Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Opening Address to
Evaluating Financial Services Regulation Summit 2008
30 October 2008
First, allow me to thank you for inviting me to address the 2008 Financial Services Regulation Summit.
This Summit comes at a time when the issues surrounding financial services regulation have been thrown into sharp relief. The recent global financial market turbulence has reminded us of the critical importance of sound prudential regulation.
Today, I would like to talk to you about the Government's ongoing work to ensure that the Australian financial system remains flexible, modern and strong. I would also like to discuss other recent developments in our financial markets.
Financial market volatility
As I'm sure you are all aware, Australia cannot be immune from the fallout of the global credit crisis.
More than 25 banks around the world have failed or been bailed out. Global stock markets have suffered significant losses.
The crisis has buffeted confidence around the world and is contributing to a serious slowdown in the global economy.
The International Monetary Fund now expects growth of less than one per cent in six of the world's largest developed economies next year.
This will be the slowest growth in advanced economies for over a quarter of a century.
As a member of the global economy, Australia is affected by these developments.
But we are in a much better position to weather the storm than many other countries. As the Treasurer has said, if there's one country in the world you would want to be in, in the current circumstances, it is Australia.
Australia has underlying strengths that virtually no other country in the world can boast.
We have four of the world's dozen largest AA-rated banks. Banks which continue to be profitable and well-capitalised.
And we have limited exposure to US sub prime securities.
The International Monetary Fund recently endorsed the strength of our four major banks, which represent 85 per cent of the Australian banking system. The IMF concluded that our major banks are weathering the financial crisis admirably, are well-regulated, and soundly-capitalised.
The OECD expressed similar sentiments on the robustness of Australia's economy early this month when it released its 2008 Economic Survey of Australia.
The OECD stated that:
"The economy has stood up well to the ongoing global financial market turbulence. So far, the financial sector has withstood the crisis thanks to prudent management, high profitability and strong capitalisation."
This is a strong endorsement - both of our economy, and our financial services regulatory system.
Government response to financial market volatility
Throughout the global financial crisis, the Government's approach has been to plan ahead, to examine unfolding events, to act early, and to act decisively.
That's why we are working closely with other governments around the world to address the issues and their underlying causes.
And that's why we have implemented several measures over the last few weeks to strengthen growth and protect Australians from the effects of the global financial crisis.
Three weeks ago, the Treasurer travelled to Washington to attend the annual meetings of the International Monetary Fund and the World Bank. He also attended the extraordinary G20 meeting held in Washington on 11 October.
These meetings provided a major impetus to international cooperation to resolve the crisis. They have also underlined the critical importance of strengthening the international financial architecture to minimise the risk of similar crises occurring again.
In troubled times, the governments of the world must work cooperatively. As part of this international response, the Prime Minister announced last week that he would attend the emergency Group of 20 meeting in Washington that was convened by the President of the United States. A global challenge demands a coordinated global response and Australia will be arguing internationally for an effective response!
And we have already seen international cooperation taking place.
As global financial conditions deteriorated, governments have taken unprecedented steps to guarantee the liabilities of their financial systems.
The United States, Britain and members of the European Union have announced significantly expanded guarantees on deposits and new guarantees on bank wholesale borrowing.
Other developed economies have implemented similar programs to safeguard their supply of capital and protect savers and investors.
Here in Australia, the Rudd Government started taking action well before the situation reached crisis point.
Since we have been in office, we have been planning ahead, and making preparations. That's why in the May Budget, we built a strong budget surplus as a bulwark against future shocks.
And that's why we have taken decisive, early action.
Over the last 10 months, we quietly implemented a range of measures to maintain the stability of the Australian financial system.
In a series of actions, the Reserve Bank moved to expand liquidity in financial markets.
In May, we announced that we would provide legislative authority for an increase in future Commonwealth Government Securities issuance of up to $25 billion to strengthen the robustness of Australia's financial system and reduce its vulnerability to adverse shocks.
The next step was to guarantee bank deposits and bank funding.
On 12 October, we announced that, as part of coordinated international action, we will introduce an interim full guarantee on all deposits in Australian-owned banks, building societies and credit unions, as well as Australian subsidiaries of foreign-owned banks.
This action guarantees 15 million deposit accounts, totalling $800 billion. It also guarantees the wholesale fundraising of financial institutions, amounting to about $1.2 trillion.
In other words, we are guaranteeing the fundamentals of this country's financial system.
On 24 October, the Treasurer announced the details of these guarantees.
On the advice of the Council of Financial Regulators, we decided to implement a $1 million threshold on the deposit guarantee. Depositors with investments over $1 million will be charged a fee to receive the benefits of the deposit guarantee.
This fee will ensure that the deposit guarantee does not provide disincentives for market participants to operate in short-term money markets.
The fee will apply from 28 November 2008. Until that date, all deposits and wholesale funding eligible for the guarantee arrangements will be guaranteed without charge.
After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.
Under the Financial Claims Scheme will also provide additional protection to policyholders in the unlikely event that a general insurer fails.
Eligible policyholders with claims against a failed general insurer will receive the equivalent in compensation to the amount of the payout they would have received from the insurer.
The legislation to enact the Financial Claims Scheme will build on the power of our regulators to ensure that, if necessary, they can step in during a crisis.
In addition to guaranteeing deposits, the Australian Government will guarantee the overseas borrowing arrangements of our banks.
This initiative will enable Australian financial institutions to raise funds overseas in the current tight conditions. It will also restore confidence in credit markets.
To ensure that taxpayers are not disadvantaged by this guarantee, the Australian Government will charge financial institutions for providing the guarantee. This charge will be similar to an insurance premium.
By acting in concert with the governments of other countries, we are also enabling our banks to compete on an equal footing with their overseas counterparts for funding on global financial markets.
If we do not follow other countries in providing such guarantees, there is a considerable risk that, over time, our banks could become less competitive in securing wholesale funding in international markets.
AOFM purchase of residential mortgage-backed securities
To further underpin the Australian financial system, the Australian Office of Financial Management will purchase an additional
$4 billion in residential mortgage-backed securities from a wide range of Australian lenders.
This move takes the total AOFM purchase of residential mortgage-backed securities to $8 billion.
Economic Security Strategy
One example of the Rudd Government's decisive action to combat the effects of financial market turbulence is the Economic Security Strategy.
This $10.4 billion stimulus package is designed to support Australian households through these difficult times, boost consumer confidence, strengthen our economy for the medium-term, and pave the way for future growth.
The Economic Security Strategy will complement the Reserve Bank's recent moves to reduce official interest rates. It also builds on the measures the Rudd Government announced in the 2008-09 Budget.
The package specifically bolsters recent weaker growth in household consumption and housing, and provides much-needed assistance to Australian pensioners and families.
The package has five parts.
First, a $4.8 billion immediate down payment to Australia's four million pensioners, carers and seniors.
Second, a $3.9 billion payment in support for low and middle income families.
Third, a First Home Owners Boost to stimulate housing activity, and give first home buyers a better chance in the housing market.
Fourth, an investment of $187 million to create an additional 56,000 new training places this financial year, and provide more skilled labour to meet the needs of industry.
The fifth part of the Economic Security Strategy is the acceleration of projects to be funded through the three Nation Building Funds announced in the Budget to strengthen our economy.
Ministers will bring forward interim Infrastructure Reports to December 2008 so that work can start in 2009 on projects in the key areas of education and research... health and hospitals... and transport and communications.
Fast-tracking the nation-building agenda can secure economic activity in the short term and expand growth potential in the medium to long term.
The Government took the tough decisions in the Budget to build a strong surplus to act as a buffer during an economic slowdown. This is now providing the flexibility we need to respond to the dramatic deterioration in the global economy.
Treasury advises that the Budget will still be in surplus after these measures.
Australia's response to the international financial market turmoil includes several other initiatives to ensure the continued integrity, fairness, and transparency of our markets.
Transparency is vital for promoting investor confidence. And in turn, investor confidence relies on the integrity of market systems and the institutions that serve the market.
This is why the independent regulator, ASIC, introduced a temporary ban on short selling, limited the number of allowable "covered" short sales, and increased disclosure requirements for these allowable covered short sales.
Last week, ASIC announced that it would extend the ban on covered short selling until 18 November this year for non-financial stocks. At this stage, ASIC intends to lift the ban for these companies. The ban will, however, remain in place for financial stocks until 27 January 2009.
In addition, the ASX announced that it was amending its authorised product list to prohibit people from entering into "naked" short sale transactions that are not otherwise allowed by the Corporations Act.
While I believe that appropriately regulated and disclosed covered short selling has a role in the effective operation of markets, it is a prudent decision to restrict it at a time of heightened market volatility.
Corporations Amendment (Short Selling) Bill 2008
To further ensure the integrity and transparency of our markets, the Government proposes to introduce legislation to require the disclosure of covered short sale transactions on Australian financial markets.
To this end, the Government issued an exposure draft of the Corporations Amendment (Short Selling) Bill 2008 for public comment in September this year.
In short, the Bill requires sellers to disclose sales of certain financial securities that are covered by a securities lending arrangement. Sellers must disclose to their executing broker, who in turn discloses the sale to the market operator.
The Government is currently reviewing the submissions we received on the Bill to facilitate its introduction into Parliament this year.
Funding boost to regulators
Ladies and gentlemen, as well as protecting Australians from the effects of the global financial crisis, we are also looking to the longer term and strengthening our regulatory architecture.
This is why we are providing a funding injection for both our regulators, ASIC and APRA.
And this is why we strongly support the recently-announced restructure of ASIC.
The restructure will ensure that ASIC better understands the markets it regulates... is more forward-looking in its decision making processes... and communicates clearer messages to the market in relation to its activities.
The restructure will also enable ASIC to reallocate its resources towards priority areas. One of the key changes flowing from the review is additional investment in market research and analysis.
The Government is committed to ensuring that ASIC receives the support it needs to meet the challenges of the current market conditions. ASIC's funding in 2008-09 is budgeted at $303.3 million. This represents an increase of about 85 per cent in real terms since 2000-01.
On Tuesday, the Prime Minister announced that ASIC will receive additional funding of $10 million in 2008-09 and $20 million in
2009-10 to provide "front-line" resources to undertake market monitoring and enforcement activities.
The banking regulator, APRA, will also receive extra funding to meet its additional workload.
These measures will help to reinforce confidence in the soundness and integrity of Australia's financial markets.
National regulation of credit
One of the more far-reaching ways the Government is reforming our financial services regulatory regime is by developing one single, national system to regulate consumer credit.
The Commonwealth took a National Action Plan to COAG to transfer all consumer credit products to the Commonwealth. As you would all be aware, COAG agreed to this landmark decision on 2 October. The transfer of responsibilities follows on from the COAG's decisions earlier this year.
This is an important initiative by the Rudd Government that will address the deficiencies that have long existed in credit regulation by establishing a consistent and robust consumer credit regulation framework.
We will implement national credit regulation in two phases, to make the transition as smooth as possible.
A phased approach achieves the goals of strengthening consumer protection, while minimising disruption to business.
Under the first phase of the plan, the Commonwealth will take responsibility for the existing State and Territory legislation - the Uniform Consumer Credit Code - by enacting it as Federal law.
The new national consumer credit law will not only cover mortgages taken out to buy the family home, it also will be extended to cover mortgages on investment properties to help stop borrowers racking up excessive levels of mortgage debt.
It will also establish, for the first time, a comprehensive national licensing regime to be administered by ASIC that will cover all credit providers, brokers and advisers.
Lenders will be licensed by ASIC, which will be given extra powers as the sole regulator to enforce the scheme.
The new national law will emphasise general conduct obligations which will require the provision of credit services honestly and fairly. Specific responsible lending requirements will also be in place to protect consumers from deceptive advertising and from being given loans they cannot afford to repay.
Important safeguards will be built into the national scheme. All borrowers will be able to appeal to an external dispute resolution body to which all licensed lenders must belong.
The Corporations Act will be extended to cover margin lending products and trustee corporations. Organisations which extend margin loans will have to provide product disclosure statements similar to those provided for the First Home Saver Accounts.
The first phase of the new regime will be in place in Commonwealth, State and Territory legislation by the end of June 2009. There will be a two-year transition period for affected businesses.
The second phase of the action plan will look at possible further rules to stem predatory lending practices, such as a review of credit card limit extension offers, an examination of State approaches to interest rate caps and other fringe lending issues.
Ladies and gentlemen, this is a major step forward.
It means that we will have the kind of system we need - one single, national and standard regulatory system which covers all consumer credit and financial services.
A truly national regime that will help to ensure that the Australian credit market remains active and competitive - both domestically and internationally.
Financial Services Working Group
Before concluding, I would like to say a few words about the work of the Financial Services Working Group.
This work underpins our reform agenda for financial services regulation.
To put it simply, we want to ensure that consumers have access to easy-to-understand information to help them make informed decisions, and compare the relative merits of alternative products.
The Working Group is facilitating the creation of disclosure documents which are short, simple and readable. Documents which will better enable consumers to understand and compare the full range of financial products.
The Government recently released the first of these documents - a four-page product disclosure statement for the First Home Saver Accounts.
The next item on the Working Group's agenda is to look at product disclosure documents sector by sector, beginning with superannuation. During this process, the Working Group will consult closely with stakeholders through its advisory panel and public consultation meetings.
Ladies and gentlemen, I opened my address this morning by talking about the global credit crisis.
In closing, I would emphasise that dealing with the effects of the global credit crisis will depend on a partnership - a partnership between the Government and the financial services industry.
Everyone in this room can be part of the solution to the issues we now face.
For our part, the Government is tackling the effects of the global credit crisis head-on. Our response is based on the principles of responsible economic management... a comprehensive agenda of reform... and ongoing international cooperation.
In return, I would ask that you continue to deliver the innovation, diligence and sound management that has played such a crucial role in Australia's economic strength.Thank you.