Parliamentary Secretary to the Treasurer
27 November 2001 - 6 October 2003
ADDRESS TO SECURITIES AND DERIVATIVES INDUSTRY ASSOCIATION CONFERENCE
Saturday 31 May 2003
(via video link)
There is no doubt that the international economic environment is at least as tough as it was this time last year when I addressed your conference. The US, Europe and Japan are all struggling at very low growth rates. The Australian economy by contrast has performed far more robustly. I think it is showing the benefits of a very strong focus by the Government - continued focus over many years - on economic reform on having a sound budget. It clearly reflects reforms by this government and the previous government to open up our markets and globalise Australia and we are certainly reaping the rewards of that. Domestically we have come through a very tough period, as you in the securities market in particular understand. Your industry itself is working off very low volumes. Obviously the values themselves have come down and so it has been a tough period internationally and domestically and the signs for the coming 12 months or so tell us that it will remain challenging. There is no great sunshine developing although the downside risks are probably less than they were a few months ago and I think the quick ending of the war in Iraq, the increased hopes of peace in the Middle East and a range of other factors show us there is potential for upside, which is stronger than it was a few months ago.
Can I say that the government's commitment to reform in this environment remains, but that we are very cognitive that reform fatigue is a potential. That certainly the reforms that you are implementing through the Financial Services Reform Act which flowed from CLERP 6 do put a strain on your businesses at a time when the market is struggling as well. But can I say on a broader front, that Government believes that ongoing reform to the structure of the Australian economy at the education sector, the health sector, the budget itself, the greater infrastructure of the country, the roads, the railways and the airports is absolutely vital if Australia is going to continue to expand at the rate it is and fulfil its potential. So please don't think that this government will get complacent about the necessity for that sort of reform.
The budget reforms and the budget that the Treasurer brought down a couple of weeks ago are quite important. I think the political situation in the Senate is of interest to you and I think Mr Chairman you mentioned my role as Manager of Government Business in the Senate, the focus on the obstruction of the Senate Labor, Democrats and minor parties I think will become an important economic issue over coming weeks and months. There is something like 17 or 18 pieces of key legislation of the government's that have either been voted down twice by the Opposition parties, voted down once or the Opposition indicated they are going to vote them down, and these include key measures to make things like Medicare and the Pharmaceutical Benefits Scheme and Disability Services provisions sustainable into the future. Anyone who tells you that you can sustain policies designed in the 70s and 80s or into this millennium without some change is kidding you. If you want to sustain a sound fiscal balance going forward - a sustainable national economy - you have to make these sort of hard decisions and that is going to become an important focus over the coming weeks and months.
Can I move then to financial services. The industry is now roughly half way through the transition to the Financial Services Reform Act. The transition period ends on March 11. No one under estimated the size of those reforms. When we first started writing CLERP 6, as it was known then back in 1997, in consultation with your industry and consultation with the Stock Exchange, the Futures Exchange, we knew that the undertaking of bringing a single licensing and regulating regime for financial services and products was a huge undertaking. I have got to say I was pretty sceptical when we set off down the road. I knew that it was a huge undertaking. I was very worried that there was potential for over regulation. I was very worried about that, but I have got to say that working across the financial services industry I have been impressed by the commitment to the concept in CLERP 6 to bring in a single licensing regime. Having said that, half way through the transition period, there remains a number of challenges and only this week I met with leaders of your industry and the Stock Exchange to discuss the statement of advice problem that is confronting many in your businesses. As a result of that meeting and ongoing consultations that you have had with ASIC, with my office and with the Treasury, we are very concerned to ensure that we have a practical workable outcome in those negotiations and discussions. I understand that a number of your firms are ready to transition but want a resolution of the SOA issue before you do that and to that end I have convened a meeting, I think it is confirmed for Sydney at 9.00am this coming Wednesday, with the leaders of many of your firms and the relevant officers from ASIC, my office and Treasury to find a practical solution. I think I told you this time last year that I will make sure that the transition to the FSRA is done in very close consultation, but we won't comprise the core principles, that we will seek however to make necessary changes to the legislation and regulation and of course work closely with ASIC to ensure that their policy guidance is in sync and that you feel part of a team that is committed to building a stronger financial services sector. The government recognises those concerns and we will continue to work with you in that way. We are working in a similar way on the CLERP 9 reforms. Your industry again has played a very significant role in helping to design a policy framework that in a practical and political sense focuses on the challenges that confront the economy with the major disclosure failures that occurred across the Pacific with Enron, with Global Crossing, with Worldcom and similar failures and, of course not to hide our own failures here in Australia, with significant corporate collapses such as HIH and some other failures.
It is quite clear that although this Government has had a significant commitment to reforming the corporate law, further reform is necessary in a number of areas and the government's principles there have been to find ways to ensure the market is better informed. That is what all the reforms are seeking to do. Seeking to minimise conflicts of interest, seeking to maximise the quality and timeliness of information that goes to investors and potential investors and that is the principle that drives all of these reforms and particularly the reforms in CLERP 9. CLERP 9 the policy proposal paper was released by the Treasurer and myself late last year. We have had terrific feedback from industry from shareholders, from institutional investors on the shape of those reforms. The Cabinet has considered those issues and considered the consultation feedback and the Treasurer and I in a few weeks time, we hope by the end of June, will release draft legislation which will incorporate not only the policy principles that were enunciated in the policy proposal paper, but also some significant improvements.
I must say that we have worked very hard with your industry to look at the analyst independence issue. We have decided to put in a more precise requirement in relation to managing conflicts of interest and have provided some draft legislative provisions to ASIC so that they can commence work on policy guidance that will support that law. ASIC have informed me that in the normal part of their policy guidance process they will consult with stakeholder groups who have an interest. Obviously a number of your firms and leaders of SDIA will be involved in ASIC in looking at that policy to ensure that we have in Australia a market place has faith that analyst advice is not conflicted by any other undue influence. I think it is fair to say that in Australia we haven't had that affliction that caused Elliot Spitzer and his team in New York to reach that historic settlement with the banks on Wall Street. I know that ASIC have done a thorough investigation into investment banking practices in Australia. I am not sure whether they have released the details of that report yet, but I know that we don't have those concerns in Australia. But it doesn't mean that we can't ensure that the regulatory regime is improved and that it is recognised internationally as good quality. We have as most of you know focused on a range of issues in CLERP 9 which I think will improve the quality of information that flows to the market place. You know that we have picked up a suggestion that was developed jointly by the Australian Stock Exchange with the full support of Richard Humphrey and Maurice Newman there, who I credit with taking the lead on this issue, and also with the full support of David Knott, the Chairman of ASIC, and that is to ensure there is an infringement penalty notice regime for failure to comply with continuous disclosure regime. We will of course be looking very closely at the detail of those regulatory provisions, but I think it is very important that the Stock Exchange and the regulator have the power at their hands to ensure that if people transgress the continuous disclosure provisions that there is a consequence and that consequence isn't delivered through a long court process that can often take many years. I say to people the current system is a bit like trying to discipline your dog that digs a hole in your front yard. If you find the hole in the front yard and discipline your dog two years later, the dog is not going to get the signal that digging holes in the garden is an undesirable practice. There needs to be a very quick method with natural justice protected. You need hearings, you need the right to ensure that firms that believe they are innocent can go to court and all of that will be protected. But I know that the Stock Exchange and ASIC need power to ensure that companies get a very clear signal that we are serious about corporate disclosure.
The audit independence provisions I believe will be recognised worldwide as best practice. We have decided not to go down the track of the United States, which has banned the provision of non audit services by audit firms or about 9 of them. What (inaudible) said is that they will be banned but if you want to get an exemption you can go to the public company audit oversight board and seek an exemption. In Australia we are saying there is a presumption in the law that those 9 non audit services prescribed by in fact will potentially compromise the independence of the audit, but if your company chooses to take those non-audit services they will be required to tell the market place through their annual report how they convinced themselves that by taking those non audit services they did not compromise the independence of the audit. So it is a disclosure based model. I think it is a very good way describing how the Australian policy approach is different to the US and Europe and it puts the onus back on the company to share its thinking with its shareholders and with the broader market.
CLERP 9 will also bring changes regarding executive and director remuneration. The government is seeking to reform this area of the law, which quite frankly was messed up by the Opposition parties in the Senate back in 1999. They brought in an amendment at the very last minute on the floor of the Senate with no consultation and I warned them it is not a very good way to go about legislating. It was a knee jerk populist reaction then and it has had the predicted consequences. The Government has been seeking to reform that to create a better quality remuneration disclosure regime and we have rolled that work into CLERP 9. Can I say the government believes that many of the termination payments that have been paid to senior corporate figures in Australia have been out of whack with community expectations. Shareholders and the people of Australia don't mind people being paid well for high achievement and I think we need to encourage that, but they don't like rewarding people for bad achievement and what they really don't like is companies hiding these packages until it is too late. So the government working with industry will develop a regime that ensures that you have more real time disclosure. We fully support the Stock Exchanges Corporate Governance Council provisions in this regard.
Can I conclude Mr Chairman by saying that it is important that in all of this debate, in all of the considerations about the implementation of FSRA, the debate about corporate governance that we don't lose sight of the overall issue. The issue is that we want to build a strong free enterprise economy. We want people who are running their companies not to spend all of their time thinking about complying with the law. They should do that as part of their normal business. We need people to be running their businesses looking to the future, looking for opportunities domestically and internationally and as I said in a speech last week to a group of accountants, we don't want people to have their head in the boat all the time. I worry that the focus on regulation and corporate governance changes will force too many people to have their head in the boat looking at their internal systems and not keep their head out of the boat looking for the next wind shift, looking for the next opportunity and looking out for threats. It is important that we don't lose focus on the important things and that is running successful businesses, expanding businesses, expanding the economy, from our point of view running the national economy.
With that in mind, can I conclude Mr Chairman by saying the next phase of reform, one of the next things I am going to put a lot of personal energy into is building on the very good work that has taken place on building our regional relationships. Some of you may have read an article I had published in the Financial Review earlier this week about what I call the Asia Pacific financial market. Australia has done a lot of work building relationships in the region. The Australian Stock Exchange has already established cross border trading systems in equities with Singapore and are currently negotiating a similar agreement with Tokyo. The Financial Reporting Council, the Accounting Standards Board, the Reserve Bank, APRA - all have put significant effort into bi-lateral and multi lateral negotiations and harmonisation of their legal and regulatory systems throughout the region. ASIC through chairman David Knott, who is also Chairman of the IOSCO Technical Committee, are doing an enormous amount of work in the region on harmonisation and lifting the standards of regulation across the region. What I would like to work on with you, with the regulators and with other relevant jurisdictions in the region is a process to build a single market in our region between Australia, New Zealand, Indonesia, Singapore, Vietnam, Thailand, Hong Kong, China, Japan, South Korea and the United States. You bring those economies together you can create a market that includes roughly 70% of the world capital market. It would be one of the most dynamic regions of the world. We have already got a lot of work going on bilaterally and multilaterally but I believe there is a huge opportunity particularly with the free trade agreement There are talks taking place with the United States at the moment, there is the fantastic political relationship we have at senior levels of the US administration and the Australian administration and there are opportunities presented by the DOHA round to build an Asia Pacific financial market and I will be working closely with your industry, with the Stock Exchange to develop that bigger picture for the future. There is no doubt that trading across borders needs to be a lot less costly, building (inaudible) settlement systems that talk to each other and don't increase transaction costs are all a part of that and I look forward to working with you on that.
Thanks again for inviting me to address you. I hope that has given you a clear picture of the government's priorities and where I want to drive things over coming months. Thanks to all of those good people here, to SDIA and the individual people and the individual firms who have worked with me so selflessly to help us in this important reform area. I look forward to continuing the relationship over the coming year.