Royal commission will go ahead: Murray

Financial System Inquiry (FSI) report author David Murray warns of damages a royal commission could have on the financial services industry.

21-Mar-2017

By Sarah Kendell

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A proposed royal commission into the financial services industry would go ahead within the next few years as the sector had so far failed to build the public goodwill necessary to avoid further dramatic regulatory change, according to Financial System Inquiry (FSI) report author David Murray.

Addressing Adviser Ratings’ Fin Forward Conference in Sydney yesterday, Murray said he was confident a royal commission would go ahead “either before or after the next election” and that it was likely to present extreme dangers to Australia’s financial system given the precedent set by previous investigations of that kind.

“We’ve had royal commissions into the banking system in the 1890s and 1937 which followed absolute disaster in the financial system, and in both those cases you got an unpredictable political outcome – the 1937 royal commission resulted in legislation to nationalise all the banks in Australia,” he said.

“The concern here is you get weird outcomes from a royal commission, particularly with not a solid base to have one – there hasn’t been widespread economic damage or a failure of the system.”

However, he said it was important advice practitioners in particular understood the reasons for community scrutiny of their activities as financial services was different to most other Australian industries in that it dealt with complex technical products that could be extremely harmful to consumers if not properly regulated.

“We concluded [in the FSI] that with financial services there will always remain a significant knowledge gap between the buyer and the seller, [and] because the process of product disclosure statements has not been successful in dealing with this, we had to think about it in another way,” he said.

“That led us to conclude that this is less like normal product sales and more like pharmaceuticals and air safety, and that has very significant consequences – regulation has a big impact on this industry.”

However, he said he was also conscious that regulation could not be allowed to completely remove consumers’ own responsibility for researching financial products and their associated risks as it would make the industry unsustainable.

“In our work we tried to make sure the principle of caveat emptor (buyer beware) stays alive – most of the consumer bodies we dealt with were thoughtful and reasonable, but if there is a significant consumer backlash and you reverse caveat emptor, it isn’t worth working in the industry anymore,” he said.

“The legal claims will overtake any return anybody’s ever going to make, so I think it’s important we stay on that principle.”

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