Transcript of Question & Answer Session Reforming and Financing the Post-crisis Future

Hi it's Pip Freedman from the Australian Industry Group, excuse my speech impediment at the moment. I'm just interested, perhaps it's a little bit cheeky, for Luci and Barry to give us their view on the Future of Financial Advice reforms and what's happened at Commonwealth Bank the past week: following from Carsten's comments.

You know it's hard for Luci, being from the Bank, to speak on this, but anyway let me hand it over.

No I will, firstly nice to see you again Pip, Pip's a former colleague, I didn't realise you'd ended up at AIG, so it's nice to see you again. What I can say I mean rather than talking about the specifics, something I spoke about at a speech about two years ago - one of the two hooks that we can use to see where there might be a bad outcome later on, and one is risk taking and one is rent seeking, and the provision of financial advice and expert advice is clearly one where rent seeking is an issue. And we did touch on this in our Financial Stability Inquiry submission, when we talked about the cost involved in the retirement income system, much of which is because of the different layers of advice and the changing rules and how to get your tax. There just seemed to be an awful lot of people who are very happy to provide you advice and there have been concerns about conflicts, and you're paying a lot of money to get conflicted advice. And so it is an important area to get right and I think it speaks to a general principle that we would point to, which is look for opportunities to rent seek within in any industry, and that is something you may wish to focus on in terms of your regulatory response.

So the question is about whether we have the superannuation system we need and adequacy. Do you have any thoughts about how the superannuation system is connected to stability because we're really here to talk a lot about stability. Do you think – you know Australia does have a very advanced and unique superannuation system, the fact that we have portable super I think makes us quite different to anyone really. We have an almost completely defined contribution system which has stability implications itself. But just to connect the questions about the super system and the adequacy of the super system to our discussion of stability, do you think the design of our super system and the way we're going with it, do you think that effects the stability of the Australian financial system, do you think there's any issues there?

We've done quite a bit of thinking about this, and the way we framed it in the Financial System Inquiry submission is that it's better to have a great big lump of money funding people through time that's unleveraged than it's leveraged. And I think one of the key aspects of our system that is distinctive is that we have this big pension system that is defined contribution and unleveraged. And so you don't have the kinds of issues you see in many other countries, for example in Europe, where they get into real trouble because they've made promises that they then can't keep because they misunderstood or mis-forecast where inflation was going to go and therefore where nominal interest rates were going to go. So in that sense you then don't get these compounding issues of a promise that then can't be met that then causes other reactions that causes assets to be sold off or allocated. So the fact that that is unleveraged is very important. But there are a number of maybe not stability issues but infrastructure issues that we need to think about in more detail and one of them is this issue of portability. It's great that we have a system that doesn't lock people into particular employers, at risk of losing their pension, because of course that's very good for the flexibility of the labour market and therefore the household sector's ability to withstand shocks. But it does mean that the superannuation funds have to manage liquidity in a way they wouldn't otherwise have to do, and that's just an issue that has to be dealt with. And similarly again coming back to the cost, this is intended to accumulate retirement savings for people but the fee structure is quite high relative to current returns, and so you do get this squeeze during periods of relatively low returns in financial markets, so that's really quite important. And of course there are important infrastructure things you need to think about like who the trustees are, who the custodians are, so in terms of resolution and too big to fail, and how you resolve a very complex financial firm and what happens if they have a whole bunch of client funds, and these are things that we just do have to be sorted out and thought about, and it's – we're not going to pretend that we have all the answers as yet, but it's certainly something that we've done a lot of thinking about over recent years.