There is much to like about the Murray Report. It is more succinct than the Wallis report and, aside from some abstruse concepts, it is mostly a straightforward read. It outlines the three touchstones of a well-functioning financial system: resilience, efficiency and fairness.
Many recommendations are broad exhortations for excellence and will allow considerable latitude in interpretation and adoption. But some are surprisingly specific.
The report does not articulate a series of implicit assumptions and decisions accepted by the committee. For example, the interim report made plain that the committee considered that competition is generally satisfactory among the major banks, whereas a number of commentators would disagree.
Similarly, although the report is greatly concerned under the resilience touchstone about banking moral hazard, there is little comment or quantification of the enormous invisible and uncosted Commonwealth guarantee of the banking system. Although publicly unrecognised, this guarantee is very real and it is given by taxpayers.
This implicit guarantee was the basis for the Rudd government’s provision of Australia’s sovereign guarantee for the foreign borrowings by Australian banks during the global financial crisis; for the provision of extremely generous government depositor protection to ensure the retention of bank deposits, and for an atmosphere in which the major banks were permitted to strengthen their oligopoly by acquiring smaller rivals.
It is instructive to consider the preliminary commentary provided by the inquiry chairman, David Murray, in his first major public address on the report to CEDA.
He said his inquiry had formed a different view from Wallis on external shocks, and suggested that Wallis had ruled out the possibility that the government might be required to backstop banks of a crisis.
But that possibility was fully accepted by Wallis. Both the Wallis Committee and the Wallis report spent considerable time on core systemic issues, including the impact of contagion on the Australian financial system from major external shocks.
Wallis fully recognised that the most potent source of systemic risk is external or internal financial contagion. Chapter 9 of Wallis discussed potential systemic instability arising from a variety of sources including the world economy.
Nonetheless, it is true that the Wallis Committee was not scarred by such a rapid, frightening and long-lasting event as the global financial crisis. It is also true that the main thrust of Wallis was domestic regulation, but the Wallis report did adopt the criticality of systemic stability as a foundation stone.
Murray is on much firmer ground in his proposal that practical steps must be taken to reduce the moral hazard arising from the government’s invisible banking guarantee.
The report is both prescriptive and specific in its proposal that the capital ratios of Australian banks should be “unquestionably strong”. This vague ideal is given specificity in the proposal that they should be ranked in the top 25 per cent of global banks.
Since Australia’s major banks are currently between the global median and the 75th percentile, Murray says they are not “unquestionably strong” and that they should be required to increase their capital ratios to be in the top 25 per cent of their global peers.
He also recommends the development of a far more transparent reporting system of comparative capital ratios.
Murray makes the interesting observation that, although Australia escaped the worst of the GFC, the circumstances that isolated Australia from the crisis are unlikely to recur.
Australia then had very high terms of trade, a small net government debt, a budget surplus, a triple-A rating, a mining investment boom, and a major trading partner (China) growing in real terms at an annual rate of 10 per cent. Accordingly, Australia was able to direct immense resources to stimulus programs.
Additionally, the Murray report’s recommendations on superannuation are very sensible.
The first is to seek broad political agreement for and to enshrine in legislation the objectives of the superannuation system, and to report publicly on how policy proposals are consistent with these objectives over the long term.
During accumulation, the report proposes 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 the efficiency of the superannuation system.
In the retirement phase, the report would require superannuation trustees to preselect a comprehensive income product for members’ retirement.
It recommends that all employees should be permitted to choose their own superannuation fund, and recommends that a majority of independent directors (including an independent chair) on the board of corporate trustee public offer superannuation funds.
Two major failures identified by the report in the super system are high fees in the accumulation stage and the absence of strong consumer-driven competition.
It elaborates on the prolems for consumers. The report says superannuation firms are not serious about consumer fairness; that there is an excessive reliance on disclosure and financial literacy is not achieving appropriate consumer outcomes; and a more pro-active regulator must reduce the risk of poor quality or unsuitable products
The report’s analysis is that its superannuation recommendations could increase retirement incomes for an average male wage earner by around 25-40 per cent (excluding the age pension).
The report considers that the Wallis regulatory architecture remains reasonably effective. But it proposes a Financial Regulation Accountability Board to subject financial regulators to regular systemic scrutiny and a culture of continuous improvement.
To ensure ASIC has appropriate resources, the report recommends an industry funding model. Wallis made the same recommendation, but it was not adopted. The report would also give ASIC a proactive product intervention power where there is a risk of significant consumer detriment.
It would also remove regulatory impediments to innovative product disclosure and consumer communication.
Along with most of the community, it recommends raising the competence of financial advisers and the introduction of an enhanced register of advisers.
There are also a number of recommendations about competition, including giving ASIC a competition mandate; three-yearly external reviews of competition in the financial sector, and regulation that is technologically neutral to facilitate full online service delivery.
The report hopes that additional competition will result from rival lenders and new techniques such as crowdfunding and peer-to-peer lending.
There’s no doubt the Murray Report is an impressive piece of work. It sets out a variety of recommendations that, if interpreted in the spirit of the report itself and adopted, will greatly enhance the financial system.
At the same time, it seems that the banks have little to fear from the report, especially as their share prices rose after its release. As with Wallis, the broad and principled recommendations may never be adopted.
Following consultation and lobbying, it will be interesting to see how far the recommendations of principle are ultimately adopted and applied by the government either as regulator policies or in legislation.
Bill Beerworth was a member of the Wallis committee. He is Managing Director of Beerworth Partners, a corporate advisory firm, and has served on numerous public and private companies and