Why financial services needs another Wallis Inquiry
The outcome of the next Federal election will determine the degree to which the financial services industry will be subjected to another far-reaching review similar to the Wallis Inquiry. Tasmanian Liberal Senator, David Bushby, last week outlined why the Coalition thinks Wallis 2 is justified. This is an edited extract of his speech.
The Wallis Inquiry was one of the first reviews commissioned by the first Howard Government upon its election in 1996.
When implemented, Wallis provided major reforms which greatly assisted the stability, certainty and efficiency in our financial system, including:
- The establishment of ASIC [the Australian Securities and Investments Commission] and APRA [the Australian Prudential Regulation Authority], and a new role for the RBA;
- Key pronouncements on merger and acquisitions – including a principle that diverse ownership itself is a form of prudential regulation; and
- Changes to the Payment System Board and the recognition of the inevitability of technological change in banking and electronic commerce, including the need to advance digital signatures and e-commerce.
The changes made as a result of Wallis created a strong financial regulatory framework which, in the intervening 15 years has survived very severe, real world stresses, including the pressures of the Asian financial crisis and the GFC.
Compared to our offshore counterparts, the number of institutional failures has been very low.
HIH is the highest profile failure – but the system recovered fairly quickly and lessons were learned and applied that, later, assisted during the GFC.
The robustness of our system post-Wallis in itself proves the value of periodically examining the structure in order to ensure it is appropriate to meet the expectations and needs of the financial sector, as well as the risks inherent in the financial world we now face and are likely to face in the next 10 to 15 years.
The financial sector across the world has changed a lot since 1997 when Wallis reported his findings. In particular, change has accelerated since 2008.
In 1997, there were six pillars in the banking industry – now there are four – and the pillars are underpinned via the 15 per cent shareholding limits and also FIRB protection against takeover by foreign banks.
On the back of the GFC, the big banks reasserted their dominance as the strong competition they faced from the securitisation markets and smaller players in the early to mid-noughties fell away, and as some decisions of the Government favoured stability over competition.
At the same time, the funds management industry has expanded its role as a custodian of household wealth.
Since the GFC, we have seen a drop in demand for borrowings and an increase for investment products as households and businesses seek to rebuild their net worth position.
A major change between now and 1997 has been the integration of financial markets around the world, providing great advantages in terms of access to international finance, but introducing more risk to Australia from offshore markets conditions – as experienced during the GFC.
We have seen the near failure of banking systems in most developed economies, contrasted with generally robust banking systems in the emerging world.
The GFC has created a strong push for tighter controls by global regulators – with solutions being designed to address problems in those countries which faced near failure, rather than those that stayed generally robust.
And of course, the advancement in technology and how banking systems work has been inestimable over the past 16 years or so.
All of these factors and, no doubt more, have major implications for the way the financial sector works and for its relationship with the real economy.
The 44th Parliament will need to ensure that the competitive and prudential structure in Australia continues to facilitate the efficient flow of funds between savers and borrowers; that it promotes investment and growth; and that it provides a safe place for Australians to place their savings.
It is for these reasons and with these objectives in mind that the Shadow Treasurer, Joe Hockey – who was a Treasury Minister under Peter Costello – has a clear policy to undertake a new root and branch review of the financial system. I might mention that the majority reports of both the Banking Competition and the Post-GFC inquiries drew the same conclusion.
Other matters that might be addressed by such a root and branch inquiry include:
The apparent failings in the regulation and enforcement of financial product sales, which I will elaborate on later in this address, and
Factors that have led to the demise of large life insurance companies - currently there is only one major stand-alone life company left in the market.
Along the way the Wallis Mark 2 review could also survey and report on how the Government can attract the best available talent to lead our financial regulatory agencies, and how due process selection and appointments should implemented.
Also, it might be useful to examine the role of parliamentary committee and ministerial oversight of our financial regulators, with a view to achieving world’s best practice.
As mentioned, during the 15 years of post-Wallis finance sector operations, there has been very substantial growth in the industry superannuation funds and self- managed super funds – and post the Rudd/Gillard reforms, the great bulk of SG funds have flowed into these two areas with little competitive pressures, via Fair Work Australia mandates.
The large super funds now rival the major banks in assets and influence on savings and investments – yet they enjoy significant regulatory competitive advantages when it comes to capital requirements and disclosure.
As such an increasingly important part of our financial system, it is vital that a big picture analysis of that system considers how super funds should fit into the regulatory framework in the best interests of all Australians.
Unfortunately, the 36th Treasurer Wayne Swan has resisted a ‘root and branch’ review of the financial system – it remains to be seen whether the 37th will take a different approach.
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