Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Genesys Wealth Advisers National Conference
Canberra Convention Centre, Canberra
22 February 2009
First, please allow me to thank Genesys Group for inviting me to address your national advisers' conference.
I appreciate the commitment of Genesys in encouraging a culture of ideas and communication within the financial planning industry.
Ongoing and proactive communication is vital in today's volatile market conditions.
After all, it is financial planners who work on the "frontline" of the crisis, providing advice and reassurance to their clients against the backdrop of the Global Financial Crisis.
Communication is also a high priority for the Rudd Government, which is why I always value the opportunity to speak with stakeholders like yourselves at events like these.
Today, I would like to update you on the current state of Australia's financial markets, and outline how the Federal Government is honing our regulatory response.
I would also like to discuss the Government's priorities over the next year — particularly as they relate to financial services including corporate law and superannuation.
Financial market volatility and the Government response
The deteriorating global outlook has seen growth forecasts slashed for 2009. The IMF is now forecasting a collective budget deficit of seven per cent of GDP for advanced economies.
Australia cannot be immune from the effects of this crisis. As a result of the global recession, budget revenues have been revised down by $115 billion since last budget. This is resulting in a temporary budget deficit.
Rudd Government reaffirms its commitment to deliver budget surpluses, on average, over the course of the economic cycle.
As the economy recovers, and grows above trend, the Government will take action to return the budget to surplus.
Nation Building and Jobs Plan
In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs and invest in nation building.
That's why the Rudd Government has put in place a $42 billion Nation Building and Jobs Plan to support jobs and to invest in future long-term economic growth.
Treasury estimates that the Nation Building and Jobs Plan will support up to 90,000 jobs in 2008-09 and 2009-10.
The initiatives in the Nation Building and Jobs Plan will provide a boost to economic growth of around ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.
Key measures funded by the Nation Building and Jobs Plan include:
- free ceiling insulation for around 2.7 million Australian homes
- constructing or upgrading a building in every one of Australia's 9,540 schools
- building more than 20,000 new social and defence homes
- one-off cash payments of $900 to eligible families, single workers, students, drought-affected farmers and others
- a temporary business investment tax break for small and general businesses buying eligible assets
- and a significant funding increase for local community infrastructure and local road projects.
By investing in jobs and long-term economic growth, the Plan strikes the right balance between providing immediate support for jobs now, and delivering the long-term investments we need to strengthen future economic growth.
In fact, for every $1 spent providing immediate stimulus to the economy, the Government has invested more than $2 on long-term investments that will generate future economic growth.
The $42 billion Nation Building and Jobs Plan builds on the stimulus measures already implemented by the Rudd Government to support economic activity and jobs.
These stimulus measures include the $10.4 billion Economic Security Strategy… the $300 million program to build local community infrastructure… the $15.2 billion COAG funding package… and the Nation Building Package announced in December 2008.
As the year unfolds, the Rudd Government will continue to tackle the effects of the global financial crisis head-on.
Clearly, there can be no quick fixes but I can assure you that we will continue to take whatever steps are necessary to support growth and jobs during these testing times.
And in the Treasury portfolio, I will continue my work of ensuring that our regulatory system operates effectively and efficiently. In developing critical regulatory reforms, I am always mindful — particularly during this volatile period — of the need for responses that are measured... far-sighted... and sound.
I would like to briefly outline some of these recent initiatives.
Pension drawdown relief for self-funded retirees
As financial planners you would all know that self funded retirees have also been hit hard by the global financial crisis. Their superannuation balances have fallen in value, while interest rate cuts have impacted the yields they receive on bank account and term deposit style products.
As such, I would like to draw your attention to an issue which was addressed just last week by the Rudd Government.
Treasurer Wayne Swan and I have just announced relief from minimum drawdown rules for those with account-based pensions.
The measure responds to concerns that meeting the minimum draw down amount in 2008-09 will mean having to sell investments assets and realise losses in a depressed market.
The Government recognises that the significant downturn in global financial markets has had a negative effect on retirees' superannuation capital in account-based pensions.
As fund members would know, Australian superannuation funds achieved a negative return of -19.6 per cent in the last calendar year which translates to a hit on superannuation capital for Australia's self funded retirees.
As such, the Government is moving quickly to provide self funded retirees with some certainty and comfort in these uncertain times.
The Government will suspend the minimum drawdown requirement for account-based pensions for the second half of 2008-09.
This will occur through a 50 per cent reduction in the minimum payment amount for 2008/09.
The temporary relief also addresses the concern that the minimum draw down requirement was set based on asset values as at 1 July 2008, when sharemarket values were higher.
For those people who have already taken half of the current minimum payment for 2008-09, the annual nature of the minimum payment rules means that a further payment will not be required until the end of the 2009-10 year.
The Government will continue to closely monitor market conditions and make a decision before the end of this financial year regarding the minimum drawdown situation for next financial year.
Currently, it is a requirement that minimum payments be made from a superannuation account-based pension at least annually.
Minimum payments are determined by age and the value of the account balance as at 1 July each year. The minimum annual payment rule is designed so that retirees draw down on their superannuation capital over their retirement.
This rule recognises that superannuation is designed as a retirement savings vehicle with substantial tax concessions.
The temporary suspension of the minimum payment requirement will apply to account based annuities and pensions (payable since 1 July, 2007); allocated annuities and pensions (pre-dating the Better Super changes); account-based and allocated pensions payable from Retirement Savings Accounts and market-linked (term allocated) annuities and pensions. Transition to Retirement pensions are also included should they originate from one of the account-based pensions described.
The Government will give effect to this announcement through amendments to the Superannuation Industry (Supervision) Regulations 1994.
The necessary changes to the regulations will be progressed as quickly as possible.
In the meantime, I would encourage superannuation funds to take note of the Government's announcement and to act in the interests of their members.
Capital gains tax loss rollover for complying super funds
I would like to outline another recent initiative which is relevant to your industry, the optional capital gains tax loss rollover for complying super funds.
With effect from 24 December 2008, the Rudd Government will provide an optional capital gains tax rollover for capital losses arising from CGT events happening under a merger, before 1 July 2010, between a complying superannuation fund, and an APRA regulated superannuation fund with at least five members.
This initiative is part of my broader commitment to minimise potential barriers to a robust and efficient super industry — a goal which has become even more important in the current financial climate.
Mergers of super funds can produce improved economies of scale, including more cost-effective services to members.
Typically, the process of transferring assets from one super fund to another, during a funds merger, triggers the realisation of capital gains or losses for the transferring fund. If the transferring super fund is in a net capital loss position, its winding-up following these transfers will lead to the losses being extinguished.
The rollover initiative will preserve the value of these capital losses in the receiving super fund. This will allow the capital losses to be offset against capital gains in the future.
Any capital gains that may be realised under such a merger would continue to be taxable. However, as capital gains and losses are calculated on an asset-by-asset basis, providing an optional rollover will allow the transferring fund to choose not to disregard capital losses realised under the merger to offset against any realised capital gains.
The Government will provide this limited CGT rollover as a short term measure. We will reconsider it after receiving the final report of the Australia's Future Tax System Review.
Consultation on the details of this measure is central to the Government's approach. On 16 January, I released a Treasury discussion paper on the design of the CGT roll-over. Submissions closed on 13 February.
The Rudd Government's Financial Services Working Group, which is charged with simplifying complex disclosure documents, has recently begun work on new margin lending disclosure documents.
The new disclosure documents are part of the Federal Government's takeover of margin lending regulation and supervision from the states, agreed to by COAG last year.
Single, standard, national regulation of margin lending is long overdue as recent high profile cases have shown.
As a result of the Federal Government takeover, margin lending will be included in Chapter 7 of the Corporations Act as a financial product by July 1.
This will mean that all margin lending providers will have to:
- have an Australian Financial Services Licence (AFSL).
- comply with general conduct standards, including the requirement to deal with investors efficiently, honestly and fairly;
- undertake appropriate disclosure to an investor, including provision of a Product Disclosure Statement (PDS), a Statement of Advice (SOA) and ongoing reporting;
- have adequate arrangements for the management of conflicts;
- ensure representatives are adequately trained and competent to provide those services; and
- be subject to enforcement measures regarding market manipulation, false or misleading statements, inducing investors to deal using misleading information, and engagement in dishonest, misleading or deceptive conduct.
All margin lending providers will also be subject to responsible lending conduct provisions as part of broader consumer credit reforms covering all credit providers.
Margin lending providers will have to be licensed by ASIC and will have to ensure representatives are appropriately trained to provide advice on those products.
Discussions with industry have begun on delivering these greatly simplified margin lending disclosure documents.
Disclosures in the new short-form Product Disclosure Statement will include all fees and charges, including commissions paid by margin loan providers to advisers who sell the product.
It's important that investors not only receive clear advice about why a particular product or strategy is being recommended to them, but also what's in it for the person or firm recommending it.
Conservatively geared margin lending may have a role in a balanced investment strategy for investors fully informed about how it works in both rising and falling markets.
The details of, for example, how these changes will impact on financial planners who recommend these products, are still the subject of policy development.
But I will make one thing very clear – there will be a margin lending specific responsible lending obligation and it will apply to all involved in the chain of putting people into margin lending facilities.
As all providers will be licensed, all clients will have recourse to an external dispute resolution scheme.
The message I am sending today is simple – the goalposts on how margin lending is offered have shifted. The providers and the advisors must now move with this new reality.
In September 2008, the Australian Securities and Investments Commission implemented a total ban on covered short selling.
This decision aligned with the actions of securities regulators around the world to limit the activity of short sellers. The measures were designed to restore market confidence during a period of unprecedented and volatile economic conditions.
The ASIC ban was not intended to be permanent. The Government recognises that, during normal market conditions, short selling plays an important role in ensuring pricing efficiency and market liquidity.
ASIC lifted its ban on the short selling of non-financial stocks from 19 November 2008.
This move is consistent with the actions of other securities regulators around the world.
These actions signal a return to more normal conditions, as the excessive volatility that gripped financial markets in 2008 begins to subside.
However, given the systemic importance of financial institutions to the economy, ASIC decided to extend its ban on short selling of financial stocks to early March.
The Government welcomed this decision, as it complements other Government initiatives designed to ensure the ongoing stability of Australia's financial sector.
Corporations Amendment (Short Selling) Act 2008
To further ensure the integrity and transparency of our markets, the Government has enacted legislation to permanently strengthen the regulatory framework which governs short selling.
In December last year, the Government passed the Corporations Amendment (Short Selling) Act 2008.
The Act provides the market with certainty about the scope of ASIC's powers to regulate short selling.
The Act also bans the practice of "naked" short selling, subject to ASIC exemptions. Given the potential for naked short sales to result in settlement failure and market manipulation, this move will help to boost investor confidence.
And finally, the Act establishes a disclosure framework for covered short sale transactions. This will reduce the scope for market speculation about short selling activity.
One of my priorities for 2009 is to finalise the detailed aspects of the disclosure framework. We are drafting regulations to govern issues such as the timing and manner of any disclosure. Once the regulations are in place, the ASIC interim disclosure regime introduced last year can be withdrawn.
The Government will, of course, liaise with industry as we develop the regulations.
As well, we are monitoring the outcomes of the recently-established IOSCO taskforce looking into the regulation of short selling to see whether this work identifies avenues for strengthening the existing regulatory regime here in Australia.
Credit rating agencies and research houses
The role of CRAs came under scrutiny due to their involvement in providing inaccurate ratings of financial products in the lead up to the US sub-prime crisis.
The Rudd Government has taken decisive action to upgrade the supervision of CRAs and research houses to promote and maintain confidence in our financial system.
As part of a new regulatory regime, ASIC will remove the current exemption held by CRAs which currently allows them not to hold an Australian Financial Services Licence (AFSL).
All product research houses will have to have an AFSL too.
CRAs will be required to issue an Annual Compliance Report outlining in detail to ASIC how they have complied with the International Organisation of Securities Commissions (IOSCO) Code of Fundamentals for CRAs.
This will also ensure uniform international regulation.
In addition, in March, I am convening a roundtable of key investor/user organisations in Australia to discuss the role they can play in developing initiatives to drive improvements in the development, assessment and usage of ratings.
Specifically on research houses, which I know may be of more direct interest to those here today, ASIC will be developing a comprehensive annual compliance reporting regime for such organisation.
This annual compliance report will cover the management of conflicts of interest and the procedures, methodologies and assumptions that result in research house advice.
This will not only seek to address perceived conflicts of interest but for the first time we will be able to crack open any real, underlying conflicts – something I know is of great importance to financial advisors as they seek to offer their client the very best advice.
We will take all steps within our power to protect the Australian system and to play an active role in the global efforts to boost financial markets and transparency.
The Rudd Government believes requiring CRAs and research houses to report annually on the quality and integrity of their ratings processes, conflicts of interest management and their responsibilities to the investing public and issuers, are all important new steps that will boost the integrity of our financial system.
Ladies and gentlemen, as you can see from my words this afternoon, 2009 is shaping up as a challenging year for Australia.
But I can assure you that the Government will continue to tackle the effects of the global credit crisis swiftly and decisively.
We will take any reasonable and necessary steps we need to stabilise and strengthen our economy... maintain investor confidence in our markets... and boost Australia's productivity performance.