David Murray seems an enigmatic character. He led the Commonwealth bank through its full privatisation and enjoyed a good working relationship with the Hawke and Keating governments. His “big end of town” credentials, climate change scepticism and budget deficit urgings sit well with the Abbott government. He accordingly landed the job to review the nation’s financial system.
Murray’s interim report was conservative. It focused on risk-proofing the financial system from international shocks and in doing so surprised and upset the major banks. They’ve been forced into a rear-guard action to fend off higher capital adequacy requirements – essentially, how much loss a bank can soak up. Increasing the ratio of capital to risk would cool lending and hit the big banks’ profits.
The interim report, widely viewed as balanced, recognised that ordinary people’s confidence has been tested by the sharp practices of the financial services industry. As it turns out, Murray and his panel were not simply mouthpieces for big money. Is it possible that the poacher could become a financial gamekeeper?
The final report will be released on Sunday. Commentary will be dominated by its pronouncements on the architecture of Australia’s financial system. But the report’s views on the financially disadvantaged matter. These are battlers, people whose dealings with the financial system are not about investing but simply surviving. Research indicates that the number of Australians in this predicament is in the millions and growing.
In 2012 the Australian Council of Social Services estimated that 2.2 million people live below the poverty line. The Australian Social Inclusion Board reported 13% of the population, or 2.5 million people, live in households of high financial stress. In other words, those households that live from week to week with no savings. Modest increases in interest rates, petrol prices and the like – let alone unemployment or a relationship breakdown – can be disastrous.
Submissions to the Murray inquiry from consumer organisations and legal services, and the interim report itself, acknowledge three critical, systemic problems with the system: the inability to take insurance, limited and sometimes exploitative options to obtain credit, and few available avenues to stabilise financial distress.
The need for credit is particularly critical when people need to smooth out lumpy, one-off demands on resources – like buying a new fridge or an unexpected car repair bill. The social security system recognises these common situations by allowing some people to take an advance of up to $1,000 on entitlements. Often this amount is not adequate. A low income wage earner will still need credit, but credit cards are an expensive option.
This market failure paved the way for “alternative” products, like payday loans. Submissions to the inquiry noted that far from being a stopgap, consumers use payday loans on a recurring basis – with the credit worsening, rather than stabilising, a difficult financial position.
Community based micro-finance initiatives, such as those trialled in some Aboriginal communities, offer a better alternative. Nevertheless, they’re tiny compared to the $380m of current outstanding payday loans. There are considerable limits on how far government can or should endeavour to direct such measures.
Financial counselling is essentially a budget support program that helps low-income individuals and families to better structure their debt and manage household budgets. It’s not disputed that it’s an effective way to help people make better financial decisions.
While part of the landscape for decades, the services provided by church and not-for-profit organisations began gaining state government support in the 1990s, with modest federal funding commencing under the Hawke government. More substantial funding occurred under the Rudd/Gillard governments in the aftermath of the global financial crisis and the first Abbott government budget largely maintained the level of federal assistance to community based financial counselling, at $20m annually.
Existing community services provide around one financial counsellor for every 2,600 people living in a financially stressed household. This disparity between the need and available resources has seen a private business model emerge to meet demand. As argued in submissions to the inquiry, the private businesses have to date only been marginally regulated and their impact has been mixed at best.
A number of the private businesses are marketed as providing “credit repair services”, holding out hope that measures can be taken to restore a person’s credit rating. Yet little can be done to “repair” a credit rating, especially where bankruptcy is concerned. In other respects the private services appear to do nothing more that the services community financial counselling provide.
As a result, people are now paying for assistance that can be accessed for free, including the submission of hardship claims to industry Ombudsman schemes. This is counter to the foundation principle of each of these industry sponsored dispute-resolution schemes – that they be provided at no cost to the consumer.
So where do we go from here, in terms of policy options? The United Kingdom’s money advice service provides a useful model as to how financial counselling could be extended and funded. The UK service has operated since 2010 and provides face-to-face, telephone and on-line programs akin to those provided by financial counsellors in Australia.
The scheme is funded by a small levy on financial service providers and receives no direct taxpayer contribution. It was introduced with support across the British Parliament and was widely accepted as a worthwhile initiative by industry.
It goes without saying that strengthening financial counselling in Australia through a similarly structured scheme would empower financially distressed households. It is also consistent with federal government plans to increase use of relationship counselling as a means to support marriages. After all, financial stress is a major contributor to relationship breakdown, just as relationship breakdowns contribute to increased financial hardship.
A recommendation from the Murray inquiry to improve financial capability by expanding publicly available financial counselling would be a modest but worthwhile reform.
