We know the federal government loves a good inquiry, and the much anticipated Murray Report into Australia’s financial sector is no exception.
For the first time in 17 years, the banking sector, investment markets, super funds and the financial advisor’s industry have come under scrutiny, with a close examination headed by former CBA chief and current head of the Future Fund, David Murray.
Bruised banking egos
The Big 4 banks of Australia hold an enviable position on the world stage, with no real competition on the horizon to snaffle any of their 94% share in a $1.3 trillion mortgage market.
But some thinly veiled..err…cautions have been bandied around by the regulatory bureaucrats in recent times, in the wake of a marked and steady increase in the number of investor loans since late 2013, when interest rates were put on hold at an all time low of 2.50%.
Extra investment activity has breathed new life into certain sectors of the property market that needed a bit of reviving – Sydney for instance. And of course when house prices rise, people start to get hot under the collar.
Aussie Banks have long argued that they are among the best capitalised in the world, and so don’t require stricter capital rules imposed by regulators. However, the Murray inquiry begs to differ.
It found that sharply higher “risk weights” were needed for bank assigned mortgages, in order to provide a more level playing field for smaller, independent lenders (of which there are only a handful left).
The Murray report said that on average, the major banks could use their “advanced modeling systems” to set aside less capital against home loans through generating risk weights of 18 per cent, compared to 39 per cent for smaller banks like Suncorp and the Bank of Queensland.
In other words, a distinctly unfair advantage when it comes to luring in ‘riskier’ borrowers who require a higher loan to value ratio.
The report recommends a higher range of 25 to 30 per cent would be “more appropriate”, thereby lowering their leverage and in turn, their bottom line. It also suggests they need to increase capital levels to the “top (global) quartile” so they are “unquestionably strong”.
The inquiry said it would be up to APRA to use its discretion with regard to where the extra $20billion or so worth of capital that the banks will be required to raise in order to meet the stricter rules would come from.
Adding that the cost of such a significant increase in capital levels – in the form of potentially higher interest rates or lower dividends – was “small” in comparison to the “net benefit to taxpayers and the broader economy.”
Spotlight on Super
Other areas of the financial sector to be selectively picked apart by the inquiry includes Super Funds, which is hardly surprising given the amount of SMSF spruikers there are multiplying like the proverbial rabbit these days.
Recommendations that would have a possible flow on effect to property investors and the housing market – if imposed – include ending the exception to prohibition on direct borrowing for limited recourse assets by super funds, because of the risk strong growth poses to the financial system.
Advisors take note…
Arguably though, it’s the much-maligned financial advice industry that cops the brunt of the Murray Report’s battering. Again, no real surprises there, because this is undoubtedly the most haphazardly regulated of all areas within Australia’s financial services sector.
With commissions flying hither and thither and salesmen dressed in ‘independent advisor’s’ clothing, it’s a difficult one to police. Trying to work out the very grey area of advice versus product pushing is a potentially subjective and seemingly impossible exercise.
Nonetheless, someone had to talk about the elephant in the room and Murray et. al. were the ones to start the dialogue in earnest, recommending a tightening of product design and distribution, as well as improving the “competency” of advisers and more power to the corporate regulator.
Real or rhetoric?
Looking back on 2014, it’s clear that a lot of talk has been bandied around with regard to banks and in particular, increased investor borrowing activity and its impact on select markets, including residential real estate.
Unfortunately, all the noise almost makes the long awaited Murray Report just seem like more rhetoric to be used by regulators who are facing an ongoing monetary policy predicament as we head into 2015.
However Boston Consulting Group financial services leader in Australia, Andrew Dyer said of the findings that all financial services companies should be preparing for inevitable industry reform, “rather than fighting for the status quo” – referring to the big banks’ lobbying efforts of late against higher capital regulations.
Needless to say, any major reforms to the industry would not happen overnight, with massive lead in times required to effect the types of dramatic systemic shifts the Murray inquiry suggests are necessary, to ensure the sustainability of Australia’s global economic standing.
Dyer commented, “It doesn’t matter whether you are an industry super fund, a major bank or one of the new attackers of financial services markets. This inquiry has not favoured any quarter in laying out the roadmap for a more competitive and dynamic financial services industry.”
He adds, “The reforms will serve Australia well for the next 20 years, and tackle the imperatives of linking us more closely with Asia and taking our superannuation savings into the global system. The committee should be commended for putting first the competitiveness of Australia.”
Hmmm…let’s wait and see shall we?