David Murray’s recent and thoughtful CEDA speech, where he addressed the topic of the Financial System Inquiry, struck me as noteworthy on a number of fronts. The Inquiry and the Government’s response are of vital interest to the Profession.
First was the recognition that, since the Wallis Report some 16 years ago, the financial services sector, and the context within which it operates has changed, more so than we might think. An example provided was the substantial increase in household debt.
Second was the sea-change in attitude by the Australian Government with its preparedness to guarantee Australia bank deposits and wholesale funding as a result of the GFC. To paraphrase Murray: who of us would have thought that this would occur especially when one of the key tenets of the Wallis report was that this should not happen?
Third was the recognition of the rapid growth in superannuation funds (particular SMSFs), and the growing impact that this would have on our financial services sector.
A final point that resonated was his observation that post GFC there has been a consequent wave of global regulatory change which has had significant implications for Australia, e.g. revising our own prudential standards to reflect global standards through Basel III.
According to Murray, all this (as well as other points he raised) reinforces our reliance on the financial system to be able to adapt to changing fund flows, as well as the fundamental importance of the financial system to our economy.
The question is, can the current system adapt to significant technological, economic, demographic and societal impacts in its existing form, or does it require comprehensive ‘root and branch’ reform to manage the waves of change expected over the next decade and beyond?
For the profession and for the Institute, the Murray Inquiry offers a once-in- a-generation opportunity to present our views to the independent Committee which is open to persuasion and fact-based argument.
The Institute, with the valuable expert input of its members, is making certain that we make the best possible submission to the Inquiry. Doing so provides us a strong platform to argue our case in the months and years ahead – our blueprint if you like. Importantly, rather than trying to cover the field, we have chosen to comment on areas we think best reflect the expertise that members can bring to bear, and where we will be listened to. Our submission will build on our earlier response to the draft terms of reference for the inquiry.
At the time of writing this column, we are going through the final sign-off process for our submission, and are focussed on three topic areas. The central theme of these topics reflects our view of the risks inherent in the financial system, in particular the retirement incomes system, which have the potential to have negative impacts if left unmitigated.
The first topic is demographic change. While this is well worn ground for us to comment on, including the Institute’s well-received 2012 report ‘Australia’s Longevity Tsunami’, it remains a critical risk for Government to face-down and deal with. It also coincides with an unparalleled expertise the Profession can bring to bear on this topic. The approach we recommend is that, to better manage the financing of our ageing population, there needs to be a comprehensive framework for policy formulation on all issues relating to this financing.
Linked to this approach is that improved regulation and better policy formulation drives efficiency in the overall financial system. Our concern is that there is no lead policymaker with an overarching role to apply a ‘best interests’ test to financial services and retirement policy. We want the Government to create such a role to help it deliver coherent regulation, assess emerging systemic risks and resolve regulator inconsistencies . Our working title for this mechanism is the Financial System Policy Commission (FSPC) and it would operate similarly to the Productivity Commission and independently of Treasury’s Financial System Division.
Our final area of interest is financial sector data collection. There are many benefits that will accrue to the economy and to individuals if there is an increase in the range and availability of financial services data to public and private sectors. This is a matter which the proposed FSPC would be well placed to investigate. Of course any increase in the collection and the use of data would have to take into account intellectual property and confidentiality and, importantly, the collection costs to industry.
Ultimately what we finally submit to the Murray Inquiry will reflect members’ views and will adhere to our long established good public policy principles. I look forward to public discussion and debate about our views.
In closing I just wanted to share some initial thoughts about the work that the Institute has done to contribute to the Murray Inquiry. Firstly, I have been impressed with the enthusiasm and expertise that the working group and practice committees have demonstrated in producing a submission in a short space of time. It is not easy to meld the views of so many members into a coherent policy position but I think the Institute has been successful in doing so.
Secondly I wanted to convey the high regard that the Inquiry Chairman and its Secretariat has for the actuarial profession: its dedication to good policy outcomes and its technical expertise. Apart from the formal channels of communication with the Inquiry the Institute has been encouraged to provide ongoing research material to assist the Committee with its deliberations. I believe that type of recognition places the Institute in a good position to influence future policy debates.
Finally I would like to congratulate two of our members, Geoff Atkins from Finity Consulting, who has been appointed on secondment and Brad Parry who has been transferred from Treasury to assist the Secretariat supporting the Inquiry.
* Robert Graves’ autobiography, Good-Bye To All That, published in 1929, points to (amongst many things) the passing of an old order after the upheavals of the Great War.
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