The more things change the more they stay the same

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Posted : Friday, July 18, 2014

Opinion piece by CEDA Chief Executive, Professor the Hon. Stephen Martin published in The Australian Financial Review on 18 July 2014.

Whenever a report or inquiry into Australia's financial system is announced or released, I am struck by an almighty sense of deja vu. And so it is with David Murray's interim report tabled this week.

In 1990 treasurer Paul Keating asked the Parliamentary Committee I chaired to write a five-year report card on the deregulation of our financial sector.

The terms of reference covered the importance of the banking system to the Australian economy; the profitability of the banking sector through time and in comparison with other industries; the effectiveness of competition in the banking sector, including the impact of any barriers to competition; and the benefits of competition to different sections of the community including access to financial services; product innovation; choice and quality of financial services; and information to users.

I suppose then it is unsurprising that these issues again were a significant element in Murray's report.

The Parliamentary Committee inquiry considered the critically important issue of competition from several angles. These included the profitability of banks, impediments to competition such as access to the payment system, and conflicts of interest arising because of the funds management role played by banks.

Like Murray, it concluded the financial system was essentially strong, and it underpinned the economic fortune of Australia. Australian banks were and are profitable, and recent results have clearly demonstrated this to be so.

How credit unions, building societies and other deposit-taking institutions, including foreign banks, might increase competition was considered. My inquiry recommended that the limitation on the number of foreign banks be removed, subject to the right prudential supervisory arrangements being put in place.

There will always an argument as to whether the number of players in a market provides a true measure of competition or whether rebadging smaller players that have been acquired simply presents an illusion that competition exists. These are continuing issues that Murray will need to address in finalising his report.

Transparent costs

On access to credit and finance, generally my committee felt that competition in the housing mortgage sector existed but that the true cost to consumers, measured by the comparison rate, should be more transparent.

In terms of financial stability, recent economic history has also shown that 20/20 hindsight is often the lens through which problems should best be examined.

My committee recommended that banks be required to enhance internal monitoring systems to limit their exposure to particular classes of business such as speculative property developments and that the Reserve Bank should satisfy itself that such systems are adequate, and if needed, put limits on banks' exposure.

Like Murray, my committee also examined the supervisory arrangements for the sector including the "too big to fail" doctrine, supervision of funds under management and supervision by the RBA. We believed that government guarantees for banks were unnecessary. Similarly, whether a super regulator or enhanced powers to current regulators were required was a matter of conjecture.

It was the recommendation of our inquiry that a Council of Financial Regulators was needed that led to its formation. Murray now is seeking answers as to whether the prudential supervisory powers of its individual members require enhancement to meet future challenges such as those identified during the global financial crisis.

Our report recommended that systems be put in place to ensure adequate separation of the banking and funds management activities of financial conglomerates. It was recommended that appropriate training for financial advisers be provided and that product offerings incorporate accurate disclosure statements. Finally, my committee examined the relationship between competition and consumers in retail banking. The availability of finance for industry sectors, credit card fees, product innovation, disclosure of information and a code of banking practice were considered, and recommendations made.

It seems the more things change the more they stay the same.

Inquiries create incremental changes, yet each one uncovers unresolved issues. While it is true that financial products, innovation, regulatory architecture and supervisory requirements evolve to meet the challenges of international integration, stability and consumer expectations, the fundamental issues of competition and the effects of retirement income planning and superannuation will bring fresh approaches to Australia's financial service sector.

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