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Murray inquiry focuses on size of big banks, super fees and advisers Murray inquiry focuses on size of big banks, super fees and advisers
(35 minutes later)
Concerns that Australia's largest banks are "too big to fail", superannuation fees are too high and the competence of financial advisers varies widely are among the findings of the government’s financial system inquiry.Concerns that Australia's largest banks are "too big to fail", superannuation fees are too high and the competence of financial advisers varies widely are among the findings of the government’s financial system inquiry.
The interim report also said Labor’s Future of Financial Advice (Fofa) reforms in 2012 had "provided greater clarity over the expectations and requirements for financial advisers" and highlighted the Coalition's subsequent changes to elements of those arrangements.The interim report also said Labor’s Future of Financial Advice (Fofa) reforms in 2012 had "provided greater clarity over the expectations and requirements for financial advisers" and highlighted the Coalition's subsequent changes to elements of those arrangements.
"The inquiry considers the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice," the report said."The inquiry considers the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice," the report said.
The chairman of the inquiry, David Murray, said Australia had come out of the financial crisis in a "relatively sound" way but must manage future risks to improve confidence "in light of some new realities in the world".The chairman of the inquiry, David Murray, said Australia had come out of the financial crisis in a "relatively sound" way but must manage future risks to improve confidence "in light of some new realities in the world".
"If we had been asked to review Australia’s financial system in 2007, before the financial crisis, we would have been likely to come to very different views about the challenges and vulnerabilities we face," he told the National Press Club in Canberra on Tuesday."If we had been asked to review Australia’s financial system in 2007, before the financial crisis, we would have been likely to come to very different views about the challenges and vulnerabilities we face," he told the National Press Club in Canberra on Tuesday.
Murray said the crisis highlighted the long-term economic damage caused by banking crises, the importance of managing vulnerabilities associated with Australia's use of foreign investment flows, the difficulties of crisis management and the importance of the government's balance sheet "in backstopping the system".Murray said the crisis highlighted the long-term economic damage caused by banking crises, the importance of managing vulnerabilities associated with Australia's use of foreign investment flows, the difficulties of crisis management and the importance of the government's balance sheet "in backstopping the system".
The interim report said the banking sector was competitive but large banks derived funding advantages from their size and sophisticated risk management systems.The interim report said the banking sector was competitive but large banks derived funding advantages from their size and sophisticated risk management systems.
"However, some submissions argue that large banks also benefit from a funding advantage because they are perceived as being too big to fail," it said. "The inquiry considers the best way to deal with any potential competitive advantage arising from these perceptions is to directly address the systemic risks posed by large banks.""However, some submissions argue that large banks also benefit from a funding advantage because they are perceived as being too big to fail," it said. "The inquiry considers the best way to deal with any potential competitive advantage arising from these perceptions is to directly address the systemic risks posed by large banks."
Murray, who headed the Commonwealth Bank between 1992 and 2005, said the inquiry team wanted to hear stakeholder views about the pros and cons of higher capital ratios to reduce taxpayer exposure to failure.Murray, who headed the Commonwealth Bank between 1992 and 2005, said the inquiry team wanted to hear stakeholder views about the pros and cons of higher capital ratios to reduce taxpayer exposure to failure.
The interim report made no recommendations but outlined 28 "observations" about how the system was working. These will provide the basis for consultation before the final report is handed to the government in November.The interim report made no recommendations but outlined 28 "observations" about how the system was working. These will provide the basis for consultation before the final report is handed to the government in November.
The report said there was little evidence of strong fee-based competition in the superannuation sector, and operating costs and fees appeared high by international standards.The report said there was little evidence of strong fee-based competition in the superannuation sector, and operating costs and fees appeared high by international standards.
It suggested a review of the effectiveness of the MySuper reforms, while warning that superannuation policy settings lacked stability, adding to costs and reducing long-term compliance and trust.It suggested a review of the effectiveness of the MySuper reforms, while warning that superannuation policy settings lacked stability, adding to costs and reducing long-term compliance and trust.
The report also raised concern over legislation passed in 2007 that expanded the ability of superannuation funds to borrow, arguing that the growth in this practice over time could contribute to systemic risks to the financial system.
The proportion of self-managed superannuation funds with borrowings rose from 1.1% in 2008 to 3.7% in 2012, when total borrowings were $6.2bn. The report suggested the option of restoring the general prohibition on direct leverage of superannuation funds on a prospective basis.
The report said the competence of financial advisers varied widely. Some options for raising standards included strengthening education and training requirements, introducing a national exam for advisers and introducing an improved national public register of advisers.The report said the competence of financial advisers varied widely. Some options for raising standards included strengthening education and training requirements, introducing a national exam for advisers and introducing an improved national public register of advisers.
It said the former government's Fofa reforms had introduced a "best interests" duty, a requirement to put the interests of the client ahead of those of the adviser, and a ban on conflicted remuneration for both personal and general advice to produce a better alignment of the interests of advisers and consumers.It said the former government's Fofa reforms had introduced a "best interests" duty, a requirement to put the interests of the client ahead of those of the adviser, and a ban on conflicted remuneration for both personal and general advice to produce a better alignment of the interests of advisers and consumers.
The government's amendments would prohibit the payment of upfront and trailing commissions for general advice, but would allow incentive payments for general advice in certain situations.The government's amendments would prohibit the payment of upfront and trailing commissions for general advice, but would allow incentive payments for general advice in certain situations.
The report stressed the need to avoid conflicted remuneration structures in financial advice.The report stressed the need to avoid conflicted remuneration structures in financial advice.
"Conflicts of interest have been a longstanding issue in financial advice," it said."Conflicts of interest have been a longstanding issue in financial advice," it said.
"There has been a tension between providing financial advice for the benefit of consumers and the product distribution role played by advisers. Shadow shopping studies carried out by Asic [Australian Securities and Investments Commission] found a strong relationship between advisers giving non-compliant advice and conflicts of interest in business models."There has been a tension between providing financial advice for the benefit of consumers and the product distribution role played by advisers. Shadow shopping studies carried out by Asic [Australian Securities and Investments Commission] found a strong relationship between advisers giving non-compliant advice and conflicts of interest in business models.
"Asic’s submission argues that, in recent cases of substantial consumer loss, conflicts of interest held by financial advisers have often been a driver.""Asic’s submission argues that, in recent cases of substantial consumer loss, conflicts of interest held by financial advisers have often been a driver."
The Australian Council of Trade Unions welcomed the report's observations about superannuation fees and argued that the comments about financial advice protections for consumers should persuade senators not to support the government's changes.
The finance minister, Mathias Cormann, defended the government's planned changes to Fofa, tweeting: "We are stripping red tape which just imposes costs without adding value while keeping protections that matter for consumers."
The Greens' deputy leader, Adam Bandt, said the inquiry was right to identify the problem of the large banks being "too big to fail" and being unfairly advantaged.
“The solution to taxpayers underwriting vast bank profits is a bank levy, like that in the UK and many European countries, which are generating revenue and creating competition," Bandt said.
Murray said the interim report was finalised before the Senate economics committee had completed its damning report on the performance of Asic.Murray said the interim report was finalised before the Senate economics committee had completed its damning report on the performance of Asic.
That report highlighted serious concerns over the Commonwealth Bank's past provision of financial advice and called for an inquiry, possibly a royal commission.That report highlighted serious concerns over the Commonwealth Bank's past provision of financial advice and called for an inquiry, possibly a royal commission.
Murray said his inquiry team had identified similar issues regarding Asic's mandate, skills, powers and funding model.Murray said his inquiry team had identified similar issues regarding Asic's mandate, skills, powers and funding model.