Parliamentary Secretary to the Treasurer
26 October 2004 - 3 December 2007
"Wallis 10 Years On: Protecting Aussie Wealth"
Financial Services Institute Of Australasia
Finsia Theatre, NAB House
Level 3, 255 George Street, Sydney
26 June 2007
Before the Wallis reforms: the regulatory system inherited by the Australian Government in 1996, and the significant problems identified in the Wallis Report.
Financial Services Reforms – Achievements and benefits: the Australian Government has provided for a cohesive regulatory system, harmonising disparate financial sector regulation and has reduced the costs to business and to consumers.
Building Aussie wealth: giving aspirational Australians the tools to build wealth, particularly through superannuation.
A Simpler Regulatory System: building on the Wallis reforms through the Banks Taskforce, to reduce red tape.
Thank you Alan [Kohler, chair].
I’d like to thank the Financial Services Institute of Australasia for the opportunity to speak with you tonight. It is a pleasure to be here to address the “Government Speaks” programme.
I’d also like to thank FinSIA for the invaluable contributions you have made to the consultative processes the Government has undertaken over the past decade.
This evening, I want to put the financial services reform agenda that I have implemented into the broader context of the work the Treasurer has initiated on financial sector reform over the last decade.
LANDSCAPE TEN YEARS AGO
During the 1990s, the Australian financial services landscape underwent significant change. By the
mid-1990s, it was apparent that the complexity of the Australian regulatory system was stifling growth.
Inconsistencies were apparent in critical areas — for example, in the way that similar products and services were regulated, and in the way that consumer needs were addressed.
In May 1996, the Treasurer announced the Financial System Inquiry to identify the factors likely to drive further change in financial markets. The Inquiry – known as the Wallis Review after its chairman, Stan Wallis - focused on the factors relevant to international competition, and the integration of financial markets.
The Inquiry was faced with the challenge of peering into the future and predicting where we would be today. It was a time when new technologies, particularly the Internet, were coming into prominence.
The radical view of the time was that the financial system was undergoing a “paradigm shift”. Commentators said we were going through a revolutionary transformation, a sharp break from our past.
Those same pundits said that the rapid emergence of cheap information technology — and its equally rapid uptake in offices and homes — would transform our financial processes and structures.
They said that this shift would change the very way we did business. That it would not only dramatically alter service delivery channels, but could also redefine the character and boundaries of markets.
But of course, like most things involving policy, there was also a counter view…
And that view was that change would remain gradual and incremental. From this standpoint, it was said that the basic role and functioning of the financial system would not change. And the impact of new technologies on the structure of the financial system would continue to be relatively limited. The pace of change was accordingly expected to remain constant, and not result in fast-paced reforms.
The Inquiry did not attempt to decide which of these two competing visions of the future was the correct one. Wisely, the Wallis Inquiry made recommendations that would allow for the regulatory framework to be flexible and adaptable to a changing environment.
Hindsight shows us that this was the correct approach to take.
The recommendations of the Inquiry were made in April 1997 in what is known as the Wallis Report.
What did the report find?
It found that Australia’s regulatory environment was fragmented to the point where the level of complexity was causing substantial compliance costs for financial service providers, not to mention, a lot of confusion for consumers.
The Wallis Report also noted that innovation in financial products was being stifled because of artificial distinctions between certain contracts — for example, securities and futures contracts.
The conclusion? Wallis determined that Australia’s financial service providers wanting to compete in global markets would be disadvantaged by the inconsistencies in the regulatory framework. The Australian Government would examine that conclusion very closely and thoroughly, as I will touch upon shortly.
Since its delivery, the Wallis Report has been used as a benchmark by overseas agencies, including the UK’s Financial Services Authority. And reforms in the US, Canada and Singapore have acknowledged the impact of the Wallis Report on reviews of their regulatory processes.
In the years after the Wallis Report, the Australian Government has initiated an unprecedented level of public enquiry and industry consultation on proposed reforms in the financial services sector. It is estimated that in December 1995, the size of the Australian funds management industry was $347 billion. Today, it is worth over $1 trillion, which in itself, speaks for the importance of the Wallis Report implementation.
Again, in that respect, let me express my thanks for the very significant and fruitful contributions FinSIA has made to the various consultation processes initiated by the Australian Government in this area. I know we would be all the poorer — and I mean that quite literally — without the combined ‘wealth’ of knowledge here this evening, and within the broader membership of FinSIA.
But I think it is important to put some context around the growth of the financial sector. And that is, the Australian Government’s policies that have provided a stable macroeconomic environment in which the advantages of the financial sector reforms could actually be maximised.
The stable macroeconomic environment has been accompanied by wide-ranging structural and labour market reforms, together with a general focus on business efficiency and competition.
These reforms have given us a stable platform to foster simple and straightforward regulation — capped off by the passing by Parliament of the Simpler Regulatory System Act which I am pleased to report passed the Parliament last Thursday. I’ll talk a bit more about the Act shortly.
The new regulatory structure sparked by Wallis was implemented in 1998. Its initiatives were wide-ranging.
The Government established the Australian Prudential Regulation Authority — or APRA. This move created a single regulator for authorised deposit-taking institutions, insurers and superannuation entities, which was tasked with their prudential regulation.
We also strengthened the role of the then Australian Securities Commission (now the Australian Securities and Investments Commission), to deal with corporate governance, market integrity and consumer protection issues for financial services.
The Reserve Bank of Australia was given the mandate to focus on systemic stability and the payments system.
The model of regulation we adopted is often referred to as ‘the twin peaks model’. I believe it is a model that has been working well. Stakeholders tell me that they do not want the ‘twin peaks’ model reformed – indeed, it would be another red tape reform issue for them.
This is because we understand the quite different roles of each regulatory agency.
Each regulator has a clearly defined statutory role within the regulatory framework. In other words, each agency has clear, impartial organisational objectives.
I find it interesting therefore, that the Federal ALP has announced a policy that would merge the two regulators into one, and at the same time, cut back the funding of the current ASIC by $129.8 million.
Prudential regulation and consumer protection are certainly complementary. But they also clash from time to time. Therefore regulators need transparent, arms-length dialogue with other regulators to reconcile these conflicts. In the Government’s view, asking a single agency to deal with these conflicts internally is to invite even more conflict and confusion.
Importantly, maintenance of the twin peaks model does not mean that regulation cannot be seamless from a business point of view. Accordingly, many of the changes currently being implemented are designed to avoid duplication and streamline reporting processes.
By streamlining financial services regulation, the Government has removed much of the complexity which had been the hallmark of financial sector regulation in the period before Wallis.
The subsequent benefits of the Wallis reforms have been felt by all those who have an interest in the performance of the financial sector. And by this I mean every Australian — consumers and financiers alike.
THE FINANCIAL SYSTEM TODAY
We have come a long way over the past decade. In June 1996, our net debt position was $95.8 billion; negative net debt has been replaced now with what the economists call “a net asset position” of $28.4 billion. And real wages have increased under this Government by 20.8 per cent, more than 2.1 million jobs have been created, and unemployment is at a 32 year low of 4.2 per cent.
We now have delegations from all around the world visiting Australia, to learn from our financial system and economy.
Today, our financial system is coherent and greatly harmonised — thanks to the significant reforms introduced by the Government as a direct result of Wallis.
This evening, I’d like to highlight just three of them.
First, the restructuring of financial sector regulation has helped us to make regulation consistent across the range of financial products and providers. This has sharpened competition in the financial sector, and also provided greater efficiency.
Secondly, by identifying and uniting the similar regulatory functions of a number of Commonwealth, State and Territory authorities, we have reduced duplication and inconsistency.
I’m sure many of you here this evening remember the mountain of paperwork you once had to deal with. The Howard Government is reducing that mountain to what I hope will be a molehill!. The Simpler Regulatory System Act will reduce the regulatory burden even further.
The third reform is perhaps the most important one. And that is the fact that the regulatory structure we have today can accommodate structural changes and new innovation in markets.
The regulatory framework has proven to be adaptable to the continual evolution of the Australian financial sector.
Today this evolution is marked by:
- a move into wealth management as envisaged by Wallis, backed by rapid growth in superannuation assets;
- significant increases in share ownership following demutualisations and privatisations;
- growth in community banking;
- the growth of financial advice;
- a significant uptake in technology by consumers of online banking and online broking;
- new emerging markets and alternative trading platforms;
- a greater proportion of household wealth being held in the form of market-linked investments, rather than deposits;
- rapid growth in securitisation and the origination of loans by non-bank financial institutions; and
- margins on conventional lending narrowing.
In its 2003 review of the outcomes of Wallis, the Financial Sector Advisory Council noted that Australia now has a highly competitive and contestable financial system. The Council also noted that we compare very favourably with the rest of the world.
As the IMF recently stated:
“In a number of areas, Australia is at the forefront of best practice”.
Australia’s Government efficiency, including regulatory intensity, is ranked seventh out of the 55 nations included in the World Competitiveness Yearbook 2007 released in May.
Our financial services regulatory regime is working well. And this is rightfully recognised around the world.
We are achieving our objective of efficiency and competitive neutrality, while providing a sound framework for consumer protection.
PROTECTING AUSSIE WEALTH
And so, ten years on from Wallis, we have a regulatory regime that is fostering Aussie wealth.
Earlier this year, it was reported that the Australian managed funds market has surpassed in Australia $1 trillion. Now, I know that everyone here is accustomed to thinking in big figures, but this is a truly impressive amount when we are talking about personal savings.
The Government recognises that superannuation is the most valuable asset for most Australians after the family home. That is why we think it imperative that members of the community have full confidence that their savings are able to be managed and invested properly.
In 2004, the Government further strengthened the prudential framework for superannuation. This has helped to ensure that trustees of APRA-regulated superannuation funds meet minimum standards of fitness and propriety.
GOING FORWARD — NEW FINANCIAL SERVICES REFORM
All those benefits have flowed from the reforms we have introduced over the last ten years. The advances we have made in the regulatory environment are significant, and our achievements have been attested to widely.
But this Government isn’t about to be sitting back and taking it easy. We’re not about basking in the success of past achievements, or thinking that the economy can simply continue to take care of itself, irrespective of who runs it.
You all work in a dynamic industry. So we have to be a dynamic government.
Our consultations with industry and other stakeholders continue to suggest possibilities for improvement.
Our most recent step in this ongoing initiative is the passage of the Simpler Regulatory System Act which I introduced into Parliament on the 24th of May this year.
Ladies and gentlemen, the Act is the most significant package of reforms in corporate regulation since CLERP 9.
The Act contains a number of measures designed to refine the financial services system and further reduce the regulatory burden that is placed on the financial services sector.
In addition, the measures address a range of regulatory areas such as financial reporting… takeovers… auditor independence… corporate governance… and fundraising.
The costs of regulation will always be difficult to quantify. However, the Productivity Commission has estimated that the compliance costs may be about four per cent of GDP. That’s $35 billion a year in 2005-06 dollars.
That is why the Act takes into account many of the Banks’ Taskforce recommendations on Reducing Regulatory Burdens.
Initiatives following from the Banks’ report that the Government has adopted in the Act include: measures addressing the use of the internet for financial reporting… financial reporting thresholds for proprietary companies… reporting requirements for executive remuneration… and fundraising requirements for employee share schemes.
I believe the Act is a major deposit in the ‘bank’ (no pun intended) of ‘reduced red tape’. By reducing the regulatory burden on business, the Government aims to reduce these costs. I am positive that the benefits of the Act will be felt by all sectors of the economy — businesses, and very importantly, consumers.
OTHER CURRENT INITIATIVES
The Australian economy is very strong — both by our own historical standards and by global standards.
To further protect Aussie wealth, I recently released a draft package of proposed amendments to the Corporations Regulations Act 2001. This package will further improve the operation of financial services regulation in Australia.
Key amendments include… incorporation by reference in disclosure documents… treatment of superannuation trustees for wholesale test purposes… and dollar disclosure for general insurance.
In keeping with my commitment to consult fully with stakeholders before implementing change, I am currently considering submissions on the draft regulations and expect that the regulations will be implemented very soon.
Other reviews that have an impact in the financial services area have recently closed for comment, and I will be closely examining the submissions during the coming months. These include: insider trading; corporate sanctions; and the business judgement rule.
There are also some newer reviews that are still open for comment – reporting obligations of unlisted public companies, and product rationalisation, for instance.
The Government is also very aware of corporate social responsibility and sustainability reporting issues. I note the release this evening of the ‘Have your say’ poll reveals that 86 per cent of FinSIA members who were surveyed believed that guidance on sustainability reporting should be provided by a body like ASIC or the ASX but that 70 per cent supported voluntary reporting.
That FinSIA takes opportunities like this to then help determine whether to address the Australian Government on matters that are important to its members, is very commendable.
As I said at the outset, I thoroughly appreciate the opportunity to have reflected on the progress we have made since Wallis. It is a very timely topic.
But, if I might adapt a famous assertion made by Winston Churchill:
“Now… is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Regulatory review is, necessarily, a continuing process. Together with industry, we have achieved much over the past decade.
Like Wallis, we need to ensure that we keep our regulatory system up-to-date and streamlined, and that our lines of communication are open and effective to insure ourselves against unnecessary red tape.
This Government is determined to continue in this endeavour.
Protecting Aussie wealth — that is, the wealth of all Australians — is a challenging, and tremendously important, project. But the evidence shows it is an achievable one, as long as we are vigilant. And as long as we continue to work together.
And that is something I very much look forward to doing. I have always placed great importance and particular value on the vital contribution FinSIA makes to this process.
And I look forward to more of it, as we continue to work together to achieve that most important goal.