Former Commonwealth Bank chief, David Murray, has delivered his Financial Systems Inquiry (FSI) recommendations and no sector of the financial services industry will remain unaffected if the recommendations are adopted.
While many recommendations focus on the financial services and banking industry at a higher level, there are several which may affect consumers. Below is a round-up of the major recommendations.
Credit and debit card surcharges
As announced last week, credit and debit card surcharges face the chop if the recommendations made in the report are adopted. Visa and MasterCard support the abolition of these fees. Despite legislation passed last year, they have failed to eradicate the problem.
Under recommendations, such charges would be limited to 0.5 per cent of the transaction or 12 cents. This is considerably less than the five to 10 per cent charged on taxi fares by Cabcharge, or the $8.50 charged by Jetstar when booking a flight.
MasterCard, which called for the abolition of such fees in its submission to the inquiry, estimates that Australians pay a total of $1.6 billion in fees per annum, or an average of $130 each. With everything from purchasing tickets (1.95 per cent) to paying a Telstra bill (two per cent), incurring a surcharge, the end to excessive fees is long overdue.
Banks to hold more capital
There has been the long-held view that Australian banks should never be allowed to fail and that the Government should be on hand to bail them out should any financial crisis, such as the GFC, hit. However, the FSI report recommends that the responsibility for financial security should be put back onto financial institutions by requiring them to hold more capital. Currently, Australian banks hold on average 9.1 per cent levels of capital as security, which is below the median level of 10.5 per cent and even further below the 12.2 per cent required to be in the top quartile of banks around the world.
In order to level the playing field in the mortgage sector, it is recommended that the big four banks would need to hold more capital to offset risk on mortgages. Currently, the big banks only hold about 18 per cent of the capital against mortgages and the smaller institutions about 39 per cent. An acceptable level has been recommended at between 25 and 30 per cent.
It is estimated that the big four banks would need to raise about $20 billion to meet this level of capital retention. The banks have responded by saying that this could result in consumers paying more in mortgage interest rates.
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Despite a push for lower superannuation fees, this hasn’t occurred and the reason for this is attributed to limited competition between super funds. The differential between fees is as much as 1.36 per cent. A formal process to allocate MySuper as the default fund for those not nominating a particular fund is recommended. Currently, if workers fail to nominate MySuper, their employers can choose a different fund. A Productivity Commission into whether a further inquiry into whether further changes are required to MySuper to lower fees should be held by 2020.
The FSI report also recommends that super funds should have a majority of independent directors.
It is also advocated that superannuation should be paid as a regular retirement income rather than a lump sum, although the option to receive a lump sum should remain.
According to the report, self managed super funds should also be stopped from borrowing money to buy shares and property, which would essentially make negative gearing impossible.
Australia’s tax system comes under scrutiny again, with a recommendation that the Government needs to review the differential tax treatments on deposits and fixed income investments, negative gearing and capital gains tax, franking and interest withholding tax.
To help fight identity theft and money laundering, a package of innovation recommendations includes enabling financial service companies to establish robust digital identities for their customers.
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The Australian Security and Investment Commission (ASIC) needs to be stronger with greater powers to tackle breaches in regulation. This should be funded by fees and levies paid by those in the industry, as is the case with the Australian Prudential Regulation Authority (APRA). A further recommendation is that there should be a new financial regulation assessment board to advise the government on the performance of regulators.
Consumers need more guidance about the level of cover required to replace income and contents following an insurance event. If insurance agencies fail to provide such transparent guidance, then the Government should look to introduce new laws which automatically provide this information to consumers when they are renewing or purchasing a policy.
While the FSI recommendations will ultimately benefit the majority of Australians, the big banks, financial institutions and retailers are all set to take a hit. Steven Münchenberg, chief of the Australian Bankers’ Association, said “The question we, and the government, must ask on each of these recommendations is simply, does it help or hinder our future economic growth? A careful analysis of each recommendation on this basis is now needed”.
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Do you think the Financial Services Inquiry goes far enough? Are there are aspects which concern you? Or do you feel consumers will benefit in the long run.