Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
The Future of Regulation in Your Industry
Speech to the Mortgage & Finance Association
of Australia National Convention
16 May 2008
I am delighted to have been invited to speak today at the Mortgage and Finance Association of Australia National Convention.
I recognise the vital role that gatherings such as these play as a forum for discussing the important issues.
Firstly, I would like to acknowledge the important contribution that the MFAA makes in elevating the role and standards of your industry.
I note that the mission of the MFAA is "to ensure the orderly and ethical working of the mortgage and finance industry in Australia". An aspiration this Government wholeheartedly supports!
Today, I would like to talk briefly about the Budget before moving on the global and domestic credit environment and the Government's plans for the reform of credit regulation — and what that might mean for the mortgage and finance industry.
The first Rudd Labor Government Budget combines nation-building initiatives with programs to redress the balance in favour of working families.
This Budget meets our commitments to Australia and begins a new era of investment in Australia's long-term future.
Australia has not been immune to the fallout from the United States sub-prime crisis.
This is why this Budget demonstrates the responsible economic management we need right now to fight inflation… deal with future uncertainty…and give us a buffer in difficult economic times.
Working families support package
Inflation means higher prices for working families. The family income is being eaten away in mortgage repayments, rent, groceries and petrol — leaving many families struggling to make ends meet.
The first priority of the Budget is to deliver much needed assistance to working families, through a $55 billion Working Families Support Package.
As part of this measure, we are improving housing affordability through a $2.2 billion housing affordability package.
The centrepiece of this package is the new First Home Saver Accounts, at a cost of $1.2 billion over four years. The new First Home Saver Accounts will provide a simple, tax-effective way for Australians to save for their first home through a combination of low taxes and Government contributions.
Meeting our commitments
The second priority of the Budget is to deliver on our promise to build a stronger foundation for Australia.
As part of our commitment to long-term reform, we are establishing three funds to finance investment in national priority areas — the Building Australia Fund… the Education Investment Fund… and the Health and Hospitals Fund.
These funds will modernise and reinvigorate our economy. They will also release around $40 billion for investment in transport and communications infrastructure… education facilities… and health, hospitals and medical research facilities and projects.
I'd like to wrap up my quick Budget overview by touching on a few measures of particular interest to the finance sector.
The Government is committed to securing Australia's place as a financial services hub in the Asia Pacific region and to reduce the regulatory burden on Australian small businesses. As one example of this commitment, the Government announced in the Budget that it will provide funding of $16 million over three years for an optional superannuation clearing house facility.
The first Budget of the Rudd Government delivers on our commitments to invest in our future. And it demonstrates the responsible economic management Australia needs to steer our economy through the difficult times ahead — with long term plans instead of bandaid solutions.
Your industry is making a vital contribution to the Australian economy. You are helping working families to realise "the great Australian dream" of owning their own home.
You are helping to fund Australian businesses during a booming economy.
And you are helping homeowners and business owners to refinance their loan arrangements in the current high-inflation environment.
Recent figures from the RBA and ABS are impressive. They show that, as of March this year, the aggregate level of all forms of credit in Australia was over $1800 billion. And that the national value of new owner-occupied housing loan commitments was over $14 billion.
Putting those numbers into perspective, Australia's gross national income as of December 2007 was $250 billion.
I'm sure nobody here today will be surprised to hear that, according to the Productivity Commission's final report on Australia's Consumer Policy Framework, released earlier this month, credit use has risen rapidly over the last 20 years, particularly in the area of consumer mortgages.
As I mentioned earlier, the aggregate level of all types of credit held as at March this year was over $1800 billion. Of this, housing loan credit represented about 50 per cent, or a little over $900 billion.
While these figures highlight a healthy economy, they also represent challenges.
Household debt as a share of disposable income has more than doubled over the past decade to around 160 per cent.
To date, households have generally been able to cope with higher debt servicing costs and maintain healthy balance sheets. Only a small proportion of borrowers are in significant arrears on their loan repayments.
This attests to the standards expected within the Australian market and to the work being done by groups like the MFAA. But we must not forget the lessons of the recent United States experience with widespread mis-selling of high loan-to-value ratios and lax mortgage underwriting standards.
We must always remember that higher debt makes households more vulnerable to the unexpected. This is a particular concern in our more difficult economic environment.
And this is why the Government is improving the current regulatory system for credit and making it consistent across the nation. This issue has been put into the too hard basket for too long. I also welcome MFAA's long-standing support for nationally consistent regulation of your industry.
Compared with many other countries, our financial markets and regulatory system have responded well to the current market turbulence.
But we have not been immune. In Australia, the fall-out has included… extremely limited activity in our securitisation markets… higher funding costs for banks and other financial institutions in both domestic and offshore markets… falls in share market prices… and several high profile corporate failures.
Given the prolonged financial boom that preceded the current market turbulence, we can't expect a quick recovery in securitisation markets.
While there is much good news for Australia in relation to the global credit crunch, we are all aware that some families are currently suffering from mortgage stress. According to the RBA, 15,000 households are over 90 days in arrears on their mortgage payments. And arrears rates can only be expected to increase, reflecting the delayed effects of recent interest rate rises.
The last 15 years have seen competition in the credit and mortgage lending market increase as new entrants have taken advantage of increased consumer demand for cheap credit.
Dr John Laker, Chairman of APRA, commented last year that lenders are engaging in riskier lending practices including relaxing the debt serviceability criteria… increasing the availability of high risk products, including products with a high loan-to-valuation ratio… self verifying income sources… and moving towards alternative valuation methods.
With increased competition, many lenders have turned to mortgage brokers to originate loans. Currently, 37 per cent of loans are originated by mortgage brokers. Brokers play a very important role in finding the most appropriate loan for consumers.
The overwhelming majority of brokers and lenders are acting in the best interests of the borrowers they are sourcing loans for.
But, as in any industry, there will always be shonky operators.
We know that some brokers and lenders at the outer fringes of the market engage in inappropriate and predatory practices that may add to, rather than reduce, financial stress.
Ladies and gentlemen, I can assure you that — in addition to our work to progress national financial services regulation in relation to consumer credit — the Government is also working to minimise shady practices.
As you know, current regulation of the credit industry is a three-way split between the six States and two Territories, industry self-regulation and the Australian Government.
The regulation of credit is mainly undertaken by the States and Territories through the Uniform Consumer Credit Code. There is now widespread acknowledgement that the regulation of credit needs to be reformed. And that it needs to occur at a national level.
Changes to the Credit Code — while widely supported — have been delayed by the complex inter-jurisdictional hoops which must be jumped to make amendments.
Some jurisdictions have introduced broker-specific legislation with Western Australia introducing a licensing regime. But these jurisdictional differences have increased compliance costs and introduced gaps in regulation.
We now have eight sets of regulation across the country. This is highly inefficient, to say the least.
This system also imposes an unnecessary regulatory burden on the providers of financial services, including mortgage brokers.
One, single, simpler national regime for regulating mortgages and brokers is the only logical solution.
At the March COAG meeting, the Australian and State Governments gave in-principle agreement to transferring the power to regulate these areas to the Federal Government. The work done to date will assist us to develop national Commonwealth credit regulation.
The Government is conscious of MFAA's responses to the draft legislation and will consult widely when deciding what form the national regulation will take. This will ensure that the regulation is effective and efficient. That it will protect consumers, while allowing the mortgage market, including broking, to operate with minimal compliance costs.
My first step toward developing national credit regulation is the imminent release of the Government's latest Green Paper. This paper will be released for consultation and I am asking for feedback on several high-level, but fundamental, questions about the proposed regime.
There are also several other significant issues that need to be addressed in the financial services sector.
One of these is the quality, complexity, length and range of disclosure documentation. I have been a long-term critic of this approach. Latin-like documents do not provide necessary information to inform and protect consumers.
As the Minister for Superannuation and Corporate Law, I am committed to seeing that industry providers produce simple, short standard and — perhaps most importantly — readable financial services disclosure documents. Documents that pass my personal gauge of effectiveness — the "Burnie Pub Test".
I consider a financial product disclosure document to be effective if it can be easily understood by the average person, in the average pub, in an average city, like Burnie in my home state of Tasmania.
Back in February, I announced the tripartite Financial Services Working Group, which was established by myself and the Minister for Finance and Deregulation, Lindsay Tanner.
The Working Group is comprised of officials from Treasury, the Department of Finance and Deregulation and the Australian Securities and Investments Commission.
As a first step, the Working Group is exploring the development of a concise Product Disclosure Statement for First Home Saver Accounts.
It is also looking at identifying hurdles to the provision of "within product" or "intra-product" advice in regard to superannuation products.
It will then formulate proposals to address the real regulatory hurdles.
Our initial soundings indicate some hurdles are not regulatory. This demonstrates there is also a job for industry in ensuring they are best placed to provide this advice.
I am confident that the Working Group will provide innovative solutions to some chronic problems. A large part of its success will be due to its close consultation with interested stakeholders, both large and small.
I expect that the Working Group will take these into account in its forthcoming work. The next public information session is expected to take place on 30 May and I would encourage you to participate.
When regulatory oversight of mortgage broking is transferred to a single national jurisdiction I will expect any relevant disclosure necessary for your industry to be completed at the same time.
Ladies and gentlemen, I'm sure I don't need to tell an audience such as yourselves that we are all operating in an increasingly complex and dynamic environment.
And with this complexity comes risk. An optimal regulatory system will harness that risk, and allow us to achieve the right balance between protection, wealth and growth.
A national Commonwealth regulatory regime for credit will seek this balance. This is an exciting evolution for your industry. One I look forward to bringing about — with the assistance of the Mortgage and Finance Association of Australia.