Australia: Government endorses the recommendations of the Financial System Inquiry

Insurance Quarterly newsletter
Last Updated: 15 May 2016
Article by Matthew Ellis

Public policy – financial services regulation – final report of Financial System Inquiry – impact on insurance industry

The Federal Government's long-awaited response to the final report of the Financial System Inquiry (FSI) was released on 19 October 2015. The ministerial reshuffle brought about by Malcolm Turnbull's appointment as Prime Minister delayed the release of the response; but the newly appointed Treasurer, Scott Morrison, and the Assistant Treasurer, Kelly O'Dwyer, did not veer from the expected course. The Government has backed all but one of the FSI's 44 recommendations across five distinct strategic priorities, namely:

  1. The resilience measures, which are aimed at reducing the impact of potential future financial crises by ensuring Australia is better equipped to weather them and lessen their cost to taxpayers and the economy.
  2. The superannuation and retirement incomes measures, which are aimed at reducing the costs of the superannuation system to consumers.
  3. The innovation measures, which are aimed at unlocking new sources of finance for the wider economy and supporting competition and the facilitation of technology-led innovation.
  4. The consumer outcomes, which are aimed at providing consumers with confidence to participate in the financial system and confidence that they are being treated fairly.
  5. The regulatory system measures, which are aimed at making regulators more accountable for their performance, more capable and more effective.

For the insurance industry, the Government's endorsement of the FSI's recommendations will ultimately lead to some significant changes to regulation, particularly in the areas of consumer outcomes and innovation.

Consumer outcomes

In the area of consumer outcomes, the Government has agreed to:

  • create a targeted and principles-based financial product design and distribution obligation. This will see organisations taking greater responsibility for ensuring that products are only designed for, and sold to, customers for whom the product is appropriate;
  • provide ASIC with a product intervention power to enable it to modify, or if necessary, ban harmful financial products where there is a risk of significant consumer detriment. These powers are proposed to be based on similar powers granted to the UK's Financial Conduct Authority in 2012;
  • remove regulatory impediments to innovative product disclosure;
  • develop legislative amendments to raise the professional, ethical and educational standards of financial advisers by requiring advisers to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year;
  • support industry-led initiatives to increase guidance and disclosure in general insurance;
  • take steps to more clearly differentiate financial products. The Government has given its support to APRA in improving product differentiation for retail consumers; and
  • rename 'general advice' to improve consumer understanding. The Government will consult with a wide range of stakeholders and conduct consumer testing before finalising the name of the new term.

Innovation

In the area of innovation, the Government has agreed to:

  • establish a permanent public-private sector collaborative committee (the Innovation Collaboration Committee) to facilitate financial system innovation. The committee will be linked to ASIC's Digital Finance Advisory Committee;
  • improve the use of data. The Government proposes to task the Productivity Commission with reviewing options to improve accessibility to data, taking into account privacy concerns and other existing Government processes; and
  • amend priority areas of legislation and regulation to be technology neutral so as to prevent technology-specific laws and regulations from impeding innovation.

Where to from here?

2016 will see Treasury embark on a range of consultations with stakeholders in respect of the recommendations. Implementation of any changes to financial services regulation is not likely to be seen before January 2017. There will be a Federal election before then (possibly early in 2016) which may disrupt this process.

Insurance industry reaction

The insurance industry has so far reacted positively to the Government's response. The Insurance Council of Australia has stated that general insurers are "pleased" with the response, but that further detailed consultation is required to address the extent to which the recommendations should apply to the insurance industry, as opposed to the banks and superannuation funds to which they appear more relevant. However, given global regulatory trends in these areas, particularly around product governance and intervention powers, the expectation is that any changes to financial services regulation will apply equally to insurance issuers and distributors.

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Authors
Matthew Ellis
 
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