Financial Systems Inquiry - Blueprint for the future?

 

(And what it highlights as a potential source of risk for the financial system and the economy)

 

You can be forgiven for thinking “here’s Brett raving on about another report”, but this one is actually pretty important. There have been major reports like this one only every 16 or 17 years (1981, 1997, 2014) and they have had significant implications for everyone.  From these two previous reports some recommendations included floating the Australian dollar, deregulation of banking and the formation of APRA and ASIC. They outline the direction – and are a good indication of the big picture where legislation is likely to go and what we might expect.

While the report is nearly 350 pages long and covers a range of issues, there are a few potential ‘game changers’. Here are a few direct quotes that it has identified that “distort the allocation of funding and increase risk in the economy”. 

“Tax treatment of investor housing in particular, tends to encourage leverage and speculative investment. Housing is a potential source of systemic risk for the financial system and the economy.” 

“Tax distorts direct savings to less productive investment opportunities.” 

It also goes on to discuss negative gearing and capital gains tax concessions as distorting the market , increasing risk AND…

We are struggling to find good reasons to keep these policies.” 

They’re fighting words! It’s pretty clear what the future policy direction is going to look like and I wouldn’t want to be counting on these as a primary strategy. Because of this increased risk the report also recommends that the banks increase the amount of capital that they need to hold.

Borrowing in Self-Managed Super Funds?

The report makes a specific recommendation here. Borrowing in self-managed super funds should be stopped and it recommends the government restore the ban on direct borrowing. It is worried about the rate of growth of borrowing, the lack of diversification (often with only one asset class) and the increased risks that is inconsistent with the objectives of superannuation as being a savings vehicle for retirement income.

So while these (and many other) recommendations are only in a report, it is very clear the direction future policy is likely to take.

We always need to consider ‘legislative risk’ whenever we make a strategic decision relating to finance, planning or investment and this report helps us manage these risks. We need to consider what is likely to happen, what may happen and what can happen. Previous changes such as deregulation of banks and CGT rules had a direct effect on property pricing; these recommendations if introduced are also likely to have a significant impact. By understanding these issues we can then make better, more informed choices.

 

Wishing everyone a safe and happy Christmas – see you in 2015.

Regards,
Brett

 

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