Australia’s Financial System Inquiry: Why this time is different

Every twenty years or so Australia establishes a formal Financial System Inquiry that mucks over the entrails of our financial system.

Australia’s angst at financial services actually goes back to the early days of NSW as a colony under the British Empire when Governor Macquarie sought to address the currency chaos by introducing the famous Holy Dollar – still used as a symbol by Macquarie Bank. Having sorted out the issue of currency Governor Macquarie then fought to establish Australia’s first bank, ultimately wining a battle with the ‘powers at be’ in London to establish the Bank of NSW in 1817.

In the bank’s early days it regularly needed government loans to keep it in business. Concentration was an issue even back in 1826 with the Bank of NSW having half of its loans to three borrowers who were drawers and acceptors of each other’s bills.

Over Australia’s history our finance sector has regularly been front page news of newspapers including the 1880’s housing boom, the 1930’s Great Depression, proposed bank nationalisation in the 1950’s under Ben Chifley, Menzies Bank Credit Crunch in 1960 and finance deregulation in the 1980’s under the Hawke Government.

Over the last 200 years there has been one common factor – and that has been that Australia has been reliant on global capital. The volatile relationship that Australians have always had with the finance sector perhaps relates to the fact that we have been a nation that has been building savings and capital – not a nation that has centuries of accumulated capital.

This is what is different about this Financial System Inquiry. Australia has now reached the point where we have accumulated significant savings in the form of superannuation. Yes, we are still reliant on global capital for investment but we are also contributing capital to global capital markets.

Over the next twenty years we are likely to see changes in the way superannuation funds invest. It will be necessary to invest more offshore in order to diversify portfolios, otherwise major superannuation funds will end up with stakes in companies that will provide effective control and pose risk management and concentration risk problems.

Out of all the submissions to the Financial System Inquiry, the submission by the Australian Council of Superannuation Investors is noteworthy for tackling this issue. ACSI recognise that the growing significance of superannuation funds as owners of capital market assets has implications for the exercise of ownership rights, governance, risk management and accountability frameworks of investee assets.

ACSI’s submission discusses the concept of superannuation as “universal investors”. According to ACSI “the universal investor proposition holds that large fiduciary institutions, once they collectively hold a significant enough proportion of the assets in a given economy, are in effect inextricably bound to the overall performance of that economy, notwithstanding that they also typically seek to vary their exposures to individual asset classes, sectors or securities within that economy’s financial system to optimise their overall financial performance.”

Universal owners, or fiduciary capitalism, as it is also referred to, have the ability to improve the performance of the financial system. But to do this superannuation funds will need to take greater responsibility for the way they invest.

ACSI argue that asset owners need to be held to a fiduciary standard. “The positive force of ‘fiduciary capitalism’ is reliant upon a positive duty of care from the institutional asset owner to the ultimate beneficiary. Consequently, a very high standard of proof should be required before seeking to dismantle or dilute the current foundations for fiduciary oversight of the superannuation system in this country.”

Australia is not alone in becoming a fiduciary capitalist. With over $21 trillion in OECD pension funds alone, long term investors have become a significant part of the global economy. There is an active global debate on the role of universal owners and fiduciary capitalism that will become much more important to Australia as our economy transitions from 200 years of dependence on global capital.


Cambridge Handbook Institutional Investment and Fiduciary Duty

Australian Council of Superannuation Investors FSI submission

Click to access 14%20August%20ACSI%20Submission%20on%20FSI%20Interim%20Report%2026.08.14.pdf

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