The Financial System Inquiry

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REPORT GENERATED ON 9 SEPTEMBER 2014, 266 RESPONSES.

In December of last year, the Australian Treasurer Joe Hockey announced the final terms of an inquiry into Australia’s financial system. The Murray Inquiry (as it has come to be known) has the overarching objectives to “… examine how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth. Recommendations will be made that foster an efficient, competitive and flexible financial system, consistent with financial stability, prudence, public confidence and capacity to meet the needs of users.”

Given the important role that actuaries play across many parts of the financial system, the findings and flow-on policy impacts of the Murray Inquiry should be of interest to people in all walks of actuarial life. Earlier this year in July, the Murray Inquiry released its Interim report, outlining observations made by the committee and possible policy options in response to these observations.

This Pulse Survey was aimed at highlighting some of these observations and gauging the profession’s views on the possible policy options laid out by the Inquiry.

Q1: WHAT IS YOUR PRIMARY PRACTICE AREA?

TABLE: Practice Area

Q2: HOW MUCH DO YOU KNOW ABOUT THE FINANCIAL SYSTEM INQUIRY (FSI) INTERIM REPORT?

TABLE: Level of knowledge

There appears to be a fairly broad knowledge of the Inquiry’s initial findings among the profession, with almost 85% of respondents having had some exposure to it. It was also interesting to look at the proportions by area of practice. This revealed that on average actuaries practising in Superannuation/Investments and Banking/Finance are more versed in the Interim report compared to those in the Life and General Insurance areas. This fact is not surprising given the Superannuation and Banking areas are likely to feel the biggest impacts of any changes the Murray Inquiry ultimately recommends.

Q3: IT HAS BEEN OVER 16 YEARS SINCE THE PREVIOUS WALLIS INQUIRY INTO THE FINANCIAL SERVICES SECTOR. DO YOU THINK THE CURRENT INQUIRY HAS BEEN:

TABLE: Response

Two-thirds of respondents believe that it is about the right time for another review. Several respondents also added that valuable learnings from the GFC should be used to shape the direction of financial services in Australia.

Q4: THE INITIAL ASSESSMENT OF THE INQUIRY IS THAT “THE AUSTRALIAN FINANCIAL SYSTEM HAS PERFORMED REASONABLY WELL IN MEETING THE FINANCIAL NEEDS OF AUSTRALIANS AND FACILITATING PRODUCTIVITY AND ECONOMIC GROWTH”. DO YOU:

TABLE: Response

The majority of respondents agree with the Inquiry’s initial assessment. However several people were quick to note that ‘reasonably well’ does not imply perfection (as the Inquiry itself also notes, there is plenty of room for further improvements). Most of the comments from people disagreeing centred on either the potential ‘super profits’ being generated in the banking sector, or on the high fees associated with superannuation.

Q5: THE INQUIRY HAS IDENTIFIED NINE PRIORITY ISSUES FACING THE FINANCIAL SYSTEM. SELECT THE THREE THAT YOU THINK WILL HAVE THE BIGGEST IMPACT ON THE AUSTRALIAN FINANCIAL SECTOR OVER THE NEXT 5-10 YEARS?

TABLE: Issue

Retirement incomes and ageing clearly polled as the biggest issue facing the Australian financial system over the next 5-10 years. This was consistent even when looked at by the area of practice of the respondent (so it wasn’t just due to superannuation actuaries trying to talk themselves up).

With the exception of international integration and regulatory architecture the remaining issues all received a relatively even distribution of votes. This would seem to suggest that actuaries generally agree with the priority issues highlighted by the Murray Inquiry.

Q6: THE INQUIRY OBSERVES THAT ON THE WHOLE THE BANKING INDUSTRY IS COMPETITIVE, ALBEIT CONCENTRATED. CURRENT REGULATORY CAPITAL REQUIREMENTS FAVOUR INTERNAL RATING BASED (IRB) BANKS, WHICH CREATES A REGULATORY HURDLE FOR SMALLER BANKS. WHAT IS YOUR VIEW ON THE CURRENT COMPETITIVENESS OF THE BANKING SECTOR?

shutterstock_203906767Based on the respondents’ comments, two distinct philosophies have emerged with regards to competition.

Firstly, those who believe there is a good level of competition noted that Australia’s banking sector emerged from the GFC relatively unscathed (when compared to the experiences in the US and Europe). In addition, this school of thought are prepared to pay a premium for banking services if that continues to provide a greater level of stability in the sector.

Secondly, those who do not believe there is enough competition, most commonly cited the ‘super’ profits generated by the Big four banks and the high barriers to entry as clear evidence of a lack of competition.

Q7: THE INQUIRY HAS FOUND THAT AUSTRALIA’S CURRENT REGULATORY STRUCTURE (NAMELY APRA AND ASIC) HAS SERVED THE FINANCIAL SECTOR WELL, HOWEVER IT IS APPROPRIATE TO REVIEW ITS PERFORMANCE IN LIGHT OF MARKET DEVELOPMENTS AND TECHNOLOGICAL CHANGES. WHICH OF THE FOLLOWING AREAS OF REGULATION DO YOU THINK NEEDS REVIEWING?

TABLE: Opportunities

Based on the responses to this question it seems that there is only a handful of people who believe the regulatory landscape in Australia doesn’t need at least a little tweaking. Following on from the previous question the theme of competition once again ranked high on the priority list.

The comments supplied by respondents made me wonder if this survey had accidentally been sent to members of the Australian Dental Association rather than actuaries, with numerous references in particular to ASIC’s teeth (or lack thereof).

The other key theme coming through in the comments was the cost of regulation – with both the direct financial costs of supporting the regulators as well as the indirect costs of meeting regulatory requirements being noted as issues. This theme generally seems to mirror the views of many participants in the financial system, with numerous stakeholder responses to the Financial System Inquiry also citing regulatory cost as an issue. Given that the previous Wallis Inquiry was largely responsible for the ‘twin peaks’ regulatory model (i.e. APRA and ASIC) that currently applies in Australia’s financial sector, it will be interesting to see how the current Inquiry reshapes this model.

Q8: INFORMATION AND TECHNOLOGY CHANGE IS LEADING TO GREATER RISK BASED PRICING IN VARIOUS INSURANCE MARKETS. WHILE RISK BASED PRICING SENDS A MARKET DRIVEN SIGNAL TO CUSTOMERS, IT CAN HAVE THE ADVERSE EFFECT OF POTENTIALLY MAKING INSURANCE UNAFFORDABLE OR UNAVAILABLE TO THE RISKIEST SEGMENTS OF THE MARKET. THE MOST NOTABLE RECENT EXAMPLE OF THIS IS PROPERTY INSURANCE IN FLOOD PRONE AREAS. WITH REGARD TO FLOOD INSURANCE, SHOULD THERE BE A REGULATORY RESPONSE TO ADDRESS THIS?

TABLE: Response

Respondents to this question seem happy to let market forces address this issue without the help of regulation. The comments in response to this question revealed a consistent view that a greater onus needs to rest with councils and planning authorities to factor flood risk into planning and zoning decision making. I completely agree with these sentiments, and a greater level of risk-based pricing is hopefully sending this signal to these decision makers. However this does not address the issue of the existing stock of properties currently occupying high risk areas, with increasing prices making it unaffordable or even impossible to obtain cover.

Q9: FINANCIAL PRODUCT DISCLOSURES ARE OFTEN LONG AND COMPLEX DOCUMENTS GEARED TOWARDS LEGAL COMPLIANCE RATHER THAN ENHANCING CUSTOMER UNDERSTANDING OF THE PRODUCT FEATURES, RISKS AND REWARDS. THE INQUIRY HAS HIGHLIGHTED POTENTIAL OPTIONS TO ADDRESS THIS. WHICH OF THESE DO YOU BELIEVE WILL BEST ADDRESS THIS ISSUE?

TABLE: Response

Improving disclosure requirements made it to the top of the list for the best way to address customer understanding about financial products. This is interesting given that several recommendations of the previous Wallis Inquiry were aimed at doing just that. The Wallis Inquiry made recommendations that product disclosure documents “be comprehensible and sufficient to enable a consumer to make an informed decision relating to the financial product” and “[provide] a clear and unambiguous statement of the risks involved”. It is clear that these recommendations were not met, and I think there is still a lot of work to make product disclosure documents informative about risks but at the same time remaining accessible to consumers across the spectrum of financial literacy.

Q10: THE RETIREMENT PHASE OF THE AUSTRALIAN SUPERANNUATION SYSTEM PROVIDES LIMITED OPTIONS
FOR RETIREES TO MANAGE RISK. WHICH OF THE FOLLOWING APPROACHES DO YOU BELIEVE WILL BEST ADDRESS THIS ISSUE?

TABLE: Response

Although there was seemingly agreement among respondents on this question, based on the comments provided there was significantly less clarity on what the appropriate policy incentives are. This is obviously a multifaceted problem, with tax incentives, barriers to product development, investor knowledge and default options all needing to play a part in the solution.

CONCLUSION

shutterstock_116114422Looking ahead in the short term, the final report and recommendations of the Murray Inquiry are due to be released in November of this year. Given the previous two Inquiries (the Campbell Inquiry in 1981 and the Wallis Inquiry in 1997) each foreshadowed significant changes to Australia’s financial system, it will be interesting to see if the Murray Inquiry follows suit. Whatever the outcomes, it is likely that there will be ramifications for actuaries across most, if not all, areas of practice. I encourage everyone to make the time and effort to review the recommendations so that we are in the best position collectively to respond.

Looking further ahead, it appears that the government is following an almost metronomic 16 year cycle for conducting reviews. Based on this, I feel quite confident in predicting that the next inquiry will occur sometime around 2030. As for predicting who will be heading up the next inquiry I feel it is necessary to deviate somewhat from the historical pattern. So far these inquiries have all been headed up by accountants/business people. Noting that the actuarial profession’s vision is “that wherever there is uncertainty of future financial outcomes, actuaries are sought after for their valued advice and authoritative comment” I feel that the time will be right for an actuary to step into the limelight. A financial system inquiry seems to encapsulate this vision almost to the letter, so if an actuary can head up the next inquiry I think we will be able to safely say that we have achieved our vision.

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