After a year of analysis, the recommendations from David Murray’s Financial System Inquiry have been published.
If that sentence – and this week’s media coverage – has you wondering how it will affect you, don’t worry, Mozo is here to break it down for you.
What is the Financial System Inquiry?
The Financial System Inquiry was commissioned by Federal Treasurer Joe Hockey in December 2013, in response to things like the GFC, superannuation growth, and the impact of technology on financial services (through Internet banking, mobile apps, etc.). The Murray Inquiry has made 44 recommendations, covering a range of areas within Australia’s financial system.
It’s the first inquiry into Australia’s financial system since the Wallis Report in 1997, which created regulatory bodies such as the Australian Prudential Regulation Authority (APRA), as well as greatly transforming the Australian Securities and Investments Commission (ASIC).
Who is David Murray?
David Murray was CEO of the Commonwealth Bank between 1992 and 2005, overseeing its privatisation. He chaired this year’s Financial System Inquiry and, as a result, the inquiry is often referred to as the Murray Inquiry or the Murray Report.
How will you be affected?
If implemented, the recommendations will affect everyone from bright-eyed property seekers to families doing it tough. And the winners and losers according to the experts are…
Winner: First home buyers
Sick of turning up to auctions only to be beaten out by yet another property investor? You will be glad to know that a review of ‘negative gearing’ tax breaks was recommended in Murray’s report.
Negative gearing is a process where investors are able to use losses incurred while managing an investment property (i.e. when the cost of mortgage repayments and property maintenance is greater than rental income) to offset their taxable income. It makes owning investment properties more affordable, but it has been criticised for contributing to rising home values, and pricing potential owner-occupiers out of the market.
Loser #1: Investors
If negative gearing tax breaks are removed, investment properties will be a less financially viable option for investors, which may mean they will need to turn to investments that aren’t ‘as safe as houses,’ such as the stock market in order to make their returns.
Loser #2: Renters
If fewer investors take on properties, this could result in a rental property shortage that may drive rent prices up. This occurred when Bob Hawke’s government tried to remove negative gearing in the 1980s, and it would be very bad news in places like inner Sydney, where finding a one bedroom apartment at less than $450/week is impossible at best.
Surcharges for paying on credit or debit card could be a thing of the past under the Murray Inquiry’s recommendations, which supported a ban on debit card surcharges and a significant scaling back of credit card surcharges through caps implemented by the Reserve Bank of Australia.
Reforms were also proposed for surcharges on high-cost cards such as AMEX and Diners, with the inquiry recommending these are capped at a reasonable cost.
Under the current system, retailers are charged by their bank, with some of that cost passed on to Visa, MasterCard and the card issuer. While some merchants absorb this fee, some are passing this cost on to you, even increasing it to make a profit. So, some retailers can expect to lose revenue if Murray’s suggested changes are passed.
Winner #1: Workers
It’s power to the people if Murray’s recommendations are implemented, with the report suggesting workers should be given greater control over their super.
The inquiry found that fees should be reduced during the accrual stage, as too often superannuation contributions are eaten up by insurance and other compulsory payments.
Increasing competition in the superannuation market was also a key recommendation. The Murray inquiry said workplaces should not have ‘default’ super funds (as many workplaces currently use industry super funds), instead requiring every worker to choose which fund their hard-earned cash is stored in for retirement.
Winner #2: New market entrants
These changes will encourage new super providers to enter the market, providing competitive services as they try to woo prospective workers. The changes should pave the way for new super funds with competitive interest rates and fee structures.
Loser: Large super providers
If implemented, these changes will be a shock to large super providers who have relied on membership from workers who are too blasé to choose their own.
Winner #1: Mum and dad investors
The Murray Inquiry recommended that ASIC should be able to intervene and ban risky financial products from sale, or restrict them to high income earners. The changes would stop low income earners and mum and dad investors from being preyed on by financial advisors who offer products that are obviously not suitable to their financial situation.
Winner #2: Reputable financial providers
The Murray Inquiry reacted strongly to the recent Commonwealth Bank financial advice scandal, in which dodgy financial advice between 2003 and 2012 caused CommBank customers to lose millions of investment dollars.
Financial providers will also need to be careful about who they hire, with the inquiry proposing stricter guidelines around the qualifications of financial advisors, suggesting that a tertiary qualification should be a requirement.
Winner: Small financial institutions
The report recommended that the big banks increase their capital buffer from $5 billion to $20 billion, so they would not need financial help from the government in the event of financial crisis. Currently, the big banks expect to be bailed out by the government because their failure would seriously upset the Australian economy, which allows them to take bigger risks.
By removing this safety net for the big banks, it will be easier for smaller financial institutions to compete. This may pave the way for new entrants to the market, more intense competition on interest rates and product innovation.
What happens next?
The government has started its consultation process, where it will review Murray’s recommendations. It will accept submissions from members of the public and industry stakeholders until 31 March 2015, after which time they will come to a decision on whether or not some or all of the recommendations should be enforced.
However, the Abbott Government’s track record in these areas suggests that they may be inclined to listen to the lobbying of the big players at the expense of customers – as we saw in their watering down of consumer protections in the Future of Financial Advice reforms. Will they do so again or will they, as David Murray has done, step back and look at the bigger picture?
Watch this space…