The Murray inquiry's mixed messages

The David Murray-led panel seems to have a conflicted stance on banking competition, while its views on consumer protection are a backwards step for the industry.

The Financial System Inquiry's interim report provides a conspectus of the areas of the financial system in which the committee will make major recommendations in its final report in November, but it does not provide much insight about the specific recommendations the committee might make in that final report.

In comparing the approaches of the Wallis and the Murray committees, it may be instructive to consider the composition and background of the two committees and their terms of reference.

The Wallis committee was chaired by a prominent businessman who had driven Amcor to become a global company. One member had a background in funds management; two were highly regarded professors in market economics; and one was an investment banker and solicitor.

None were bankers or insurers and only one had particular expertise in superannuation and funds management.

All understood the absolute necessity for stability in the banking and financial systems, but all wanted to understand why the major banks were so profitable, and to make the system more competitive in order to provide cheaper finance and to encourage more competition.

The chairman of the current FSI is a former eminent chief executive of CBA; one member is a former chief executive of AMP, one of the largest insurance and wealth management companies in Australia; another has also been on the boards of large superannuation funds; one is an eminent professor; and another a highly successful and innovative businessman.

Some cynical commentators have suggested that the composition and backgrounds of the committee mean that the major banks and wealth managers have little to fear from harsh recommendations.

The Murray committee’s terms of reference are unlimited except that it may not make recommendations on the objectives and procedures of the RBA in its conduct of monetary policy.

The Wallis committee was far more constrained and was adjured not to make recommendations in relation to:

·         the objectives or procedures of the RBA in its conduct of monetary policy

·         retirement incomes policies (including superannuation)

·         the regulation of companies through corporations law; and

·         policies for taxation of financial arrangements, products or institutions

The limits on recommendations in superannuation and taxation were particular constraints for the Wallis committee.

In the four months to the FSI’s final report, much newsprint will be expended on what its recommendations might be.

Since the interim report is suitably non-disclosive, some insights might be found in the address by chairman David Murray AO to the National Press Club, titled 'Sustaining Confidence in the Australian Financial System'. Murray said this was central to the work of the FSI.

That was also a fundamental premise of the Wallis committee, which carefully considered the potential impact of contagion, including from foreign sources. Nonetheless, an event such as the GFC was then a hypothetical circumstance, notwithstanding the 1987 stockmarket crash and the Asian Financial Crisis.

I politely disagree with the chairman that the Wallis committee assumed that threats to financial stability would be primarily domestic, although it is true that the GFC was closer to the Great Depression than any of us have actually experienced.

The chairman suggested three areas for particular comment and it is worth analysing them:

1. Soundness of the Financial System

He said that taxpayers must accept the need to insure against a catastrophic collapse of the financial system. This means that the major institutions (including the banks and the insurance and superannuation companies) will continue to be provided an implicit, unstated and extraordinarily valuable guarantee against failure.  

The chairman suggested that the moral hazard arising from this huge but invisible guarantee can be reduced.

To date, except by imposing higher capital requirements, this elusive goal has not been achieved by regulators in the US or the UK, so it will be interesting to discover the committee’s recommendations, especially as Murray has said that it is better to address root causes than symptoms.

The root cause is, of course, the simple fact that the guarantee exists even though very few in Australia understand its nature, its extent or the boon it offers the major banks and insurance companies in Australia.

He asks rhetorically whether post-financial crisis prudential regulation in Australia has been excessive.

The Wallis FSI led to the institution of APRA, which sets prudential standards in Australia. Its creation was not received sympathetically by either the RBA or the major banks.

A core purpose in its establishment was to ensure that the small banks and other deposit-taking institutions were more equitably treated by Australian regulators.

The Murray FSI considers that the banking market is still competitive, even though the major banks have acquired most of the small banks operating at the time of the Wallis FSI.

Recent reports indicate that the major Australian banks are the most profitable in the world and that fees in the large superannuation funds are higher than in other parts of the developed world.

It seems that competition has not reduced major bank profitability nor the fees of the major superannuation funds.

2. Superannuation

The chairman acknowledged that operating costs and fees are high by international standards and also that, in comparison to international funds, Australian superannuation funds are heavily weighted to riskier assets, mostly equities.

It seems that the FSI may make recommendations in areas not examined by the Wallis committee, including some form of compulsion to purchase superannuation longevity protection.

3. Consumer Protection

Some of the most interesting comments by the chairman relate to consumer protection.

He correctly asserts that the Wallis FSI endorsed full disclosure as the best protection in the area of prospectuses and other financial offers.

He suggests that disclosure may be insufficient to deal with the knowledge asymmetry between the seller and the buyer. He says that the disclosure approach has failed adequately to safeguard consumer interests, while imposing significant costs on the industry.

The suggestion may be that the committee may endorse a greater role for bureaucratic paternalism, an approach certainly regarded as outmoded by the Wallis FSI.

He also refers to some of the deficiencies identified within ASIC and a number of ways in which the regulatory architecture might be altered. Many other observers consider that ASIC has become far too large and unfocused, so it does seem that architectural change may be in order. 

Bill Beerworth was a member of the Wallis FSI Committee that reported in 1997.  He is managing director of Beerworth Partners, a corporate advisory firm, and has served on numerous public and private companies and committees. 

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