New Zealand: Australia's financial system report – will the waves reach New Zealand?

Brief Counsel

The Australian Financial System Inquiry Report, delivered on Sunday, makes 44 recommendations which, if adopted, will change the way in which financial institutions in Australia do business – particularly at the big end of town.

We look at the suggested reforms, some of the likely outcomes, and the relevance for New Zealand.

An elite pedigree

The "Murray Inquiry", named after its chair, David Murray, a former CEO of the Commonwealth Bank of Australia, has a lot to live up to as the Abbott Government has placed it in the tradition of two earlier inquiries, both of which were catalysts for major reform:

  • the Campbell Inquiry in 1981 which led to the floating of the Australian dollar and the deregulation of the financial sector, and
  • the Wallis Inquiry of 1997 which led to the establishment of APRA and to the recasting of ASIC into its current form.

The "blueprint" the Murray Report has come down with does not envisage change of anything like this scale but does reflect international thinking in the post GFC environment and is likely to be significant in its effect.

From here

The Australian Government will consult with industry and the public before formally responding to the Inquiry. That consultation will run until 31 March 2015. But a number of the recommendations are not directed at the government as they come within the mandates of APRA and the Reserve Bank of Australia while those relating to tax have been referred directly to the Tax White Paper.

Key reform themes

The key characteristics that the Report identifies for an effective financial system are efficiency, resilience and fair treatment.

Here in New Zealand, these values are also reflected in the purpose of the Financial Markets Conduct Act (FMCA) to promote and facilitate the development of fair, efficient and transparent markets, in the new unfair contract terms regime under the Fair Trading Act and in the upcoming changes to consumer credit legislation (including the responsible lending code).

Another important theme informing the Inquiry's recommendations is the need to increase the international competitiveness of the Australian financial sector. This applies particularly to the comments on tax distortions and is relevant to New Zealand in relation to the debate on the ongoing usefulness of the approved issuer levy scheme.

Resilience

The Report reflects the international shift post GFC toward imposing higher capital requirements on the larger banks to remove any implicit government guarantee and so that they are more resilient against financial shocks without having to rely on taxpayer funded bail-outs.

The top 25%

Murray works from the premise that the four main Australian banks need to be "unquestionably strong". To achieve this, he recommends that they should be ranked within the top quartile of internationally active banks in terms of capital. Estimates of what they would need to raise to meet this requirement over the medium term range are as high as A$35 billion to A$40 billion.

Moreover the Report expects this to be primarily in the form of equity or retained earnings to give the greatest level of protection against a bank failing and (presumably) to dispel further perceptions around any implicit guarantee.

Doubtless this will be a response to the recent APRA stress tests of the 'Big Four' which showed that, while they would all be above their minimum capital requirements even in the most extreme of scenarios, a number of them would breach their capital conversion triggers, thereby requiring their loss-absorbing regulatory capital to be converted into share capital.

It is also worth noting that the top 25% is a moving target as regulators in other jurisdictions impose stronger Basel III minimum requirements and requirements in excess of the Basel baselines. Only this week, for example, the US Federal Reserve announced a risk-based capital surcharge to be applied to the eight largest US banks which will penalise them for being too reliant on short-term funding.

Other recommendations to build resilience include:

  • implementation of the Basel III leverage ratio (the "raw" test of capital without the impact of risk weighting assessments)
  • introduction of a framework for minimum loss absorbing capital capacity in line with emerging international practice which, as announced at the G20 Summit, proposes a layer of "bail-in" securities that sit above the Tier 2 capital instruments already contemplated under the Basel III regime
  • narrowing the difference between the IRB risk weightings on mortgages (estimated to be around 20%) and the standard risk weighting imposed by APRA on the smaller, regional banks to create a more level playing field and (probably) to take some of the heat out of the Melbourne and Sydney residential property markets, and
  • requiring effective pre-positioning in planning for the use of powers in relation to effective crisis management or resolution regimes. These compare with New Zealand's own statutory management regime and the work the RBNZ has done on open bank resolution (OBR).

Interestingly, the Report explicitly declines to recommend the bailing in of deposits. This contrasts with the New Zealand OBR policy where customer deposits are subject to the OBR "hair cut" and need to be pre-positioned in order to enable a bank to open as soon as possible after it is placed in statutory management.

Implications for the RBNZ

As international investor expectations continue to rise, a trend which the Murray Report will reinforce, the RBNZ may come under pressure to increase the quality and quantum of domestic capital requirements. In anticipation of this eventuality, New Zealand banks may choose to build up their retained earnings.

Regardless of whether the RBNZ moves, the New Zealand subsidiaries of the Big Four Australian banks may experience a "trickle-across" effect if the proposed minimum loss absorbing capital requirements are adopted in Australia, depending on how their parent group responds to the new minima.

The RBNZ has consistently stated that it does not consider the leverage ratio to be appropriate for the New Zealand market. Reasons offered include that it is "poorly targeted", can give "a misleading picture of risk" and is rendered unnecessary by a robust and properly applied risk-based approach.

While it has been accepted for some time that New Zealand and Australia (and several other significant OECD countries) diverge on this issue, the Murray Report may put the spotlight back on this position and make New Zealand more of an outlier.

The proposals relating to the mortgage market may be of interest to the RBNZ as it considers how to use its macro-prudential tool kit to slow the increase in Auckland house prices, including the imposition of a minimum risk weighting on residential loans which would effectively require banks to hold more capital against residential lending.

Superannuation

The Report makes a number of recommendations for improving the operational efficiency of Australia's superannuation system, commenting that:

  • a "lack of strong price-based competition" means the benefits of scale are not being fully realised
  • one of the design features contributing to inefficiency is the proliferation of multiple accounts, and
  • superannuation assets are not being efficiently converted into retirement incomes.

The recommendations which will likely be of particular interest in the KiwiSaver context include:

  • automatically allocating new workforce entrants to default funds in 'MySuper' products chosen by the government after a competitive tender process (with each such person having only one 'high-performing' account, portable across new jobs until they choose another fund)
  • requiring trustees to pre-select for each member's retirement a 'comprehensive income product' (with minimum features which include a regular and stable income stream, longevity risk management and flexibility ) and to communicate this selection to the member, with drawdowns then commencing on the member's instruction (but allowing members to actively choose to take their benefits in another way), and
  • requiring superannuation funds to provide retirement income projections on member statements from defined contribution schemes (using ASIC regulatory guidance) to improve member engagement.

The first of these recommendations will have a familiar ring in New Zealand (aside from there being a high-performance, rather than conservatism and risk management, focus when choosing default funds).

The second recommendation is also very topical. Product providers and commentators in New Zealand are devoting steadily more attention to the 'decumulation phase' of KiwiSaver and to mitigating longevity risk in retirement.

The third recommendation reflects research indicating that giving consumers retirement income projections improves their engagement with saving for retirement and their ability to make informed decisions about retirement saving.

Innovation

The recommendation that the Australian Government accelerates proposals for crowd funding and, following that, peer to peer lending in order to give SMEs additional funding options reflects recent advances in the New Zealand market under the FMCA.

Development of such a market in Australia is likely to create a broader market in New Zealand and potentially provide more of a challenge to the traditional funding models.

The Report considers that further work is needed to lower interchange fees and to put more prescriptive limits on credit card surcharges. These are issues in New Zealand too, with the Commerce Commission deciding recently not to take action against Air New Zealand in relation to its credit card surcharging policy.

However the Report's recommendations could increase public pressure for a further review in this area given the general unpopularity of these fees and charges.

Consumer outcomes

The Murray Inquiry is concerned that the current system is deficient in a number of respects. These include:

  • the "cultural approach" that banks take to treating customers fairly and the consequential pressure that places on the regulatory framework and regulator, and
  • the heavy reliance placed on disclosure, financial advice and financial literacy as sources of consumer protection given the limited effectiveness of these tools.

The Report recommends a securities regime built around targeted and principles-based product design and distribution obligations in which product issuers would be required to identify target and non-target markets, stress test products to see how consumers would be affected in different circumstances, and consumer-test marketing materials to ensure that they are clear and easy to understand.

New Zealand has already made progress in this regard. The FMCA has effected a significant move toward regulating conduct, as compared to the previously narrow focus on disclosure, and the Financial Markets Authority is emphasising the centrality of good governance and putting customers first.

Other matters

The Report also makes recommendations on a range of ad hoc matters.

Of interest in the New Zealand framework is the recommendation that there be reduced disclosure requirements for large listed corporates issuing "simple" bonds to retail investors. The Inquiry proposes the use of terms sheets and a cleansing notice.

Hopefully this will result in greater alignment with the new reduced disclosure requirements for quoted financial products under the FMCA, and that it will pave the way for mutual recognition of such limited disclosure documents.

Also of note are:

  • the support the Report gives Australian government proposals to extend the unfair contract terms protections to small businesses (these must be relevant to New Zealand given the large number of SMEs in the New Zealand economy), and
  • the encouragement to the banking industry to develop standards on the use of non-monetary default covenants, including requiring sufficient notice of changes so that borrowers have reasonable time to obtain alternative funding. Any new standards introduced into Australia should feed into the review due next year of the New Zealand Bankers' Association Code of Banking.

A summer read?

At over 350 pages, and having taken account of nearly 7,000 submissions, the Report contains a wealth of information, and a detailed commentary on the current state of the Australian financial market.

That makes it a useful document which deserves to be read. But it doesn't necessarily make for good holiday reading!

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mike Woodbury
Roger Wallis
Penny Sheerin
Bradley Kidd
Similar Articles
Relevancy Powered by MondaqAI
Chapman Tripp
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Chapman Tripp
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions