The interim report of David Murray’s inquiry has found that Australia’s financial system has generally performed well.

The Financial System Inquiry was set up by the Government to look at what changes may be needed for Australia’s financial system to provide efficient access to finance, while remaining stable, low-risk, fair and accessible.

The inquiry is being chaired by former Commonwealth Bank chief executive David Murray.

Its key interim finding is that, “many areas of the financial system are operating effectively and do not require substantial change.”

However, it warns against complacency and says the financial sector will have to confront challenges from future financial crises, pressure on the Federal Government’s budget from an ageing population, stagnant productivity growth in the economy, technology advances in financial services and greater international integration.

The inquiry has not yet made recommendations, but rather raised issues and suggestions for further discussion.

A key issue in banking has been competition, and the dominance of the big four banks.

On that front, the inquiry has found that the financial services sector has become more concentrated since the Wallis Inquiry of the 1990s.

However, the report finds the industry is still competitive, with the net interest margins – the different between rates banks borrow at and what they lend at and a key source of profit – of the major banks around historic lows.

It does suggest, though, that smaller institutions may be disadvantaged in the home loan market because they have to assign a higher risk to mortgages than the major banks, forcing them to hold more funding and raising their costs.

The committee suggests the status quo is acceptable, but it is looking at the merits of lowering risk weights for mortgages held by the smaller institutions, providing government support for the mortgage securitisation market which on-sells bundles of home loans to investors, or changing the treatment of mortgage securities to class them as high quality liquid assets.

Securitised mortgages in the US, mainly those consisting of ‘sub-prime’ or more marginal borrowers, were the key trigger for the global financial crisis.

Super costs ‘high’

On superannuation, the inquiry observes that fees have remained relatively high despite the increase in funds under management and economies of scale that should have resulted.

“There is little evidence of strong fee-based competition in the superannuation sector, and operating costs and fees appear high by international standards,” the report noted.

“This indicates there is scope for greater efficiencies in the superannuation system.”

The report finds that Australia’s superannuation funds have some of the highest operating costs among the Organisation for Economic Cooperation and Development’s member countries.

There is a suggestion that the MySuper reforms may help to lower costs, and that the effectiveness of these should be looked at when they have been in place longer, and with consideration of extending them.

The inquiry also questions whether it is a good idea to keep allowing super funds to borrow money, a limited practice that is growing, particularly amongst self-managed super funds.

“If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems,” the report cautioned.

It raises the prospect that restoring the prohibition on super funds borrowing money might be considered.

On retirement incomes, the inquiry observes that it might be wise to look at incentives or requirements for people to take out products that manage longevity risks, such as taking super through an annuity rather than in lump sums.

Consumer finance

The report observes that current financial disclosure documents are complex and lengthy, often do not enhance customer understanding and also impose significant costs on the industry.

The inquiry says it will look at measures to simply disclosures, perhaps including layered disclosure whether important information is placed at the top in easy to understand terms.

It is also considering whether the corporate and investment regulator ASIC should be given more powers to ban products, and whether there should be a greater shift towards default products with simple features and fee structures.

Given the controversy over the Commonwealth Bank’s recent financial planning scandal and the Government’s move to roll back some aspects of the Future of Financial Advice laws, the inquiry says it will look closely at financial planning.

Some ideas floated include the possibility of renaming general advice as “sales” or “product information”, and mandating that the term “advice” can only be used if personal circumstances are taken into account.

The inquiry also raises the possibility of an enhanced public register of financial advisers that includes their credentials, as well as a national examination for planners offering personal advice.

‘Vanilla’ corporate bonds

Another widely discussed financial issue in Australia is access to finance for both small and large corporations.

The Murray Inquiry says access to finance is a bigger problem for small and medium enterprises, which it says is largely due to the difficulty for banks in obtaining information about such businesses.

It has flagged the idea of a financial information database of small and medium businesses so lenders will have more information about a prospective borrower’s financial position.

The report also raises the prospect of allowing large listed corporations selling so-called ‘vanilla’ bonds directly to retail investors without the need for a prospectus.

The inquiry has also found that Australia’s tax system distorts households savings towards housing, both for owner-occupation and investment, and encourages people to take on higher levels of debt.