Overall, the “initial assessment” of the FSI is that the Australian financial system has performed “reasonably well” in meeting the financial needs of Australians and facilitating productivity and economic growth.
However, the 460-page report warns there is no room for complacency, flagging future financial crises, fiscal pressures, productivity growth, technology change and international integration as upcoming challenges for the system.
“Most sectors of the Australian financial system are concentrated, with that concentration generally increasing since the [1997] Wallis Inquiry,” says the report.
The report noted that concentration can be “strong” between players in a concentrated market.
“Market concentration can be a by-product of competition, if more efficient firms grow at the expense of their less efficient competitors,” it said.
“On balance, the Inquiry considers that the banking sector is competitive.”
When it comes to superannuation, the report has found “little evidence” of strong fee-based competition in the sector.
“Operating costs and fees appear high by international standards. This indicates there is scope for greater efficiencies in the superannuation system,” said the report.
“If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems.”
On the funding of Australia’s economic activity, the report said ongoing access to foreign funding has enabled Australia to sustain higher growth than otherwise would have been the case.
“The risks associated with Australia’s use of foreign funding can be mitigated by having a prudent supervisory and regulatory regime and sound public sector finances,” it said.
Turning to the post-GFC regulatory response, the report said the crisis has “entrenched perceptions that some institutions are too-big-to-fail”.
“These perceptions can be reduced in Australia by making it more credible to resolve these institutions without Government support,” said the report.
“A number of jurisdictions have implemented new macroprudential toolkits to assist with managing systemic risks.
“The effectiveness of these for a country like Australia is not yet well established, and there are significant practical difficulties in using such tools,” it said.
The report flagged the need for “sound corporate governance” to clarify the responsibilities and authorities of boards and management.
“There are differences in the duties and requirements of governing bodies for different types of financial institutions and, within institutions, substantial regulator focus on boards has confused the delineation between the role of the board and that of management,” it said.
Turning to the current disclosure regime, the report said it produces “complex and lengthy documents that often do not enhance consumer understanding of financial products and services, and impose significant costs on industry participants”.
On financial advice, the report noted that “quality financial advice” can bring significant benefits for consumers.
“Improving standards of adviser competence and removing the impact of conflicted remuneration can improve the quality of advice,” said the report.
“Comprehensive financial advice can be costly, and there is consumer demand for lower-cost scaled advice.”
Addressing Australia’s regulatory architecture, the report said ASIC and APRA are generally strong and well regarded, but “some areas of possible improvement have been identified to increase independence and accountability”.
The report also noted there are some regulatory and “other policy impediments to developing income products with risk management features that could benefit retirees”.
On technology, the report said government and regulators need to weigh the benefits for consumers against the risks as they seek to “manage the flexibility of regulatory frameworks and the regulatory perimeter”.
“Government is also well-positioned to facilitate innovation through coordinated action, regulatory flexibility and forward-looking mechanisms,” it said.
The report also said the financial system’s shift to an “increasingly online environment heightens cyber security risks and the need to improve digital identity solutions”.
“Government has the ability to facilitate industry coordination and innovation in these areas,” the report said.
