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Behemoths dominate the financial system -- and super

16 July 2014  |  Super

GiantThe Financial System Interim Report has been released and it has some negative insights into the super industry. Australians are paying through the nose to have their super administered:

"Notwithstanding the difficulties in comparing fees and costs across funds, Australia’ssuperannuation sector has some of the highest operating costs among Organisation for Economic Co-operation and Development countries. The decline in fees over the pastdecade is modest, given the economies of scale that the sector has achieved. That said, high allocations to growth and alternative assets contribute to these costs, but they can also deliver higher after-fee returns to members.

In general, competition has led to feature-rich, but more costly, superannuation products, in part reflecting that many consumers are not fee sensitive. It is too early to assess the effect of recent reforms to default arrangements (MySuper) on fees. There is an opportunity for fees to fall significantly over time, with further expected increases in scale and increased competition for MySuper products.

High demand for liquidity from superannuation funds may be reducing after-fee returns to members. The mandatory inter-fund portability timeframe of three days is contributing to higher allocations to liquid assets than the system requires. It remains unclear whether funds are chasing short-term returns and, if so, whether this is contributing to lower after-fee returns, as well as to what extent more individual tailoring of asset allocations would produce net benefits to members."

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The reason is a heavy concentration of financial players:

"Most sectors of the Australian financial system are concentrated, with that concentration generally increasing since the Wallis Inquiry. Banking, payments, financial market infrastructure (FMI) and personal general insurance have a relatively high degree of market concentration. However, competition can be strong betweenplayers in a concentrated market. Indeed, market concentration can be a by-product of competition, if more efficient firms grow at the expense of their less efficientcompetitors."

As the AFR points out, it is a report written by bankers which is not all that positive on Australia's banks.

"Notwithstanding the panel’s undisclosed personal financial interests, the interim report has boldly canvassed many fundamental policy problems that plague Australia’s immensely concentrated and heavily taxpayer-subsidised financial system."

Quite.

The report attacks what the AFR calls "the crazy “risk-weighting” system, which allows Australia’s major banks to literally hold less than half the capital (and thus twice the leverage) of their competitors when lending against housing, which is the cornerstone of their comparative return-on-equity advantage." In truth, we have banking behemoths that not only dominate the mortgage market, they also dominate financial advice.

It is an extreme oligopoly. The Commonwealth Bank of Australia has a market capitalisation of $131 billion, more than Goldman Sachs or American Express.

Andrea Slattery, chief executive of SPAA says the renaming of some financial advice would be a positive step. She says she is especially pleased that the FSI is advising dispensing with the category of ‘general’ financial advice, to be renamed ‘sales’ or ‘product information’. The term ‘advice’ can only being used in relation to personal financial advice.
 
“We believe that this would lead to consumers having greater awareness of the type of advice they are receiving and being able to make more informed financial choices," says Slattery. "However, SPAA does not support the implementation of a national exam for financial advisers as we believe there are too many risks inherent in this approach."
 
“The mere passing of an exam is evidence of past knowledge and financial planning is about practical judgement and understanding the future."


 

 


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