Chapter Eleven: Promoting Increased Efficiency

The funds management industry is composed of funds collectively invested in life insurance, superannuation, equities and unit trusts. It has both retail and wholesale dimensions. Funds management fees in Australia appear to be higher than those in comparable countries. One of the potential reasons for higher costs in Australia is the fragmentation of the managed funds industry.

Regulatory reform can improve the performance of the managed funds industry. The following specific reforms are recommended. Foreign investment regulations restricting foreign owned or controlled managers of collective investments should be reviewed. The Corporations Law should be amended to provide for the application of takeover provisions modelled on Chapter 6 of the Corporations Law for public unit trusts, and to provide for streamlined merger and reconstruction provisions for collective investment scheme. The Australian Stock Exchange should amend Listing Rules 15.14 to permit the exercise of sanctions in trust deeds designed to provide unit holders with the protection embodied in Chapter 6 of the Corporations Law.

Superannuation fund members should have greater choice of fund. Employees should be provided with choice of fund, subject to any constraints necessary to address concerns about administrative costs and fund liquidity. Transfer costs should be transparent and reasonable. Regulation of collective investments and public offer superannuation should be harmonised. The States and Territories should give urgent priority to establishing a modern, uniform, national regime for trustee companies. There is also considerable scope for rationalising and standardising the taxation of collective investments, although this is outside the Report's terms of reference.

A regulatory framework which is responsive to technological innovation will also promote increased efficiency. Relevant legislation should be generally amended to allow for, and facilitate, electronic commerce. Regulation should not differ between different technologies or delivery mechanisms in such a way as to favour one technology over another. Australia should also adopt international standards for electronic commerce, and international harmonisation of law enforcement and consumer protection should be pursued, especially in regard to electronic commerce. Financial regulators should keep abreast of technological developments as they affect the financial system and liaise with each other as well as government departments and other agencies on these issues.

The existence of cross-subsidies between products, channels and customer groups is pervasive in the financial system. Profits from higher prices for some transactions are used to provide prices which are lower than they would otherwise be for other transactions. Cross-subsidies are derived from historical product bundling, earlier difficulties with apportioning costs, and community expectations that institutions should meet community service obligations. The unwinding of such cross-subsidies can increase efficiency in the financial system. Institutions should have the freedom to set fees and charges on their services and products based upon costs, without government intervention or suasion. Governments should expedite the examination of alternative means of providing low-cost transaction services for remote areas and for recipients of social security and other transfer payments.

In regard to the mortgage insurance market, which is of great importance to mortgage lenders, the Housing Loans Insurance Corporation should be privatised to eliminate its undercharging, in comparison to private insurers, which is derived from the Commonwealth Government's guarantee of its activities.

Improved flows of market information can also increase efficiency. In regard to small and medium-sized enterprises (SMEs), debt markets are not seriously deficient, while equity markets are improving. The current low investment by superannuation fund managers in this sector will probably increase and there should be no compulsion on funds managers to invest in SMEs. However, compared to the United States, Australia lacks benchmarking and performance measurement data on investment pools in the SME sector. This discourages institutional investment there. The CFSC and the Australian Bureau of Statistics should take into account the specific requirements of credit-rating agencies and funds managers when reviewing SME data collection.

In regard to privacy issues, current credit reporting for lender institutions is restricted to negative reporting of defaults and delinquencies. The Privacy Act prevents positive credit reporting (i.e. the successful completion of debt repayments). The latter would be very useful in making more efficient credit assessments of potential borrowers. This restriction should be reviewed. In a similar vein, credit information sharing amongst group entities should be allowed unless the customer withdraws consent. In general, reforms to the privacy regime should balance protection, choice and efficiency, be responsive to market changes, be national in scope, avoid duplication and deal sensibly with information collected under previous privacy regimes. The administration of privacy laws in the financial system should be done by the Privacy Commissioner rather than the financial consumer protection regulator.