11 March 1996 - 3 December 2007
ADDRESS ON THE
LAUNCH OF THE NEW CORPORATE AND FINANCIAL REGULATORY FRAMEWORK
1 JULY 1998
Today I am pleased to be present at the birth of two new institutions which will occupy central roles in the framework of financial sector regulation in Australia.
Australia will have the most modern financial sector regulation with more efficiency, less overlap, less cost but increased consumer benefits. Our system is now leading edge in world terms.
The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) commence operations today. These institutions and the new regulatory framework they will administer (together with the Payments System Board) have been established in accord with the recommendations of the Financial System Inquiry (FSI) sometimes referred to as the Wallis Inquiry after its Chairman Mr Stan Wallis.
On 2 November 1995, as Shadow Treasurer I announced that upon election the Government would establish such an inquiry. It was established in June 1996. I am especially pleased that we have been able to implement the main outcomes within the Governments first term two years later.
When I announced the then Opposition policy for a financial system inquiry I described it as the daughter of Campbell.
The Campbell committee was established in 1979 to examine the Australian financial system and recommend changes. An interim report was tabled in Parliament in August 1980 and the final report in November 1981. While some reforms were implemented prior to the change of government in March 1983, progress was stalled by the establishment of the Martin Inquiry.
The economic circumstances of the time brought on the float of the Australian dollar in December 1983, prior to the release of the Martin Inquirys report. It provided an early signal of the inevitability of reform, it took until February 1985 for the entry of foreign trading banks to be approved. It was not until April 1986 that deregulation a la Campbell was completed with the removal of the 13.5% ceiling on new housing loans.
At that time it must be said that there were significant doubts about financial sector deregulation. While these doubts delayed reform in the 1980s, changes in technology, communication, increases in skill, and diversification of product was making change inevitable.
Financial services have now been deregulated worldwide and increasingly even non-market economies have sought to allow and participate in international financial markets.
As a result of technology and communication developments, we are seeing a change in the nature of financial entities and the convergence of institutions that once were exclusively banks or insurance companies or funds managers.
Australia is a significant participant in the worlds financial markets. Our currency, according to the Bank of International Settlements latest report on foreign exchange and derivative markets activity, is the worlds eighth most traded currency. In addition the Australian Stock Exchange is now the second largest in our region in terms of capitalisation (larger than Hong Kong and Singapore and second to Tokyo) and has liquidity levels similar to that in London and New York.
The range and sophistication of products traded in the Australian derivatives market is greater than any other market in the region.
The financial services sector comprises a growing proportion of international trade. Australia currently has 24 bank branches of overseas institutions, 33 representative offices and a large number of Australian subsidiaries of global financial conglomerates.
The Governments first term has also seen a growing recognition of the development potential of the Australian financial sector and its position in the region with an influx of overseas banks establishing a presence in Australia and 8 new foreign bank branches being licensed since March 1996.
It was against this background that the FSI commenced in June 1996, reported in March 1997 and you are present today to witness the implementation of the FSI reforms by the government.
Since the Government announced its response to the Inquiry two new banking authorities have been granted to institutions that have adopted the previously unacceptable non-operating holding company structure. Rothschilds and AMP are examples of the new licensing flexibilities and the emphasis placed on enhancing competition in the banking and financial sectors. These are the hallmarks of the Governments financial system reforms.
There has also been a heightened interest from potential new participants in the payments system. The Governments creation of the Payments System Board within the Reserve Bank will ensure that non-traditional organisations with a competitive advantage in large and small scale payments processing can enter and compete in the payments system so long as they meet the relevant standards and guidelines.
These developments are indicative of the trend to convergence in the financial system and reinforce the timeliness of the governments financial sector reforms.
In commissioning the Financial System Inquiry soon after our election to Government in 1996, we stressed the need for regulation to become more responsive to, and indeed anticipate technological developments and the increasing integration of the global economy.
The Inquiry noted in its report that a type of mishmash of regulation had developed over the years that regulatory arrangements did not treat all new market structures and activities equally, giving rise to biases in the system.
This had the effect of limiting competition and increasing costs in the financial sector.
Not surprisingly, the Inquiry advocated the need to promote competition within the sector by ensuring that regulation was not a deterrent to market entry or innovation.
The role of ASIC
Late last year, I announced the response to the FSI. As part of that response, the Government decided to undertake a substantial refocusing of regulatory agencies in the financial sector and their responsibilities.
Along with the Reserve Bank, ASIC and APRA will be the core of the new structure.
ASIC will be the market integrity and consumer protection regulator across the financial system and will be responsible for the regulation of conduct, disclosure and dispute resolution for financial service providers and financial markets.
ASIC, of course, retains the role of the Australian Securities Commission for corporate regulation.
ASIC has acquired a number of functions that were not previously undertaken by the ASC.
In particular, ASIC now has prime responsibility for consumer protection within the financial sector.
Consumers of financial services are, of course, a critical component of the system and without willing consumers, the financial system cannot operate successfully.
This is why the Government is firmly committed to strong and vigilant consumer protection in the financial system. ASIC's enhanced role will enable it to focus on the needs of consumers of financial services and provide more efficient market integrity and consumer protection regulation throughout the financial system.
The Governments view is that the transfer of consumer protection responsibilities for the financial sector from the ACCC to ASIC will improve the level and quality of regulation because of ASIC's experience in the consumer protection field. With its enhanced resources, ASIC will be able to effectively build on its current expertise and infrastructure.
This combination of regulatory and consumer protection functions performed by ASIC achieves one of the goals of the financial system inquiry, which was to remove regulatory overlap. Of course, the Australian Competition Consumer Commission will still have its role to play in consumer protection in areas other than financial services.
To ensure that consumers of financial services are not inconvenienced by the changeover in functions from the ACCC to ASIC, the two regulators will be entering into an operating agreement. This agreement will facilitate the smooth operation of the new arrangements in the transitional period and beyond.
The ASC's existing Financial Complaints Referral Centre, will also assist consumers of financial services. The Centre operates as a "one stop shop" and directs consumers who have a complaint about a financial service to the appropriate consumer complaints forum, for example, the Australian Banking Industry Ombudsman scheme or the Life Insurance Complaints service. ASIC will ensure that the Centre continues to operate effectively for the benefit of consumers, and that appropriate matters are referred to the ACCC.
In addition to its new consumer protection role, ASIC will also acquire relevant responsibilities previously performed by the Insurance and Superannuation Commission and the Australian Payments System Council.
I am confident that the transfer of these responsibilities will be as seamless as possible for both staff members and those client individuals and organisations for whom these tasks are undertaken.
In due course, subject to the agreement of the States and Territories, I hope to see the transfer of similar responsibilities from the Australian Financial Institutions Commission, and associated State Supervisory Authorities
The range of functions for which ASIC is responsible is vital to the credibility and security of the whole financial system.
The role of APRA
APRA will have the single responsibility for performing prudential regulation of deposit-taking institutions (initially banks, but extending to credit unions and building societies later in the year if agreed), life and general insurance companies, superannuation funds and retirement savings accounts. This will allow APRA to provide flexible, efficient, coordinated and consistent regulation across the financial sector.
The need for consistent, coordinated and flexible regulation has been highlighted by the emergence of financial sector conglomerates which now make up the major part of the Australian financial landscape.
The single prudential regulatory framework will also ensure that any competitive advantage gained by perceptions about the effectiveness of prudential regulators will be removed allowing financial institutions to compete on a level playing field.
APRA will be charged with performing the functions contained in various financial sector acts including the enhanced depositor protection provisions contained in the Banking Act 1959.
The creation of APRA as a specialised regulatory agency focused on clear regulatory purposes will enhance our strong reputation in the region of first class prudential regulation of our domestic financial institutions and as a growing regional financial centre.
Our FSI reforms place Australia at the forefront of financial sector reform, especially in relation to prudential regulation. A number of other countries including the UK, Canada, Korea and Japan took inspiration from the FSI report and are now adopting similar regulatory infrastructures.
The Reserve Bank and the Payments System Board
The Reserve Bank will continue to have the role of maintaining overall financial stability, including a safe and reliable payments system.
To this end, the Government has established a new Payments System Board (PSB), within the Reserve Bank, which will have responsibility for the banks new powers under the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998.
These powers will enable the PSB to regulate, in the public interest, payment systems and stored-value cards (such as smart cards) to improve the efficiency and contestability of this important market. These benefits will flow through to consumers, and business especially small business in the form of lower prices and a wider range of better products.
The PSB will be chaired by the Reserve Bank Governor, Mr Ian Macfarlane; the deputy chair will be Reserve Bank Assistant Governor, Dr John Laker. Mr Graeme Thompson will represent APRA on the board. I expect to be in a position to announce appointments of independent directors to the PSB in the near future.
Other initiatives - reforming Australias corporate law
The establishment of the new framework for regulation is in part only as successful as the laws within which our financial and corporate sectors work.
Anyone who does business in this country knows that our present Corporations Law is highly prescriptive, highly complicated for directors and difficult to comply with.
We are making great strides to delivering good, sound and sensible corporate laws. Laws which engender confidence in our business community and investors alike. Laws which our regulators can enforce swiftly and fairly to protect the integrity of our markets and the rights of consumers of financial products.
In March 1997, I announced a comprehensive new Corporations Law Economic Reform Program which brought a new and fresh approach to corporate law. It is focussed on promoting business, bearing in mind the economic purpose of the corporation. Our laws must protect investors. Ultimately, investor protection and corporate law must be focussed on the objective of developing the country and creating jobs.
We expect to introduce the Corporate Law Economic Reform Bill 1998 into the Parliament this week. It implements far ranging reform in the areas of accounting standards, fundraising, directors duties and takeovers. Legislation to implement reforms in the areas of markets and financial products will be released later this year.
We are improving our corporate laws at a strategic time. We are taking action because we want to make Australia a better place to do business. Now is the time to press our reputation for good, sound, solid corporate practices so that we can capture a competitive advantage in our region.
Studies of the Asian crisis show that problems in corporate governance were an important cause of misallocated investment and the spread of financial contagion across a number of Asian economies once they were subjected to external shocks. We have a good structure of corporate governance which the Government is further strengthening with sensible workable laws and strong effective regulators.
Our commitment to getting our laws right can be seen in the recently passed Managed Investments Act 1998 which commences its operation today. As those of you who have followed the debate know, this has not been an easy path to reform. Yet we persevered, why? Because at the end of the 1980s, early 1990s there were difficulties in respect of Australias managed funds industry. There were some spectacular failures and a number of investors got hurt.
Managed investments are a large and growing segment of the capital markets and play an important role in savings and investment capital formation. In 1980, when the first retail cash management trust was launched in Australia, there was $2 billion under management. Today, approximately $90 to $100 billion is invested in managed investment schemes, and the amount invested is growing rapidly.
CASAC/ALRC, the Financial System Inquiry and the Parliamentary Joint Committee on Corporations and Securities all said reform was needed in this industry, that there should be one single responsible entity, and as a Government we had to act on those recommendations.
We have introduced reforms which will provide a simplified structure for the industry, clarify the responsibilities of the operators of managed investment schemes, known as responsible entities, and improve corporate governance in relation to these entities.
The Company Law Review Act 1998 also achieved passage last week with a commencement date of today. The Act rewrites and improves the core company law provisions governing company registration, meetings, share capital, financial reporting, annual returns, deregistration of defunct companies and company names.
The Government has also recently seen the passage of legislation through the Parliament to extend cheque issuing rights to building societies, credit unions and their special service providers. Building societies and credit unions can now fill the gaps left by banks that have closed branches in regional and rural Australia. My Parliamentary Secretary, Senator the Hon Ian Campbell, announced last Friday that the extension of cheque issuing rights will begin on 1 December this year.
Further legislation has also recently passed through the Parliament to enhance the effectiveness of the new real time gross settlement system for the settlement of high-value wholesale payments recently introduced by the RBA. It will also provide greater legal certainty for other netting arrangements, including
- The netting of low-value retail payments in the payments system;
- Close-out netting in the financial markets; and
- Netting undertaken in accordance with the rules of a stock exchange or futures market.
Today marks the beginning of new and exciting times for ASIC and APRA. But it is important to remember that much of their success will build upon the fine work already undertaken by the ASC and its predecessors, and the ISC and APSC whose roles now fall within ASICs and APRAs areas of responsibility.
I am pleased that Alan Cameron, and his fellow Commissioners Peter Day and Jillian Segal, have agreed to continue their roles in ASIC. I know that with their wide commercial experience, their concerns for consumers and their outstanding expertise, they are ready to meet the challenges which the Commission will face.
Similarly, I am also pleased that Graeme Thompson has accepted the role of Chief Executive Officer of APRA and Jeff Carmichael the role of independent chair of APRAs board. Both Graeme and Jeff bring a wealth of experience and expertise to APRA and have the difficult role, with assistance from the States and Territories and staff of the ISC and RBA, of ensuring the smooth transition of prudential regulation from numerous regulators to the single APRA.
I also acknowledge the importance of the cooperation between the Commonwealth, and the States and Territories, in developing the regulatory changes and in supporting the new roles of ASIC.
The States and Territories will continue to play a significant role in the regulation of the corporate and financial sectors and I look forward to our continuing relationship in these areas. In particular, I look forward to completing the negotiations with the states and territories to achieve the transfer of regulatory responsibility for building societies, credit unions and friendly societies to achieve competitive neutrality in the deposit-taking and life insurance-type products.
Australias financial sector regulation is acknowledged as world class and has the respect of international organisations and overseas regulators.
I am confident that the new regulatory framework developed by the Government will build on this reputation and contribute to the efficiency of the economy, while maintaining and improving investor protection and market integrity.
It is a regulatory framework that has the capacity to anticipate and respond to innovation, and permit market participants to adapt to challenges of the current and emerging corporate and financial environment, both domestically and internationally.
I wish ASIC, APRA and the RBA and all the staff who sail within them good fortune and I look forward to working with you in the future.