Parliamentary Secretary to the Treasurer
26 October 2004 - 3 December 2007
ADDRESS TO IFSA MEMBER LUNCHEON
ACHIEVING BALANCE IN THE
FINANCIAL SERVICES INDUSTRY
PARK HYATT, MELBOURNE
WEDNESDAY, 4 APRIL 2007
Simpler Regulatory System Bill: is designed to provide the right level of regulation to promote confident consumer participation in the financial services sector.
Value of consultation: By consulting closely with all stakeholders and working through the complexities of the issues, the Government is determined to strike the right balance between the needs of investors and the needs of industry.
Good afternoon. And thank you, Jeremy Duffield, for that kind introduction. I’m always delighted to address IFSA members at these luncheons.
I’ve been asked to talk today about achieving balance in the financial services industry. It is a topic that is critical to the policies that the Government chooses to implement today in order to provide reliably for the future of every Australian.
If balance is not achieved, or once achieved, is not maintained, the damage to the economy could be considerable.
For instance, if sections of the Australian community cannot access quality financial advice because they see it as too expensive for what they get in return – and those expenses are imposed by Government on the supply side of the industry - then whole sections of the Australian community will be disempowered about their financial futures.
In practice, this may mean they don’t pay off the mortgage as quickly as they might otherwise have done; they may not be able to live the way they thought they could when they retire; they may even have less children than they originally thought they might, all because their financial circumstances have not eventuated in the way they had hoped for.
That this could be the case is a prime motivator for me in working towards a healthy balance between meeting the needs of all Australian investors, and especially the ones I’ve described – the prospective, ‘would if I could’ investors – and the industry. That is, not tolerating policies that stifle innovation, competition, growth and development.
I don’t believe that regulation should ever risk being a parasite that feeds off the future of the financial services industry. Parasitic relationships will only ever produce damage of some description.
In the early days of the Financial Services Reform Act 2001, features not unlike ‘teething troubles’ began to characterise the relationship between regulating for investors and implementation of the new regulatory framework.
Probably, this was the inadvertent result of what had been best designed intentions.
For example, industry was uncertain about what the new laws meant. They naturally sought to obtain certainty by seeking out professional legal advice. Lawyers, wishing to mitigate as many of their clients’ risks as possible, advised that compliance with the law would require much in the way of documentation.
Industry got on with transitioning to the new laws – and core issues, like what a law meant, were left to another day, partly in the hope that they would resolve themselves, and partly because no-one wanted to be seen to be complaining to Government without due cause.
But, after some time, it became apparent that the core issues were not resolving themselves.
Industry took up the challenge of communicating its experiences to the Government, in the hope that balance could be achieved.
Industry told me that the FSR philosophy and principles were right, but that they were drowning in business regulation and compliance costs. Very quickly, I heard the resounding note: the imbalance could cost us all.
Against this background, IFSA stands out as a stakeholder that led the way by taking its concerns to the Government.
I’d like to acknowledge the trust that IFSA placed in us, and further take this opportunity to thank IFSA for its subsequent contribution to developing initiatives designed to simplify and streamline the corporate and financial services framework, and address its regulatory imposts. Taking issues up with governments of any persuasion takes courage and requires a good case to be made out.
The effectiveness of economic regulation is a key contributor to strong economic growth and the well-being of all Australians.
The Government is committed to ensuring a regulatory environment that fosters competition, promotes innovation and enterprise, promotes stability and provides appropriate safeguards for consumers.
I am intent on reducing red tape and unnecessary complexity in our laws and their administration, minimising compliance costs, enhancing competition and better equipping investors to benefit from competitive markets.
The best way to develop financial services laws that are more workable, and better suited to real world industry conditions, is simple. It is for Government and industry to work together closely and collaboratively at every stage of the law-making and law review process.
After all, we all have the same goal — to develop a better financial services industry.
An industry that is highly professional … more responsive … more efficient …
An industry that excels at giving good advice to all investors.
Today, more than ever, Australians need sound but simple, professional and objective financial advice to help them strive for their goals. They should be able to access thorough and comprehensive financial advice when they need it.
That is why I am striving for balance.
In the two-and-a-half years that I have been in this role, my belief in the value and importance of open dialogue with industry has only strengthened.
Looking ahead, two particular factors are essential for increasing Australians’ confidence that this will be on offer to them.
The first is that the investing public knows that the person providing them with advice on their financial goals is in every respect, a professional. Trusted professionals are the ones who engender the public’s trust. Increasingly, investors demand more professionalism and higher standards from financial advisers. I’m therefore pleased to see the financial services industry responding to this new level of demand, which is a point I’d like to come back to a little later.
And the second is the Government’s work to provide the right amount and level of regulation to promote a sound and well-functioning financial services sector.
Simpler Regulatory System Bill
You all know that a wider review of red tape generally was commissioned by the Government in 2005 (the Banks Report).
The Government is determined to improve on the results.
For my part, I determined that some important reforms to the corporate and financial services regulatory regime were needed.
Implementing those reforms will restore a healthier balance between investor protection and industry sustainability, and is exactly what the “Simpler Regulatory System Bill” will be designed to do.
The Bill will implement most of my proposals for simplifying and improving aspects of corporate and financial services regulation that I announced last November.
That paper contained 35 detailed proposals designed to strengthen consumer protection … minimise costs to business … remove regulatory overlap … facilitate access to capital … and enhance the accountability of regulators.
The proposals build on the improvements I introduced, back in November 2005, to the practical operation of Financial Services Regulation. I should note that those improvements have been well-received and their implementation has been smooth.
In addition, I recently released a set of draft regulations on some of the more straightforward refinements that can be made to financial services regulation.
I first floated the need to address these issues in a consultation paper released this time last year.
Key amendments in the package of draft regulations include … incorporation by reference in disclosure documents … treatment of superannuation trustees for wholesale test purposes … and dollar disclosure for general insurance.
As IFSA welcomingly pointed out, the proposed amendments will allow financial service providers to include a brief description of the product in their product disclosure statements, together with references or links to other documents if the consumer wants more detailed information.
This will not only save the service provider from having to supply sheaves of documentation — but the consumer from having to wade through it if they don’t need that level of detail. In doing so, some balance will be struck between adequate and appropriate disclosure from the supplier, and empowering the consumer to seek out further details if they wish to.
I appreciate IFSA’s public endorsement of the package and the leadership demonstrated by Richard Gilbert in ensuring that IFSA’s views were strongly and properly conveyed to me on behalf of you, IFSA’s members.
I would encourage as many of you as possible, just as Richard has done to input into the current consultation process either directly or through IFSA representation or both.
Over 100 submissions were received in response to the November 2006 proposals paper from industry organisations, consumer representatives, academics and individual practitioners.
This has been, by far, the biggest response to any series of reforms that I have released in my time as Parliamentary Secretary.
Clearly, both industry and the broader public are looking to government to deliver a financial services regulatory framework that works in all their best interests.
I am pleased to report that of the 100 submissions, the clear majority were overwhelmingly positive. Indeed, many of then expressed appreciation to the Government for its consultative approach, and for making genuine efforts to improve the effectiveness of the regulatory regime.
As well as the proposals to be implemented through amendments to the Corporations Regulations, and those to be implemented through the “Simpler Regulatory System Bill”, other, more complex, proposals will be developed through further consultation.
These include the business judgement rule, which is being considered as part of the sanctions review paper released by the Treasurer for public consultation in early March this year.
We are also making progress on two regulatory issues that have been a focus of IFSA and challenge us all to come up with the ‘right balance’. One is the proposed sales recommendation regime. The other is product rationalisation.
Sales recommendation and threshold proposals
The sales recommendation and threshold proposals in the paper sparked considerable debate and discussion.
The sales recommendation proposal aimed to address some of the perceived imbalance that arises as a result of the current law’s definition of general and personal financial advice.
The proposal was designed to make it quite clear to consumers as to when they are receiving financial advice, as distinct from what is really a “pure” product sales presentation.
The balance I wanted was to see a realignment of the law to the reality of the day-to-day marketplace.
Because this proposal deals with investor perceptions, it raised some quite complex issues.
The feedback on the sales recommendation proposal indicated very clearly what I had suspected – that there is a need to realign the law as referred to earlier. However, the large number of detailed comments I received also indicated that the proposed response would not produce an adequate balance.
Accordingly, I have tasked Treasury with finding a better solution, with endorsement from as many stakeholders as possible.
A closed forum of peak stakeholder bodies to further discuss the issues involved was held about one month ago.
I would like to thank IFSA for its valuable input at that meeting. I am now refining the possible options and to that end, expect that Treasury will be convening a wider public forum later this month.
Clearly, combating the ‘sales’ versus ‘personal’ advice issue will require considerable further consideration. I look forward to IFSA continuing its interest in this area.
Another area for possible reform, and one that I know many of you have a close interest in, is that of product rationalisation.
The potential size of the problem alone speaks to me as a policy decision maker.
IFSA estimates that 25 per cent of all funds under management — worth about $221 billion — are invested in what are known as “legacy products”.
I can assure you that the problem is one whose significance I recognise.
The fact that legacy products are often run on old computer systems makes them increasingly difficult to support. It also means they may require a great deal of manual processing.
The level of manual processing involved can make legacy products vulnerable to error and fraud. In turn, this increases costs for product providers — and ultimately, for investors.
The fact that the costs of maintaining the product are distributed among an ever-decreasing number of investors places the pool of investors at further possible disadvantage.
Comparisons between legacy products and their modern counterparts, offered by the same company, show that on virtually every feature, the modern version gives investors a much better deal. So conceptually, it is easy to see where the policy needs to be.
Factors such as regulatory change, product innovation and technological development have contributed to the growth of legacy products.
The Treasury is advising me closely on options to address legacy products. I believe that the right solution to address this situation can be found. But there are many dimensions to this issue, and they all need to be considered in order to achieve a balanced solution.
Under current law, many legacy products can be rationalised only with the consent of all members of the scheme. Experience shows that there will always be a minority of members who will not provide their consent to move from the product they know to the one they are being encouraged to take out.
Recent research indicates that member responses to rationalisation proposals are not always rational, even if the proposal is clearly in their interests.
It appears that many members simply lack the expertise to assess and understand product rationalisation proposals.
This means that they will either discard the proposal outright, or respond in the negative.
I consider that any solution to the problem, therefore, requires the industry to devote a high level of resources to educating these investors about the merits of product rationalisation, as much as it requires some element of incentive in moving investors out of legacy products.
But, I am on the record as being committed to working through this issue because I believe the challenges should be worked through in the interests of all Australians.
To this end, I am happy to tell you that Treasury’s consultation and analysis with the key regulators, ASIC, APRA and the ATO on the many taxation and investor protection issues involved is proceeding well.
These consultations need to occur before I can confidently develop the Government’s approach in this area. I am confident that the working officer level consultations will be productive and helpful. I fully intend to release an issues paper for public consultation in the next few months.
There are many potential models that I may be asked to consider. I will keep pressing ahead on this issue, at the same time maintaining my focus on the Simpler Regulatory System Bill measures.
This is the balance I see as necessary in relation to this issue right now.
Analysing and calculating future costs and benefits
I would like to say a few words about analysing and calculating the future costs and benefits of proposed regulation.
Today, I’ve been talking about achieving balance in the financial services industry.
To this end, I am always aware that we need to ensure that our regulatory environment strikes the right chord between the rule of law that enshrines standards and protections, and the need for industry regulation to be flexible and adaptable in a dynamic environment.
Effective and well-focused regulation can play a vital role in correcting market failures, and raising the bar for industry.
This Government is committed to minimising any negative impacts of the regulatory framework. We recognise that there are key areas of regulation that, while necessary, will inevitably incur costs for business.
But, we are committed to ensuring that all new regulation undergoes rigorous cost/benefit analysis. We will implement further regulation only where the benefits across the board –— to industry, to consumers and to government — outweigh the costs.
Determining whether regulation meets the dual goals of “effectiveness” and “efficiency” requires a structured approach to policy development.
An approach which considers a range of options — including the option of taking no action — for achieving the desired objective. Then the likely economic, social and environmental consequences of each option are carefully weighed up.
As you are no doubt aware, the Australian Government has made a commitment to improve the quality of our regulation, and reduce the burden of regulation on the community. Like most member governments of the OECD, we have adopted explicit policies to improve regulatory quality.
Formal regulation impact analysis is now mandatory for all regulatory policies considered by the Government. In line with the recommendations of the Banks Taskforce, when the Government develops proposals, it is now more accountable, and the cost/benefit analysis process is now more robust.
This new way of doing things is challenging departments to seek out and assess the full range of likely impacts of any proposed legislation.
Departments are also consulting more broadly with stakeholders to develop regulation that will best address the problem at hand, while achieving the right balance between efficiency and effectiveness.
We can see this new approach at work in both the recent Corporate and Financial Services proposals and regulations. I’ll give you a recent example…
In considering the sales recommendation issue, I put forward a proposal to address some of the fundamental problems that industry and consumers had told me were significant to them.
Treasury analysed a range of options taking into account the various comments, research and data. But as you’re all aware, developing the best regulation to address a complex problem doesn’t end there.
The dialogue between the Treasury, industry and consumer groups has been ongoing… and the analysis is continuing. Through this process, the problems crystallise and the balanced solution begins to emerge.
Only through this partnership approach with industry and consumers can the government properly meet its accountabilities and responsibilities.
Only through this partnership approach can we balance competing interests. And only through this partnership approach can we arrive at the best possible solution. A solution which meets the needs of individual stakeholders — but also meets the broader needs of the Australian economy and the Australian community.
I don’t shy away from recognising that, in some cases, regulation will inevitably incur costs to business. But I am confident that this will only occur where the benefits to consumers… the broader industry… and to Australia as part of the global economy… warrant this.
As I have mentioned, we rely on the partnership approach to ensure that we get regulation right. We greatly value industry assistance in identifying the costs and benefits of proposed regulation. Your input is invaluable in allowing us to fully assess the costs and implications.
The best way that industry can provide us with this information is by making comments on issues papers and Regulation Impact Statements, and maintaining the effective two-way dialogue we have so easily achieved.
The issues I have been talking about today are quite complex and somewhat technical in nature.
Discussions on the Simpler Regulatory System Bill underline the complexity of the issues and the need to balance the views of all stakeholders. That is why further consultation is being undertaken in some areas.
The discussions also highlight, once again, the value of consultation.
However, consultation is a mutual process. It is important for industry to alert Government to potential issues.
By consulting closely with all stakeholders and working through the complexities of these issues, the Government is determined to get it right.
To strike the right balance between the needs of investors and the needs of industry.
And to develop financial services laws that we know will work in the way they are intended.
Once again, I thank IFSA for being a very valuable part of this process. And I look forward to continuing to work with you all.