The Financial System Inquiry has released its Interim Report.

The Interim Report does not make recommendations, nor does it describe the final view of the Inquiry.

But each chapter of the Interim Report makes a number of observations on the Australian financial system on areas where submissions suggest the performance of the system may be improved in some way, and reflecting the observations made, the Interim Report also includes a range of possible policy options.

The Interim Report also notes that the findings of the Senate Report on ASIC will be examined by the Inquiry in the lead-up to its Final Report.

Submissions were received from the following sectors: banking, small‑ and medium‑sized and rural business, superannuation and wealth management, retail consumers, payments system, financial markets, insurance, advisers and dealers, large corporates, professional firms and property and infrastructure business.

A final report is to be provided to the Treasurer by November 2014.

Areas of possible change
Observations for which options are being considered include:

• The application of capital requirements in the banking sector is not competitively neutral. Banks that use internal ratings-based (IRB) risk weights have lower risk weights for mortgage lending than smaller authorised deposit-taking institutions (ADIs) that use standardised risk weights, giving the IRB banks a cost advantage.
• differences in the structure of payment systems (ie credit card and debit card payment schemes) have resulted in systems that perform similar
  functions being regulated differently, which may not be competitively neutral.
• There is little evidence of strong fee-based competition in the superannuation sector, and operating costs and fees appear high by international standards. This indicates there is scope for greater efficiencies in the superannuation system.
• The perceptions that some institutions are too-big-to-fail can be reduced in Australia by making it more credible to resolve these institutions without Government support.
• There are differences in the duties and requirements of governing bodies for different types of financial institutions and, within institutions, substantial regulator focus on boards has confused the delineation between the role of the board and that of management.
• Improving standards of adviser competence and removing the impact of conflicted remuneration can improve the quality of advice.
• The regulatory perimeters could be re-examined in a number of areas to ensure each is targeted appropriately and can capture emerging risks.
• The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees.
• There are heightened privacy and data security risks for customer information.

The options will be considered in the coming months.