RELEASE OF THE REPORT OF THE FINANCIAL SYSTEM INQUIRY AND INITIAL GOVERNMENT RESPONSE ON MERGERS POLICY

I am releasing today the Final Report of the Financial System Inquiry.

The Report is a major review of the Australian financial system covering a stocktake of financial de-regulation, an analysis of the forces driving change and recommendations on the key issues in regulatory reform. This accords with the terms of reference set for the Inquiry.

On behalf of the Government I would like to thank the chairman, Mr Stan Wallis, and the Inquiry members, Mr Bill Beerworth, Professor Jeffrey Carmichael, Professor Ian Harper and Mrs Linda Nicholls, for their hard work in delivering a quality report on time.

The Government commissioned the Inquiry because of the significant and rapid changes occurring in the Australian financial system which are affecting all Australians, both businesses and individuals. The Government recognises the importance of ensuring that the regulatory regime is capable of adapting to the changes occurring in such areas as technology, globalisation and consumer needs and is one that can best carry Australia into the 21st Century.

The Inquiry's Report has clearly documented the extent of change occurring in the financial sector and the challenges this is posing to the regulatory structure. The Report has demonstrated both the need for and importance of such a review.

• The Report notes that an effective financial system delivers many advantages to users. The most direct and transparent benefit is the reduction of costs to consumers. But a more efficient financial system has benefits for the wider economy, as it releases resources for more efficient uses and enhances Australia's competitiveness.
• The Report notes that even a 10 per cent improvement in efficiency in the financial sector would translate into cost savings for the economy in excess of $4 billion per annum.
  

The Inquiry has made a large number of recommendations to improve the regulatory framework. The Government will give careful consideration to these recommendations over coming months as it assesses the steps required to ensure that Australia has an efficient, competitive and stable financial system. I expect to make a comprehensive statement on financial sector reform later in the year.

The Final Report, the Inquiry's preceding Discussion Paper, and the large number of submissions made by interested parties provide a very valuable and detailed body of knowledge about the issues facing the financial system.

As a consequence, in considering the Report's recommendations, the Government will not be duplicating the formal consultative processes which went into the preparation of the Inquiry's Report.

Mergers Policy in the Financial System

While the Government will provide a comprehensive statement on financial market reform after it has fully considered the Report, market speculation in the area of mergers requires an immediate response from the Government.

When the Inquiry was established, I said that I would review the policies that applied to mergers in the finance sector in the light of the Inquiry's findings. The Government has taken note of the Inquiry's recommendations and its findings on the state of competition in the financial sector.

The Government has decided to end the so-called "six pillars" policy, which has involved a blanket ban on any mergers among the major banks and the largest life insurance companies.

The Treasurer will retain powers to reject mergers under relevant banking and insurance laws. In exercising these powers, I will take into account, but not be limited by, assessments by the Australian Competition and Consumer Commission (ACCC) under section 50 of the Trade Practices Act 1974 in relation to competition considerations, and the advice of the relevant prudential regulators on prudential considerations.

The Government has further decided that mergers among the four major banks will not be permitted at this time. This will be reviewed when the Government is satisfied that competition from new and established participants in the financial industry, particularly in respect of small business lending, has increased sufficiently to allow such mergers to be considered.

The Government has decided to remove the former Government's blanket prohibition on a foreign takeover of any of the major banks. Any proposed foreign takeover or acquisition will need to be assessed, like any other proposed foreign takeover or acquisition, on a case by case basis on its merits in accordance with the Foreign Acquisitions and Takeovers Act 1975.

In making these assessments, however, the Government will apply the principle (as concluded by the Inquiry) that any large scale transfer of Australian ownership of the financial system to foreign hands would be contrary to the national interest.

Canberra, ACT
9 April 1997