Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Credit Regulation for the 21st Century:
the Government's Vision
Keynote Address To Lexisnexis 18th Annual
Credit Law Conference
2 October 2008
First, I would like to thank LexisNexis for inviting me to address your 18th credit law conference.
I'd also like to acknowledge the invaluable services LexisNexis provides to the legal fraternity. I'm sure that many professionals in today's increasingly complex and fast-moving environment appreciate your comprehensive approach.
Size and growth of credit industry
Today, I've been asked to talk about the Government's vision for bringing Australia's credit regulation regime into the 21st century.
The provision of consumer credit is a significant, and growing, industry in Australia. The real value of consumer loans has grown at about eight per cent each year since 1988. As of June 2008, total consumer credit on issue, including securitisations, amounted to over $1.1 billion.
The largest sector of consumer credit is residential mortgages. While mortgage growth recently dipped to a 20-year low, mortgages still account for an estimated 86 per cent of all consumer loans.
Consumer credit — current arrangements
As demand for consumer credit has grown, so too, have consumer expectations.
But at the same time, greater product complexity, together with demographic changes — such as the ageing population, and the increasing market participation of young people — may have increased the pool of vulnerable consumers.
Rising community expectations are increasing the demand for less risky products, as well as the mandatory provision of new product information.
But in our current environment, providing better consumer protection for financial products and services is easier said than done.
Currently, consumer protection may occur under a plethora of different regimes.
This approach has served us well in the past. But it cannot keep pace with the demands of today's economy.
Financial services are now an Australia-wide, national sector of our economy. Products are becoming increasingly sophisticated, and the providers offering them operate across State boundaries, and are organised along national or international lines.
At the same time, Australia is a member of an increasingly fast-paced, and increasingly globalised, economy.
This environment calls for a different approach.
One that provides a clear, simple and standard method for regulating consumer credit. One that is better integrated… more cohesive… and truly national in scope.
Margin loans are a specialised consumer credit product. I will talk about them in a little detail to illustrate some of the issues with the current regime.
As you would all be aware, margin lending is an arrangement in which investors borrow money to buy financial products. These could be listed shares, fixed interest securities, or units in managed funds. The underlying financial products are then used to secure the loan for those products.
There has been a massive increase in margin lending in recent years. From September 2000 to March 2008, the value of margin lending grew from $6.7 million to $32.6 million. That's an increase of over 480 per cent.
During the same period, the number of margin loan client accounts grew by nearly 240 per cent. And over that period, the average number of "margin calls" per day, per one thousand clients, increased by over 300 per cent.
While margin lending is a legitimate financial activity, a growing number of investors may not fully understand the nature of the complex contractual arrangements they have entered into.
The client may not be aware that they need to repay some or all of the loan if the investment is subject to a margin call — in other words, if the market value of the investment falls below the level agreed under the contract.
The strong performance of the Australian stock market over recent years means that, up until recently, the instance of margin calls has been very low.
But with the stock market moving into a time of more uncertain growth, some industry players have expressed serious concerns about the depth of understanding among small investors of how their margin loan product works.
I am also concerned about the current absence of consumer protection for margin loans.
Consumers may not necessarily be aware of the extent to which margin lending contracts place the risk of fluctuating market conditions squarely on them.
In particular, some contracts allow the lender to unilaterally withdraw the facility. Or withdraw a particular company's stock from their acceptable list of equities over which margin lending is accepted. In either of these cases, the consumer would be forced to repay the loan in full — often in a very short period of time.
As well, I am concerned that marketing material often makes margin loans seem far more straightforward than they really are, and does not fully disclose the inherent risks.
This is one of the reasons why I have been working hard to ensure all consumers of credit products are provided with disclosure documents which are readable and easy to understand.
Another potentially difficult area with margin loans is that, because they consist of both a credit component and an investment component, regulating them can be complex.
If the investment aspect involves a financial product such as shares, the Federal Corporations Act applies.
But the credit component of the margin loan transaction is currently largely unregulated. This is because the instrument the States and Territories currently use to regulate consumer credit — the Uniform Consumer Credit Code — expressly excludes credit provided for investment purposes.
Margin loans are just one example of a specialised consumer credit product, but they illustrate some of the issues and complexities in this field.
Green Paper and COAG decision
When the Rudd Government came into office, the reform of consumer credit was high on our agenda.
This is why, on 3 June this year, I released a Green Paper setting out a range of major areas for reform in relation to consumer credit and financial services.
The Green Paper laid out a plan for one single standard, national system to regulate mortgages, mortgage broking, margin lending and trustee companies.
And the sector reacted in exactly the spirit we had hoped for. Over 150 separate submissions showed overwhelming support for a national consumer credit framework covering all consumer credit products.
So after listening to industry and consumers, we pushed for all credit, including payday lending, personal loans and credit cards, to move to the national level too.
We achieved this goal with the landmark decision made by COAG on 3 July.
Ladies and gentlemen, this was a major step forward.
It recognises that we are operating in a truly national economy, and an increasingly international financial environment.
It also recognises that one, single, national regulatory system will be far more effective than regulation by six States and two Territories could ever be.
This groundbreaking decision echoes the recommendations of the Productivity Commission in its recent report, Review of Australia's Consumer Policy Framework.
So now, after far too many years, we have action to implement the kind of system we need — one single, national and standard regulatory system to cover all consumer credit and financial services.
This move will go a long way towards implementing the COAG vision of a seamless economy.
And in doing so, it could further the goals of the Australian and New Zealand Governments to more closely integrate the economies of our two countries.
One single, national and standard regulatory system will also help to ensure that the Australian credit market remains active and competitive — both domestically and internationally.
Consumers will benefit from a regime which is easier to understand and provides them with improved, and more consistent, consumer protection. In short, they will be better informed… more engaged… and more empowered.
In turn, this will further the development of nationally competitive markets, and enhance productivity and innovation — the cornerstones of Australia's strong economic performance over the last two decades.
A truly national regime will also make life simpler for businesses by reducing red tape.
The current system imposes unnecessary red tape on business, because regulatory requirements in many areas are not uniform across State and Territory boundaries.
Ladies and gentlemen, as I'm sure many of you are aware, COAG is meeting this very afternoon to discuss the issues I have just been talking about.
It would be premature of me to say much more at this stage, and in many ways addressing you later today may have been a better idea.
But I do have a clear vision for our new, national regulatory regime.
I anticipate that it will be flexible… competitive… and adaptable. Able to respond rapidly to market developments, both domestically and internationally.
That it will establish a consumer credit protection framework that is consistent and robust.
That it will achieve the right balance between providing important consumer protections without being overly burdensome for business.
That consumers will be able to access credit that is appropriately priced for risk. And that they will be provided with information that clearly sets out the costs and likely risks.
Residential mortgage-backed securities
Before concluding, I would like to say a few words about the
$4 billion residential mortgage-backed securities package the Treasurer announced recently.
This package is another demonstration of the Rudd Government's commitment to ensuring that Australia's financial markets continue to perform strongly. And that our financial markets provide Australian households with a wide range of financial products at competitive prices.
The Treasurer has directed the Australian Office of Financial Management to invest in AAA-rated residential mortgage-backed securities in two initial tranches of $2 billion each.
This initiative will strengthen the capacity of new and smaller mortgage lenders to compete with the major banks.
I should add that this investment is very different from the initiative proposed by United States Treasury in response to financial market conditions in that country.
Unlike the US, Australia's banking system remains profitable and soundly capitalised. Australian banks do not have significant exposures to troubled mortgage‑related assets. This reflects our robust lending standards and low rates of mortgage default. While the US Treasury is being forced to issue debt to invest in existing troubled mortgage assets, such as securities backed by sub‑prime mortgages with high default rates, the Australian Office of Financial Management will invest only in newly-issued, prime, AAA-rated residential mortgage-backed securities that meet strict criteria in relation to the quality of the underlying mortgages.
This initiative demonstrates the Government's determination to promote the efficient operation of Australia's financial markets, and to ensure robust competition in the mortgage market to put downward pressure on mortgage interest rates.
Ladies and gentlemen, in conclusion, I would point out that many of the consumer credit reforms I have talked about this morning have languished for well over a decade. They have been examined by at least five inquiries. But, until now, no action has been taken.
The Rudd Government made its vision clear at the last election.
We said we would reduce the regulatory burden on business.
We said we would better protect the interests of consumers.
And we said we would ensure that the Australian economy is modern and strong.
And after the consultations on the Green Paper, we said we would start detailed action within 10 months.
We are already delivering on these promises. The vision I have outlined this morning is further testimony that the Rudd Government is committed to achieving positive and enduring change — for Australia, and for Australians.
Thank you, and I trust that you enjoy the rest of your conference.