Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Positioning Australia in a Global Context
Speech to Securities and Derivatives Industry Association Conference
22 May 2008
I'd like to thank the Securities and Derivatives Industry Association for this opportunity to speak at your 11th annual conference.
Today, I've been invited to talk to you about how the Rudd Government will position Australia as a global force in the finance and superannuation sectors.
Before I turn to last week's Federal Budget, I would like to say a few words about the important role of the SDIA in Australia's financial markets.
As the peak industry body representing institutional and retail broking firms and investment banks in Australia, you sit at the centre of a sector which last financial year saw around 50 million trades in listed equities worth $1.3 trillion and total on and off market equity derivative trades worth a staggering $1.7 trillion
You have a systemically important role to play in best practice, accreditation and industry standards.
In my recent meetings in the United Kingdom, the heads of both the UK Financial Services Authority and the London Stock Exchange complimented the measured manner in which the Australian Government, Australian market supervisors and Australian market participants have dealt with recent international turmoil. The SDIA is an important part of that measured response and I thank the sector for its advice and on-going good counsel.
Now, to last week's Budget – the first for the Rudd Labor Government.
This 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 our 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.
And this is why this Budget delivers the lowest real increase in Government spending in nearly a decade.
Every single dollar of new spending in this Budget is more than offset by revenue measures and savings in expenditure.
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 well, we will fully implement our promise to reduce personal income tax by $47 billion over four years, directed to low and middle income earners.
And we will ease the burden of rising childcare costs.
We will increase the Child Care Tax rebate from 30 per cent to 50 per cent and pay it quarterly, at a cost of $1.6 billion over four years.
We will also make it easier for working families to buy their own home, 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.
We are responding to the concerns of working families about the cost of essential goods like groceries and petrol, by giving the ACCC tough new powers and introducing the first ever National Fuelwatch scheme.
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.
Climate change is another key challenge for Australia.
Ratifying the Kyoto protocol was the first official act of this Government. We will continue to show global leadership on the environmental front.
The Budget includes measures totalling $2.3 billion over five years to help reduce Australia's greenhouse emissions, and help us adapt to climate change.
Ladies and gentlemen, the first Budget of the Rudd Government delivers on our commitments to invest in Australia's future. And it demonstrates the responsible economic management our nation needs to steer our economy through the difficult times ahead — with long-term plans instead of bandaid solutions.
The opportunities of financial integration
Turning now to the main theme of my address…
Since the reforms of the Hawke and Keating Governments, Australia has opened itself up to the world, especially in the area of financial services.
And since the 1980s, international financial markets have become increasingly integrated. This has been driven by two factors — the technology which allows international financial transactions to be made in real time; and by the investors who want to access foreign markets.
These dynamics have seen the flows of international capital almost treble in the past decade. In 2006, these funds amounted to more than six and a half trillion US dollars, or 18 per cent of world gross domestic product.
These financial flows offer Australia the opportunity to source competitively-priced capital for investors, and to enable our ageing population to invest their savings in countries with higher growth and return potential.
This is why the Government is committed to positioning Australia as a financial and superannuation centre of global excellence.
The Government's plan for the sector
Recognising the enormous potential of Australia's finance sector, the Government is committed to growing the national market by attracting a greater share of global equity investment.
Reducing the withholding tax for foreign investors
One of the ways we are achieving this goal is by modernising the taxation system. As my colleague, the Treasurer, said on Budget night:
"We need a tax system that is fairer, that is simpler, that better rewards people for their hard work, that responds to our environmental and demographic challenges, that makes us internationally competitive, and that creates the incentives to invest in our productive capacity. One that supports national prosperity beyond the mining boom."
To this end, the Budget began the process of levelling the playing field for the funds management industry. We will reduce the current 30 per cent withholding tax down to a final rate of 7.5 per cent for most non-resident investors.
The lowered withholding tax will be limited to countries with which Australia has an effective exchange of information. This will enhance the integrity of the new arrangements and reflect Australia's commitment to combating international tax avoidance and evasion.
Our funds management industry is internationally recognised as one of the major markets for managed funds, with current assets under management of more than $1 trillion. And this is expected to grow to $2.5 trillion by 2015.
Reducing the level of withholding tax will make Australia's withholding tax one of the most competitive in the world. And will provide a significant boost to our ability to compete globally.
Redesigning the taxation system
We are also redesigning the tax system.
Complex and uncertain tax rules reduce the competitiveness of the financial services sector. If Australia is to compete effectively in today's global economy, we need a taxation system that is simple… transparent… and internationally competitive.
Recognising this, earlier this year my colleague, the Assistant Treasurer, Chris Bowen asked the Board of Taxation to review income tax arrangements applying to managed investment trusts.
The review will provide options for introducing a specific tax regime for managed investment trusts. Together with the Board's review of the foreign source income attribution rules, this will identify ways to reduce complexity, increase certainty and minimise compliance costs.
The Board of Taxation will also review Division 6C of the Income Tax Assessment Act 1936 dealing with trading trusts. Currently, the rules limit the activities of managed funds to investing in land for the primary purpose of deriving rent… or investing or trading in certain financial instruments. Otherwise, managed funds are taxed in a similar way to companies.
Pending completion of the Board's review in mid-2009, the Government also announced consultation on interim changes to streamline and modernise these rules. These consultations are currently underway with stakeholders. While the changes will mainly affect listed property trusts, the range of eligible financial instruments that a managed fund can invest or trade in will also be expanded.
Australia's financial regulatory framework
The Government is also considering how we may meet emerging domestic policy challenges.
For example, multiple market operators pose both regulatory and practical challenges.
There is a range of regulatory amendments which we may need to implement to ensure market integrity and quality.
I have received advice from ASIC on these issues and I and the Government are considering it carefully. In making my decision, I will place a high priority on maintaining quality domestic markets, transparency and liquidity and continuing the attractiveness of Australia as an investment destination.
Market reform and transparency
While our regulatory system is sound, the recent turbulence in financial markets has highlighted the need for some fine-tuning to ensure the integrity of our markets.
The Government is committed to ensuring that financial markets are fair… orderly… and transparent. We can achieve transparency by ensuring that investors have access to the information they need to make informed investment decisions.
I'll give you just one example.
The Prime Minister recently announced that Treasury would review appropriate disclosure requirements for equity derivatives, such as Contracts for Difference.
As you would be aware, these instruments give their owners an economic interest in the underlying securities — but not traditional legal rights such as the right to vote or dispose of the securities.
It has been suggested that these instruments enable market participants to exercise a degree of de facto control over the underlying securities, while avoiding the disclosure obligations that apply to legal owners of securities. In other words, owners of Contracts for Difference can avoid disclosure obligations under the substantial shareholding and takeover provisions.
If we ignore these tricky issues, we will be hamstrung in our efforts to achieve a transparent marketplace.
Short selling and securities lending
I am sure that you would also be aware of the recent concern over short selling and securities lending.
At the outset, I would like to stress that the Rudd Government sees short selling as an important financial tool in promoting market efficiency and encouraging true stock prices.
The specific issue that has been raised is whether the short selling rules need to be tightened to resolve any ambiguity about the obligation to disclose short sales to the market, including those effectively facilitated by borrowed stock.
In the interests of transparency, the Government will pursue legislative change to the Corporations Act to address any ambiguity around covered short selling and the requirement for disclosure.
Treasury and ASIC are currently investigating the best legislative option to address these issues.
We want to protect investors. We want to promote confidence in Australia's financial market. As Prime Minister Rudd said this month, when he addressed the Confederation of British Industry and Australian Business in London:
"We want to ensure that Australia's regulatory regime does not impose an undue burden on market participants or inappropriate barriers to foreign equity investment in the Australian market."
I encourage the SDIA and its members to continue to play a constructive role in these developments.
Australia and the international policy context
In creating a sound business environment for Australian investors, we need to look beyond our own shores.
This is why the Government is examining how we can use bilateral international measures to position Australia as a global financial centre, and to secure the stability of our financial system.
As you would be already aware, the Government is currently focused on finalising a mutual recognition arrangement with the United States on securities markets. You may recall that the start of these historic discussions was announced during the Prime Minister's visit to America in March.
As well as reducing red tape, mutual recognition with the US offers many benefits. In the longer term, it will provide incentives to further stimulate capital flows between Australia and the US, and increase secondary trading leading to increased liquidity.
And of course, we are willing to enter into mutual recognition arrangements with other countries which have well-regulated capital markets.
Both the Treasurer and I have also held important financial markets oriented meetings in both Washington and London over the last several weeks. Further ensuring Australia remains keyed into the major directions in the international market.
Credit rating agencies
I'd now like to turn to another aspect of the recent international events in global financial markets, and that is the role played by credit rating agencies.
There have been some very serious concerns voiced to me about the role credit rating agencies may have played in some aspects of recent financial market problems, including the U.S. sub-prime mortgage situation.
I and the Government are sufficiently convinced that we need to ensure the Australian regulatory system as it relates to such rating agencies is up-to-date and robust.
As such, I today announce that I have formally requested Treasury and the Australian Securities and Investment Commission (ASIC) to review the regulation of credit rating agencies and research houses in Australia.
I have written to Treasury and to Tony D'Aloisio, ASIC Chairman, and asked them to immediately commence the work, which Treasury will lead.
I have also asked for input from the Australian Prudential Regulation Authority (APRA) and other relevant agencies, together with stakeholders from the investor, shareholder and superannuation communities.
Enhancing the operation, transparency and effectiveness of financial system gatekeepers like CRAs is of paramount concern to this Government and indeed to the financial system as a whole.
In addition to CRAs, the review will examine financial product research houses, in particular the role they played in the provision of advice to investors in several major recent corporate collapses, such as those in the unlisted/unrated area, including Westpoint.
On research houses, I've requested an analysis of the appropriateness of the current regulatory framework and whether it might also require updating.
To make sure we get the full picture, the review will also look at how ratings advice is used by retail and wholesale investors.
As such, I have asked Treasury and ASIC to consult with key investor groups such as the Securities and Derivatives Industry Association, the Investment and Financial Services Association, the Association of Super Funds of Australia and the Australian Shareholders' Association.
The announcement of this review also follows discussions I recently held on international efforts regarding CRAs with Greg Tanzer, Secretary General of the International Organisation of Securities Commissions.
Treasury and ASIC will commence work immediately and report to the Government within six months.
Superannuation – the Government's vision for the future
The measures I have just outlined are designed to position Australia as a global financial system of excellence.
And in doing so, these reforms will enhance the ability of the superannuation industry to generate the kind of returns that hard-working Australians deserve when they retire.
Labor is the party of superannuation, with a strong history of championing the cause for all working Australians. In fact, it was a Labor government that introduced the first fundamental superannuation reforms, with the mandating of superannuation in 1993.
Today, the Rudd Government is committed to improving the administration of the superannuation system to maximise the retirement incomes of Australians.
To do this, we are keen to improve the quality of information available about the superannuation system, and make it world's best practice.
The latest available data from the Australian Prudential Regulation Authority shows that total assets over the 12 months to 31 December 2007 rose to a total of $1.18 trillion, despite a fall of $4.3 billion during the December quarter.
However, some fund members will be concerned that the current market volatility will translate into lower superannuation returns. Equally, funds may fear that these short-term fluctuations will make their members more sensitive to their fund's performance, and therefore more willing to switch funds.
The ability of employees to utilise portability and select a super fund for contributions gives them the ability to switch their savings to another fund. It's also true that a significant amount of switching could put the liquidity of an unprepared fund at risk.
On a more positive note, trustees are now better placed to manage the risks arising from market volatility than they may have been in the past. This is because they are now required to have risk management strategies and plans in place.
Risks to the investment strategy would include those that may arise from sudden market moves, including the risk of members switching to another fund.
Superannuation is a long-term investment. Over the 35 years to 30 June 2007, Australian superannuation has delivered excellent real returns of about five per cent, over and above inflation.
And because superannuation is a long-term investment, people continue to benefit for many years after they retire. So when they receive their fund statements this year, they need to look — not just at the yearly rate of return — but to the more important five to seven year rate of return that should also be included in the statement.
I have asked APRA to closely monitor superannuation fund liquidity. I have also asked ASIC to ensure that funds adequately inform their members about their returns.
It's important that superannuation investors are well informed. And it's equally important that investors get the best possible return from their contributions.
Superannuation Clearing House
The Government has also made a firm commitment to reduce the regulatory burden on Australian small businesses.
As just one example of this commitment, we announced in the Budget that we will provide funding of $16 million over three years for an optional superannuation clearing house facility.
This facility, which will be contracted to the private sector, will cut red tape and reduce compliance costs for businesses across Australia.
This new initiative will be offered free of charge to small businesses with fewer than 20 employees. It will help business owners to manage their obligations under Superannuation Choice, including the time-consuming task of checking details entered on the Choice form and distribution of contributions to the nominated funds.
The superannuation clearing house will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the relevant superannuation funds as selected by their employees.
Businesses which use the clearinghouse facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearinghouse. The facility will be available from 1 July 2009.
To ensure that Labor's election promise to reduce superannuation red tape for employers is instituted efficiently and effectively, the Government will consult with industry on the implementation of this measure.
Future direction of regulation and disclosure
The Government is committed to ensuring Australia's financial system operates efficiently and effectively.
As with every large industry, the financial services sector has a number of significant issues that need to be addressed.
In particular, investors must have access to, and understand, the information being provided to assist them in making informed decisions.
Financial Services Working Group
The quality, complexity and length of disclosure documentation is of significant concern to Government. I have been a long-term critic of how disclosure has evolved into documents that may as well be written in Latin and do not provide necessary information to inform and protect consumers.
Now, as the Minister responsible for financial services, I am determined to fix this problem. I am committed to seeing that industry providers produce simple … 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 community, like the city of Burnie in my home state of Tasmania.
The Minister of Finance and Deregulation, Lindsay Tanner, and I have announced the formation of the Financial Services Working Group. The group have already started to examine disclosure documentation in a staged process. The over-arching aim is to facilitate short, simple and readable documents, to better enable consumers to understand and compare products.
As a first step, the Working Group is developing a concise Product Disclosure Statement for First Home Saver Accounts.
It is also examining the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The group is currently identifying hurdles to the provision of such advice.
The Working Group's agenda does not end there. It has a key task ahead of it — shortening product disclosure documentation in the wider financial services arena.
The benefits will not only serve consumers - they will also serve industry. The regulations on industry in relation to shortened product disclosure will allow for cost reduction and greater industry clarity and certainty about the requirements.
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.
A consultation paper on intra-fund advice will be released shortly.
For many years now, a cluster of financial and credit services have remained the subject of often difference state-level regulation, or have operated unregulated, despite significant growth and national importance.
Of these financial services, residential mortgages make up the largest sector, accounting for an estimated 86 per cent of all consumer loans.
Recently there have been some issues concerning certain margin and stock lending practices – these problems, while only affecting a minority of margin lenders, still need to be addressed.
Presently, we have no comprehensive national approach to credit-related financial services. Credit is primarily regulated by the States and Territories through the Uniform Consumer Credit Code. Given the number of different jurisdictions, it's no surprise that current regulation is at times patchy and inconsistent.
In addition to these jurisdictional issues, the current regime does not do enough to prevent undesirable behaviour, in particular, in situations of predatory lending and the provision of inappropriate advice.
Australia needs a financial services regulatory structure for the 21st century … one which provides the highest standards of conduct … product disclosure … and advice at a national level.
Simple, standard and consistent regulation can only be achieved at a national level … by one government rather than by six states and two territories.
The Commonwealth and the States are united in their commitment to changing this situation – and there have been some key milestones achieved recently.
COAG recently agreed in-principle to the Commonwealth assuming responsibility for regulating mortgage credit and advice, with a view to reassessing the regulation of other credit arrangements in due course.
These statements and agreements are key steps toward delivering an effective national system. This is where the hard work begins. To bring this agenda quickly forward, I have developed a Green Paper seeking comment on Commonwealth regulation options for mortgage brokers, margin lending, non-bank lenders, trustee companies, debentures, property investment advice and other forms of consumer credit. This wide-ranging Green Paper will ask stakeholders to provide their views on these important financial services.
Your submissions will be crucial to shaping the development of the new regulatory regime. I encourage your views and participation in providing feedback to the Green Paper.
Ladies and gentlemen, in conclusion, I would like to assure you that the Rudd Government is committed to making sure the Australian finance industry has the support it needs to flourish.
This is why we are focused on improving the competitiveness and international relationships of the Australian financial system.
By positioning Australia as a global centre of excellence, and securing access to well-regulated capital markets, we can also maximise the ability of the superannuation sector to generate excellent returns for retirees. We can also improve the superannuation system by improving the quality of information available within the industry.
By working together, we can achieve a more prosperous Australia.Once again, I would like to thank you for inviting me to talk with you today. And I trust that you will all enjoy the remainder of the conference.