannuation system – The government has agreed to "enshrine" the objective of the superannuation system. Resolution of the explicit objective of superannuation is important because in recent times various parties have lodged arguments for or against changes, stating that the proposals go against the primary objective of superannuation. Treasury said setting the objective, "will be a valuable yardstick against which to measure competing superannuation proposals, providing certainty that measures that do not accord with the objective will be held up to scrutiny"
- Open up default superannuation accounts – The government agrees, opening up default superannuation accounts to more funds will improve efficiency. The Productivity Commission will explore ways for the superannuation of ordinary Aussies, who perhaps don't care for their accounts, to be put up for grabs in a competitive process. This'll force big fund managers to put their best foot forward for – arguably – the accounts of the most financially vulnerable Australians.
- Welcome to the land of free choice of Super – This is one problem that has really annoyed me in years gone by. I've seen financial advisors make tens of thousands of dollars from one meeting if their client was an employer, who controlled their company's superannuation accounts and agreements. The advisor would indirectly make a commission for recommending a particular superannuation fund for his/her client's entire employee base. Under current rules, enterprise bargaining agreements and workplace determinations mean your employer's super fund of choice is the one into which your superannuation contributions will be paid. However, the government has finally made a decision to allow employees the CHOICE to choose their own fund to which their Superannuation Guarantee will be paid. How on earth has it taken this long!
- Superannuation funds will become more accountable – The government agrees with the Murray inquiry's recommendation to improve the independence of directors of super funds. From 16 September 2015, one third of directors are required to be independent. The government also supported criminal sanctions and penalties for directors who fail in their duty to act in the best interests of members.
- Time to wave goodbye to excessive merchant fees – The government will move to ban unfair charges on payments by credit card. The ACCC has been charged to ensure consumers are not overcharged for credit card use. Shops, cab companies, banks and many other merchants will be affected.
- Strengthen ASIC with powers and funding – ASIC is often criticised for its inability to successfully prosecute dodgy firms and financial advisors. The government has already released a consultation paper on an industry funding model for the regulator. APRA, the banking regulator, has proven to be very successful using an industry-funded model. The government has also agreed to give ASIC more power to broaden the assessment when determining if a person should hold a financial services license. ASIC's ability to impose conditions on firms relating to serious misconduct will also be increased.
- Raise the competency of advisors – Along with the banking system changes, this is one I'm passionate about because it's proven to be a significant flaw in our system. The government has agreed to increase the competency of financial advisors by requiring us to hold a university degree, meet and agree to professional and ethical standards, pass an exam and undertake continuous professional development – it's about time.
Foolish takeaway
A periodic review of our financial system is vital to ensure its competitiveness and fairness for all consumers' benefit. It remains to be seen what will come of the proposals, but for the most part, it appears it'll be a positive move for the industry.
