Financial System Inquiry Final Report

The Treasurer has released the Financial System Inquiry’s Final Report together with Fact Sheets.

The Report’s 44 recommendations will influence future regulation in the financial services sector.

The issues discussed are wide ranging.

What’s next?
The Government has announced it will consult with stakeholders on the Inquiry’s final report before making any decisions on the recommendations. Consultations will be open until the end of March 2015.

Once the Government has considered the feedback of stakeholders it will release a formal Government response in mid-2015.

There are no time frames for implementation.

The Inquiry has made a number of observations on tax issues (such as unfavourable tax treatment of deposits and fixed-income securities and the inability of mutuals to distribute franking credits). These will be considered under the Tax White Paper process to be announced shortly.

A decision on some recommendations, such as capital risk-weighting, will be up to APRA.

A number of recommendations address multiple issues eg competition, consumer protection, capital, resilience and regulation.

Some recommendations are already being implemented eg the register of financial advisers.

The following are likely to be the subject of ongoing discussion:

Financial product design:

  • “Introduce a targeted and principles-based product design and distribution obligation.”
    (Recommendation 21) (Financial System Inquiry Final Report, page 198)

    “The obligation would require product issuers and distributors to consider a range of factors when designing products and distribution strategies. In addition to commercial considerations, issuers and distributors should consider the type of consumer whose financial needs would be addressed by buying the product and the channel best suited to distributing the product.” (Financial System Inquiry Final Report, page 198)

  • “Introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment.” (Recommendation 22) (Financial System Inquiry Final Report, page 206)

    “ASIC should be equipped to take a more proactive approach to reducing the risk of significant detriment to consumers with a new power to allow for more timely and targeted intervention. This power should be used as a last resort or pre-emptive measure where there is risk of significant detriment to a class of consumers. This power would enable intervention without a demonstrated or suspected breach of the law. Given the potential significant commercial impact of this power, the regulator should be held to a high level of accountability for its use.” (Financial System Inquiry Final Report, page 206)

  • “Remove regulatory impediments to innovative product disclosure and communication with consumers, and improve the way risk and fees are communicated to consumers.” (Recommendation 23) (Financial System Inquiry Final Report, page 213)

Financial advice

  • “Better align the interests of financial firms with those of consumers by raising industry standards, enhancing the power to ban individuals from management and ensuring remuneration structures in life insurance and stockbroking do not affect the quality of financial advice.” (Recommendation 24) (Financial System Inquiry Final Report, page 217)
  • “Rename ‘general advice’ and require advisers and mortgage brokers to disclose ownership structures.”
    (Recommendation 40) (Financial System Inquiry Final Report, page 271)


  • “Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.”
    (Recommendation 8) (Financial System Inquiry Final Report, page 86)

    “Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) on a prospective basis. This section allows superannuation funds to borrow directly using limited recourse borrowing arrangements” (Financial System Inquiry Final Report, page 86)

    “In implementing this recommendation, funds with existing borrowings should be permitted to maintain those borrowings. Funds disposing of assets purchased via direct borrowing would be required to extinguish the associated debt at the same time.” (Financial System Inquiry Final Report, page 88)

  • Choice of fund: Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid.
  • Governance of superannuation funds: Mandate a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair; align the director penalty regime with managed investment schemes; and strengthen the conflict of interest requirements.

Bank capital/ Competition

“Raise the average internal ratings-based (IRB) mortgage risk weight to narrow the difference between average mortgage risk weights for authorised deposit-taking institutions using IRB risk-weight models and those using standardised risk weights.” (Recommendation 2) (Financial System Inquiry Final Report, page 60)

“Since the IRB approach was introduced, the divergence in mortgage risk weights between the two approaches has widened… The gap between average IRB and standardised mortgage risk weights means IRB banks can use a much smaller portion of equity funding for mortgages than standardised banks… this translates into a funding cost advantage” (Financial System Inquiry Final Report, page 61)

“In the Inquiry’s view, the relative riskiness of mortgages between IRB and standardised banks does not justify one type of institution being required to hold twice as much capital for mortgages than another.” (Financial System Inquiry Final Report, page 61)

This recommendation seeks to: “improve the competitive neutrality of capital regulation by limiting distortions caused by the differential regulatory treatment of different classes of authorised deposit-taking institutions”. (Financial System Inquiry Final Report, page 60)

Payments system
“Enhance graduation of retail payments regulation by clarifying thresholds for regulation by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. Strengthen consumer protection by mandating the ePayments Code. Introduce a separate prudential regime with two tiers for purchased payment facilities.”


  • The current funding structure of the Financial Claims Scheme for authorised deposit-taking institutions should be maintained (recommendation 6). No bank levy is recommended.
  • “Create a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.”
    (Recommendation 27) (Financial System Inquiry Final Report, page 239)
  • “Introduce an industry funding model for Australian Securities and Investments Commission (ASIC) and provide ASIC with stronger regulatory tools.”
    (Recommendation 29) (Financial System Inquiry Final Report, page 250)
  • “Review the state of competition in the sector every three years, improve reporting of how regulators balance competition against their core objectives, identify barriers to cross-border provision of financial services and include consideration of competition in the Australian Securities and Investments Commission’s mandate.” (Recommendation 30) (Financial System Inquiry Final Report, page 254)

Credit reporting
“Support industry efforts to expand credit data sharing under the new voluntary comprehensive credit reporting regime. If, over time, participation is inadequate, Government should consider legislating mandatory participation.” (Recommendation 20) (Financial System Inquiry Final Report, page 190).

More analysis will follow as the Report’s implications become clearer.

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