Comment: Consumers and the nation big winners from FSI

The banks have been forthright in telling David Murray what they want from his inquiry, moving the Boston Consulting Group's financial services leader for Australia, Andrew Dyer, to explain why he reckons they're out of step with global peers.

Ignore the rumblings about the Murray Inquiry leading to higher interest rates; David Murray's Financial Services Inquiry will deliver multi-billion dollar benefits to consumers year after year.

My estimate is the reforms will transfer at least A$3.5 billion in value every year from the financial services industry to consumers, and the total benefit could be much higher.

This baseline figure can be derived from some reasonable assumptions about the way the banks and their investors will respond in a post-inquiry world.

The major banks will need to raise about A$20 billion to meet the recommended capital requirements, but investors will not want any dilution in return on equity, which averaged 15.6 per cent at 30 June 2014 across the major banks.

To keep returns at that level on an expanded capital base, the major banks will need to increase profits by about $3.5 billion a year. They cannot turn on a tap that pours new business at the current rates of return, so will either need to increase their margins (the higher interest rates scenario) or find cost savings and efficiencies.

In a low-growth economy with more than double the number of mortgage providers operating on roughly the same competitive terms, and a regulatory environment that welcomes new "fintech" players such as peer-to-peer lender SocietyOne, the major banks will not be pricing themselves out of the action.

In fact, fintech companies will bring to bear the strongest competitive pressure that our major banks have ever seen. These new players not only operate with a low cost base, but have also shown in overseas markets they can exploit Big Data and social media to make credit decisions that are as good as or better than the traditional lenders.

Against this onslaught, the major banks will be forced to find savings and efficiencies to reach the $3.5 billion needed to maintain return on equity. Those savings don't just evaporate, they represent a large transfer of value from the major banks to consumers.
This is just the baseline in sizing up the win for consumers from the Murray Inquiry.

The recommendation to allow ASIC to intervene early and remove unsafe financial products before they wipe out investor savings has the potential to save consumers billions of dollars. The Inquiry noted that failed investment schemes and companies had cost Australians an estimated $4 billion over the past decade.

Then there is the consumer benefit of what the inquiry has prescribed as a genuine customer-centric approach to doing business. Financial institutions have certainly lifted their game in the past decade, but for many service providers the focus is on compliance and process - the 'tick-a-box' approach.

If the locals believe it can't be done any better, they should take a trip to the UK and see what government and industry are doing now. In fact, financial industry laws introduced recently in the UK go much further to protect consumers than where we would end if all the recommendations of the Murray Inquiry were implemented.

Looking further ahead, the key changes recommended for superannuation could add up to many tens of thousands of dollars extra in retirement for an average worker. The inquiry has been vocal in its criticism of the monopoly rights of industry funds and the prices being paid for advice.

Inevitably, the price for increased competitiveness and efficiency will be job losses in the financial services industry. Adjustment will affect many workers, but difficult change that creates a stronger, more competitive industry is always worthwhile.

The Murray Inquiry will ultimately create many more jobs elsewhere in the economy thanks to the many billions it will redirect into consumers' pockets year after year.

The benefits will take time to flow through to Australians, with perhaps years of debate on the legislation, and the risk of this being slowed by opposition from those who feel their profitability is under threat and need to radically change their business models.

But the momentum behind sweeping reform of the Australian financial services industry is unstoppable, and all industry players should be preparing for change rather than fighting for the status quo.