Actuaries Seek Better Investor Protection
Sydney Morning Herald
Sunday April 27, 1997
The influential Institute of Actuaries of Australia has called on the Federal Government to seize the opportunity provided by the Wallis report to impose uniform capital adequacy requirements on banks and insurance companies in an effort to provide better protection for investors.
The IAA proposal that both banks and life companies come under the same capital adequacy rules appears to get around the concerns aired last week by Commonwealth Bank's managing director, Mr David Murray.
Mr Murray said that having a "mega regulator" would increase the risk of a systemic failure in the financial system, similar to the US savings and loans scandal of the late '80s.
The president of the IAA, Mr Trevor Matthews, submits that there was a great need to rationalise capital adequacy requirements which differed widely between those for banks and insurance companies selling similar products, such as capital guaranteed superannuation bonds or lump sum rollovers.
This arose because the two regulators, the Reserve Bank and the Insurance and Superannuation Commission, set different capital standards.
Mr Matthews observed that banks and life insurers market some similar investment products but the controls that safeguarded investors in the two areas were different.
For instance, under banking regulations a hypothetical $1 million asset portfolio held to back a capital guaranteed product would require $58,175 of capital, compared with $24,807 of capital for the same asset portfolio held by a life insurer under ISC regulations.
But using a typical $1 million life insurance portfolio the bank would need $65,800 under the banking regulations, against $116,178 under ISC regulations.
"With one prudential regulator as proposed by Wallis there is an opportunity to remedy this anomalous situation, and it is quite likely that rationalisation will lead to higher levels of protection for investors, and a more efficient competitive environment for product providers," Mr Matthews said.
The Wallis report recommended a single prudential regulator, called the Australian Prudential Regulation Commission. "There is growing potential for 'regulatory arbitrage' in the present system and we believe there should be consistent capital adequacy measures applied to all institutions offering financial services," Mr Matthews added. "These should be based on actuarial 'risk of financial ruin' approach.
"If the cost of capital adequacy is significantly higher for products offered under one set of regulations than under another, there is a systemic pressure for financial institutions to design products under the less onerous regime."
Mr Murray's comments have provoked a stinging response from some institutions and observers.
Wallis committee member Dr Jeff Carmichael said yesterday that Mr Murray's analogy was an "almost absurd comparison".
"There is no suggestion in our system of lowering prudential standards," Dr Carmichael said on Nine Network's Business Sunday. "David (Murray) has made his position very clear in his submission and in discussions. He is very conservative.
"David Murray has already launched his attack and I suspect the Reserve Bank may come out at some stage with their views. Other than that, the major banks have all come out in support of it."
© 1997 Sydney Morning Herald