The conventional wisdom in politics is that you don’t appoint a commission of inquiry unless you know the answer first. Well, that definitely hasn’t happened with David Murray’s Financial System Inquiry.
It is an absolute shocker for the government and the banks it’s been trying to please. If accepted it would undermine both of their two pillars of profitability: property lending and superannuation.
Presumably everyone felt that appointing an ex-banker to run it would work out nicely, but David Murray and the FSI panel have gone rogue.
The then shadow treasurer, Joe Hockey, announced the inquiry at a speech in October 2010, during a period of more than the usually frenzied bank bashing, which focused on the idea that they were colluding.
Wayne Swan was getting solid traction with his attacks on the banks at that moment, and Hockey needed to say something. He came up with a nine-point plan, the last of which was: “Let's wrap up all of this work into a full review of the financial system-a Son of Wallis, or Granddaughter of Campbell, whatever you will.”
Whatever you will. Four years later, after the Abbott Government has spent 12 months battling to roll back the financial advice reforms at the behest of the banks, the granddaughter of Campbell has pulled the rug from under all of them.
Indeed, David Murray, and panel members Craig Dunn, former CEO of AMP, and Carolyn Hewson, former director of Schroders and BT Investment management, seem to have had a late life conversion, realising that the system they’ve been part of has failed.
Consumers, it says, have not been getting fair treatment and the current regulatory framework “is not sufficient”.
This is directly contrary to what the government, and the banks and retail super funds such as AMP, have been saying.
Murray then goes on: “the most significant problems related to shortcomings in disclosure and financial advice, and over-reliance on financial literacy. The changes introduced under the Future of Financial Advice (FOFA) reforms are likely to address some of these shortcomings…”
Eureka Report and Business Spectator have been complaining for more than 10 years that disclosure and “financial literacy” -- the foundations of financial regulation in Australia -- are not enough, and that this approach has resulted in huge, complex reports that are never read. This has now been fully supported by Murray.
The only solution has always been tighter regulation to improve both the behaviour and competence of financial advisers.
The Labor government’s FoFA reforms were an attempt to address this, and the Coalition’s efforts to roll them back have aimed, fundamentally, at going back to a reliance on disclosure only -- removing “red tape”, as they put it.
The Murray Report supports FoFA but wants to go even further, recommending a large number of extra regulations including greater powers for ASIC to intervene on product design and distribution, moves to better align the interests of firms and consumers, increase the competency of advisers and to allow the use of new online media for “innovative disclosure”.
In addition the report suggests that the superannuation tax subsidies for high income earners, on which much of the profitability of super funds and wealth managers is based, are unjustified and should be wound back.
And finally the report says superannuation fees in Australia are too high and it wants them reduced -- directly contradicting the industry’s assertions.
If the Murray recommendations were to be adopted, it would represent another FoFA, tougher than the one introduced by the ALP.
On top of that, the Murray panel proposes a series of reforms to banking that would do the same thing to lending.
Essentially, it says the banking system is too leveraged and therefore too risky, too subsidised by taxpayers and too exposed to property.
Murray wants the banks to raise more capital -- about $20 billion more -- and has directly dismissed the industry’s argument that this would lead to a big increase in costs for consumers.
It says: “the tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment.”
And it wants to level the playing field between the big banks and the smaller institutions, including credit unions and building societies.
Overall David Murray and the panel have put consumers and competition front and centre in their proposals for big changes to the financial system.
The banks will fight hard against Murray, but the momentum for change is beginning to look unstoppable and the banks and the government are looking isolated.