Plus deregulation of NSW retail electricity prices By Kirsty Simpson.

David Murray’s Financial System Inquiry

As far as federal government inquiries go, few come any bigger than David Murray’s Financial System Inquiry, commissioned by the Abbott government to report in November. 

Set the job of “examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth”, it is the biggest such review since the Wallis inquiry in 1996, which recommended the current regulatory system and the “four pillars” policy.

A flood of submissions was lodged by the end of March and published on the FSI website on April 4. For the past week, financial journalists, academics and analysts have been poring over the 200 or so that were made public.

And as you might imagine, the submissions suggest the incumbents are generally happy with the system, and would-be competitors far less so, and Treasury has raised concern about the “too big to fail” status of the major banks. 

There is also a substantial push for the superannuation system to diversify its investments and improve the way it works in retirement. 

For those without the time or inclination to wade through the submissions, here is a brief look at a few highlights, as they relate to households.


As Australia’s $1.6 trillion pool of compulsory savings continues to grow, so does the pressure for alternative forms of investment in an industry long focused on the traditional asset classes of shares, property, cash and bonds.

First in the inquiry’s extensive terms of reference is an examination of “how Australia funds its growth”. Many disparate groups are looking at ways to help super invest in other longer-term projects. With the super pool growing far faster than the Australian economy, it will get harder for funds to find attractive well-priced investments locally.

Cracking the code to better enable superannuation to help fund Australia’s infrastructure backlog is perhaps the biggest issue – and might be partly solved by the federal government encouraging the development of a project finance market, according to some submissions. But private equity, venture capital funds, some forms of agribusiness and others are also keen to win the backing of super.

“Super funds are traditionally thought of as vehicles for investment in existing financial assets, rather than creators (such as banks) of new financial assets associated with new real investment opportunities,” the Australian Centre for Financial Studies submission says. Furthermore, “if banks face a declining share of new savings, how will the supply of new financial assets (securities) available for super fund investment be created? Will super funds take on, in some way, a larger role as creators of financial assets?”

Second, many different groups have urged the inquiry to make the super sector more efficient and improve the way it manages people’s pensions after retirement. In its extensive submission, Treasury advises the panel to “review the availability and adequacy of options for the retirement phase” and warns the industry “has [not] sufficiently developed a broad range of products for individuals to manage their financial affairs through retirement”.


The inquiry will also consider the extent of competition in banking and whether regulation sufficiently encourages new entrants. 

For households seeking new mortgages, and small businesses seeking loans, competition and innovation are essential. At the heart of this question is whether the big four banks received an unfair advantage in the post-global financial crisis world in which they are deemed too big to fail. The Treasury sums up the consequences of this perception in its submission, “[This] has two major consequences for the efficiency and stability of the financial system: moral hazard – the behaviour of the major banks and their investors, particularly their attitude to risk and its management, may be affected as some downside risk is perceived to be shifted to the government.” 

Another consequence, Treasury says, is that “major banks’ funding costs will be lower relative to competing financial institutions, such as smaller banks or corporate bonds”.

Leaving the reader in no doubt of their approach, Australia’s four regional banks dubbed their offering “Levelling the playing field”. The crux of their argument is that “issues have emerged since the GFC that result in a significant competitive advantage for larger banks”.

Unsurprisingly, the Australian Bankers’ Association lobby group bluntly declared in its submission that “the first conclusion of the inquiry therefore should be that the current system works well and that it is imperative that its strengths are preserved. The banking industry will not be seeking dramatic change to the current policy and regulatory framework”. Although it does make a modest concession that “there could be opportunities to enhance competition, however, including through broadening the funding options for banks”.


• “The inquiry should consider how best to lift the quality and integrity of the financial advice sector, including whether conflicted remuneration and percentage fees should be allowed,” National Seniors Australia says.

• Macquarie Group calls for a reduction in corporate tax rates from 30 per cent to 25 per cent.

• Some participants call for new ways for retirees to unlock the value in their family home, claiming current arrangements mean retirees don’t want to sell their homes because a cash windfall threatens their ability to get the pension.

• Australia Post wants the inquiry to look at delays in adopting new payment technologies, and the role of “key industry participants” in these delays.

1 . Political power play as NSW joins full deregulation  

The Barry O’Farrell government’s move to fully deregulate NSW retail electricity prices whipped up predictable positioning from both sides of the debate.

Premier O’Farrell and the industry say this will lead to lower power prices, and the Labor opposition argues the opposite – that bills will soar. 

NSW will abolish price caps from July 1 (the same day Tasmania moves to a deregulated retail market and 17 months after South Australia deregulated) and will switch to a two-year transitional tariff set 1.5 per cent below today’s rates.

The government has cited a report from the independent Australian Energy Market Commission that says that if NSW customers shop around they could save up to $400 off the average annual power bill.

Independent consumer group Choice, however, says a crucial driver of rising power bills is the cost of poles and wires – run in NSW by a separate government-owned distribution company, according to a Fairfax Media report.

This article was first published in the print edition of The Saturday Paper on April 12, 2014 as "Cheat sheet for the financial inquiry".

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Kirsty Simpson is The Saturday Paper’s business editor.

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