Open Banking May Catalyse Digital Disruption

Last week Treasurer Scott Morrison’s media release on the proposal to introduce an open banking regime in Australia was framed around the requirement for banks to be able and willing (with customer agreement) to share product and customer data with third parties.

The timing is interesting given the disruptive rise of FinTechs and the fact there are new entities emerging across the banking value chain. Until recently banks tended to regard their data as a strategic asset (for example not sharing default data) but with positive credit now in force, this is already changing. So this is a logical next step, and should be welcomed.

From our work whit a number of FinTechs we know that access to data is one of the barriers to success, alongside concerns about data security, and identity fraud. Opening the door to data sharing may be laudable, but there are significant technical issues to work through.

If open banking arrives, it would have the potential to increase competition, and perhaps put pressure on bank product pricing, as well as differentiated servicing; but we will see. It may open the door to more automated product switching, as well as better portfolio management and cross-selling. It certainly is another dimension in the wave of digital disruption already in play, which is ultimately being facilitated by the adoption of mobile technologies and devices.

The Turnbull Government has commissioned an independent review to recommend the best approach to implement an Open Banking regime in Australia, with the report due by the end of 2017.

Greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth.

The review will be ably led by Mr Scott Farrell. Mr Farrell is a Partner at King & Wood Mallesons and has more than 20 years’ experience in financial markets and financial systems law. Mr Farrell has given many years of service to the public and private sector in advising on, and guiding, regulatory and legal change in the financial sector. He has intimate knowledge of the financial technology (FinTech) sector and is a member of the Government’s FinTech Advisory Group.

Mr Farrell will be supported by a secretariat located within Treasury and will draw upon technical expertise from the private sector as required. The review will consult broadly with the banking, consumer advocacy and FinTech sectors and other interested parties in developing the report and recommendations.

The Review terms of reference have been released and an Issues Paper will shortly be made available for interested parties to provide input to the review.

Purpose of the review

The Government will introduce an open banking regime in Australia under which customers will have greater access to and control over their banking data. Open banking will require banks to share product and customer data with customers and third parties with the consent of the customer.

Data sharing will increase price transparency and enable comparison services to accurately assess how much a product would cost a consumer based on their behaviour and recommend the most appropriate products for them.

Open banking will drive competition in financial services by changing the way Australians use, and benefit from, their data. This will deliver increased consumer choice and empower bank customers to seek out banking products that better suit their circumstances.

Terms of reference

  1. The review will make recommendations to the Treasurer on:1.1. The most appropriate model for the operation of open banking in the Australian context clearly setting out the advantages and disadvantages of different data-sharing models.1.2. A regulatory framework under which an open banking regime would operate and the necessary instruments (such as legislation) required to support and enforce a regime.

    1.3. An implementation framework (including roadmap and timeframe) and the ongoing role for the Government in implementing an open banking regime.

  2. The recommendations will include examination of:2.1. The scope of the banking data sets to be shared (and any existing or potential sector standards), the parties which will be required to share the data sets, and the parties to whom the data sets will be provided.2.2. Existing and potential technical data transfer mechanisms for sharing relevant data (and existing or potential sector standards) including customer consent mechanisms.

    2.3. The key issues and risks such as customer usability and trust, security of data, liability, privacy safeguard requirements arising from the adoption of potential data transfer mechanisms and the enforcement of customer rights in relation to data sharing.

    2.4. The costs of implementation of an open banking regime and the means by which costs may be imposed on industry including consideration of industry-funded models.

  3. The review will have regard to:3.1. The Productivity Commission’s final report on Data Availability and Use and any government response to that report.3.2. Best practice developments internationally and in other industry sectors.

    3.3. Competition, fairness, innovation, efficiency, regulatory compliance costs and consumer protection in the financial system.


The review will consult broadly with representatives from the banking, consumer advocacy and financial technology (FinTech) sectors and other interested parties in developing the report and recommendations.

The review will report to the Treasurer by the end of 2017.



When Is a Bank, Not a Bank?

The Treasury has also released draft legislation to enable more entities to be able to use the term “bank”.  The Government announced in the 2017-18 Budget that it will act to reduce regulatory barriers to entry for new and innovative entrants to the banking system, by lifting the prohibition on the use of the word ‘bank’ by authorised deposit-taking institutions (ADIs) with less than $50 million in capital.

In practice this means a wider range of entities can now claim to be a bank, provided they are an ADI. Given the term is widely recognised in the community, it may help to level the playing field a little (though it is probably less important than differential capital rules and other barriers, such as implicit Government guarantees!)

Currently APRA  only permit ADIs with Tier 1 capital exceeding $50 million to use the terms ‘bank’, ‘banker’ and ‘banking’. However, there are a number of smaller ADIs which are prudentially regulated by APRA who would benefit from the use of these terms. The proposed amendment will allow all ADIs to use the terms will create a more level playing field in the banking sector.

The current restriction on the use of the words ‘bank’, ‘banker’ and ‘banking’ under section 66 of the Banking Act will be removed to the effect that where an entity is an ADI, that entity will be able to use those terms in its business. This will allow a range of ADIs to use the term ‘bank’.

APRA will retain its ability to restrict the use of the term ‘bank’ in certain circumstances; for example, where a purchase payment facility is an ADI but does not conduct traditional ‘banking’ business.

It is important that APRA retains the ability to determine that some ADIs may not use the restricted terms. Therefore, APRA will continue to be able to restrict the use of the terms ‘bank’, ‘banker’ and ‘banking’ through providing an affected ADI with a written determination restricting that ADI from use of the terms. [Item 5, subsection 66AA(3) of the Banking Act]

Determinations made by APRA to restrict the use of these terms may apply to a single ADI or to a class or classes of ADI. It is expected that APRA would use the power to prohibit certain ADIs which do not have the ordinary characteristics of banks from utilising the term ‘bank’ (for example, purchase payment facilities). This power may also be used to deny the use of the term where serious or unusual circumstances warrant APRA making this determination.

APRA may still receive applications from non-ADI financial businesses for permission to use the term ‘bank’, or from ADIs who wish to apply for the use of other restricted terms, such as ‘credit union’ (non-mutual ADIs are separately prohibited from inaccurately describing themselves as ‘credit unions’ or like terms). The latter approval is not automatically granted in the same way as ‘bank’ given that these terms convey the concept of mutuality, which is not relevant to all ADIs.

However, given APRA will no longer receive applications from many ADIs, it is no longer desirable that the remainder of the decisions to be made under section 66 be reviewable. This more appropriately reflects the Government’s intent to limit the use of the term ‘bank’ by financial businesses other than ADIs to very rare and unusual circumstances. This approach is consistent with Recommendation 35 of the Financial System
Inquiry to clearly differentiate the investment products financial companies and similar entities offer retail consumers from ADI deposits.

The Customer Owned Banking Association welcomed the move:

COBA congratulates the Government on moving quickly to allow all credit unions and building societies to use the term ‘bank’.

Credit unions and building societies are Authorised Deposit-taking Institutions (ADIs), like banks, and are subject to the same prudential regulatory framework as banks and the Government’s deposit guarantee under the Financial Claims Scheme.

“It makes sense that all ADIs should be able to choose to use the term ‘bank’ to explain what they do – which is banking,” said COBA CEO Mark Degotardi.

“The historic restriction on use of the term bank by ADIs with more than $50 million in capital is out of date and no longer relevant.

“We welcome the Government’s move to level the playing field.

“There are already 18 customer owned banks providing competition and choice in the retail banking market. These former credit unions and building societies are likely to be joined by many of the 60 other customer owned banking institutions currently trading as credit unions and building societies.

“Some credit unions and building societies may prefer not to rebrand but at least now they will have a choice.

“This draft legislation is the latest installment of the Government’s agenda to promote competition in banking. COBA congratulates the Government on its commitment to this agenda and its delivery of positive reform.

“We look forward to engaging with the Government on the draft legislation.”


Property Investors Lose Tax Breaks

The Treasury has released its exposure draft for consultation on the plans announced in the budget to disallow travel expense deductions and limit depreciation for plant and equipment used in relation to residential investment property.

Closing date for submissions: Thursday, 10 August 201.

As part of the 2017-18 Budget, the Government announced it would disallow travel expense deductions relating to residential investment properties and limit depreciation deductions for plant and equipment used in relation to residential investment properties.

Travel deductions

From 1 July 2017, all travel expenditure relating to residential investment properties, including inspecting and maintaining residential investment properties will no longer be deductible.

This change will not prevent investors from engaging third parties such as real estate agents to provide property management services for investment properties. These expenses will remain deductible.

Plant and equipment depreciation deductions

From 1 July 2017, the Government will limit plant and equipment depreciation deductions for investors in residential investment properties to assets not previously used. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

Plant and equipment used or installed in residential investment properties as of 9 May 2017 (or acquired under contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

The Government has released exposure draft legislation and explanatory material for amendments to give effect to the Budget announcements outlined above.

Public consultation on the exposure draft legislation and explanatory material will run for four weeks, closing on Thursday, 10 August 2017. The purpose of public consultation is to seek stakeholder views on the exposure draft legislation and explanatory material.

Superannuation Guarantee Compliance Reforms Ahead

Despite not being able to estimate the true amount of superannuation guarantee non-compliance, the Government is proposing a number of reforms to protect employees and strength compliance.  They say it is mostly small businesses who are non-compliant, and this is often caused by cash-flow issues. We have summarised their recommendations.

On 31 March 2017, the Superannuation Guarantee Cross-Agency Working Group provided its report on Superannuation Guarantee Non-Compliance to the Minister for Revenue and Financial Services. This Working Group, established in December 2016– comprised officials from the Australian Taxation Office (Chair), the Treasury, the Department of Employment, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority.

There are currently no robust estimates of superannuation guarantee non-compliance.

In December 2016, Industry Super Australia (ISA) estimated non-compliance in 2013-14 to be $2.8 billion (affecting an estimated 2.15 million employees). In March 2017 this estimate increased to $5.6 billion (affecting an estimated 3 million employees).

The Working Group believes this estimate should be considered in the context of the $89.6 billion in total employer contributions made in 2015-16. From the analysis of ISA’s methodology, the Working Group considers that the $5.6 billion estimate is likely to substantially overstate the actual size of the superannuation guarantee gap. The data is inconsistent with experiences and observations from the ATO’s
compliance program.

A review of ATO case data indicates that small businesses account for around 70 per cent of reported superannuation guarantee non-compliance. Cash flow problems are often the major reason small business employers provide as to why they did not pay their employees’ superannuation guarantee contributions.

The Working Group recognises that while there is, overall, a high level of voluntary compliance by the majority of employers there is scope to improve compliance to better safeguard employee entitlements.

The Working Group has identified two key barriers to maintaining or improving superannuation guarantee compliance.

The first barrier is that the ATO does not currently have any visibility over an employer’s superannuation guarantee obligations to their employees. The second barrier is that the ATO only receives information on superannuation guarantee payments received by superannuation funds on an annual basis so there can be a lag of up to 14 months in the reporting of contributions that employers have paid. This delay further reduces the effectiveness of the ATO’s compliance work.

The Working Group proposed changes that would improve substantially the ATO’s capacity to monitor superannuation guarantee compliance:

  • All employers should report superannuation guarantee obligation information to the ATO in a more timely manner. One way this will be achieved is to leverage the Government’s introduction of Single Touch Payroll legislation. Single Touch Payroll will commence for businesses with 20 or more employees from 1 July 2018. The Working Group considers that Single Touch Payroll should be extended to businesses with 19 or fewer employees as soon as practicable. Subject to more detailed design and consultation, it is believed that this change may be able to be implemented from 1 July 2018.
  • The regime should be more flexible so that penalties can be tailored to reflect different levels of employer behaviour and culpability. The current penalty regime within which the ATO operates is not consistent with the settings of other areas of taxation administration. The superannuation guarantee charge regime operates largely on a one-size-fits-all basis and does not distinguish between deliberate or repeated non-compliance and inadvertent mistakes.
  • Employers display to avoid superannuation guarantee obligations are closely related to characteristics that are seen in phoenix activity – the Phoenix Taskforce, which may recommend widening the manner in which the ATO is able to use Security Bonds and more readily securing outstanding superannuation guarantee charge debts through Director Penalty Notices.
  • The Government should clarify the law on how salary sacrifice agreements affect an employer’s superannuation guarantee obligations. In particular to, firstly, ensure that employers cannot use an amount an employee salary sacrifices to superannuation to satisfy the employer’s superannuation guarantee obligation; and secondly, to ensure that the ordinary time earnings base used to calculate an employer’s superannuation guarantee obligation includes those salary or wages sacrificed to superannuation. This will ensure that employees receive the full benefit of voluntary contributions.
  • At present, superannuation guarantee is required to be paid by employers within 28 days of the end of each quarter. The Working Group considers that improvements to data visibility are the main priority after which payment frequency could be reviewed.
  • There is merit in departments working more closely to promote conformance with, and performance of, the superannuation guarantee system drawing from the respective roles and expertise of each agency. So some information sharing arrangements will be changed.


The BEAR Roars!

The Government has released the Banking Executive Accountability Regime (BEAR) Consultation Paper for comment. We now get to see how these measures may be implemented, and it is the consequence of a significant “fail” across the industry in terms of appropriate behaviour over many years, especially given the special yet unequal place financial services companies have in the economy.

Of course, the question is – will these measures help tackle the cultural shortcomings endemic to the sector?

In the 2017-18 Budget the Government brought forward a comprehensive package of reforms to strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new Banking Executive Accountability Regime (BEAR).

The intention of the BEAR is to enhance the responsibility and accountability of ADIs and their directors and senior executives. The BEAR will provide greater clarity regarding their responsibilities and impose on them heightened expectations of behaviour in line with community expectations.

Where these expectations are not met, APRA will be empowered to more easily remove or disqualify individuals, ensure ADIs’ remuneration policies result in financial consequences for individuals, and impose substantial fines on ADIs. ADIs will be required to register individuals with APRA before appointing them as senior executives and directors.

The Government is now releasing this consultation paper, which outlines the key features of the BEAR and the proposed approach for implementation.

All interested parties are encouraged to make a submission by 3 August 2017.

Here are the main points.

All ADI’s are included.

ADIs are in scope of the BEAR due to the critical role they play in the economy and in response to community concern regarding recent poor behaviour. It is imperative that they maintain the trust of financial sector participants and depositors in particular.

The scope of the BEAR is also intended to include all entities within a group with an ADI parent. This will include subsidiaries of ADIs, including those that provide non-banking services and those that are foreign subsidiaries. Where an ADI exists within a group with a non-ADI or overseas parent company, the scope of the BEAR is intended to apply only to the subgroup of entities for which the ADI is the parent.

Senior Management and Board are included.

An objective in defining accountable persons for the purpose of the BEAR is to provide greater clarity in relation to the responsibilities of the most senior individuals within an ADI. The BEAR should make it easier to hold senior individuals to account for their behaviour in carrying out their responsibilities.

The net should not be cast so wide that responsibility can be deflected and accountability avoided. The risk is that if everybody is responsible, nobody will be accountable. On the other hand, the definition of accountable persons should not be cast too narrowly so as to exclude individuals with effective responsibility for management and control.

The definition of accountable persons is intended to clearly identify the most senior directors and executives who will be held to a heightened standard of responsibility and accountability. It is intended to build on, rather than replace, existing concepts of responsibility and accountability, such as definitions of ‘responsible persons’, ‘directors’ and ‘senior managers’ under APRA’s Fit and Proper framework.

Specific Behaviour Expectations Are Defined.

The new expectations are intended to identify a heightened standard of conduct or behaviour rather than replacing existing concepts such as contained in APRA’s Fit and Proper framework.

The BEAR will apply where there is poor conduct or behaviour that is of a systemic and prudential nature.

ASIC will remain responsible in its role as conduct regulator.
One potential approach in identifying the new expectations for ADI groups and accountable persons is to draw upon the expectations of behaviour contained in the SMR and the Fundamental Rules in the United Kingdom, as outlined in Appendix A, but keeping the focus on systemic and prudential matters.

Using this approach, an ADI would be expected to:
• conduct its business with integrity;
• conduct its business with due skill, care and diligence;
• deal with APRA in an open and cooperative way; and
• take reasonable steps to:
– act in a prudent manner, including by meeting all of the requirements of APRA’s prudential standards, and maintaining a culture which supports adherence to the letter and spirit of these standards;
– organise and control its affairs responsibly and effectively; and
– ensure that these expectations and accountabilities of the BEAR are applied and met throughout the group or subgroup of which the ADI is parent.

An accountable person would be expected to:
• act with integrity, due skill, care and diligence and be open and co-operative with APRA; and
• take reasonable steps to ensure that:
– the activities or business of the ADI for which they are responsible are controlled effectively;
– the activities or business of the ADI for which they are responsible comply with relevant regulatory requirements and standards;
– any delegations of responsibilities are to an appropriate person and those delegated responsibilities are discharged effectively; and
– these expectations and accountabilities of the BEAR are applied and met in the activities or business of the ADI group or subgroup for which they are responsible.

Includes Variable Remuneration Deferment.

In the 2017-18 Budget, the Government announced that:
• a minimum of 40 per cent of an ADI executive’s variable remuneration — and 60 per cent for certain ADI executives such as the CEO — will be deferred for a minimum period of four years; and
• APRA will have stronger powers to require ADIs to review and adjust remuneration policies when APRA believes these policies are producing inappropriate outcomes.

Remuneration policy should be aligned with sound and effective risk management and should not incentivise a short-term focus or excessive risk-taking. Deferring variable remuneration is aimed at providing an appropriate period of time for risks to crystallise and for variable remuneration to be adjusted downwards as a result. The intention is to better align the realisation of risk with reward.

Accountable Persons to be Registered.

ADIs will be required to register accountable persons with APRA. This mechanism will operate by requiring ADIs, prior to appointing an individual as an accountable person, to advise APRA of the potential appointment and provide APRA with information regarding the candidate’s suitability.

Upon notification, APRA would consult its register of accountable persons and advise the ADI if the candidate has previously been removed or disqualified by APRA, or if APRA is aware of any other issues that that could affect the candidate’s suitability for the role. It is not intended that ADIs be able to consult the register themselves. In order to ensure that the register is internal to APRA it may be necessary to provide exceptions from information law regimes, such as the Freedom of Information Act and the Privacy Act.

From The Introduction.

In recent years, there has been growing community concern regarding a number of examples of poor culture and behaviour in banks and the financial sector generally. There have been too many instances where participants have been treated inappropriately by banks and related financial institutions.

The House of Representatives Standing Committee on Economics Review of the four major banks (the Coleman Report) found that no individuals have had their employment terminated as a result of recent scandals, noting that:

‘The major banks have a ‘poor compliance culture’ and have repeatedly failed to protect the interests of consumers. This is a culture that senior executives have created. It is a culture that they need to be accountable for.’

The Australian financial system is the backbone of the economy and plays an essential role in promoting economic growth. In order for it to operate in an efficient, stable and fair way, it is imperative that participants have trust in the system. It must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses.

Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests. As the Financial System Inquiry noted:

‘Without a culture supporting appropriate risk taking and the fair treatment of consumers, financial firms will continue to fall short of community expectations.’

Banks, as authorised deposit-taking institutions (ADIs), play a critical role in the financial system, including through their deposit-taking, payments and lending activities. ADIs enjoy a privileged position of trust, with prudential regulation designed to provide consumers with confidence in the safety of their deposits.

In the 2017-18 Budget the Government brought forward a comprehensive package of reforms to address the recommendations of the Coleman Report and strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new Banking Executive Accountability Regime (the BEAR).

Scott Morrison is cracking down on credit cards

From Business Insider.

Australians have around $52 billion in debt outstanding on credit cards and the federal government is going after this lucrative part of the banking sector with four tough new measures in a crackdown on card debt.

Treasurer Scott Morrison has announced plans to change the way eligibility for a credit card is assessed, shifting it from the ability to pay the minimum repayment to being able “to repay the credit limit within a reasonable period”.

Before the end of the year, Morrison has pledged to pass legislation banning unsolicited offers of credit limit increases. The ban follows on from changes in 2011 which stopped card issuers offering written offers to increase credit limits unless the customer had already given consent. Banks switched to verbal offers as a way around the laws.

The remaining changes will see interest calculations simplified and force providers to offer online options to cancel cards or to reduce credit limits.

Morrison argues that under the current arrangements, people enticed to a card by an interest-free period have no way of calculating the cost and interest charges if they do not pay off the balance in full when the offer period ends.

Such are the technicalities and complications, most consumers have no idea how interest charges apply, and therefore incur heavy interest charges after the interest-free period when their balance is not paid in full.

Morrison said the government was targeting “unfair and predatory practices” by credit card providers.

“These measures will deliver the first phase of reforms outlined in the Government’s response to the Senate Inquiry into the credit card market,” he said.

“The reforms will substantially reduce the incidence of consumers being granted excessive credit limits and building up unsustainable debts across multiple credit cards.

“Collectively, these measures will help prevent the debt cycle that many Australians find themselves in.”

Of the $52 billion owed on 16.7 million credit cards in Australia, which often attracts interest charges of around 20%, the average outstanding balance is $4,730.

Retirement Income Stream Review Outcomes

In its superannuation policy for the 2013 election, the Government stated that it would review both the minimum withdrawal amounts for account-based pensions and the regulatory barriers currently restricting ‘the availability of relevant and appropriate income stream products in the Australian market’. The Treasury has now released the outcomes of the review.

The paper says the current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement and should be maintained.

An additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.

In regard to the existing minimum drawdown rules:

1. The current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement and should be maintained.
2. The Australian Government Actuary should be asked to undertake a review of the annual minimum drawdown rates every five years and advise the Government to ensure that they remain appropriate in light of any increases in life expectancy.
3. Any other changes to the minimum drawdown amounts should only be considered in the event of significant economic shocks and based on further advice from the Australian Government Actuary.

In regard to the development of other annuity-style retirement income stream products:

4. An additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.
5. The alternative product rules should be designed to accommodate purchase via multiple premiums but additions to existing income stream products should continue to be prohibited.
6. Self-Managed Superannuation Funds (SMSFs) and small Australian Prudential Regulation Authority (APRA) funds should not be eligible to offer products in the new category.
7. A coordinated process should be implemented to streamline administrative dealings with multiple government agencies.

Minimum drawdowns in practice

Chart 1 (below) illustrates a drawdown scenario for male and female retirees commencing an account-based pension with a balance of $200,000 at age 60 and drawing down at the minimum payment amounts with investment returns of 6 per cent per annum. The chart shows the account balance at various ages and the income drawn down each year in both nominal and net present value (NPV) terms.

An account-based pension drawn down only at the minimum rates can be expected to last beyond average life expectancy, although the NPV of the annual income will generally gradually diminish. In the below example, the net present value of the account balance at life expectancy is around 25 per cent of the initial opening account balance. The net present value of income from the pension declines steadily over time, but ‘ratcheting-up’ occurs when the regulated percentages increase, resulting in a somewhat variable income stream in nominal terms.

Chart 1

Note: The analysis assumes an average nominal investment return of 6 per cent. This is also the discount rate for net present value.

Proposed capital access schedule

Under the proposed alternative income stream rules, products would qualify for the earnings tax exemption provided the maximum amount that could be returned to the product holder if they withdraw from the product at a later date declines in a straight line from commencement to life expectancy.

In addition, products would be able to offer a death benefit of up to 100 per cent of the nominal purchase price for half of this period, with the maximum death benefit limited to the capital access schedule thereafter.

For example, male life expectancy at age 65 is approximately 19 years.

Under this proposal, a product sold to a 65 year old male could offer a declining commutation value such that the amount of the purchase price that could be returned on withdrawal would be zero by age 84, but a death benefit of 100 per cent could be offered for around 10 years (to age 75). Income payments would continue for life (see Chart 2).

In the case of deferred products, the schedule would commence at the same time as the product becomes eligible for the earnings tax exemption. For example, where an individual retires at age 65 and buys a deferred annuity that pays an income stream from age 80, the earnings tax exemption and the depreciation schedule would both commence from age 65, even though income payments would not commence until age 80.

Chart 2

Treasury Says Housing Is A Key Economic Risk

There were a number of familiar themes in Secretary to the Treasury John Fraser’s opening address to budget estimates. But the section on household finances bears close reading. He says developments in the housing market will remain a key risk to the outlook and the near term the outlook for wage growth remains subdued, reflecting spare capacity in the labour market.

Household consumption has grown in recent years, but below historical rates with average growth in consumption per capita of just 1.1 per cent since the GFC.

This partly reflects weak per capita income growth over this period.

Consumption accounts for around 60 per cent of GDP and almost half of GDP growth so it is a critical factor in determining the strength of the economy.

We expect household consumption to pick up over the forecast horizon and continue to grow by more than household income, as labour market conditions improve and wages growth picks up. This would result in a further decline in the household saving rate.

Still, there are risks to the real economy around the momentum in household consumption – in particular, a change in households’ attitudes toward saving could lead to household consumption being weaker than forecast.

Wage growth has recently been low by historical standards, with the wage price index growing by 1.9 per cent through the year to March 2017.

We expect wages growth to increase as domestic demand strengthens, but in the near term the outlook for wage growth remains subdued, reflecting spare capacity in the labour market.

The near term outlook for inflation is also subdued.

Although full-time employment has strengthened recently, labour market conditions have generally softened after strong employment growth in 2015, with the majority of employment increases over the last 18 months being been in part time employment.

All that said, the unemployment rate remains below 6 per cent and indicators such as job advertisements, vacancies and business survey measures suggest labour market conditions will improve.

Employment is forecast to grow by one and half per cent through the year to the June quarters of 2018 and 2019 and the unemployment rate is forecast to decline modestly through the forecast period – consistent with an improving outlook for business and the economy overall.

Housing and dwelling investment

Household balance sheets have been strengthened by a notable rise in the value of housing and superannuation assets since the GFC, with household assets now more than five times higher than household debt.

We should be mindful that household debt has grown more rapidly than incomes in recent years, driven in particular by increasing levels of housing debt.

Dwelling prices have increased by 16 per cent through the year in Sydney and 15.3 per cent in Melbourne, though there have been some recent indications that this growth is moderating.

It is also important to emphasise that in other cities and regions, prices have been growing more moderately or declining for some years.

There are a number of complex factors that drive the housing market across both the demand side and the supply side.

For instance, there is no doubt that low interest rates have combined with population growth along the east coast to increase demand and support greater dwelling investment.

At the same time, insufficient land release, complex planning and zoning regulations and public aversion to urban infill have impacted the supply of housing.

Residential construction activity was subdued in the mid‑to-late 2000s leading to a state of pent-up demand in the housing market.

But activity has strengthened since 2012 with significant investment in medium-to-high density dwellings.

As the current pipeline of dwelling construction reaches completion over the next two years it is likely that dwelling investment will ease as a share of the economy.

Developments in the housing market will remain a key risk to the outlook, and the Treasury and our regulatory counterparts will be paying close attention to adjustments in the market.

As the steps taken recently by the Australian Prudential Regulation Authority demonstrate, there is a role for sensible and careful measures that can address risks and underpin market stability – and we will continue to focus on these going forward

Financial Services Supervision Costs Set To Fall

The Treasury has released a paper to seek industry views on the proposed Financial Institutions Supervisory Levies (‘the levies’ or FISLs) that will apply for the 2017-18 financial year.

The paper, prepared by Treasury in conjunction with APRA, sets out information about the total expenses for the activities to be undertaken by APRA and certain other Commonwealth agencies and departments in 2017-18 to be funded through the commensurate levies revenue to be collected in 2017-18.

The financial industry levies are set to recover the operational costs of APRA and other specific costs incurred by certain Commonwealth agencies and departments, including the Australian Securities and Investments Commission, the Australian Taxation Office, and the Department of Human Services.

The total funding required under the levies in 2017-18 for all relevant Commonwealth agencies and departments is $244.5 million. This is a $6.2 million (2.5 per cent) decrease from the 2016-17 requirement. The components of the levies are outlined below:

Doing more with less then?

Inquiry into the State of Competition in the Financial System Announced

Following reports over the weekend, the Treasurer has confirmed that the Productivity Commission will examine competition in Australia’s financial system. This includes a consideration of vertical and horizontal integration and access to banking services for small business.

The Government is committed to ensuring that Australia’s financial system is competitive and innovative.

That is why I have tasked the Productivity Commission to hold an inquiry into competition in Australia’s financial system. Competition is central to the Government’s plans to support innovation and economic growth, and deliver better outcomes for consumers and small businesses.

This delivers on the Turnbull Government’s commitment to task the Productivity Commission to review the state of competition in the financial system, made as part of the Government’s response to the Financial System Inquiry.

The Productivity Commission will look at how to improve consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and support financial system innovation, while balancing financial stability objectives.

In doing so it will consider the level of contestability and concentration in key segments of the financial system, including the degree of vertical and horizontal integration. It will also examine competition in the provision of personal deposit accounts and mortgages and services and finance to small and medium businesses.

The Government encourages all parties with an interest in competition in the financial system to consider making a submission to the Commission.

The Inquiry will commence on 1 July 2017 and is due to report to the Government by 1 July 2018.

Further information and the terms of reference will be available on the Commission’s website.

The Customer Owned Banking Association welcomed the news.

The customer owned banking sector welcomes today’s announcement by the Treasurer of a Productivity Commission (PC) inquiry into the state of competition in the financial system.

“The enduring solution to concerns about the banking market is action to promote sustainable competition so that poor conduct is swiftly punished by loss of market share,” said COBA CEO Mark Degotardi.

“Customer owned banking institutions – mutual banks, credit unions and building societies – are eager to build on their 4-million strong customer base, but we need a fairer regulatory framework.

“Fast-tracking this PC inquiry was our top policy priority for the 2017-18 Budget so we are delighted it has been unveiled a day early.

“Consumers stand to gain from a more competitive banking market where all competitors have a fair go.

“Currently, major banks benefit from unfair regulatory capital settings and a free subsidy from taxpayers in the form of an implicit guarantee that significantly lowers their cost of funding.

“These problems can be addressed by the PC as well as measures to empower consumers to more easily find the best deal for them on a savings account, credit card or home loan.

“This PC inquiry was recommended by the Financial System Inquiry because the current regulatory framework suffers from ‘complacency’ about competition.

“COBA believes one way to tackle this problem is to give the powerful banking regulator APRA an explicit ‘secondary competition mandate’ and an obligation to report annually against this mandate.

“We look forward to engaging with the PC inquiry, particularly on removing barriers to innovation and competition.”