Financial System Inquiry Final Report November 2014 © Commonwealth of Australia 2014 ISBN 978-1-925220-14-8 This publication is available for your use under a Creative Commons Attribution 3.0 Australia licence, with the exception of the Commonwealth Coat of Arms, the Treasury logo, photographs, images, signatures and where otherwise stated. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode. Use of Treasury material under a Creative Commons Attribution 3.0 Australia licence requires you to attribute the work (but not in any way that suggests that the Treasury endorses you or your use of the work). Treasury material used ‘as supplied’. 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Other Uses Inquiries regarding this licence and any other use of this document are welcome at: Manager Communications The Treasury Langton Crescent Parkes ACT 2600 Email: [email protected] Contents Foreword .................................................................................................................... vii Background to the Inquiry ................................................................................................ vii Financial System Inquiry Terms of Reference ................................................................ vii Financial System Inquiry Committee ............................................................................... ix International Advisory Panel ............................................................................................ xi Acknowledgements ............................................................................................................ xi Executive summary ................................................................................................. xiii Overview and general themes......................................................................................... xiv Chapter 1: Resilience ........................................................................................................... xvii Chapter 2: Superannuation and retirement incomes ........................................................ xviii Chapter 3: Innovation .......................................................................................................... xix Chapter 4: Consumer outcomes ............................................................................................ xx Chapter 5: Regulatory system ............................................................................................... xx Appendix 1: Significant matters .......................................................................................... xxi Appendix 2: Tax summary .................................................................................................. xxi Recommendations ............................................................................................................. xxi Overview ....................................................................................................................... 1 The Australian context ........................................................................................................ 2 Characteristics of a well-functioning financial system ................................................... 3 The Inquiry’s approach to financial system regulation .................................................. 8 Themes of this report ......................................................................................................... 12 Conclusion .......................................................................................................................... 30 Chapter 1: Resilience ................................................................................................ 33 Strength in the financial system ....................................................................................... 34 Recommended actions ...................................................................................................... 35 Principles ............................................................................................................................. 37 Conclusion .......................................................................................................................... 38 Capital levels ...................................................................................................................... 41 Narrow mortgage risk weight differences ...................................................................... 60 Loss absorbing and recapitalisation capacity ................................................................. 67 Transparent reporting ....................................................................................................... 76 Crisis management toolkit ................................................................................................ 79 Financial Claims Scheme................................................................................................... 82 Leverage ratio ..................................................................................................................... 84 Direct borrowing by superannuation funds ................................................................... 86 Chapter 2: Superannuation and retirement incomes.......................................... 89 Recommended actions ...................................................................................................... 90 iii Financial System Inquiry — Interim Report Principles ............................................................................................................................. 94 Conclusion .......................................................................................................................... 94 Objectives of the superannuation system ....................................................................... 95 Improving efficiency during accumulation .................................................................. 101 The retirement phase of superannuation ...................................................................... 117 Choice of fund .................................................................................................................. 131 Governance of superannuation funds ........................................................................... 133 Taxation of superannuation ............................................................................................ 137 Chapter 3: Innovation ............................................................................................. 143 Recommended actions .................................................................................................... 144 Principles ........................................................................................................................... 146 Conclusion ........................................................................................................................ 146 Collaboration to enable innovation ............................................................................... 147 Digital identity.................................................................................................................. 151 Clearer graduated payments regulation ....................................................................... 161 Interchange fees and customer surcharging................................................................. 168 Crowdfunding .................................................................................................................. 177 Data access and use.......................................................................................................... 181 Comprehensive credit reporting .................................................................................... 190 Chapter 4: Consumer outcomes ............................................................................ 193 Recommended actions .................................................................................................... 194 Principles ........................................................................................................................... 197 Conclusion ........................................................................................................................ 197 Strengthen product issuer and distributor accountability ......................................... 198 Introduce product intervention power ......................................................................... 206 Facilitate innovative disclosure ...................................................................................... 213 Align the interests of financial firms and consumers .................................................