Credit where it’s due: the Murray inquiry is a policy success for Treasurer Joe Hockey, even if it ends up giving him a couple more political problems.
It’s now over five years since the “six economists” — Christopher Joye, Nicholas Gruen, Joshua Gans, Stephen King, John Quiggin and Sam Wylie — issued their call for a major inquiry into the financial system in the wake of the financial crisis, to ward off complacency, to determine what we got right and wrong in our financial regulation and, most of all, to address the core problem of how to regulate the big banks that are so systemically important to the economy, especially given that they benefit from an implicit “too big to fail” government guarantee. Hockey picked up the idea and, encouraged particularly by Joye, ran with it in 2010, at a time when the big banks were under fire for lifting interest rates more quickly than the Reserve Bank (remember that?). Hockey was attacked as a populist, and even compared to Hugo Chavez by ANZ’s Mike Smith, for his troubles.
Once in government, Hockey launched the inquiry, although the diminished terms of reference, and the appointment of former Commonwealth Bank head David Murray to lead it, augured poorly for the sort of root-and-branch review many had wanted. But while the final product doesn’t reflect the breadth of issues raised back in 2009, it’s a worthy successor to the Wallis and Campbell reports and in particular gets to grips with the “too big to fail” and competition problems at the heart of the financial system. It also does something Stan Wallis et al couldn’t have done — focus on our now-vast superannuation system to see how it is serving both the national interest and the interests of individual consumers.
Murray and Co. also did Hockey a favour in placing the onus on the Australian Prudential Regulation Authority to pursue the most challenging recommendations — lifting capital requirements (doubtless in the face of a furious campaign by the banks insisting the economy would collapse and interest rates would skyrocket), and narrowing the range between the internal ratings-based (IRB) mortgage risk weights used by the big banks and Macquarie Bank and the standardised risk weighting used by other institutions. The second of those relates to the risk weighting attached to residential mortgages. If you’ve been accredited by APRA to use IRB weighting — that’s the big four and Mac Bank — you can use a more finely tuned weighting process in assessing risk for housing loans, lowering capital costs. Other institutions have to use a standardised weighting across asset classes that takes no account of individual institutions.
In recent years, the gap between the two approaches has been widening, placing other institutions at a growing competitive disadvantage compared to the IRB institutions, which have lower costs. Murray wants APRA to start closing the gap again by lifting the risk weights for IRB institutions, moving the playing field closer to even — and also making the big banks more resilient, thus feeding into the capital requirements argument. The big banks say either that smaller institutions should be assisted to achieve IRB accreditation, or that the gap isn’t that bad, a view rejected by the inquiry.
You can see why the big banks aren’t going to be happy — but their lobbying efforts will be aimed at APRA, which has in effect been told to revise its attitude both to resilience and to competition by the inquiry.
And in its conclusions about super, the inquiry illustrates why the Future of Financial Advice debacle might be a long-run positive for the government:
“The Inquiry considers that cases of consumer detriment and poor advice reflect organisational cultures that do not focus on consumer interests. Such cultures promote short-term commercial outcomes over longer-term customer relationships. This has contributed to a lack of consumer confidence and trust in the system.”
Those are the very cultures that the government wanted to encourage with its repeal of FOFA and restoration of conflicted remuneration. Indeed, the inquiry suggests the government go beyond FOFA:
“The Inquiry notes the FOFA ban on conflicted remuneration and associated measures are relatively new and should bring significant change to the industry and benefits for consumers. However, some incentive-based remuneration models remain, including grandfathered arrangements and other specific exclusions. The Inquiry believes that these instances of conflicted remuneration should be monitored, and Government should intervene if further significant issues are observed.”
Directed at the government that came within a couple of Senate votes of gutting FOFA, that’s a clear criticism of the way the Coalition bent over backwards to look after financial planners and big bank-owned retail super.