In this edited excerpt from the FinFuture White Paper, a multidisciplinary team of University of Melbourne academics discusses the state of personal finance in Australia and proposes five steps to improve the nation’s financial wellbeing. At its core is a simple message – the financial sector needs to rediscover its purpose of serving the community.
Australia is a prosperous country. Yet many Australian households contend with over-indebtedness, underfunding of retirement, under-insurance and financial exclusion. About two-thirds of Australians face some level of financial vulnerability and stress. Indeed, financial difficulties are the number one concern among young people and are the second biggest concern after climate change among older Australians.
The Australian financial sector faces several institutional challenges. First, the sector has been plagued by widespread, systemic misconduct, as reported by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
In addition to misconduct issues, previous inquiries have also reported that the Australian financial system suffers from other inefficiencies. These include high fees for payments, high costs associated with the management of superannuation accounts and often low-quality financial advice. An even bigger concern is the allocation of certain major financial risks in the Australian economy. For example, Australian households effectively do not have access to long-term (five-plus years) fixed-rate mortgages. Similarly, most Australians no longer have access to defined-benefit retirement savings products. This means that many major financial risks are being borne by individuals and households, who are less likely to be capable of managing such risks. Again, the associated economic inefficiencies are likely substantial.
Australia also has a highly complex and fragmented legal and regulatory system that imposes different obligations and requirements depending on the area of finance in question, often leading to confusion and inertia due to lack of legal clarity and coherence.
In this white paper, we propose a new approach for the Australian personal finance sector. We argue that in order to improve outcomes for Australians, the sector needs to rediscover its purpose – serving the community.
The sector’s core objective, as it relates to personal finances, ought to be the improvement of individual financial wellbeing, which in turn should be the guiding principle in government policy, regulation and technology. In order to fulfil its purpose, the financial sector needs to be effective, sustainable, inclusive, safe and ethical.
We consider financial wellbeing as a service outcome that is created through the interaction of multiple actors, including customers, banks, regulators, professionals, superannuation funds and community organisations. This means that financial wellbeing is co-created but also influenced by factors outside a person’s control. Therefore, improving financial wellbeing in a sustainable way requires a holistic approach. It also needs to be evidence-based and grounded in science.
In order to align the sector with its core objective – improving individual financial wellbeing – five key steps will need to be taken.
1. Implementing a National Financial Wellbeing Framework
Australia needs to develop and widely adopt a National Financial Wellbeing Framework (the Framework) that defines the aspects of financial wellbeing and how they are measured. The Framework would serve several functions, including facilitating agreement among stakeholders on important financial wellbeing outcomes. We also propose the establishment of a National Financial Wellbeing Agency, which would coordinate sectors and institutions, including regulators, financial firms, technology firms, consumer groups and universities.
2. Financial literacy training for individuals and households
Individual financial skills are an important determinant of financial wellbeing. We propose the introduction of compulsory, nationwide, evidence-based financial literacy training in schools, as well as training offerings at TAFE and in universities. In conjunction with this, we propose the introduction of free basic financial health checks and easily accessible financial counselling for all Australians when they need it.
3. A service-based approach
The financial sector needs to adopt a service-centric, co-creation approach. We propose that customer contracts, and the rights and obligations of the parties under such contracts, should be fair, transparent and capable of being assessed by the individual as to whether a given contract is expected to enhance his or her financial wellbeing. Contractual documentation should be evidence-based and road-tested to ensure that it is effective and fit for purpose. We also propose that the Framework should become the basis for professional standards in financial services and regulation, including the provision of advice. To address financial exclusion and predatory pricing, we propose that basic financial services be designated as essential services on a national basis and treated as such to ensure universal access and fair pricing. Furthermore, legal and regulatory requirements should ensure that similar services are priced on a similar basis.
4. Simpler, stronger legislation and regulation
Relevant laws and regulations need to be adapted, strengthened and put to the service of improvements in financial wellbeing. More specifically, we propose that legislation (Chapter 7 of the Corporations Act 2001) should be simplified, and that exceptions and qualifications should be eliminated to the greatest possible extent. We also suggest that it is necessary to move beyond prescriptive, rules-based regulation towards principle-based, outcome-focused regulation that is supported by regulatory guidance. Importantly, we propose that financial service providers should be subject to a duty to consider financial wellbeing in performing their functions and providing their services. In particular, they should be required to consider what impact a course of action would have, or would be reasonably likely to have, on the financial wellbeing of an individual.
5. Increased privacy protection
Technology must be employed so that it supports, rather than hinders, the advancement of financial wellbeing. We suggest that increases in data sharing must be balanced by stronger privacy protection. We also propose that financial institutions should be required to give access to a public application program interface for algorithms that determine the terms and conditions of financial services. Further, we propose that in the absence of a chartered body for data science, financial service companies should establish an industry code of conduct that requires customer data to be used only within a consent framework and in a manner that is not detrimental to the financial wellbeing of the customer.
Improving the effectiveness of the Australian personal finance sector by putting it in the service of improving financial wellbeing, and by helping Australians address their financial challenges, presents an enormous opportunity.
A key goal ought to be to re-establish people’s trust in the Australian finance sector. Trust is the lifeblood of the financial system, and it must be earned through positive behaviour. For the finance sector, this means behaviour that is aligned with people’s financial wellbeing.
Government, industry, regulators and other stakeholders must work together if we are to succeed in achieving lasting improvement of financial wellbeing and securing long-term prosperity for the sector and the Australian people.
The economic benefits of the approach proposed in this white paper would be substantial. But improving the financial wellbeing of Australians can also be expected to have positive effects on overall wellbeing, not only for individuals but also for their families, with follow-on effects on health, education and workplace productivity.
For more information, visit the FinFuture website.
Andrew is the Director of Melbourne Law School’s banking and finance law program and is part of the team of University of Melbourne academics who researched and authored the FinFuture White Paper.
“FinFuture is an initiative involving a multi-disciplinary team of academics,” he explains. Four disciplines are represented: (1) law and regulation, (2) decision science (the behavioural science behind financial decision-making), (3) service science (which examines the ways service ecosystems operate) and (4) technology (particularly in relation to privacy and data protection).
The white paper was the product of their combined, inter-disciplinary effort. “In our research, we conducted a number of interviews with stakeholders and tested 23 propositions, many of which were relevant across all four disciplines,” Godwin says. “The propositions included various recommendations for reform to the system of personal finance in Australia. We hope the white paper will help inform the debate for reform in Australia, particularly in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry."
This article originally appeared in MLS News, Issue 22, November 2019