tag:theconversation.com,2011:/au/topics/financial-systems-inquiry-21726/articlesFinancial Systems Inquiry – The Conversation2020-03-31T19:15:56Ztag:theconversation.com,2011:article/1339062020-03-31T19:15:56Z2020-03-31T19:15:56ZThe coronavirus response calls into question the future of super<figure><img src="https://images.theconversation.com/files/324193/original/file-20200331-65533-856ena.jpg?ixlib=rb-1.1.0&rect=17%2C413%2C5928%2C3529&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/gb4KXbOFLlA"> Brendel/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Understandably, given we are in a crisis, the government has baulked at including <a href="https://treasury.gov.au/coronavirus/jobkeeper">superannuation contributions</a> in the A$140 billion worth of $1,500 per fortnight wage top-ups it will be directing to six million Australians.</p>
<p>As the JobKeeper <a href="https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet_supporting_businesses_4.pdf">fact sheet</a> puts it:</p>
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<p>It will be up to the employer if they want to pay superannuation on any additional wage paid because of the JobKeeper Payment. </p>
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<a href="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=962&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=962&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=962&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
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<p>This is in the middle of a treasury led <a href="https://treasury.gov.au/review/retirement-income-review">Retirement Income Review</a> that is considering, among other things, whether the current 9.5% of salary contribution should be increased to 10% and then to 10.5% and then in a series of annual steps to 12% by 2025.</p>
<p>In considering the idea (it is actually leglislated – if the government decided not to go ahead it would need to unleglislate it) it helps to go back to basiscs.</p>
<h2>The blinding power of money</h2>
<p>The trouble with money is most people are so busy looking at it they are blind to what’s going on in the real economy - by which I mean the production and distribution of goods and services. </p>
<p>Our current material standard of living depends almost entirely on our current ability to produce goods and services (assuming for a moment imports are funded by exports). </p>
<p>Similarly, our standard of living in 2050 will depend almost entirely on our capacity to produce goods at that time. This means it has little to do with how much money is in our superannuation accounts.</p>
<p>Part of the justification for superannuation is to get us more resources in retirement, and it will for those who have big super balances, but it won’t do much to change the total amount of resources available at the time.</p>
<h2>The limits to saving</h2>
<p>Often it’s put another way. We are told <a href="https://en.wikipedia.org/wiki/Baby_boomers">baby boomers</a> need to fund themselves in retirement, instead of relying on pensions paid for by those who are still in the workforce.</p>
<p>But imagine a perfect scenario where every retired baby boomer has $1 million in super, freeing those still working from the tax burden of funding the pension.</p>
<p>When the boomers are using their super to buy services and goods, who are they going to take them away from? </p>
<p>You guessed it, those still working. </p>
<p>They’ll be giving up resources to support the retirement of boomers, whoever supplies the cash.</p>
<h2>In the main, saving can’t create resources</h2>
<p>If there was no superannuation and the government instead taxed current workers in order to fund retiree consumption, the real cost to workers would be the same. That cost is the provision of goods and services to retired people instead of workers.</p>
<p>Individuals can indeed save for the future by foregoing some goods and services today in order to have more of them later. Financial planners refer to it as <a href="https://www.investopedia.com/terms/c/consumption-smoothing.asp">consumption smoothing</a>.</p>
<p>But an entire society can’t save for the future through consumption smoothing. </p>
<p>If Australia as a whole consumes fewer goods and services in one year, it is likely to reduce rather than increase its future wealth because it is fully utilised labour and capital that drives investment and productivity.</p>
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Read more:
<a href="https://theconversation.com/5-questions-about-superannuation-the-governments-new-inquiry-will-need-to-ask-124400">5 questions about superannuation the government's new inquiry will need to ask</a>
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<p>That’s what lies at the core of misunderstandings about the superannuation system. Foreign investment aside, it can’t allow an entire society to save for the future to support itself in retirement.</p>
<p>It can skew the distribution of resources in future years, away from those of working age and those with low super balances towards those with (tax concession subsidised) high super balances.</p>
<h2>Boosting productivity can help</h2>
<p>If our goal is an adequate and sustainable income in retirement for all Australians, our main priority ought to be ensuring that those remaining in the workforce are productive enough to support themselves, their children, those without work and those who have retired. </p>
<p>In other words, if you’re worried about the economic impact of our ageing population on our material standard of living (and there are reasons <a href="http://press-files.anu.edu.au/downloads/press/n2121/pdf/ch04.pdf">not</a> to be worried) you would want our focus to be on productivity, rather than retirement savings.</p>
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<strong>
Read more:
<a href="https://theconversation.com/boosting-super-will-cost-the-budget-more-than-it-saves-on-age-pensions-119002">Boosting super will cost the budget more than it saves on age pensions</a>
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<p>To the extent retirement savings are used for productivity enhancing investment, that’s good. The reality is much of our retirement savings are funnelled relatively unthinkingly into an already bloated financial system where they expand speculative bubbles.</p>
<p>Elsewhere I’ve referred to it as <a href="https://overland.org.au/2013/07/australias-first-compulsory-ponzi-scheme/">Australia’s first compulsory Ponzi scheme</a>.</p>
<p>Like most important economic questions, the best retirement income system is not, at its core, solely an economic question, it is also a moral and political question about distribution and inequality.</p>
<p>So, with that in mind, here’s what my personal moral (plus economic) analysis tells me would be the best retirement income system. </p>
<h2>We could give the money back, slowly</h2>
<p>The best way would be to get rid of compulsory superannuation, give all the money back to account holders (slowly to avoid too much inflation), mandate a 9.5% pay rise in its place and redirect the tens of billions of dollars we currently spend on superannuation tax concessions toward rent assistance, a higher Newstart allowance and a higher pension. </p>
<p>With retired renters better looked after, a moderate (say 20%) increase in the pension, and continued indexation of the pension to wages, no retired Australian would be living in poverty.</p>
<p>It’d be sustainable so long as we ensured sufficient worker productivity, primarily through full employment, appropriate infrastructure investment and well-supported education, training and research.</p>
<p>There, problem solved.</p><img src="https://counter.theconversation.com/content/133906/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warwick Smith is also co-founder and economist at the Castlemaine Institute. </span></em></p>Rarely do we think about what super is for, and even more rarely do we think about whether it is capable of achieving those aims.Warwick Smith, Research economist, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/729762017-02-21T02:40:31Z2017-02-21T02:40:31ZAPRA fiddles on bank risk while Rome burns<p>Australian Prudential Regulation Authority (APRA) chairman Wayne Byers has <a href="http://www.financialstandard.com.au/news/apra-urges-banks-to-raise-capital-92155866">made it clear</a> the bank regulator will be cracking down on bank capital levels this year. </p>
<p>Bank capital reserves are a loss-absorber, designed to protect creditors if banks suffer significant losses. That protection, in turn, will – ostensibly – prevent panicked withdrawals by depositors, thereby preventing financial contagion and financial crises.</p>
<p>Byers has decided that Australian banks’ capital levels must be “unquestionably strong” in keeping with the <a href="http://fsi.gov.au/files/2014/11/FSI_Final_Report.pdf">findings of the Financial System Inquiry</a>. But how much capital equals “unquestionably strong”? We don’t know. </p>
<p>What we do know is that the inquiry handed down that finding in November 2014. More than two years have passed and only now is APRA getting a wriggle on. </p>
<p>The problem is that, <a href="http://data.imf.org/?sk=9F855EAE-C765-405E-9C9A-A9DC2C1FEE47">according to the IMF</a>, when it comes to Tier 1 bank capital, this time last year Australia was ranked 91st in the world. That puts us close to the bottom of the G20, the OECD and the G8. Our position has fluctuated, but at no time during the preceding four quarters have we risen above 60th.</p>
<p>Ranked above Australia were Swaziland, Afghanistan and even Greece. That sounds like, at best, unquestionably ordinary. Maybe even unquestionably weak. But definitely not “unquestionably strong”.</p>
<h2>The global financial crisis could’ve led to change</h2>
<p>Some argue, determinedly and erroneously, that when functioning correctly bank capital levels are almost magical things. As former US Federal Reserve chair Alan Greenspan <a href="https://www.c-span.org/video/?292886-1/2008-financial-crisis-federal-reserve-day-1-part-1">once said</a>:</p>
<blockquote>
<p>The reason I raise the capital issue so often is that … it solves every problem.</p>
</blockquote>
<p>Greenspan, as Fed chair, was ultimately responsible for the health of the US financial system. Having touted capital levels, his tenure ended just before the sub-prime disaster turned into the global financial crisis. This earned Greenspan Time Magazine’s moniker as one of the 25 people <a href="http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877331,00.html">most to blame for the crisis</a>.</p>
<p>However, bank capital levels were in place before the crisis hit. The Basel Committee – a sort-of UN for Reserve Bank governors and bank regulators – <a href="https://theconversation.com/is-the-basel-process-broken-you-can-bank-on-it-11488">introduced global standards</a> for bank capital as far back as 1988.</p>
<p>Back then, it set the capital level at 8%. In other words, for every $100 in liabilities, banks had to retain $8 in cash (or close to cash). But this level was simply a reflection of the average of the day. </p>
<p>Codifying the average into a global standard was an excellent trick. No-one was made to feel left out, or inadequate.</p>
<p>Then came the global financial crisis. It resulted in an output loss of somewhere between US$6 trillion and US$14 trillion <a href="https://www.dallasfed.org/research/eclett/2013/el1307.cfm">in the US alone</a>.</p>
<p>The Basel Committee said it was going to raise bank capital levels in response to the crisis. This meant it was going to do more of the thing (bolster capital levels) that had been meant to prevent such a crisis from occurring in the first place, but had failed.</p>
<h2>What now?</h2>
<p>The Basel Committee’s <a href="https://www.bloomberg.com/news/articles/2017-01-03/global-bank-regulators-delay-key-meeting-on-capital-rule-revamp">latest attempt to take action</a> on capital levels involves curbing “internal risk-based models”. These models allow banks to determine how risky their assets are, and therefore how much expensive and unusable capital they have to set aside for loss-absorption, to match the risk profile of their assets. </p>
<p>That’s like you or I determining how risky we are as borrowers, and therefore deciding how much interest we should be charged on the money we borrow.</p>
<p>European banks <a href="https://www.bloomberg.com/news/articles/2017-01-03/global-bank-regulators-delay-key-meeting-on-capital-rule-revamp">have pushed back</a> against curbing internal risk-based models. They resent not being able to have absolutely everything their own way. And the Basel Committee has proven to be a push-over.</p>
<p>Australian banks have pushed back too, with a not-so-subtle threat that <a href="http://www.smh.com.au/business/banking-and-finance/apra-lifts-mortgage-capital-on-big-banks-by-billions-of-dollars-20150719-gify5r.html">customers will bear the costs</a> of higher capital levels. If Byers and APRA do what they are supposed to, and what the government told them to do <a href="http://www.afr.com/opinion/columnists/apra-to-force-big-banks-to-raise-more-capital-20170212-guaxi2">in late 2015</a>, Australia’s banks will need to raise A$15 billion or more to rectify their thin capital position.</p>
<p>That’s $15 billion not earning returns or bringing in bonuses. No wonder our bankers aren’t happy.</p>
<p>And while APRA and Byers have fiddled on this issue and effectively ignored government instructions, and Australian banks remained capital-thin, conditions have arisen that economist John Adams argues <a href="http://www.news.com.au/finance/economy/australian-economy/australia-headed-for-economic-armageddon/news-story/998390d5128ed69e8799db3de9efe52d">may result in</a> an “economic Armageddon” for Australia. </p>
<p>If that happens, guess who will be bailing out the banks? You, the taxpayer.</p><img src="https://counter.theconversation.com/content/72976/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is affiliated with, and serves in executive capacities for, Australian Citizens Against Corruption (ACAC); the Australian Law and Economics Association (AustLEA) and the American Council on Consumer Interests (ACCI). He is the founder and CEO of Clarity Prudential Regulatory Consulting Pty Ltd. He currently consults to members of Australia's House of Representatives and the Senate of the Republic of Korea.</span></em></p>Some argue, determinedly and erroneously, that when functioning correctly bank capital levels are almost magical things.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633932016-08-03T20:11:45Z2016-08-03T20:11:45ZA competitive superannuation system: will efficiency gains follow?<p>Will competition in the superannuation system improve efficiency, or is this an ideological argument extended beyond its usefulness? If more competition would promote efficiency, what design and policy issues need to be addressed to accommodate the changes?</p>
<p>The Productivity Commission’s <a href="http://www.pc.gov.au/inquiries/current/superannuation/competitiveness-efficiency/draft/superannuation-competitiveness-efficiency-draft.pdf">draft report on superannuation’s efficiency and competitiveness</a> seeks to address whether increased competition will, in fact, drive efficiency, or whether this proposal is ideologically driven by either a belief in the free market or a desire to weaken the role of the unions in industry superannuation funds.</p>
<p>The Commission confronts this, saying that the role of competition is to drive efficiency, and is not an end in itself. Competition is justified only if it drives funds to become more innovative and efficient. An increase in the number of funds could lead to inefficiencies as smaller, potentially more innovative, funds would not have the economies of scale of bigger funds.</p>
<p>A number of participants in the consultation process made the case that competition may not lead to greater efficiency: the <a href="http://www.pc.gov.au/__data/assets/pdf_file/0004/198031/sub018-superannuation-competitiveness-efficiency.pdf">ACTU raised the concern</a> that competition could weaken the superannuation system, noting failures when other services, specifically technical education, were opened to the market. </p>
<p>Other submissions discussed whether consolidation of the existing range of providers would improve efficiency; <a href="http://www.pc.gov.au/__data/assets/pdf_file/0006/197979/sub007-superannuation-competitiveness-efficiency.pdf">Fiduciary’s Friend</a> thought this would detract from innovation, while the <a href="http://www.pc.gov.au/__data/assets/pdf_file/0009/198144/sub028-superannuation-competitiveness-efficiency.pdf">Financial Planning Association</a> and <a href="http://www.pc.gov.au/__data/assets/pdf_file/0007/198214/sub029-superannuation-competitiveness-efficiency.pdf">Financial Services Council</a> thought that competition could incentivise underperforming funds to consolidate with more efficient funds. </p>
<p>Another perverse effect of competition could be to change the investment policies of superannuation trustees. If members were encouraged to switch funds, this could place stress on the liquidity of the fund. If funds retained more investment in liquid assets this would not only flow through to capital markets but would affect the returns of the fund.</p>
<p>The draft report does make the point that superannuation is a unique environment, so the usual frameworks for assessing efficiency need to take that into account. Specifically, superannuation is an instrument for government policy, and is compulsory. Member disengagement continues to be relatively high, as shown by the number of members who accept the default options both of their fund and of investments within their fund.</p>
<p>Although the introduction of MySuper with the <a href="http://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/information_pack/mysuper.htm">Stronger Super Reforms</a> was intended to increase efficiency and reduce costs, the behavioural effect could well be to further reduce member engagement with the superannuation system. </p>
<p>Since 2005 most employees have been able to choose their fund, but according to the PC report, about two thirds of employees remain in their default fund and less than one third switch their investment options within their fund. There are also about 20% of employees who are not able to choose a fund other than the default fund nominated in their award or enterprise bargaining agreement (EBA).</p>
<p>This contributes to a large number of agency relationships in the system: the employer acts as an agent for the members when nominating a default fund; there is a fiduciary relationship between the trustees of the fund and the members in respect of managing the fund; and many trustees outsource functions to external service providers. </p>
<p>Given the combination of member disengagement and the agency relationships, competition needs to be considered more broadly than facilitating member choice.</p>
<p>The report also discusses the relationships that arise at the wholesale level, including a range of services provided to the superannuation sector. Insurance is particularly in the spotlight here as many members are entitled to insurance benefits through their superannuation fund. </p>
<p>Superannuation trustees are able to obtain policies at far better rates than most individuals – although <a href="http://www.smh.com.au/money/super-and-funds/donor-family-wants-insurance-victory-to-help-everyone-20160726-gqe2t9.html">this has been under the spotlight recently</a> as members find exclusions in their policies. The effect of competition in this area could be less efficient than the current system. </p>
<p>The Productivity Commission sets out a series of objectives for the superannuation system, that sit below the policy objective that the superannuation system is <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/Objective-of-superannuation">“to provide income in retirement to substitute or supplement the Age Pension”</a>. These objectives include: </p>
<ul>
<li>Competition that drives efficient outcomes through facilitating rivalry and contestability in supply and demand conditions and allowing suppliers to compete on adding value to members</li>
<li>Maximising net returns over the long term</li>
<li>Meeting member preferences and needs over the member’s lifetime</li>
<li>Providing insurance that meets members needs at the lowest cost</li>
<li>The Superannuation system complements a stable financial system</li>
</ul>
<p>The development of these objectives is the first stage: the report goes on to refine the objectives into assessment criteria and indicators.</p>
<p>It is important that the superannuation sector operates efficiently as it is becoming an increasingly important retirement policy instrument and a major component of household wealth. This report has articulated a set of objectives that would strengthen the superannuation system and the faith that members have in their superannuation fund.</p><img src="https://counter.theconversation.com/content/63393/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from AHURI. Helen is a member of the Tax and Superannuation advisory panel for ACOSS and the Social Policy Committee of NFAW. She is a member of the WISER research group at Curtin Business School. Helen was a member of the WA Legislative Council from 1997 to 2001, elected as an Australian Democrat. She is not currently a member of any political party.</span></em></p>Competition between super funds should drive innovation and efficiency, not be an ideological tool.Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633952016-08-03T04:22:15Z2016-08-03T04:22:15ZPC sets groundwork for long-awaited look at super competition and efficiency<figure><img src="https://images.theconversation.com/files/132891/original/image-20160803-7744-7y04nf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The long-awaited look into super is happening. </span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The Productivity Commission has released its draft <a href="http://www.pc.gov.au/inquiries/current/superannuation/competitiveness-efficiency/draft">report</a> setting out criteria for assessing the competitiveness and efficiency of the superannuation system. The final report will be delivered in November this year. </p>
<p>The study, the first stage of a three-stage exercise, is part of the Government’s <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/Government%20response%20to%20the%20Financial%20System%20Inquiry/Downloads/PDF/Government_response_to_FSI_2015.ashx">response</a> to the 2014 Murray Financial System Inquiry. Murray recommended that the Government “introduce a formal competitive process to allocate new default fund members to MySuper products, unless a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency in the superannuation system.” </p>
<p>This first stage does not assess the superannuation system; it merely sets out criteria for evaluating it. The second stage, to be delivered by mid-2017, will develop alternative models for the competitive process. The third and final stage will review the system. Only then, and only if the government finds there is still significant inefficiency, will it consider introducing one or more of the “models” developed in the second stage. </p>
<h2>What’s at stake?</h2>
<p>The efficiency of the superannuation system makes a big difference to incomes in retirement. Today, the system charges fees totalling <a href="https://grattan.edu.au/wp-content/uploads/2015/04/821-super-savings2.pdf">about $16 billion</a>, or 1% of GDP. There are too many unwanted accounts, too many funds, and many funds charge <a href="https://grattan.edu.au/report/super-savings/">fees that are too high</a>. Costs that are too high by even half a percent a year can reduce balances at retirement by over 10%, and many Australians are paying more than that in excess fees. The recent Stronger Super reforms and the Future of Financial Advice reforms have reduced fees somewhat, but billions of dollars in excess cost remain. </p>
<h2>What the Commission proposes</h2>
<p>The challenge in evaluating superannuation is to make sense of the system’s jargon and its maze of products, sales channels, governance structures, and performance metrics. Even people with real financial expertise struggle to assess funds’ performance, and many members are inexpert and disengaged. What’s more, some providers and advisers have interests that are not aligned to those of members. </p>
<p>The Commission proposes a rich set of performance measures for this complex system. It begins from the Government’s announced objective for superannuation: “to provide income in retirement to substitute or supplement the Age Pension”, and proposes five supporting goals, including maximising net returns, meeting member needs, providing appropriate insurance at least cost, complementing a stable financial system, and competition that drives efficient outcomes. </p>
<p>It then sets out separate criteria for the competitiveness and efficiency of the superannuation system. Sensibly, it notes that “competition in the superannuation system is not an end in itself, but provides benefits to the community as a whole and members in particular when it promotes efficient outcomes.” </p>
<p>It proposes that the system’s competitiveness be assessed by reviewing such measures as whether members are engaged and informed, whether advisers and sellers are acting in members’ interests, whether funds compete on costs and pass on cost savings to members, and whether member outcomes are affected by vertical or horizontal integration. </p>
<p>The criteria it proposes for the system’s efficiency include net returns after fees and tax, the costs of the system, the extent to which the system’s services align to members’ needs and preferences (such as risk management), and the extent of unpaid contributions and lost accounts. </p>
<p>These criteria are all sensible, though many will prove much easier to specify than to measure against an ideal or acceptable outcome. As the draft notes, work must begin now to ensure the data is in place when it is needed. </p>
<h2>Three critical additions to ensure the process works</h2>
<p>The Commission needs to build on its draft report in three directions. </p>
<p>First, it should be more explicit about the weighting given to different performance measures. Not all measures are equally important. </p>
<p>Second, it should be clear about what matters to different fund members. The draft notes that default and choice superannuation members have different needs; those needs should be clearly set out in the final report. Many of the 9.5 million Australians with default products are disengaged. Few will engage much until they near retirement, if they ever do. Many do not have financial expertise. That means that risk-adjusted net returns should be given strong weight in evaluating default products. </p>
<p>Lost accounts and unpaid contributions will also be particularly important for this part of the market. For the choice part of the market – currently about 5 million people – returns should remain paramount, but member engagement and advice quality may play a larger role.</p>
<p>Third and most critically, the Commission must strengthen the links between the three stages of its work. The government’s <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/Government%20response%20to%20the%20Financial%20System%20Inquiry/Downloads/PDF/Government_response_to_FSI_2015.ashx">response</a> to the Murray Inquiry and the Commission’s <a href="http://www.pc.gov.au/inquiries/current/superannuation/terms-of-reference">Terms of Reference</a> for the first two stages make it obvious that the three are intended to work closely together. Stage 1 must define criteria that inform the development of competition models in Stage 2, as well as the assessment of those models against today’s model in light of the findings of Stage 3. </p>
<p>But the draft hardly discusses these links. For example, there is no discussion of how the proposed measures will inform Stage 2. And there is no discussion of which measures will help government decide whether to deploy the models designed in Stage 2. Without much tighter links between stages, the whole purpose of the process will be defeated. </p>
<p>At a minimum, the set of measures in Stage 1 must include <a href="http://grattan.edu.au/wp-content/uploads/2014/04/811-super-sting.pdf">the performance of funds</a> by governance type (industry, public sector, and for-profit) in different competitive contexts (tender, awards, direct, and advised) and across product types (default and choice, accumulation and post-retirement). </p>
<p>It must also include the performance of tenders for investment management and administration separately. And it must include the implications of those segment outcomes for the whole system. That type of detailed assessment will be vital if the Commission is to assess competitiveness and efficiency and so inform the government’s decision about whether and how to change the competition model for default super. </p>
<h2>Broader lessons?</h2>
<p>The Commission’s process might seem cumbersome, but it could prove a model for a better way of developing policy. Superannuation is not the only sector in which competition seems to be leaving many consumers little better off.</p>
<p>There are at least two opportunities to roll out the multi-stage market assessment model. First, in its response to the Murray Inquiry, the Government <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/Government%20response%20to%20the%20Financial%20System%20Inquiry/Downloads/PDF/Government_response_to_FSI_2015.ashx">has already committed to</a> implement periodic reviews of competition in the broader financial sector. </p>
<p>More generally, last year’s Harper Review recommended that government set up a new body that would have the power to initiate what it called “market studies”. That was one of the few Harper recommendations the Government <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/Government%20response%20to%20the%20Competition%20Policy%20Review/Downloads/PDF/Govt_response_CPR.ashx">left hanging</a>, perhaps because it wasn’t convinced a new body was needed. </p>
<p>But if the Commission’s three-stage process can credibly assess both superannuation system outcomes and the policy options to improve them, it could prove a model for further market studies, whether undertaken by the Commission, the ACCC, or some new body.</p><img src="https://counter.theconversation.com/content/63395/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.
Jim Minifie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.</span></em></p>The Productivity Commission has set in train a comprehensive evaluation of how super works.Jim Minifie, Productivity Growth Program Director, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575502016-04-12T20:12:21Z2016-04-12T20:12:21ZTalk of reforming toxic banks is misguided: improve the product and culture will follow<p>The recent and strident language from <a href="http://www.afr.com/business/banking-and-finance/ceasefire-called-in-banking-culture-wars-20160407-go0su0">financial regulators</a>, <a href="https://theconversation.com/banks-get-a-bollocking-from-turnbull-on-ethics-57350">politicians</a> and <a href="http://www.smh.com.au/business/banking-and-finance/conduct-risk-rising-for-australian-banks-fitch-20160407-go0oca.html">credit ratings agencies</a> about financial services culture is a sure indicator that something is <a href="https://theconversation.com/command-and-control-banks-have-got-ethics-and-culture-all-wrong-56289">seriously amiss in the sector</a>. </p>
<p>This spike in hostility has arisen from some despicable behaviour and outcomes; however, neither reform of culture nor technological innovation are panaceas, as ideologies cannot replace a clear understanding of these complex businesses.</p>
<p>There are several markers in this conversation which need to need to be teased out because there is a real danger that consumers could end up suffering higher costs, achieve even less peace of mind dealing with financial services providers, and potentially transfer huge enterprise value to disruptive players which may ultimately misplace consumers’ trust in even quicker time than the so-called legacy institutions.</p>
<p>Firstly, understanding and addressing culture is far more complex than expressing a reactive political and regulatory narrative. As conduits of reasonable anger and disillusionment, politicians express a belief that parentalism will ensure that consumers are protected from harm. There are limitations to the regulatory narrative. Columbia University Law School Professor John Coffee identifies the <a href="https://corpgov.law.harvard.edu/2012/03/12/the-political-economy-of-dodd-frank/">causal and lagged link</a> between appalling market outcomes and regulatory response. </p>
<p>On the other hand, industry participants need to re-assume authority over both narratives and rebuff further regulation. </p>
<p>This authority should arise from their constant and deep engagement with customers. Financial services firms own the benefits of information asymmetry (including emerging issues and product failures). This reinforces their authority.</p>
<p>Second, financial services institutions are complex businesses with many moving parts. Their interactions with customers occur in highly varied contexts or “customer-product interfaces”. Not surprisingly, it is a challenge to articulate an authentic cultural message for a financial services conglomerate. </p>
<p>Aggrieved customers and stakeholders mean that the term “customer-centric” is hollow. The customer’s wallet is the centre of what financial conglomerates do. </p>
<p>This commercial imperative is the legitimate reason that financial services exist. Similarly, financial innovation occurs because of the need to address customers’ economic needs, rather than mere predation. It solves customers’ problems and achieves a reasonable return for the provider within a highly regulated sector of the economy.</p>
<p>Providers of financial services therefore need to better explain what they actually offer and from there consumers can make informed decisions. There have been advances. The industry communicates in plain English and consumers are savvy enough to intuit that this industry provides a range of largely intangible things. </p>
<p>On the other hand, the industry seems to have difficulty in levelling with consumers about this, preferring to maintain institutional mystique (“trust us, there’s something more to it”).</p>
<p>The real challenge (and opportunity) is to reassure consumers in product interfaces, to clarify what is being provided, and if and when any trust is actually warranted. In other words, providers need to unbundle and explain simply what their products entail so that consumers (personal and institutional) understand what they are buying, if it suits their circumstances, and what (if any) trust is involved. Some examples are set out in the figure:</p>
<iframe src="https://datawrapper.dwcdn.net/CwO3K/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="350"></iframe>
<p>Third, criticisms of culture are entwined with questions of morality. Legislation and regulation set boundaries informed by knowledge and conventions, and within this perimeter and the associated contested marketplace, providers must organise their businesses sustainably. </p>
<p>At a high level, it is important to acknowledge that financial services firms are a mirror on their customers which have varying ethics and values. This must be the case, because otherwise they would not remain in business. </p>
<p>Society’s mores do change over time. Witness the prevailing household debt culture, the post-GFC emergence of government bailouts, the shallowing of thought and synthetic reasoning. However, it is unreasonable to expect the financial services industry to lead morality debates: rather that is the domain of legislators and regulators who need to both represent society and understand existing product markets.</p>
<p>Finally, informed regulation is especially important because digital technologies are being aggressively deployed to unbundle highly-regulated financial services. Innovations and industry disruption need to be carefully assessed so that consumers do not suffer from misunderstandings, broken promises and a loss of trust. </p>
<p>Although technology generally may suggest individual freedoms, transparency, engagement and creativity, when applied within financial services it is largely used for the more mundane functions of customer aggregation, processing documentation and bulk communications.</p>
<p>Informed regulators and providers therefore must work together to carefully consider if in fact innovation and disruptive technologies can genuinely resolve economic trade-offs and maintain a durable consumer trust. This will usually require an old-fashioned - but perennially trendy - strong balance sheet.</p><img src="https://counter.theconversation.com/content/57550/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Martin Gold does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are limitations to the narrative that more regulation can help tackle toxic bank culture.Martin Gold, Senior lecturer, Sydney Business School, Faculity of Business, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/492362015-10-19T19:04:06Z2015-10-19T19:04:06ZRising mortgage rates - is it time to refinance your home loan?<p>Last week, Westpac hoisted its lending rate by 20 basis points in a bid to recover the costs of recent <a href="https://theconversation.com/explainer-banks-are-raising-capital-but-should-we-be-worried-45884">capital raisings</a>. There is speculation other banks will follow. Australia’s non-bank lenders could be winners from such a scenario - but the choice may not be as simple as the lowest interest rate.</p>
<h2>The outcome of the Financial Systems Inquiry</h2>
<p>The background to Westpac’s move lies in recommendations by the <a href="https://theconversation.com/au/topics/financial-system-inquiry">Financial System Inquiry</a> that the <a href="https://theconversation.com/a-call-for-capital-murray-report-pushes-for-higher-banking-standards-35015">capital base of Australian banks should be increased</a> to an “unquestionably strong” level and that there should be a narrower gap in different mortgage lending requirements between institutions. </p>
<p>As a result Australian banks have considerably increased capital levels this year by approximately <a href="http://www.afr.com/business/banking-and-finance/the-great-big-bank-capital-build-20150813-giysc5">$16 billion</a>. </p>
<p>However, higher capital levels and bank stability may come at additional costs, even if trade-off theory suggests greater bank and system resilience would normally equal lower funding costs. That’s because bank investors have high dividend expectations, so this means the costs of boosting capital may be passed onto borrowers.</p>
<p>Capital levels are likely to increase further as regulators seek to narrow the gap between the practices of the big banks and smaller lenders, and amid their increasing concern at Australia’s house prices. In particular, large banks are expected to increase capital required under their internal risk weighting models for mortgages.</p>
<h2>Will non-bank lenders grow their mortgage books?</h2>
<p>Non-bank lenders provide mortgage loans with comparable features but unlike banks are exclusively funded from wholesale markets and not from consumer deposits. </p>
<p>As a result, banks face minimum capital requirements enforced by the Australian Prudential and Regulation Authority to protect depositors, while non-bank lenders are unregulated and may more freely choose their funding mix and hence have lower funding costs. </p>
<p>This often implies lower capital ratios for non-banks than banks. Raising capital levels for banks only may have an impact on the balance between bank and non-bank competitors. </p>
<p>The following chart shows the counts and total assets of banks and non-bank lenders in Australia over time:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/98739/original/image-20151018-25135-1sqzbqr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Total assets of non-bank and bank lenders.</span>
<span class="attribution"><span class="source">provided by Australian Prudential Regulation Authority, http://www.apra.gov.au</span></span>
</figcaption>
</figure>
<p>The size of non-bank lenders ($120 billion) is much smaller than the size for bank lenders ($3.8 trillion) and has shrunk in relative terms over the past years. This may suggest that Australians fail to really consider this sector to finance their homes despite competitive mortgage rates from non-bank lenders.</p>
<p>There are many reasons for this – convenience may be one of them as banks are able to offer a larger product range and cover most financial needs of consumers, and consumers prefer to bank with a single institution. </p>
<p>The small size is a great disadvantage as relative fixed costs are higher for small firms than for the major banks.</p>
<h2>Should you choose a bank or non-bank to finance your home?</h2>
<p>Consumers seeking mortgage finance for a property – either a new borrowing or refinancing of an existing loan – can choose between a large number of banks and non-bank lenders, along with hundreds of loan products.</p>
<p>Comparison websites generally rank lenders and products according to the most obvious criterion – the interest rate. Non-bank lender often provide the cheapest terms. But the lowest rate loan is not necessarily the best loan. </p>
<p>The choice between bank and non-bank lender can be important if you want to use an offset facility. Offset facilities are not always included and they can expose borrowers to lender risk. </p>
<p>Having savings in an offset facility means that in effect the lender owes you money. Banks are much less risky in this regard because they benefit from government guarantees as well as greater scrutiny that are tied to the bank status. </p>
<p>Non-bank lenders are excluded from such guarantees and furthermore may have a greater exposure to market instability. </p>
<p>During the global financial crisis non-bank lenders (especially overseas firms) that were funded through capital markets, rather than customer deposits, were challenged as wholesale funding markets dried up. Some failed and total volumes shrank between 2009 and 2013 (see chart above).</p>
<p>Still, it is likely that more Australians change to non-bank lenders in the future. Changing a lender is easy as mortgage brokers often provide the legwork, plus exit fees have been considerably reduced <a href="http://asic.gov.au/about-asic/media-centre/speeches/rules-on-exit-fees-are-clear">since new laws came into effect</a> on 1 July 2010 limiting mortgage exit fees to the lender’s losses directly connected to the borrower exiting the loan early.</p>
<h2>Are non-bank lenders dangerous to our system?</h2>
<p>Low volumes mean non-bank lenders are currently of no systemic concern to the economy and regulators. However this may change in the future as volumes shift and grow for non-bank lenders. </p>
<p>New market participants enter as new non-bank loan platforms are developed. One example is internet-based <a href="https://theconversation.com/what-you-need-to-know-about-peer-to-peer-lending-38836">peer-to-peer lending</a>.</p>
<p>Australians may adapt to this new regime and take on new technologies offered and seek the lenders providing the cheapest funding. Consumers generally do not care about the lenders’ own funding and may arbitrage the differences in mortgage rates by shifting the business from regulated banks to unregulated non-banks. </p>
<p>A concern may arise if non-bank lending is successful and to become a large player that is systemically important. In such a scenario the government would be well advised to consider regulating the industry.</p>
<p>Such regulations may include minimum lending and funding standards with the mission to protect de facto consumer deposits via offset accounts and to ensure the credit supply in economic downturns when wholesale funding markets are constrained. </p>
<p>We may be some time away from such a scenario in light of the increasing dominance of bank lenders.</p><img src="https://counter.theconversation.com/content/49236/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule receives funding from Centre for International FInance and Regulation (CIFR). CIFR is funded by the Commonwealth and NSW Governments and supported by other consortium members (see <a href="http://www.cifr.edu.au">www.cifr.edu.au</a>).</span></em></p>Last week, Westpac hoisted its lending rate by 20 basis points in a bid to recover the costs of recent capital raisings. There is speculation other banks will follow. Australia’s non-bank lenders could…Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.