Financial System Inquiry: Government Responds to Final Report

Wednesday 11 November 2015 @ 12.07 p.m. | Corporate & Regulatory | Trade & Commerce

Previously we  reported that on  7 December 2014, the Financial System Inquiry Chairman Mr David Murray (the former Commonwealth Bank chief executive) and the then Federal Treasurer Joe Hockey, released the final report of the Government commissioned, Financial System Inquiry (the FSI).

A report which the former Treasurer was keen to emphasise:

" . . . was completely independent from the Government" and was meant to be ". . . a report to the Government, . . . not a Government report."

Recently (20 October 2015) the Government published its response to the FSI Report and the recommendations it made.

The Government's Response

The key points of the Government's response to the FSI Report are that the Government:

  •  accepts all but one of the 44 recommendations made by the FSI Report;
  • will move to strengthen competition and generate stronger reserves for the banks;
  • has promised to place tougher controls on financial advisers; and
  • will crack down on unfair credit card surcharges.

Government Accepts 43 of 44 Recommendations

It is reported that the Government stopped short of agreeing to accept all 44 of the FSI Report's recommendations, rejecting the proposal that it would prevent direct borrowing by superannuation funds.

Further, with respect to superannuation the Government has indicated in its response that, the Productivity Commission will be tasked to review the superannuation system, which the FSI Report described as a system that was "fragmented, costly and suffering from a lack of member engagement", with a view to the development of alternative models for allocating default fund members to products.

Strengthen Competition and Generate Stronger Reserves

Banks will gradually build up their financial reserves ("capital levels") and competition will be encouraged between home lenders through a process the Australian Prudential Regulation Authority began in July 2015.

Tougher controls on financial advisers

Also highlighted in the response, is the Government's intention to pass laws in the next year for stronger penalties against superannuation fund directors, and the aim to work closely with industry to provide retirees with more flexible and reliable retirement income products.

Crack Down on Unfair Credit Card Surcharges

Recommendation 17 of the FSI Report states that the government should:

“Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging”.

The Government has indicated that by the middle of next year (2016), it will legislate to ban unfair card surcharges that are greater than the cost to lenders to accept payment by card:

“We will increase the efficiency of the payments system and ensure it achieves fairer outcomes for consumers, merchants and system providers by phasing in a legislated ban on excessive card surcharges. The ACCC [Australian Competition and Consumer Commission] will be responsible for enforcing these rules.

The Payments System Board will pursue policies to address problems with interchange fees and provide clarity around what constitutes excessive customer surcharges on card payments."

The Payments System Board released an issues paper on this in March 2015 but as yet the resulting report and legislation are to be finalised.

Reactions to the Government's Response

On the matter of stronger financial reserves (capital levels), as already seen, the banks have not hesitated to use this as a reason for increasing interest rates and as reported by the ABC News quoting the Australian Bankers' Association chief executive Steve Munchenberg, the view of the banks to such requirements is:

". . . higher capital levels make banks stronger, but are also additional costs for banks, . . . They will be passed on in part to shareholders, including our own superannuation funds or to customers . . . Banks will have to make a judgement about how to balance that."

Safer banking systems are expensive and need to be paid for according to Mr Munchenburg and it should be noted that,  at the time of responding the Government, through both the Treasurer and the Prime Minister, indicated it did not think that requiring stronger capital levels would result in higher interest rates, it appears that all major banks have raised their rates citing the need to increase capital reserves as the reason for doing so.

Regarding the crack down on unfair credit card surcharges the ABC News reports that Choice through its chief executive Alan Kirkland welcomed giving the ACCC extended powers to take action on excessive credit card surcharges:

"We've seen outrageous surcharges over the years and we'll finally have a regulator with the teeth to knock them out of the system."

The Greens through their treasury spokesman Adam Bandt are also reported as supporting the crackdown, but said the crackdown should also extend to bank ATM fees:

"If credit card operators are now not allowed to make a profit out of the cost of using your card, then nor should banks be able to, . . ."

Generally the opposition is reported as supporting the crackdown on unreasonable credit card fees and the moves to lift the standards for financial advisors, but has also pointed out that the Government had unwound some of its reforms in this area while also indicating that there are policy differences with the government in key aspects, for example, the Labor opposition argues for an end to superannuation tax concessions for wealthy Australians.

What's Next

Already the move to stronger reserves have seen interest rates rise and certain superannuation measures are already before the parliament (see the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (Cth) and our article Superannuation Legislation Trustee Governance Amendment: Needed Reform?). However, it will be interesting to see how the promises of action on matters like unfair credit card surcharges translate into legislation and practice.

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products.

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