Source: Australian Treasurer
COVID-19 has been a stress test for the global economy.
Monetary policy, fiscal policy, supply chains and national institutions have all come under the spotlight and, in many cases, been found wanting.
With the IMF expecting global GDP to fall by 4.4 per cent in 2020, the economic impact of this crisis dwarfs that of the GFC when the global economy contracted by just 0.1% in 2009.
In this crisis, Australia has fared better than nearly any other nation.
Yesterday, in Australia there were 6 new COVID-19 cases whereas globally there were 652,000 including more than 150,000 in the United States alone.
Australia’s real GDP is forecast to fall by 3¾ per cent in 2020 before recovering in 2021 to grow by 4¼ per cent.
This compares favourably to expected falls of 5 ½ per cent in the US and 9 per cent in the euro area this calendar year.
The success of Australia’s health and economic response to date has seen the virus suppressed and the economic recovery now underway.
The road ahead will be hard and bumpy and not without its challenges, but there is cause for optimism and hope.
Jobs are coming back and business and consumer sentiment is on the rise.
Consumer confidence is up for the eleventh straight week, reaching its highest level since February and yesterday’s fortnightly payroll jobs data was positive with the strongest increase in Victoria following the easing of restrictions.
Resilience of our financial system
One of the factors underpinning Australia’s success to date has been the resilience of our financial system.
Despite our economy facing the biggest shock since the Great Depression, our markets and institutions have weathered the storm.
The ASX200 index dropped 39 per cent between 20 February and 23 March, and has all but recovered these losses.
The Australian dollar which fell 8 cents or 13% in just 11 days is now back at the level it was pre-COVID-19.
Through all of this turbulence there has been no run on Australian banks.
Credit did not seize up.
Capital raisings did not end.
To the contrary, COVID-19 has precipitated a ‘Team Australia’ moment where the Morrison Government, the financial industry and key regulators have come together to support consumers and stabilise the financial system.
The RBA’s Term Funding Facility supported by the actions of Australian Office of Financial Management has helped lower funding costs, with the three month Bank Bill Swap Rate now 0.02 per cent, the three-year bond rate at 0.10 per cent, and ten-year bonds at around 0.9 per cent.
For households, this has supported a structural shift in the mortgage market as borrowers have taken advantage of very low fixed-rate mortgages and refinancing activity among owner-occupiers has reached record highs.
SME loans, benefiting from a 50% Government guarantee have supported more than 22,000 businesses with over $2 billion allocated.
The expanded and enhanced phase two of the SME guarantee scheme, with 39 participating lenders, is designed to meet the evolving needs of SMEs shifting from cash flow support during the crisis to now supporting investment during the recovery.
At the same time, lenders agreed to defer payments on more than 450,000 housing and small business loan facilities, worth around $168 billion.
Thankfully many of these borrowers are indicating they are now able to resume repaying these loans.
Importantly, these deferrals were facilitated by APRA with a more accommodative approach to capital adequacy.
The combination of these interventions during COVID-19 together with reforms that were put in place after the GFC, including higher capital standards, have made balance sheets of our banks “unquestionably strong.”
This has seen Common Equity Tier 1 capital reach $247 billion in June, compared to $173 billion five-years earlier.
Measures to strengthen capital markets have been complemented during COVID by a series of other regulatory changes, including continuous disclosure laws, virtual AGMs and statutory demands under insolvency law that have supported other elements of our financial system.
In each case, the goal has been the same, cushioning the blow, keeping people in jobs and businesses in business, while building a bridge to the other side of the crisis.
While these goals remain in focus, the Government is also pursuing a series of structural reforms that will support the recovery and deliver better consumer outcomes across our financial system.
Consumer credit reform
First, consumer credit.
What started as a principles based responsible lending framework has become an overly prescriptive set of obligations that have given rise to almost a hundred pages of ASIC regulatory guidance.
This has led lenders to become increasingly risk-averse and conservative for fear of falling foul of the guidance.
Borrowers, irrespective of their financial circumstances, have subsequently faced a longer and more intrusive approval process.
There are numerous real-life examples that illustrate this point.
A retiree who recently lost her husband and had $430,000 in her account, as well as her husband’s refundable accommodation deposit being repaid to his estate, was informed by her lender that she couldn’t obtain a new credit card in her own name as it would put her in “severe financial distress”.
The lender could not consider her assets in her credit evaluation – only actual income received each month.
Another example was a first home buyer who put down a deposit after receiving pre-approval from the bank. Before settlement he received a promotion at work that involved a salary increase. He notified the lender before his loan was finalised and the bank told him that the promotion constituted a change in circumstance, requiring his loan application to be reassessed and delayed because he didn’t have a past history of income at that level to rely on.
Even modest increases in credit limits for existing customers trigger the need for a reassessment of the customer’s financial circumstances. For example, a customer who has paid down $200,000 of their $500,000 mortgage but subsequently seeks a $1000 increase on a $10,000 credit card limit needs to fill in a long form credit application to re-verify income, expenses and other liabilities to check if they haven’t changed since the original mortgage was approved.
To restore balance and reduce the cost and time faced by consumers, the Government is seeking to remove RLOs for all lenders except those issuing small account credit contracts or consumer leases.
APRA’s lending standards which already require lenders “to make reasonable enquiries and take reasonable steps to verify a borrower’s available income” will remain.
Significantly, the Council of Financial Regulators which is chaired by the RBA and includes APRA, ASIC and Treasury have said the proposed reforms would “support the supply of credit.”
Second, superannuation reform.
With our superannuation system managing $3 trillion on behalf of 16 million Australians, there is already enough savings in the system to buy every company listed on the ASX one and a half times over.
With the compulsory nature of super, this pool will only grow, reaching an expected $5 trillion by 2034.
With such a significant proportion of people’s assets tied up in super, it is increasingly important that downward pressure is maintained on fees that are already $30 billion a year, and under-performing funds are exposed.
The Government has already implemented a series of reforms that have benefited members.
This includes consolidating low balance inactive accounts which has so far saved Australians around $700 million in unnecessary fees and insurance premiums.
Other reforms have protected Australians from unintentional and unwanted insurance in superannuation, by ensuring that it is only offered on an opt-in basis for accounts with balances under $6,000 and new accounts belonging to members under age 25.
We have also allowed more than 800,000 members to choose their own fund rather than being restricted by the terms of their Enterprise Bargaining Agreement.
Building on these reforms, the Government announced in this year’s Budget the “Your Future, Your Super” package to further enhance competition and choice, while boosting transparency and accountability.
Superannuation will follow members to their new employer. This will prevent the creation of unintended multiple superannuation accounts, already six million in number and costing more than $450 million per annum in unnecessary fees um.
The new YourSuper portal will establish a trusted, reliable source of information on the ATO website. Superannuation products will be ranked in terms of fees and returns which will make it easier for superannuation members to choose a well-performing product that meets their needs.
Underperforming superannuation funds will be held to account, protecting members from poor outcomes and encouraging funds to lower costs and fees.
And, finally, there will be more transparency and accountability about how superannuation funds use members’ savings.
The combination of these reforms is expected to save consumers $17.9 billion over the decade.
Third, regulator reform.
In recent years and through the implementation of the Financial Services Royal Commission recommendations, the Federal Government has provided increased funding and powers to our regulators.
The Government has provided ASIC with a product intervention power to ban the offer of financial products that are, or are likely to, result in significant consumer detriment.
New design and distribution obligations will require product issuers to distribute their products only to appropriate consumers, to reduce the risk of consumers acquiring or being sold inappropriate products that do not meet their needs.
The Government established the Australian Financial Complaints Authority, increasing access for borrowers to external dispute resolution and redress.
And we introduced legislation into Parliament last week to implement further 20 commitments of the Financial Services Royal Commission with more to come.
This legislation will enhance protections in the system for consumers by preventing the pressure selling of financial products in particular insurance products, ensuring that handling of insurance claims occur in a manner that is fair, honest and efficient and placing stronger obligations on licensees of financial firms to identify, report and remediate misconduct.
Our regulators now have the tools they need to deliver on their mandate without needing to come to government with more requests.
The public rightly expects that regulators pursue their enforcement activities according to the law and independent of government.
They need to independently decide on individual matters and cases, whether to approve a licence for an applicant or take particular enforcement action.
However, regulators do not carry out their mandates in a vacuum.
They must pursue their mandates in a manner that is consistent with the will of the Parliament.
There need to be mechanisms to hold them to account. This will be a key role of the Financial Regulator Accountability Authority that Commissioner Hayne recommended and the Government has accepted.
It is the Parliament who determines who and what should be regulated.
It’s the role of regulators to deliver on that intent, not to supplement, circumvent or frustrate it.
In the context of the COVID recovery, it is critical that our regulators are conscious of the environment they are operating in and have the flexibility to respond in a way that simultaneously fulfills their mandate, enhances consumer outcomes and supports rather than hinders the recovery.
This year has been like no other, with the Australian economy and our financial system showing remarkable resilience.
The reforms both preceding and during the crisis have helped Australia outperform so many other nations, but there is no room for complacency.
We need to ensure our financial system remains an important enabler of economic activity providing funding for households and businesses and the efficient allocation of capital and the pricing of risk.
This is why the reform agenda remains so important with changes to consumer credit, superannuation and the role of regulators helping to strengthen our financial system and deliver better outcomes for all Australians.