The Minister for Financial Services and Regulation
21 October 1998 - 26 November 2001
Address to the
Australian Banking and Finance -
2 October 2001
Ladies and gentlemen.
I am delighted to have the opportunity to speak to you tonight at the Australian Banking and Finance Lecture series.
As you would all know, this has been a eventful year in the financial services industry. Our economy and financial sector has displayed continued strength and resilience, even in the face of deteriorating conditions abroad.
At the same time, the Government has passed some of the most comprehensive reforms in a generation to the regulatory framework in which the industry operates.
The most significant of these have been the Financial Services Reform Bill and the General Insurance Act. Both represent the culmination of many years of effort and consultation by Government and industry.
They will place Australia at the cutting edge in financial services regulation. This will benefit both the Australian financial services industry, and the customers it serves.
While the reforms are ambitious, they have also been necessary. They will help to ensure that we can continue to grow a vibrant, flexible and adaptable financial services industry.
But we know that to have a successful industry, we also need confident and informed consumers. Confidence is a commodity that is hard won, and easily lost.
I know that there has been heightened community interest in the safety of superannuation, following losses suffered by some super funds. However, it is important to remember that the overwhelming majority of funds are very well run.
That said, because of the compulsory and long-term nature of super, the Government needs to ensure that the community has full confidence in the way super is supervised.
With this in mind, the Government has today released an Issues Paper canvassing options for improving the safety of superannuation.
The paper covers reform options in two key areas.
Firstly, it proposes updating the prudential and legislative framework for super, and secondly, it proposes new governance and accountability measures. I will return to some of the details later.
I should stress from the outset that this is an Issues Paper, not a paper spelling out final Government policy. It raises options and ideas for comment, in response to concerns that do warrant some form of action.
As you know, this Government has a solid record of reform. And we pride ourselves on pursuing reform through consultation and feedback from key stakeholders.
In super our approach is no different. I am pleased to announce that Mr Don Mercer has agreed to chair a Government working group on the Issues Paper, which will include APRA, ASIC, and the Federal Treasury.
The working group will conduct the public consultations on the paper, and develop legislative advice for Government.
I am hopeful, and will strongly encourage all those in industry and the community at large to contribute to this process. It is vital that we continue to get this right.
Ladies and gentlemen, after owning a home, super is the most important asset of Australian households. With over 8.5 million people having super that is worth over $500 billion, it is a big part of our economy and a big part of people's lives.
But despite the industry's size and importance, it is fair to say that community understanding of superannuation remains low. That is not surprising.
People don't always see super as an issue in their day-to-day lives. What is happening in super won't make the front page of the Daily Telegraph or be hot topic on talkback radio.
But when a super fund fails, it will quite rightly be on A Current Affair.
People do look to super for security in their retirement, and at a minimum, they want to know that these savings are safe.
This is a response to those concerns.
While the Issues Paper talks about safety from a prudential "top-down" perspective, it also suggests that safety might require more of a role for the people who own the super, that is, the members.
Members can play a greater role in the scrutiny of their own fund and the performance of its managers. Just as shareholders want their companies to grow and their directors to perform, super members should also be able to take action to demand the best.
But right now there are limitations on the ways members can question trustees and super fund managers.
The Government's paper proposes some options.
Like a company, an annual meeting could empower members and give them a forum to probe trustees about the fund's management.
We want to ensure that the people running super front up to annual general meetings every year, respond to members' questions and explain how they have been investing members money.
And, like shareholders, if members need the power to get rid of trustees who are not doing their job, then we will give them that power.
In other words, we want to extend shareholder democracy to superannuation.
Accountability to members is one thing, but scrutiny and assessment by peers and commentators is another. The Issues Paper asks whether there is merit in requiring that super funds make their financial statements more accessible to the public and market at large.
After all, the annual reports to members of managed investments must be made publicly available through ASIC.
Forcing public disclosure by all super trustees has some obvious benefits. It would broaden scrutiny beyond just members to a much wider audience.
This would enable the market to join fund members in their scrutiny of fund operations and could provide valuable sunlight and market discipline on the trustees.
This seems like a simple improvement in accountability with little if any downside. And the proposal could be delivered in the same simple way as managed investments by releasing financial statements on the ASIC or the APRA website.
The Issues Paper also looks at other issues such as poor investment decisions, which lead to big losses. This often comes down to trustees just not having the right skills.
The Paper suggests a universal licensing and minimum capital regime for super trustees, which would force them to have the skills necessary to watch over other people's money.
Under current law, many funds' trustees are split between employers and workers. While this appears democratic and equitable, these trustees often have no financial training or expertise, yet have the final say in how funds are managed. In some cases, trustees are no more than enthusiastic amateurs. But they should be much more than this.
We don't let enthusiastic amateurs run our banks, and they shouldn't be looking after our super funds.
Whats more, under the Financial Services Reform Act, investment advisers have to be licensed; why not the people looking after our super?
The Issues Paper also suggests giving APRA the power to make prudential standards, particularly for capital adequacy. This would make super funds more accountable and force them to clear the same sorts of capital hurdles as banks and general insurers.
As I've mentioned, there are requirements in current laws for managed investment schemes that could be applied to super funds.
Managed investments already have to lodge a compliance plan with ASIC, which spell out how the will comply with the Corporations Act and the scheme's constitution.
This discipline forces these schemes to give these matters their full and considered attention. This is reinforced by the need to submit these plans to a range of audit obligations.
It's also useful to know that ASIC considers that compliance plans and adherence to them, is one of the most useful tools available to it in its regulation of these schemes.
If it works for managed investments, then why couldn't it work for super funds?
This Issues Paper also looks at changing the way super funds deal with related parties.
This might force funds to disclose and at times, seek approval, of members if they are going to engage in related-party activities. So if funds are giving work to mates they are going to need to seek approval of members of the fund. The days of the cosy relationships in superannuation are now over.
Another key issue is when super funds make negative returns. The Issues Paper refers to this problem, particularly addressing the misconception that Government supervision means a Government guarantee.
Prudential supervision does not guarantee a super fund will not fail, just as with banks, insurers or any other company. What supervision aims to do is minimise the chance of that failure.
However, under current laws, if a fund fails because of theft or fraud, the Government can step in and provide financial help to members, by levying all the super funds of other Australians.
There has been some suggestion that the test for assistance, now limited to theft or fraud, should be widened to include cases where trustees have misled or deceived members to their detriment.
This proposition raises a number of difficult issues. For instance, how would misleading or deceptive conduct be demonstrated? Who would decide an application for assistance, which alleged misleading or deceptive conduct, and how should such assistance be funded?
Given the practical issues involved in making such a change, input on this idea is crucial, and I would urge industry and fund members to come forward with their ideas on this very fundamental issue.
This paper is the start of an important debate and we would hope our political opponents support our push for safer super.
They have not always been supportive. The Labor Party opposed choice of superannuation laws that would have meant members could swap between funds and have more say in who was managing their money.
But that would have upset the cosy position of the union-dominated industry funds. As such, the Labor Party blocked choice in the Senate.
We tried to increase the penalty for funds not lodgling annual returns. The Labor Party rejected this too. When we finally got it through they wanted to actually halve the penalties we proposed.
That has been their record on super safety and I would hope they have more political will to support these initaitives.
Finally, stepping away from the Issues Paper for a moment, I would like to talk about another element of the super industry that has been an important confidence builder in the industry.
Any industry, particularly one as far reaching as super, needs an effective mechanism for resolving the complaints of customers. In super, this mechanism is currently provided by the Superannuation Complaints Tribunal.
You may be aware that the draft report of the Productivity Commission recently recommended that the Tribunal be abolished and replaced by an industry-based scheme. Doing this, the Productivity Commission argued, would bring the super industry more in line with other parts of the financial services sector.
I don't intend to respond directly to the draft recommendations of the Productivity Commission, but I would like to point out a number of important facts. The Tribunal, without doubt, enjoys the full support of the industry.
It is clear to everyone that the benefits of the Tribunal outweigh the costs when measured against the alternative of the court system.
It's performance is also worthy of note. For example, the number of cases settled by conciliation increased from 86 last year to 183 this year.
I believe the Tribunal has been an extremely effective dispute resolution body, and I am confident that it remains a cost-effective way of delivering justice.
Without any doubt, consumers and industry are better off because of it.
Ladies and gentlemen, the Government is committed to making sure supervision of super and members' confidence in that supervision is as strong as possible.
But we know that improvements can be made in the prudential regulation of super.
We have produced an Issues Paper, which looks at a number of options for improving supervision from the bottom up and from the top down.
The Issues Paper opens up a debate that we have to have.
It is open for comment until next February, and I welcome contributions from all interested parties.
But above all the proposals I have outlined today are not an attack on well-managed super funds or a tirade against trustees. They are simply about making super safer. And that can only be a good thing for Australia.