The interim report into the Australian financial system, released yesterday, is heading down the route of recommending a significant tightening, not relaxing, of laws over superannuation advice, fees and other key rules.
That’s contrary to the way the Federal government is pushing in dealing with the Clive Palmer mob to greenlight the proposed changes to the financial advice rules.
If anyone though that the inquiry chaired by former Commonwealth Bank CEO, David Murray, might be looking to relax laws and so-called red tape (a perennial favourite of the Abbott Government), then they should think again.
The interim report suggests the inquiry’s thinking is looking to recommend the significant overhaul of many of the conflicting and costly laws covering super and retirement policy, while strengthening the rules and regulations once people have retired (See our report of yesterday).
There’s also the strong suggestion that the tax inquiry planned by the Federal Government should look at the superannuation benefits paid to high earning people – perhaps the top 20% of wage and salary earners because the inquiry makes the point they have the ability to earn enough to provide for their future and retirement.
In looking down this route, the inquiry has also accepted the views of the Reserve Bank, APRA, federal Treasury and independent think tanks that super is too expensive with fees well above world levels.
One area that will have to be watched (we noted it in yesterday’s first report) is the inquiry’s concerns about the slow emergence of leverage in the superannuation system.
The committee’s report said the "general lack of leverage in the superannuation system is a major strength of the financial system”. But it went on to note that recently there has been a substantial growth in the use of leverage by superannuation funds which, "if allowed to continue … may create vulnerabilities for the superannuation and financial systems” and “over time, erode this strength and create new risks to the financial system".
The committee therefore suggests that the government should "restore the general prohibition on direct leverage in superannuation on a prospective basis".
The committee is reacting to the current rush of self-managed superannuation funds into leveraged speculation on house prices. Sydney is the most active market for this kind of investment, according to statistics from the Bureau of Statistics and comments from regulators.
The Committee isn’t so much worried about a possible a house price bubble (which isn’t happening, yet); it is more concerned that this type of investment could trigger long term losses if the rate of price increase continues falls behind the carrying costs of these properties.
The current surge in prices would have to continue for years to come for self managed super funds to come out ahead on their property investments. People could find themselves with an investment chewing up investment income from other sources, leaving the retirees with little or nothing to live on.
And in another blow to the Abbott government and especially Federal Treasurer, Joe Hockey, the Committee suggests that key regulators APRA and ASIC be given more secure funding bases.
"Strong, independent financial regulators are crucial to the efficient, stable, fair and accessible operation of the financial system. However, regulators also require robust accountability mechanisms that provide appropriate checks and balances," the inquiry observes.
"Submissions identify areas of improvement in relation to operational and budgetary independence. Current funding models for the Australian Prudential Regulation Authority (APRA) and ASIC diverge from best-case funding models for financial regulators. In particular, the current funding models potentially could be improved through increasing the certainty of year-to-year funding."
The inquiry’s key observation (not recommendation) in this area is to "Move Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulatory Authority (APRA) to a more autonomous budget and funding process. …Regulators face strong competition for top talent, given the size and high remuneration levels of the Australian financial sector. Another hurdle is the perception that APRA and ASIC’s operational independence and effectiveness are unduly hampered by public sector operating constraints."
APRA complained in its submission about the adverse impact the so-called efficiency dividends imposed by successive Federal Governments (which end up requiring staff cuts) on the regulator and the damage they could do to regulation of financial entities such as banks, insurance companies and super funds.
The Federal government earlier this year rejected APRA’s stance, saying it “expects that APRA will look for opportunities to reduce compliance costs for business and the community and contribute to the government’s $1 billion red and green tape reduction target”.
In fact the just retired head of APRA, Dr John Laker, used his last media interview to warn of the damage cuts to its $116 million a year operating budget could cause:
“The simple point we have always made to governments is that an efficiency dividend will take our resources away, it will reduce the cost to industry and give a different intensity of supervision but it will make no contribution whatsoever to the government budget position,” he told The Australian Financial Review. “Down the track, cumulative effects of efficiency dividends can undermine our ability to provide a certain intensity of supervision,” he said. The government’s efficiency dividends do not fit easily with an industry funded model, he added.”
That repeated the warning given in APRA’s submission to the inquiry.
On ASIC, the inquiry’s interim report says:
"ASIC’s predominantly Government-funded model poses limitations in meeting the principles of a best-case funding model. There is a case for moving to an industry-funding model for ASIC, based on approaches taken in the United Kingdom, Canada and other jurisdictions."
"Costs for ASIC are borne by the public, in proportion to their tax contributions. Members of the public, as beneficiaries of regulation, do not bear these costs in proportion to that benefit. Equally, market participants, who contribute to the need for regulation, generally do not bear its cost directly."
"ASIC’s submission highlights significant differences between the forward projections of its budget expenditure and realised expenditure. The differences between the forward and realised expenditure constrain ASIC’s ability to forward plan in response to market and regulatory developmentsIn recent reviews of Australia’s financial system and regulatory framework, both the Financial Stability Board (FSB) and the IMF raised concerns about ASIC’s lack of stable funding and inability to commit resources to longer-term projects.
"According to the IMF, this limited degree of budgetary independence in turn inhibits ASIC’s ability to dedicate sufficient resources to conducting proactive supervision. Recent commentary from the IMF and the International Organization of Securities Commissions (IOSCO) generally supports a move towards an industry-funding model.Globally, most securities and markets regulators are employing industry funding–based models.
"Adopting an industry-funding model, if designed carefully, may increase the degree of certainty in funding," the report said.
