11 March 1996 - 3 December 2007
NATIONAL MARKET, NATIONAL INTEREST
AUSTRALIAN SECURITIES EXCHANGE
23 April 2007
I’m delighted to have been invited to the Australian Securities Exchange today to launch a book celebrating its 20-year history — National Market, National Interest by Edna Carew.
Let me begin with a few killer facts.
Australia has the greatest share ownership of any country in the world on a per capita basis.
A 2004 survey found that 55 per cent of the Australian adult population — or about eight million people — own shares, either through direct ownership or through a managed fund. This is more than any other country. The United States of America has around 50 per cent shareowners (based on figures in 2002). In the United Kingdom it is around 22 per cent (again, based on figures in 2002).
According to the most recent Global Stock Market Review by Standard & Poor’s, Australia’s stockmarket, in total market capitalisation terms, is the ninth largest in the world and the second-largest in the Asia-Pacific region, after Japan.
Our stockmarket is around 300 per cent larger than Singapore’s by market capitalisation.
Axiss Australia, using figures sourced from US-based Investment Company Institute (ICI), state that Australia’s investment funds asset pool continues to be the fourth largest in the world, and the largest in the Asia-Pacific.
The latest figures from ICI, for the December quarter 2006, show that Australia’s investment funds asset pool is around $US864 billion. Compare this to Hong Kong’s $US631 billion and Japan’s $US579 billion.
The Australian foreign exchange market is ranked 7th in the world by turnover. The Australian dollar is the 6th most actively traded currency in the world after the US dollar, the Euro, the Yen, the UK pound and Swiss Franc (March 2005).
The World Economic Forum Global Competitiveness Report 2005-06 ranked the sophistication of Australia’s financial markets as the highest in the Asia-Pacific region and among the best in the world.
There is no question that the financial services industry has been an economic success story for Australia.
I suspect that most people do not realise the extent of the contribution that the financial services industry makes to the economy.
Many people would be surprised to learn that the financial services industry makes a larger contribution to the economy than the mining industry.
In 2005-06, while mining (including services to mining) comprised 5.9 per cent of the economy, finance and insurance comprised 8.5 per cent.
But the success that has come to the financial services industry has not just fallen down from the heavens. Success comes from hard work, judgement calls, and wise decisions.
So today I want to talk about our Financial Services Industry – where we have come from, and some of the decisions involved in shaping our economic future.
Overview and history of ASX
The ASX has come a long way over the last two decades.
Two decades ago there were six separate stock exchanges in the capital cities around the country that operated, as some have described, as little more than gentlemen’s clubs. All record-keeping was done on paper. Prices were written in chalk.
It’s a different story today.
A national exchange was formed in 1987. That year the development of the pioneering Stock Exchange Automated Trading System (SEATS) enabled the Australian stockmarket to be counted among the first fully automated markets in the world.
This is an area where Australia led the world.
In October 1996, ASX members voted to demutualise, and to convert ASX into a company limited by shares, allowing non-members to take an interest in the exchange. The Government and ASX worked together to devise the necessary legislation, which was passed in November 1997 and came into force in December 1997.
The ASX listed on itself in October 1998. This created an absolute divide between ownership of the exchange and the right to access the market through the exchange.
Under the legislation and administrative arrangements, ASX retained its supervisory functions, although ASX's accountability for the performance of these functions was strengthened by requiring it to make a formal annual report on its supervisory activities.
With the listing of the ASX on the exchange, the ASX could no longer supervise its own compliance with listing rules or conduct market surveillance of trading in its own securities. The Australian Securities and Investments Commission (ASIC) was therefore given power to administer the listing rules in relation to ASX.
This clarified and separated the roles of the various parties involved in the operation of the exchange.
The demutualisation of the ASX was followed by the Stock Exchange of Hong Kong (2000), the Stock Exchange of Singapore (2000), along with a string of other demutualisations and listings.
And another area where Australia led the world was our highly regarded world-class operating systems including the CHESS settlement system.
Today, the ASX is one of the world’s top ten listed exchange groups, measured by its market capitalisation.
As at 31 December 2006, its domestic market capitalisation amounted to $1.39 trillion… it had an average daily turnover of $4.3 billion… with nearly 150,000 share transactions a day.
But it is no good having a first class stock exchange if the regulatory structure around it does not promote fair and efficient markets; if it does not protect mum and dad investors; and if people do not have confidence it its overall integrity.
Regulatory reform and economic vision
Back in 1996 the Australian economy was in a very lacklustre state:-
- our international credit rating had been downgraded twice
- we were still recovering from a massive recession
- the government was running very large budget deficits,
- and government debt had peaked at $96 billion.
I was very firmly of the view that restoring the health of our financial markets was integral to restoring our economy.
Back in 1996 the regulation of financial markets had been considered an arm of legal policy and administered by the Attorney-General’s Department. Changes in regulatory arrangements were slow and proceeded in a very legalistic way.
My view was that corporations law should be seen as an arm of economic policy. The purpose of the corporation is to so confer limited liability so individuals can engage in economic enterprises which they would not otherwise undertake, economic enterprises which generate wealth and eventually lead to rising incomes and employment opportunities.
So we brought these important areas under the umbrella of the Treasury - corporate law, competition law, accounting standards, oversight and regulation of the stock exchange – which means we now have a situation where all the key economic regulators – the insurance regulators, the prudential regulators, the corporate regulator, the competition law regulator – come under the rubric of an economic department, with the only exception those areas that State Governments still reserve for themselves.
Now we can quickly evaluate and respond at the national level to the dynamics and interaction between corporations, regulatory theory, enforcement, competition, confidence, capital markets, equity raising and the risks.
I think it has been an unqualified success and has allowed Australia to steal the march on other countries.
In 1996, I commissioned the Financial System Inquiry (the ‘Wallis Inquiry’) to make recommendations on regulatory arrangements to develop an efficient, responsive, competitive and flexible financial system.
The Inquiry found that the existing regulatory structure was inefficient and distorted competition in the financial sector. Regulation was institutionally‑based and undertaken by a variety of Commonwealth and State regulatory agencies. This structure had resulted in functionally similar institutions, such as banks, building societies and credit unions, being subject to different regulation. It involved significant duplication of resources and did not provide a sound basis for regulating financial conglomerates.
The Inquiry’s key recommendation was for financial sector regulation to be brought under the Australian Government and based on functional objectives. This included establishing a single prudential regulator, the Australian Prudential Regulation Authority, for authorised deposit-taking institutions, insurers and superannuation entities.
The Australian Securities and Investments Commission became responsible for consumer protection and market integrity issues across the financial sector, while the Reserve Bank of Australia remained the institution responsible for systemic stability and payments. The new regulatory structure was implemented by the Government in 1998.
The Wallis reforms have delivered three main benefits:
- Structuring financial sector regulation along functional objectives has assisted in making regulation consistent across the range of competing financial products and providers, thus fostering competition and greater efficiency in the financial sector.
- Bringing together similar regulatory functions from a number of Commonwealth and State regulatory authorities has reduced duplication and inconsistency in regulation, thereby enhancing the cost effectiveness of regulation and reducing complexity.
- The new regulatory structure is better able to accommodate structural changes and innovation in markets, such as an increasing presence of financial conglomerates.
We made reforms to the corporate law through the Corporate Law Economic Reform program. We took a light handed principles based approach to regulation – against the strong prescriptive ‘tick-a-box’ approach favoured by others who wanted us to adopt the US Sarbanes-Oxley model.
CLERP has played a major role in building a strong and vibrant economy. A central tenet of this program has been quality disclosure of relevant information to the market to ensure that Australia has an effective disclosure framework that provides the structures and incentives for a fully informed market.
It is our model that has led world’s best practice in regulation.
In 1998, the IMF described Australia’s Wallis reforms as ‘a package of path-breaking reforms, which puts Australia at the forefront of international practice …’.
In its 2006 Financial System Stability Assessment, the IMF commended Australia on the maturity and strength of its financial sector and the soundness of its overall regulatory structure.
Another boost that we gave to stockmarket investors was to abolish the stamp duty on share transactions in 2000. This was part of the biggest tax reform in Australia which introduced the GST, all of which is received by the states to fund the abolition of this tax and 10 other state taxes.
I was delighted to consign that particular tax to the rubbish bin of history.
Stamp duty on shares was a financial burden to investors and acted as sand in the wheels of an efficiently operating market.
Financial markets are highly dependent on trust and compliance with corporate laws.
The Australian Government has massively increased funding for corporate regulation while I have been Treasurer. In 2006-07 funding for ASIC is budgeted at $265 million, an increase of 58 per cent above CPI compared to spending in 1995-96. I view the ASIC funding as essential to maintaining confidence in the corporate and financial markets.
But clearly this is not well understood with the Opposition recently proposing to cut $129.8 million from ASIC over four years. This would weaken corporate enforcement and weaken the reputation of Australia’s financial services industry. And this is an industry critical to our economic future.
Ladies and gentlemen, the Australian financial services industry has been an astounding success story for Australia.
This book by Edna Carew tells the story of one important part of that story:- the rise of the national stock market from a series of provincial markets. The story is a fascinating tale of the people and the project they put together so successfully.
I am delighted to launch National Market, National Interest.