Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Government and the Financial Services Sector: A Working Partnership
"Innovate 08" Investment and Financial Services Association
8 August 2008
First, I would like to thank the Investment and Financial Services Association for inviting me to address your annual conference and particularly to David Deverall, IFSA Chair and Richard Gilbert, IFSA CEO.
Second, I would like to do something unusual and acknowledge and thank a political opponent. I am talking about the contribution to Australia’s accounting and financial services sector and our regulatory framework made by the former Liberal Senator John Watson. I know, as an organisation, you thanked him yesterday, I wish to do the same.
Now, I understand that you’ve already heard from my Ministerial colleagues the Treasurer, Wayne Swan and Assistant Treasurer, Chris Bowen yesterday.
It’s also very good to see that for your conference theme this year you’ve gone with our own lyrical approach – we of course had Kevin 07, you’ve taken that forward with Innovate 08. Well done!
And it really is a theme that fits the times – right now, innovation is a core focus for the Rudd Government, as we consider how we can best reform and realign Australia’s financial services and superannuation sectors for future growth for the 21st century.
This morning, I would like to outline some of that work, but before I do, I want to touch on a few aspects that make the financial services sector in this country – that means all of you in this room – so critical to our whole nation’s future.
Global financial situation
I know the Treasurer spoke last night about the situation facing the global economy, and I know you’re each confronting the reality of this every day.
The times are indeed very difficult and Australia is not immune. We’ve seen financial year data recently released on super returns that again illustrates the situation we face.
As the Treasurer has outlined, the Government is tackling this head-on with responsible economic management, a comprehensive agenda of reform and ongoing international cooperation.
The additional message I want to strongly make today is that dealing with the effects of the global crisis will be a partnership – a partnership between the Government and each of you.
I have great confidence in you as a sector to rise to the challenges we face.
I believe in this room are the individuals that can provide the solutions to the issues we face.
The compact that I would like to confirm with you is this – we’ll keep up with our approach of avoiding knee-jerk reactions, of listening to you, of consulting with the sector, of maintaining and strengthening a robust system and of allowing you to get on with your enterprise; and on your side, we ask for more of the innovation, endeavour and good management that has played such a crucial role in our economic strength in recent times.
Yes, times are tough. But from adversity comes opportunity and the ability to strengthen our partnership.
Regulation of credit
My first example, in this case from my Corporate Law portfolio, of how we’ve already been working in this way is uniform national regulation of financial services and credit.
On June 3 this year, I released a Green Paper setting out a range of major areas for reform in this area.
We felt very strongly on coming into Government, that for more than a decade these reforms had languished unnecessarily.
I know from discussing them with you when we were in Opposition, that you shared that view.
The system was duplicated, patchy, confusing and very difficult to change — and in some areas, even completely non-existent.
And the sector has reacted in exactly the spirit we’d hoped, with an impressive 156 separate submissions, including a comprehensive submission from IFSA for which I am thankful.
The proposals set out in the Green Paper represent the Rudd Government’s first step in bringing Australia’s financial services sector and credit regulation regime into the 21st century.
And listening to you, we pushed for all credit to come to the national level, something we achieved with the landmark decisions made by COAG on July 3.
This move will also go a long way towards implementing COAG’s vision of a seamless economy.
This initiative is about better protection for consumers, but in alignment with cutting red tape for business. These are two goals that don’t often run hand-in-hand, but I am convinced that we can achieve just that outcome.
Let me say at this stage that we’ve heard your preferences for how we go forward with regulation in this field and we’re alive to your concerns.
In the near future I will be announcing a detailed road map for national regulation of the areas covered in the Green Paper and agreed by COAG.
Other corporate law projects
There are several other corporate law and markets projects I want to mention today.
First, ASIC is now well underway with its biggest ever restructure – not as a result of recent market issues, it was already in the works – but nonetheless, under the leadership of Chairman Tony D’Aloisio it will be brought closer the market, something I know you’re all very supportive of.
In addition, as part of the fallout from international financial events – while our system has proved its robustness – we have identified a few discrete areas where, after detailed consideration, we have decided to take action.
Issues have repeatedly been raised in relation to short selling. Let me say again for the record – we will not be banning short selling.
Short selling adds liquidity to the market and boosts pricing efficiency. As the RBA has said, it contributes to lower bid-offer spreads and helps reflect the views of both bullish and bearish investors.
We see a problem where short selling activities are occurring but are not being fairly disclosed, and of course where they occur and might be combined with market manipulation of some type.
As we’ve previously said, the Government will introduce into the coming Spring Session of Parliament the Corporations Amendment (Short Selling) Bill, which will deliver on the commitment made by both the Treasurer and myself to legislate to require the disclosure of covered short selling, which had been a serious area of concern.
Credit rating agencies
We are also examining the role of credit ratings agencies and, in the Australian context, research houses.
Recent financial market turbulence highlighted the need for some fine-tuning in this area to ensure the integrity of all parts of the system.
There are three broad objectives.
First, to examine the issues surrounding the role of credit rating agencies in the recent market volatility, particularly in relation to structured and securitised products.
Secondly, to analyse whether the circumstances under which credit rating agencies operating in this country have been granted an exemption from holding an Australian financial service licence are still current or justified.
And lastly, to examine, consider and report on the range of issues raised in recent international reports on credit rating agencies, such as those released by the Financial Stability Forum, and the International Organisation of Securities Commissions, IOSCO.
I can report that industry roundtables have been held – again with IFSA making an important contribution through its Investment Board Committee.
I expect delivery of a final report by the end of this year.
The Government is committed to further improving the transparency, competitiveness and efficient operation of our financial markets for the continued benefit of investors.
That was the motivation behind the Prime Minister’s announcement an examination of the disclosure requirements for equity derivatives.
As you would be aware, equity derivatives give their owners an economic interest in the underlying securities, but not traditional ownership rights such as the right to vote or dispose of the securities.
However, it appears that, under certain circumstances, these instruments enable market participants to exercise some control over the underlying securities, while avoiding the statutory disclosure obligations that accompany ownership of securities.
In particular, they avoid the statutory obligation to disclose the control of substantial shareholdings in large Australian companies.
The disclosure requirements I’m talking about are integral to a transparent marketplace.
Product rationalisation and legacy products
Before moving onto my other portfolio responsibility in superannuation, I wanted to touch on two more important corporate/markets issues – product rationalisation and mutual recognition.
Another important area of reform to bring financial services regulation into the 21st century is helping to transfer customers out of outdated managed investment products.
Again as you all know, this is not a marginal issue and I can repeat today my commitment to treating this problem as core business.
Outdated products carry a higher risk of error and fraud for both investors and product providers and according to IFSA’s own estimates, the total amount of funds under management in legacy products is about $221 billion, or a staggering 25 per cent of all funds under management.
That’s $221 billion which could be invested more efficiently and more safely – delivering better outcomes to everyone involved.
- The rationalisation of financial products of course needs to be done in a way that is transparent and fair, and ensures that the interests of investors are protected.
- Earlier this year, a panel of industry members, representative organisations and Government agencies was formed to advise Treasury on finalising a product rationalisation mechanism.
- I would like to take this opportunity to thank IFSA for your valuable contribution to the discussion so far.
- I recognise that this is an important issue for IFSA and encourage your participation in the concluding phase.
As the Treasurer mentioned last night – the Government and ASIC have taken a world-leading position on delivering financial services and market regulatory mutual recognition arrangements to support the financial services sector in Australia.
I recently signed into force an Agreement with New Zealand on securities offerings. We now also have various Agreements with China and Hong Kong.
I can also report that we are making significant headway on a mutual recognition arrangement with the United States, a project that both the Prime Minister and the Chair of the US Securities and Exchange Commission, Christopher Cox, have put considerable personal focus on.
If we deliver this, we will have a historic agreement that will bring our two markets even closer together, making it easier for US investors to invest in Australia and vice-versa.
Let’s be clear about how important such an Agreement would be – it would be the first such arrangement the US would have entered into, putting Australian ahead of the EU and others who have been seeking such arrangements for some time.
This can only strengthen our economy and our role as a financial services hub for the Asia-Pacific region.
Superannuation – rates of return
I now want to turn to superannuation.
And hasn’t superannuation moved firmly onto the front pages lately?
We all know just how important super is and just how impressive our system is by world standards.
The latest available data indicates that, as at March 2008, fund assets totalled $1.1 trillion.
This impressive figure is due to the combination of two factors — a growing level of superannuation contributions, plus several years of strong investment performance by Australia’s superannuation funds.
Superannuation is now a dominant financial asset and a significant item on the household balance sheet.
Yes, we’ve been hearing a lot about negative rates of return and we cannot shy away from the current market conditions, but as I have been saying – and as IFSA and other peak bodies have also been saying – superannuation is a long‑term investment.
I like reminding people of the following: if $1 was invested into super ten years ago this would today be worth about $2.07. So despite one negative year, that $1 invested ten years ago has more than doubled today – not bad at all.
The Government is committed to working with industry to leverage that wealth into optimal outcomes for hard-working Australians and I thank you for your contribution in maintaining a calm and well-informed community when it comes to the current situation in super.
You’re playing a major role at a crucial time for the whole system.
As part of this, we raised the issue in Opposition, and again in June this year, of our intention to see universal access to benefit projections as a permanent feature of our superannuation system.
I consider that it is vital that fund members have access to standardised estimates of their retirement savings, including the age pension, at critical ages.
I know that this will be difficult work as the consolidation of information from all of a members separate accounts will be necessary to make the estimate meaningful. Nonetheless I am determined that the Government will deliver in this important area.
As you will know ASIC has released a consultation paper and I look forward to your response.
Financial Services Working Group
Another important part of communication is simplicity.
We’re determined to ensure that Australians have access to easy-to-understand information to help them make informed decisions about their superannuation.
One of the ways we are doing this is through the Financial Services Working Group.
The Working Group was established to facilitate short, simple and readable disclosure documents, to better enable consumers to understand and compare the full range of financial services products.
As you’ve heard me say, whilst Latin may have died as an active language many centuries ago, but it once again found new life in the Australian PDS!!
It isn’t good enough and we’re taking action to fix it.
We’ve released the first simplified PDS for First Home Savers Accounts and yet again I want to thank you all for the crucial role you played in that work.
As a key plank of this project I am keen to improve Australians’ access to low‑cost advice about their superannuation. There is currently a large unmet need for just this kind of simple superannuation advice.
The Working Group released its consultation paper, Simple Superannuation Advice, on May 30, and it sets out several proposals that may facilitate the provision of intra‑product advice relating to superannuation.
The Working Group is currently seeking feedback on these proposals, as well as what regulatory and other steps Government could take to help more investors receive appropriate and helpful advice.
Now a few comments on the broader governance arrangements within the superannuation system.
As I indicated in a speech to the SPAA Conference in March there are a range of matters currently under consideration in respect of the self managed superannuation fund sector. Further I indicated governance matters required consideration across all sectors of the industry – corporate, public sector, industry and retail.
Any examination should be conducted in thorough, open, transparent and highly engaged manner.
This is what I have called “renovating the house”.
I consider as that as Australia’s Superannuation Minister I have a duty of care to being thinking about this issues, especially in a compulsory system that is underwritten to the extent of $70 billion in capital flows and $28 billion in tax concessions.
In the same spirit of cooperation that has been the hallmark of all the other achievements I have run through this morning, I would be relying on you to play a constructive role in this critical project.
And of course, IFSA – who has written to me positively on this issue – would be front and centre.
I can also report that preliminary work is progressing well to deliver the Government’s election commitment to establish a Superannuation Clearinghouse.
We announced in the Budget that we will provide funding of $16 million over three years, starting in 2009‑10 and the clearinghouse will be available from 1 July 2009.
Another system-wide structural inefficiency is lost accounts. According to the latest figures from the Australian Taxation Office, the number of lost accounts on the register has grown to almost six million, with total assets of about $11.9 billion.
This is a disturbingly large figure.
My preference is to reunite Australians with their lost accounts by introducing an automatic consolidation arrangement, with an opt-out provision, using our Tax File Number system.
Under this option, lost accounts would be automatically rolled over into a current or the most recently active account.
Members of the recently-formed Superannuation Advisory Group discussed options to address this issue at their inaugural meeting in March.
I will consult further with the industry on a range of practical solutions. Together, we will develop a solution to improve workers’ retirement savings while minimising complexity and red tape.
The final issue I want to address this morning is temporary residents superannuation.
This measure was announced by the former Government and supported by the current Government as a part of the 2008-09 Budget package.
This measure will see superannuation paid to temporary residents in Australia collected by the Commonwealth.
You will recall that on May 5, I released a consultation paper to the industry on administrative implementation issues. I said at the time that my reason for doing this was to hear from the sector so that the policy, when in place, had the least possible impact on superannuation product providers.
You will recall that the proposal suggested in the consultation paper required an annual sweeping of the account balances held in funds for temporary residents so that the money could be forwarded to the ATO. Under this model temporary residents had 5 years to claim their superannuation, without interest, following departure from Australia.
In another good example of the sector responding well to consultation processes, the Government received 47 submissions which we have now considered in full, including those made by ISFA, as well as key submissions by ASFA, AIST and others.
Accordingly, I can today announce that the Government has decided to significantly modify the administration of the temporary residents policy.
There will no longer be any annual sweeping of accounts with the need to reopen an account where a new employer contribution is received in the following year.
Most importantly, temporary residents superannuation will remain growing in the superannuation fund for the time that the person is residing in Australia.
Employers will make Superannuation Guarantee payments into funds in the same way as for any other employee and the Government will use the existing unclaimed money arrangements to transfer the account balance of temporary residents six months after they depart Australia and no longer hold a visa.
Following departure a former temporary resident will be able to claim the superannuation.
I can also announce that, following the consultation, the Government has decided to exempt retirement visa holders from the measure entirely.
These new arrangements will be implemented in the same timeframe as that announced in the Budget, being from the date that the legislation receives the Royal Assent, which I expect will be in either late November or early December.
I am please to say that the new arrangements:
- will significantly reduce the compliance cost for the industry;
- will allow for the insurance cover of temporary residents as they will continue to be fund members while they reside in Australia;
- will best address the lost member issue;
- will provide the same superannuation payment arrangements to all employees in a workplace;
- will allow for the full payment of superannuation contributions to all former temporary residents at any time following their departure from Australia; and
- will still allow Australia to attract foreign skilled workers to assist us to address skill shortages that currently exist.
The full details will be shortly released to key stakeholders, which of course include ISFA, but I want to conclude this issue by again reiterating the role you’ve played here.
I would like to thank IFSA and other participants for the cooperative role they’ve played.
Ladies and gentlemen, as the Treasurer, Assistant Treasurer and I have all said, we face difficult times.
But as we have also all said – we are very well positioned to make it through.
A major part of that does, and will continue to, depend on each of you in this room – your skills, your enterprise and your innovation.
The Rudd Government is delivering on its commitment to govern as economic and fiscal conservatives, and we’re doing it in a successful and, in my strong opinion, very productive partnership with the financial services and investment sector.
I thank you for having me here today and look forward to hearing about the detailed outcomes of the conference.