Govt’s FSI response: what it means for mortgages

It’s been 10 months since the FSI published its final report. Now the government has made its decision on recommendations that will reshape the Australian mortgage market.

The government accepted all but one of the FSI's 44 recommendations – a ban on SMSF lending.

Yesterday morning the government announced that it does not agree with the FSI’s recommendation to prohibit limited recourse borrowing arrangements (LRBAs) by superannuation funds.

“While the government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the government does not consider the data sufficient to justify significant policy intervention,” the government’s official response stated.

The government announced it will, however, commission the Council of Financial Regulators and the ATO to monitor leverage and risk in the superannuation system and report back to government after three years.

“This timing allows recent improvements in ATO data collection to wash through the system. The agencies’ analysis will be used to inform any consideration of whether changes to the borrowing regulations might be appropriate,” the government said.

Comprehensive credit reporting

Murray’s final report recommended supporting industry efforts to expand credit data sharing under the new voluntary comprehensive credit reporting (CCR) regime.

The important part of this recommendation was its suggestion that if, over time, industry participation of CCR is inadequate, government should consider legislating mandatory participation.

The government yesterday agreed to support industry efforts to implement the CCR regime, but said it will not legislate for mandatory participation at this stage.

“The CCR regime has been in place for a little over a year and authorised deposit-taking institutions are still in the process of working to participate in the regime,” it said.

Brokers

Murray sparked a fierce debate when he released the FSI interim report last year, which found that vertical integration may have the potential to distort the way in which mortgage brokers direct borrowers to lenders. The final report called for greater disclosure. 

The Coalition government yesterday agreed with the FSI recommendation that mortgage brokers and financial advisers must disclose their ownership structures.

The government said it will develop legislative amendments to ensure that financial advisers and mortgage brokers adequately disclose their relationships with associated entities.

The government also agreed to rename ‘general advice’ to improve consumer understanding. “We will consult with a wide range of stakeholders and conduct consumer testing before finalising the new term,” it said.

Competition

The FSI recommended that competition be considered in ASIC’s mandate. The government yesterday agreed with this recommendation.

“We support inclusion of competition in ASIC’s mandate and we will develop legislation to introduce an explicit reference to consideration of competition in ASIC’s mandate in the second half of 2016,” the government said.

“We will also be clear in the Statements of Expectations that regulators should explain in each annual report how they have balanced competition with other elements of their mandates.”

Bank resilience

The government believes that the capital ratios of Australian banks should be unquestionably strong and said this will ensure the financial system remains resilient during difficult times and will maintain investor confidence. 

“We support and endorse APRA as Australia’s prudential regulator to implement this recommendation and will continue to closely monitor the resilience of our banks.”

The government noted that APRA released an international capital comparison study on 13 July this year, which found that Australia’s major banks’ capital levels are currently below the top quartile of internationally active banks (the baseline target proposed by the Financial System Inquiry), even after adjusting for APRA’s conservative approach to measuring capital.

Given that Westpac's recent 20-basis-point rate rise was billed as a reaction to increased capital requirements, the government's support for more capital could lead to higher rates over time. 

Finally, the government agrees that the gap between average mortgage risk weights should be narrowed, highlighting the benefits to competition in the banking sector.

“We support and endorse APRA as Australia’s prudential regulator and its initial actions announced on 20 July 2015 to raise the average IRB mortgage risk weights to at least 25 per cent from 1 July 2016 to implement this recommendation.

“The major banks have subsequently undertaken capital raisings to increase their capital levels.”

The government said it will take an active and ongoing role in monitoring developments as a result of these changes.

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