To judge from 48 hours of reaction to its interim report, the lasting effect of the Murray Inquiry may be quite different from what most people expected. Rather than rewrite the banking rules, it may redirect the Australian financial system debate away from those rules and onto our managed investments system.
For the major banks, this is equal parts pleasure and pain.
First the pleasure. Back when Joe Hockey first signed on to the idea of a new financial system review, he was seeking to outflank then Treasurer Wayne Swan in a debate about reining in the banks. At the time the Big Four were taking a pounding over their lending rates.
That moment in the debate appears to have passed. Murray and his panel think banking regulation is in OK shape. Are bank margins too high; are they gouging consumers on loans? No, the industry is "competitive". Are big banks getting a de facto subsidy from the government, as the IMF suggests? Not enough to worry about. Has the 2008 crisis exposed the need for a rethink of prudential supervision? No, crises will happen, the Australian system worked and there's nothing obviously better to replace it.
And that brings us to the pain the report is inflicting on the major banks.
For openers, the interim report explicitly rejects leading bankers' claims that Australian bank capital requirements are out of line with international standards. In fact, it's pretty damning about bankers' complaints that APRA has applied the Basel rules too aggressively. It says they're flat wrong.
"In fact, banks' actual capital ratios do not appear excessively high, including when compared to countries at a similar level of financial development," the interim report says on page 3-36.
"Australia's prudential framework does not seem to require excessive capital levels ... In addition, a growing body of work suggests that the social costs to higher bank equity funding are smaller than is often presumed."
From an inquiry panel headed by the bloke (Murray) who used to run the CBA, and containing the bloke (AMP CEO Craig Dunn) whose investment group owns a bank of its own (AMP Bank), as well as a woman (Carolyn Hewson) who used to sit on the Westpac board, this is a debate-closer.
It remains unlikely that the final report will endorse tougher prudential rules for the Big Four, but the interim report certainly does not rule it out. Small wonder that bank stocks have fallen two days in a row, in a rising market.
But all that is potentially a flesh wound compared to the report's comments on wealth management and financial advice. Here the Murray Inquiry seems to be opening up an issue that could dog the big banks for years to come.
It has been an article of banking faith for decades now that riches will come from vertical integration and cross-selling - from offering customers not just banking services but also the full range of wealth management services and financial advice. In Australia, the big banks have bought up wealth management groups like MLC and BT and financial advice groups like Count. The interim report says that "the five largest platform providers" - the Big Four plus AMP - "now hold almost 80 per cent of primary planner relationships."
Over a period of many years it began to occur to some Australian consumers that many of the people helping them invest have an obvious conflict of interest. (The journalist Alan Kohler has argued that most "financial advisors" are deceptively named, and should be called "salespeople", since their true loyalties will naturally lie with the product providers who pay them.)
The FoFA (Future of Financial Advice) reforms were one response to this problem. But now the Inquiry panel, led by Murray and featuring Dunn and Hewson, has largely endorsed all those concerns. Worse, it has pointed out that financial planners are increasingly part of bank-owned wealth management groups.
And the panel has done this just as the CBA confronts some of the results of the conflicted system.
For all the scepticism about a former bank boss heading a banking inquiry, Murray (and AMP's Dunn, and the ex-Westpac Hewson) have been pretty blunt about what the banks are doing in wealth management and financial planning.
Now this, of course, is just an interim report, and a very cautious one at that. It has been written not as a first draft but as an indicator of directions and interests. Nevertheless, some of the directions seem pretty definite.
And the media reaction over two days has been pretty straightforward. In general, the report's investment comments are getting much more attention than its comments on the core business of banking. (See our
running summary of media reaction.)
For the banks, the story looks to be: out of the loan margin frying pan, into the investment fire.