The Financial System Inquiry

24th Annual Credit Law Conference Katherine Forrest

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Background to the FSI

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•  Purpose of the FSI •  Assess how well the financial system is working •  Make recommendations to foster an efficient, competitive and flexible

system •  The terms of reference were announced on 20 December 2013

including: •  developments since the 1997 Financial System Inquiry and the GFC; •  new technologies and market innovations; •  consumer protection; •  superannuation; •  international integration; and •  developments in the payment system.

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Background to the FSI

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•  Initial submissions closed on 31 March 2014. •  Interim Report was released on 15 July 2014,

open-ended and sought opinions •  Second round submissions seeking

responses to the Inquiry Interim Report closed on 26 August 2014.

•  Report due: November 2014

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Initial Assessment

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System has performed really well in meeting financial needs and facilitating productivity and growth.

However, future implications of: •  future financial crises •  fiscal pressures •  productivity growth •  technology change •  international integration

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Competition and funding

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• Credit reporting • Product switching •  LMI • Small business lending

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Consumer outcomes: Disclosure

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First round submissions and interim report ▪  complex and lengthy disclosure documents ▪  driven by a culture of compliance rather than informing time poor consumers ▪  improve by adopting layering, risk profile disclosure, comparators ▪  remove ineffective disclosure requirements ▪  facilitate new delivery methods Australian Bankers’ Association and major banks’ second round submissions ▪  support using new technology e.g. smart phones, social media ▪  support layered disclosure and the ability to tailor disclosure to consumers Implications ▪  Benefits of changing the requirements must be justified in light of the costs

and shortcomings of disclosure documentation

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Consumer outcomes: Alternatives to disclosure

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First round submissions and interim report §  Regulation of product features and default product designs ▪  Requiring product issuers to promote suitable products for consumers ▪  Giving ASIC product intervention powers Australian Bankers’ Association and major banks’ second round submissions §  Default products would limit consumer choice and innovation §  Shifting responsibility for suitability may mislead consumers and intervene in the

role of financial advisers §  ASIC powers over product intervention could stifle innovation and be costly Implications §  Would shifting responsibility remove the need for other protections? §  Administrative burden and costs? §  Appealing ASIC bans on products

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Consumer outcomes: Advice

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First round submissions and interim report •  There is a need for higher quality financial advice and affordable advice. •  Education, complementary and enhanced register of advisers •  Wider banning powers •  Differential labelling (sales v advice, independent v aligned) Australian Bankers’ Association and major banks’ second round submissions •  Support better accreditation and continuing education and a public register •  Support other elements of professionalisation e.g. best practices, professional

bodies •  Support more clearly labelling 'General Advice' as ‘General Financial Information,’

and explicitly limiting who can hold themselves out to be a ‘financial adviser’. Implications ▪  Ability of regulators, banks to monitor and keep records of financial advisers ▪  Are different labels for financial advice helpful or simply another layer?

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Technology: Electronic documentation

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The interim report •  Many existing regulatory requirements were developed in a paper-based

era and are not technology neutral •  Developments have been made in the electronic delivery of financial

services Major banks’ second round submissions •  Digital and mobile technologies and new applications will reshape the

industry •  Technology neutrality can be promoted by removing obstacles to digital

services and channels to verify or contract with customers. Implications •  Inconsistent approach to regulation of electronic documentation •  The tension between the benefits of technology and threats (including

privacy and security)

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Payments products

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The interim report •  Lowering or removing interchange fee caps and capping merchant service fees •  Regulation of payment products may be wound back e.g. purchased payment

facilities Second round submissions include •  If interchange fees are lowered or banned, banks would need to adjust their business

models, as well as product fees and charges, to ensure cost recovery. •  Banks support a narrower interchange range so merchants cannot justify

surcharging •  Visa and MasterCard support capping fees and regulation by the RBA Implications •  New payment systems that may be created by smaller and newer players •  Should regulation be based on the risk of the institution, or should like products be

treated in the same way? •  Regulators shaping the industry by explicit pricing controls

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Other issues

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Stability and the major banks ▪  The risk posed by financial institutions that are “too big to fail” ▪  Will FSI will recommend more equity and less leverage? Superannuation ▪  Including fees, liquidity of assets, portability to allow rollovers, products for post-

retirement ▪  Leverage The corporate bond market ▪  How regulatory changes e.g. to disclosure can develop this market International integration ▪  How Australia can better integrate with ASIA e.g. through RMB internationalisation Role and Power of Regulators ▪  Independence, performance, higher penalties