There’s nothing in yesterday’s response to the Murray Inquiry into the Financial System from the Turnbull Government to worry the banks and fund management companies.
The controversial areas of capital buffers and tougher prudential controls were worked out over the past nine months or so, action (and possible major changes in superannuation) have been put off for at least two and perhaps three years.
We know the banks face more demands for more capital – they will come next year and we know that will impact adversely their earnings and returns on equity until they rebalance their income streams.
Tough decisions have been pushed off to the Productivity Commission to conduct yet more reviews/inquiries, all of which will push possible action out past the election in 2016.
And only the headline grabbing crackdown on credit/debit card surcharges considered to be over the odds could upset some in financial services, but more likely a collection of retailers (large and small), airlines, telcos, utilities and others who force people paying by credit card to pay extra for the ease and convenience.
There could be some damage to bank earnings in this area, but most of the controversial surcharges seem to be coming from the likes of tax companies, airlines and utilities.
So all the publicity went to the politically favourable decision to crackdown on high credit card fees. Shops, taxis, airlines, utilities, and other merchants will be banned from imposing surcharges that are greater than the cost of accepting payment by card.
This is a big win for the Reserve Bank and the Payments System Board which has been pushing for years for reductions in fees, especially of late with the growth in debit cards. But it is also good politics – bashing the banks plays well outside Canberra and among voters.
Treasurer Scott Morrison tuned up last week with his criticism of Westpac’s 0.20% mortgage rate rise to help pay for some of the added capital costs imposed by regulators.
So superannuation faces at least three years of continuing uncertainty about its nature, its products, fees and its rationale for the country as a whole (and Australians individually). That will not be addressed until well into 2017-18.
For the financial system as a whole, the key regulators – APRA and the Reserve Bank (and ASIC) – have already done the heavy lifting and moved to improve the resilience of the banking system by forcing the big four banks – Westpac, NAB, CBA and the ANZ – raise and hold more capital (with more to come in 2016 and 2017) as new tougher capital requirements, especially for home mortgages are demanded.
The Federal government has supported this measure now and in the future. The major banks will have to hold more capital against home loan mortgages because they represent the biggest risks, dominating home lending and with 60% or more of their assets in home loans.
But what surprised was the delegating of a number of inquiries to the Productivity Commission. For example the Turnbull government will ask the Productivity Commission to develop an alternative model for a ‘formal competitive process’ for allocating default super funds to members. It was only three years ago that the Commission did a similar inquiry for the former Labor Government, so this has a large hint of can kicking. And there’s more
“The Government agrees to task the Productivity Commission to immediately develop and release criteria to assess the efficiency and competitiveness of the superannuation system.
“The Government agrees to task the Productivity Commission to immediately develop alternative models for a formal competitive process for allocating default fund members to products.
“Subsequent to the development of criteria and following the full implementation of the MySuper reforms, the Government will task the Productivity Commission to review the efficiency and competitiveness of the superannuation system.”
On financial innovation: “We will task the Productivity Commission to examine the scope to broaden access to, and use of, data. We support current industry efforts to expand data sharing under the new comprehensive credit reporting regime rather than through legislation….By end of 2015 Consult on legislation to support crowd-sourced equity funding. Consult on crowd-sourced debt financing. We will task the Productivity Commission with reviewing options to improve accessibility to data, taking into account privacy concerns and other existing Government processes.”
And then there is what seems to be a big future inquiry planned “beyond 2016 with the government promising that “Beyond 2016: Commence a review of ASIC’s enforcement regime. Task the Productivity Commission to review the state of competition in the financial system.
But there was one recommendation rejected – the one prohibiting limited recourse borrowing arrangements by superannuation funds. That decision was signalled earlier in the year by Josh Frydenberg when he was Assistant Treasurer to Joe Hockey and it is one kept by Treasurer Morrison and Mr Turnbull. It was a prohibition strongly supported by the two key regulators, the RBA and APRA who fear a build up of leverage risk in self-managed super funds which have borrowed to invest in assets, such as housing.
It is part of the reason for the explosion in investor borrowing in the past couple of years, especially in Sydney and Melbourne and there is no doubt the allowing of such borrowing has added to the rising level of risk in the financial system, as the RBA highlighted in its Stability Report last Friday.
