Will a safe, secure system kill innovation?

When the Campbell inquiry was handed down in 1981, it laid the groundwork for the deregulation of our financial system, with the Hawke-Keating governments using this blueprint to provide much of the intellectual framework underpinning their reforms. When the Wallis report came out 16 years later, the issue was how to oversee a deregulated system. Both reports had clearly defined goals and outcomes.

But as the Murray inquiry winds its way through submissions and hearings, there remains a nagging question: what does it aim to achieve?

Certainly the economic architecture as it has an impact on the financial system has changed since 1997; two obvious examples are the emergence of Asia (especially China) as the principal engine of global economic activity and, domestically, the growth in superannuation assets to about $1.8 trillion, with the total savings pool now well in excess of $2 trillion.

I’ll leave the issue of what Asia’s economic emergence means to the economists. But on superannuation I think there’s a real opportunity for Murray to address a critical issue, as it pertains to this burgeoning honey pot.

What we have seen in recent years is consolidation across the sector. The banking sector has consolidated (in the wake of the GFC government guarantee on deposits it simply accelerated the process), and now we are seeing the same trend in superannuation (corporate funds are disappearing and industry funds are merging) and- most importantly- the financial planning industry.

It’s a trend, I would argue, that regulators like because consolidation means less entities to regulate. Certainly at the ASIC inquiry we heard accusations of how this regulator may favour the large entities. And the FoFA reforms, in their current form, certainly seem to favour the large, vertically integrated groups at the expense of the niche financial planning practices.

So the industry is consolidating- the big are getting bigger- and the regulators don’t seem to have an issue with it. They are certainly of that school of thought that says size equals security. But what does it mean in terms of having the industry competition and innovation so necessary to ensure the best returns for the millions of individuals locked into our compulsory superannuation system?

Don’t get me wrong, the security of the system is critical (especially for those nearing or in retirement). But at what point does security override the need for the finance industry to grow and innovate to deliver a variety of products and services to the superannuation sector?

There’s no innovation without risk. But it’s also a vital ingredient in allowing competition. In the current environment we desperately need other financial service companies to flourish and offer the competition so sorely needed across home mortgages, financial planning, and funds management, to name but three.

In funds management in particular, without innovation a large portion of our superannuation money (which is now greater than the market capitalisation of the ASX) will leave our shores and invest in assets overseas rather than assisting develop Australia. The beneficiaries will be Hong Kong and Singapore, and not just in terms of capital. Our talent will also head offshore.

It’s an issue worthy of Murray. Let’s hope he addresses it.

About George Lucas

George Lucas is managing director of Instreet Investment Limited. He has over 24 years' experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products.

He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.