A matter of trust: Financial system inquiry chairman David Murray. Credit:Dominic Lorrimer In a comprehensive report the Murray led inquiry also made recommendations for the nation's $1.8 trillion superannuation system to deliver better outcomes, for the powers of the regulators to be increased. Here is a key summary the inquiry recommendations. Bank Capital and Risk-Weights The FSI called for bank capital levels to be raised amid evidence that the banks were not the quartile of international banks when it came to high capital levels.

An increase in capital levels would make the banks safer on a standalone basis and reduce the "implicit government guarantee" and reduces the recourse to taxpayer funds. The Murray report recommended that the banks should target being in the top quartile of international banks as far as capital levels are concerned. This would suggest on latest numbers that the banks The FSI said that the top quartile level was increasing as other banks "caught up" and on latest levels the average 9.1 per cent capital levels of the Australian banks was below the median of 10.5 per cent and below the 12.2 per cent required to get into the top quartile. The FSI said any increases in capital should take the form of common equity capital. The FSI said the cost to the economy of increasing capital ratios was small for the overall economy relying on RBA numbers.

Capital and Competition The FSI called on mortgage risk weights to be narrowed between the major banks and their smaller competitors by raising the average internal risk weights required to be held by the major banks. This would address some of the "competitive distortion" and the costs to making the system more competitively neutral were modest. The FSI proposed that the major banks which hold less capital because of their use of internal risk weighted models should increase their average risk weight to between 25 to 30 per cent. The required quantum would be a one percentage point increase in major bank's common equity Tier I levels from currency levels. The FSI said this would increase funding costs to the banks that would be born by shareholders and consumers.

Leverage Ratios Leverage ratios aim to make up for any failings in the models used by banks and regulators to calculate capital by using a simply dollar for dollar approach. The FSI claimed that the major banks current leverage ratio of 4 to 4.5 per cent would mean that a GFC style shock would be "sufficient to render the banks insolvent". The FSI said the banks should target a minimum leverage ratio of between 3 and 5 per cent. A leverage ratio would provide a "backstop" againt the risks of using models to determine capital levels. Bail-In Bonds

The FSI proposed the adoptions of "bail-in" capital methods to align with international standards that would prevent taxpayers being called on to bail-out the banks if there was a financial crisis. It said most of these instruments already existed under the Basel framework but left open the possibility of new instruments that could sit above Tier I and Tier II capital but below senior debt. Credit Ratings The FSI was unsure whether such measures would impact the credit ratings of the big four banks saying that the "net effect was unclear' A loss-absorbing framework would increase the buffer afforded to senior debt holders which the credit rating is based upon which should strengthen the rating. However since the major banks benefit from a two-notch upgrade on the basis of expected government report and suggestions that this could be weakened could actually result in a potential downgrade.

Superannuation funds The FSI recommended superannuation funds be forced to tender for the right to manage hundreds of billions of dollars in default savings. Self-managed superannuation funds should be banned from borrowing to buy assets such as property and shares. Super fund boards should be be forced to appoint a majority of independent directors. The FSI recommended Trustees subject to the same penalties for misconduct as directors of managed investment schemes.

The objectives should be enshrined in legislation. The FSI recommended super fund trustees to pre-select a comprehensive income product for members' retirement. Regulation The FSI recommended new board – the financial Regulator Assessment Board to the assess the performance of regulators. ASIC and APRA would be given a three year funding model providing them with more autonomy.

The FSI took aim at large corporations liquidators and financial institutions recommended they should pay more as their current fees don't cover the cost of regulation. The state of competition in the financial sector should be reviewed every three years, it said. Consumer protection The FSI recommended the law should be changed to introduce a principles based product design and distribution obligation" to boost consumer confidence and trust. Tax The FSI one again identified "distortions" the tax system that it claimed distorted the allocation of funding and risk in the economy. Such taxes should be looked at by the government and the current White paper process.

They include differentiated tax treatments on savings such as deposits and fixed income investments, negative gearing and capital gains tax, franking and interest withholding tax. Wealth and financial advice The Federal Government needs to raise the minimum education standards for financial advisers. This includes requiring planners to hold relevant tertiary degrees and prove their competence in specialist areas such as superannuation. The inquiry also called for the corporate regulator to be equipped with new intervention powers, including product banning and distribution restrictions. It asked the government to change the law governing expensive life insurance commissions, recommending lucrative upfront commissions to not exceed ongoing commissions. General insurance

Consumers should be given better and more transparent guidance when it comes to replacing the value of their home and contents in the event of a claim. If progress was not made to improve the guidance, the government should consider introducing new laws to provide this information to consumers when they renew or buy a new policy. Technology: The FSI recommended setting up a permanent "innovation collaboration" committee with members from the public and private sector tasked with making sure policy and regulation keeps up with technological change. This woould include ASIC, APRA, RBA and ATO. Murray says the government should "promptly" allow online crowdfunding platforms to make public offers of simple securities such as shares and non-convertible debt. Said regulation of both equity and debt crowdfunding should be encouraged with "graduated" regulation based on existing securities law. Digital identity: implement a federated digital identity strategy rather than a single form of online ID, as suggested in the interim report. This would involve the government setting up a new framework under which private and public sectors compete to supply digital identities to consumers and businesses.

Payments The Reserve Bank was asked to: Cap card fees paid by business to issue cards to consumers

Ban on merchants surcharging for debit cards

Set up different rules for low cost, medium cost and high cost cards

RBA to set cap on surcharges for Visa MasterCard

High cost cards like Amex and Diners get to surcharge, but only at reasonable cost.