Parliamentary Secretary to the Treasurer
26 October 2004 - 3 December 2007
IFSA Annual Conference
Brisbane Convention and Exhibition Centre
2 August 2007
Breakthroughs achieved over the last decade in financial services: Australia’s strong economy, growth of the financial services sector, Simpler Regulatory System Act, access to and provision of, financial advice.
Product rationalisation: Numerous complexities arise, but the right scheme would have benefits for Australian consumers as well as product providers.
ASIC: Importance of good working relationships between stakeholders and regulators in the context of reducing red tape even further.
Funds Management Exports: Government and stakeholders can work together to make the Australian financial services industry a centre for the Asian region.
It gives me great pleasure to be here in Brisbane today to address the Investment and Financial Services Association Annual Conference 2007.
The theme of this conference – “Breakthrough” – is, I think, one that prompts us all to review what has been achieved in the investment and financial services sector in Australia, and also look toward what might be achieved into the future.
But to “breakthrough” is not just about the past and the future. It is also about the present - where we are today. And in that vein, I think it is worth noting that the IFSA Conference happens to be taking place at the same time, and in the same state, as Australia hosts its first meeting of APEC Finance Ministers.
It is a mark of how significant Australia is seen in the world today, that we now come to join the impressive list of countries who have formally hosted APEC since 1989.
APEC is a vitally important meeting forum at which Australia can present its views, and share its experiences, on the world stage.
As host of APEC 2007, Australia has an unprecedented opportunity to lead and influence the policy debate on some of the most challenging and fundamental issues of our time amongst some of the most powerful and influential leaders of our time. To reach such a point in the modern history of our nation is a real breakthrough.
And whilst APEC Finance Ministers will talk this week with each other about the issues that matter most in their respective areas of responsibility, IFSA has brought us all together to work through the issues that matter most in the investment and financial services sector.
Australia’s achievements 1996-2007
I think this sector has a lot to be proud of. Much has been achieved together through beneficial collaboration since this Government first came to office.
When I look back to 1996, for example, I note that there was no IFSA - IFSA was established not quite 10 years ago, in January 1998.
There was also no super choice.
There was no Wallis, which meant there was a very disparate and segregated financial services sector.
There was no Financial Literacy Foundation to help Australians understand their money and there was an outdated and largely inappropriate tax system which the previous government could see no reason to change.
But what there was in 1996 was, for example, a $96 billion net debt left to us by the previous government, and over $8 billion being paid by hardworking Australians per annum in net interest payments because of it.
There was unemployment of around 8.2 per cent and mortgage rates of around 10.5 per cent, and inflation averaged at 5.2 per cent, all left to us by the previous government.
I am deeply concerned that this past – which at its peak resulted in almost 1 million Australians unemployed and interest rates peaking at 17 per cent – be remembered.
I want it to be remembered because a return to anything like it would be so detrimental to the future of the investment and financial services sector in Australia and indeed, to the future of all Australians who rely on your critical sector to help them achieve their goals and ambitions.
According to the Australian Bureau of Statistics (Managed Funds, Australia 5655.0), in December 1995, the Australian financial services sector was worth around $315 billion in total.
You all know that today, that figure has exceeded one trillion dollars. That is more than triple what it was when this Government first came to office.
And you all know the esteem in which Australia is held by its international peers because of this result.
So I ask you to contemplate something.
I ask you to contemplate whether this very impressive result would have been achieved, or even possible to achieve, in an economic environment characterised by: high inflation, high unemployment, downgraded credit ratings for Australia (which happened twice in thirteen years under Labor), budget deficits (9 of them in 13 years), significant net debt, zero super choice, higher marginal tax rates and bases, and of course, the ‘recession we had to have’.
I think the key questions to ask are would this sector have achieved its trillion dollar ‘breakthrough’?
Would real net household wealth have more than doubled since 1996? and would IFSA even be about to celebrate its tenth anniversary?
What has been achieved in over 10 years in this industry is a set of significant breakthroughs, in the interests of all Australians, and something I believe you should all be very proud of.
I would urge you all to protect those achievements fiercely and continue to work to ensure we never experience a “recession we have to have”.
Australia’s investment and financial services sector today
The Australian Government has committed itself, together with your sector, to making the investment and financial services system better for consumers and better for industry.
You all know that Super Choice is just one example of this. Only a few years ago, Australians did not have the right to judge for themselves who was best able to look after their retirement savings.
Another more recent example was the introduction, from the first of July this year, of the Government’s Better Super package.
Better Super delivers simplicity and certainty in place of complexity and confusion.
Clearly, the Australian Government’s reforms are ‘breaking through’ and meeting the needs of Australians who want to save better for their future.
In the June quarter of 2007, for example, Australians had poured an additional ten billion dollars into their superannuation savings.
I’m proud to be part of a Government which has worked in conjunction with industry to respond to the needs of hardworking Australians: both their needs today and the needs they will have into the future.
Very importantly, some of these needs have been about reducing the red tape burden.
As you know, the Government has already delivered some significant red tape reductions in your sector to help enhance, on the one hand, the ease and accessibility of financial advice for all Australians, and on the other, the ease with which business can do business.
One very important step following from the Banks’ Report on Reducing Regulatory Burdens on Business was the successful passage in the recent budget sittings of the Simpler Regulatory System Act.
This Act will reduce the regulatory burden on investors, on shareholders and on providers of financial services.
But in no way does the Act reduce the rights of investors or shareholders.
Rather, the Act is about taking Australia forward. It is a piece of legislation in which I have tried to ‘break through’ the mould of unnecessary, overly complex, overly burdensome laws and compliance costs, to make the system simpler for all who participate in it.
I would like to think the Act is a “breakthrough” on many levels.
First, it is a “breakthrough” because of the measures it is delivering to reduce red tape, such as the electronic distribution of annual reports which were able to be brought into effect for the 06-07 financial reporting year.
Second, it is a “breakthrough” statement about the sincerity with which this Government is prepared to hold itself to account for red tape and do what it can to minimise it in the interests of all Australians.
Third, it is a “breakthrough” example of the manner in which many different but equally significant stakeholders – Government, industry, regulators, central policy agencies, practitioners, advisers, planners, investors, consumers – can all come together and work through issues, in the united goal of delivering better results for every Australian who depends on us to get it right.
I want to take this opportunity to commend IFSA on the way in which it has taken up the opportunity to be at the forefront of policy development and dialogue in this area. The dedicated professionalism IFSA has shown throughout the Simpler Regulatory System Act process, clearly cements IFSA’s role as a major contributor to getting the balance right.
I believe strongly that the days of devising policy without closely involving those who would be affected by it, and know it best, are at an end. We have come together and found a better way.
I hope that we all continue to invest in the principles that I believe have lead to the success of the Simpler Regulatory System Act – primarily, that we all continue to engage one another in meaningful dialogue about the issues that concern us, so we can “break through” them as best as possible, in the interests of a more productive, effective and responsive financial services sector.
IFSA is uniquely positioned to champion these principles in its discussions with government and regulators, and just as importantly, with its own members.
As the key industry association, IFSA plays a critical part in guiding its 140-plus members on how to best comply with their legal and other obligations, and on how to boost investor confidence in the services they offer.
Since becoming Parliamentary Secretary to the Treasurer in late 2004, I have tried in every way I can to practise what I preach – primarily, that no new laws should be introduced unless there is a clearly made-out case for them.
I know that this is a mantra that has been welcomed by your industry, and that you understand that you play a critical part in determining whether there is a need for new laws or not. A prime example is fees versus commissions.
I think the law is clear enough whether an adviser is paid on the basis of commission or fee for service. That is, financial advice should, at all times, be objective, and be in the interests of the client.
As I see it, there is a place for commissions, so long as the adviser being paid the commission makes full and proper disclosure to the investor that this is how she or he is to be paid.
When you get down to it, the most important factor is that there is, and is seen to be, a correlation between the value of advice and the amount paid for it, whether payment is upfront or through commissions over time.
But there are some others in politics, and those in the broader community, who from time to time intimate that commissions should be banned, even though there is evidence that fees have come down despite increased demand for financial services advice, and even though most advisers being paid a commission are doing their best to comply with the law.
It is therefore a challenge that industry needs to work through if it does not wish to see such calls for regulation acted upon.
I consider that IFSA is playing a key role in this space, and I was pleased to launched IFSA’s revised Industry Code of Ethics and Code of Conduct which are designed to help tackle issues like this.
I would also note the work that the Australian Securities and Investments Commission is undertaking alongside stakeholders, so as to provide guidance to financial advisers about appropriately managing conflicts of interest.
The place where we are today is one that has happened as a result of hard work and dedicated professionalism on all sides. It is a great place from which to wisely build our growing financial services sector even further.
Australia’s financial services sector into the future
Looking into the future, I would like to canvass some issues that fall within the ‘near to medium term’ and then discuss more broadly what I see as a new role that Australia’s financial services sector can play in the years ahead.
Firstly, the Government has recognised the importance of examining tangible solutions to solve the many issues that arise in the context of legacy products.
In April this year I undertook to deliver a detailed product rationalisation discussion paper to help focus policy discussion on this topic.
I am happy to report that the paper was released in June, and would take the opportunity to reiterate that submissions are due to Treasury in September.
A well-designed product rationalisation mechanism can have many benefits for all Australians - I am sure of this.
For example, by transferring legacy products to more modern financial products, investors may be less exposed to errors and fraud risk. Indeed, they may be more likely to achieve their financial goals, which guided them to select a particular product in the past, but is probably no longer delivering for them in the way they may have expected.
The enhanced certainty that would be created in the marketplace by eliminating legacy products would also be likely to deliver a set of more user-friendly and appropriate financial products for all Australians.
However, I also consider that product rationalisation is a substantially difficult policy issue to “break through”.
I know the industry understands that any mechanism for achieving product rationalisation must take into account a number of significant legal and investor protection concerns and that utmost in my mind is the need to protect investor interests at all times.
I realise IFSA understands as well as I do, the myriad policy issues that a product rationalisation mechanism puts into play. Certainly, I am convinced that together, we can work to resolve them constructively and effectively and I thank IFSA for the valuable contribution it has already made to highlight the importance of this issue.
Incorporation by reference
I am very confident that another issue highlighted by stakeholders including IFSA, will be resolved in the near future, and that is the issue of ‘incorporation by reference.’
I have already spoken about the Simpler Regulatory System Act and how I envisage that its reforms can help give industry the space it needs to continue to expand and grow.
One of the remaining refinements that I am hoping to deliver on within coming weeks, is incorporation by reference.
I welcome the support IFSA has given in progressing these regulations, which will allow some information that must currently be included in key disclosure documents, such as a Product Disclosure Statement, to be referenced in the primary document.
The detail of the material that is referenced will be located elsewhere — for example, in another document, or on a company website.
Incorporation by reference will allow industry to focus the attention of investors on the important information that they need, while still fulfilling reporting requirements by ensuring that all the information is available. It is another example of how the Government is reducing red tape in the interests of consumers, investors and business alike.
Incorporation by reference will see Australia’s financial services sector “break through” to the forefront of IT and other technological developments.
It will help keep Australia’s regulatory system abreast of communications developments, and continue to bring our regulatory system into the modern era.
IFSA Relationship with ASIC
A key aspect of “breaking through” any regulatory issues is having a good working relationship with the relevant regulators.
I don’t wish to comment in depth on this today, other than to say that I recognise that IFSA is serious in its commitment to maintaining a good and healthy working relationship with the regulators, and especially its primary regulatory body, ASIC.
I applaud both IFSA and ASIC for maintaining regular contact with each other, as both stakeholders work to find the best way forward on issues of concern. Positive reinforcement of your relationship with each other is one of the best ways to avoid the pitfalls of regulatory malaise.
A good relationship, through day-to-day contact and regular meetings — such as those of the Financial Services Consultative Committee — is a credit to the operation of both organisations.
Australia as a financial services centre
I said earlier that here in Australia, we have a financial services sector that we can be – indeed should be - very proud of. The “breakthroughs” we have seen in the last decade are a true credit to your industry.
But yours is a continuously evolving, never stagnant industry. And this means that there are some key challenges still to come.
It is vitally important for the future of the industry that we don’t ignore the prospects for further expansion.
As the sector continues to grow, so too can the standing of the Australian financial services industry on the world stage.
The international financial services market is highly competitive. We should have no illusions about that. But I in government and you in industry both know that there is mutual interest in recognising the opportunities for Australian funds management exports.
I therefore share your vision for the ‘export potential of Australian funds management services’. I also believe that your industry can grow even more into an international centre, servicing, in particular, the Asian region.
I believe that Australia clearly has the market infrastructure — and the necessary industry expertise — to become a natural first choice in the region.
The increased development of markets in Asia means that future growth of the Australian industry will depend on us recognising and indeed, capitalising on export opportunities.
That is why the Government has actively sought to increase Australia’s role as an international centre for financial services.
Our work has included partnering with industry on promotional efforts under the auspices of Austrade…and engaging internationally on trade in financial services.
As well, we have facilitated a number of reforms which simplify and improve taxation and regulatory arrangements.
We have made progress - but it is evident — from the industry’s relatively small contribution to Australia’s export performance — that we can and should identify and explore more ways to tap into the enormous potential that exists.
Perhaps industry itself needs to be as vigilant as possible in looking at ways to capitalise best on the opportunities that are available, and alerting government and regulators alike to impediments to the growth of exports.
In this context, I welcome the Access Economics report commissioned by IFSA and released late last week that looks further into these issues. I hope very much to work with IFSA on them, and see what can be achieved – dare I say, “broken through”.
Convergence of External Dispute Resolution Schemes
Last year when speaking at the International Financial Services Ombudsman's conference I publicly encouraged the seven EDR schemes across the financial services, banking, credit and mortgage broking sectors to consider converging.
It is widely accepted that there are too many dispute resolution schemes and I believe that their merger should lead to enhanced consumer knowledge and understanding, and improved levels of public confidence.
Convergence will also bring benefits through the simplification of existing complex structures and give rise to administrative efficiencies.
Recently a sector based report has been completed following discussions with all of the EDR organisations and their relevant industry associations, which of course includes, IFSA.
The report recommends that the Banking and Financial Services Ombudsman, the Financial Industry Complaints Service and the Insurance Ombudsman Service consider converging into one single EDR scheme. The Boards of these organisations will shortly be considering the proposal to merge and to be a part of an implementation process.
I wish to congratulate all those involved for their willingness to address the key issues facing consumers and the various industry sectors.
Given the importance of these reforms I will continue to do all I can to support the convergence process, with of course, the agreement of the various EDR schemes.
Ladies and gentlemen, it is clear that, while there will always be a cyclical aspect to any industry, the Australian financial services sector is most definitely going through an expansion phase.
I think the sector is in very good shape — not just in the present, but also for the future.
Our joint current challenge I think is to manage these good times, so as to ensure that Australians benefit from this success and that you continue to attract and retain good quality advisers, and meet the growing demand for your services in an appropriately beneficial way.
To “break through” is an exhortation upon all of us here today, people who care about the future of the investment and financial services sector, to contribute as much as we can to the sector and be proud of what it has done, and can do, for Australia and Australian families.
Thank you very much for inviting me to talk with you today. I regard it as a privilege and a pleasure to be here and I hope that you all have an enjoyable and fruitful time at the conference. Thank you.