Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Australia's Policy Response to the Global Financial Crisis
Address to the Institute of Actuaries of Australia Biennial Convention 2009
21 April 2009
I'm delighted to address the Biennial Convention of the Institute of Actuaries.
First, let me thank the Institute for the high standards you bring to your work, and your ongoing commitment to professional development.
As you know, in this country, the law confers statutory responsibility on the actuary. This means that the Australian community places a great deal of confidence and trust in your profession.
The current economic crisis has highlighted the role of actuaries, and the key role they play in the prudential management of some of our most important institutions — life insurers, general insurers, private health insurers and defined benefit superannuation funds. These are institutions which are crucial for maintaining the stability of our financial system.
I would like to take this opportunity to thank the Institute for your public policy contributions on a range of issues. In particular, your recent initiatives have helped inform the Government's broader thinking about our response to the global financial crisis.
Which brings me to my next topic...
Financial market volatility and Government's response
We are all well aware that that the world is in dire financial straits.
According to the OECD's Interim Economic Outlook, released late last month, the global economy is in the midst of the deepest and most synchronised recession in our lifetimes.
We always knew that Australia could not be immune from the effects of this crisis. The recent dramatic contraction in the economies of the United States, Japan and the European Union will inevitably slow our export performance.
Impact of GFC on superannuation
The global financial crisis has had a significant and immediate impact on superannuation fund balances.
Despite this, our superannuation system remains robust, sufficiently liquid, and very well-regulated.
The latest available data from the Australian Prudential Regulation Authority indicates that, as at December 2008, superannuation fund assets totalled $1.05 trillion. This is almost double the asset figure of five years ago.
While we cannot dismiss the effects of the financial market turbulence, we must remember that superannuation is a long-term investment.
Australians typically spend about 35 to 40 years in the workforce before they retire, and over 20 years in retirement. During that period they will experience a number of investment cycles, and there will be time for the markets to recover.
And history tells us that markets will recover over time.
Australian superannuation has proved its worth over the long haul. In the last 35 years, it has delivered very good real returns of close to four per cent a year over and above inflation.
While we have a robust superannuation system by world standards, some important challenges lie ahead for the sector. In addressing those challenges, the key priority for the Government remains constant — to maintain the safety, stability and efficiency of our superannuation system.
International responses to the global financial crisis
Governments around the world have mounted a unified response to the challenges posed by the global financial crisis. A key focus has been to work towards restoring the stability of national financial systems.
This has included measures to provide liquidity... support access to funding, such as guaranteeing deposits and debt issuance... and providing additional capital to absorb losses and support continued lending.
Governments have also been working to boost aggregate demand... maintain cross‑border flows of trade and investment... and address the regulatory deficiencies exposed by the global financial crisis.
The G20 has played a key role in this process. The Rudd Government has strongly supported an enhanced role for the G20 to focus efforts to achieve a coordinated global response.
The key outcome of the London Summit was agreement by G20 Leaders to an additional US$1.1 trillion program of support to restore credit, growth and jobs in the global economy.
The Summit also endorsed the G20's ongoing work to strengthen financial regulation to address the deficiencies exposed by the crisis. While media coverage of this aspect of the London Summit focused on the regulation of hedge funds and uncooperative jurisdictions, I am sure you were heartened by the news that a number of reforms endorsed by G20 Leaders reflect proposals that were previously put forward by the International Actuarial Association on 10 February 2009.
The International Actuarial Association proposed four measures. These were more counter‑cyclical regulatory arrangements [PM Rudd raised this at the UN in September]... the creation of a chief risk supervisor role... the application of comprehensive risk management concepts by financial institutions...and improved risk governance by financial institutions.
The fact that these recommendations are reflected in the proposals adopted by the G20 is testament to the role and influence of the actuarial profession.
I don't have time to list all the proposals this afternoon, but they include expanding the Financial Stability Forum to become the new Financial Stability Board which includes all G20 members... global early warning exercises to be conducted jointly by the Financial Stability Board and the IMF... and better systems for identifying and addressing systemic risks at the national level.
Here at home, the Rudd Government moved swiftly and decisively to cushion Australia from the worst impacts of the global recession.
You are no doubt familiar with our $42 billion Nation Building and Jobs Plan to support jobs, and to invest in future long-term economic growth.
The Treasurer recently described the Plan as a "temporary investment with lasting gains". I think this is an apt description.
Treasury estimates that the Nation Building and Jobs Plan will support up to 90,000 jobs in 2008-09 and 2009-10. And that the initiatives in the Nation Building and Jobs Plan will boost economic growth by about ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.
The most recent analysis from the OECD underscores the importance of Australia's decisive and early action.
The OECD's Interim Economic Outlook demonstrates that Australia's economic stimulus measures, with a strong focus on direct government investment, are amongst the most effective of all OECD fiscal packages in terms of stimulating activity and supporting employment.
And as I have said many times before, I can assure you that the Rudd Government will continue to take whatever responsible steps we need to support growth and jobs during these testing times.
Australia's response on executive remuneration
I would now like to talk about two key policies that Australia has implemented as a direct result of the global financial crisis.
The first relates to executive remuneration.
Both the G20 and the Financial Stability Forum have identified remuneration practices as a contributing factor to the global financial crisis.
A review of the causes of the crisis has revealed that many financial institutions pay their employees in a way that encourages them to take inappropriate risks. Some incentive structures encourage excessive short-term risk taking at the expense of longer-term sustainability.
In Australia, our strong prudential and corporate reporting framework has held us in good stead. This is a key reason why we have not seen any mainstream financial institution collapse, nor any financial institution require a capital injection from the Government.
APRA review into executive remuneration
You would no doubt be aware that the Prime Minister has advocated reform of executive remuneration arrangements in financial institutions to remove incentives for excessive and short-term risk-taking. Or as Mr Rudd put it, financial institutions need "clear incentives to promote responsible behaviour rather than unrestrained greed".
In October 2008, the Prime Minister announced that the Government, together with APRA, would examine how we could take steps on executive remuneration to avoid excessive risk-taking in Australia's financial institutions.
In response to this request, APRA has been participating actively in the Financial Stability Forum to develop principles for sound executive compensation. The FSF report was endorsed by the G20 London Summit on 2 April. This work is helping APRA refine its approach for Australia's needs.
The APRA framework will go beyond disclosure to mandatory standards for sound compensation structures. APRA-regulated entities without sound remuneration practices in relation to risk‑taking will be subject to supervisory intervention. This could include, where appropriate, increased capital requirements.
APRA is scheduled to release its discussion paper next month for consultation with interested parties.
Excessive termination payments or "golden parachutes" have caused concern for some time. They are clearly problematic in the current economic climate, particularly when they are seen as "rewards for failure".
This is why the Government will curb excessive termination payments by reducing the threshold for shareholder approval. This will ensure that termination benefits that exceed the threshold will require shareholder approval, regardless of whether they are made to directors or executives.
We are currently drafting legislation to amend the Corporations Act. The amendments will require that shareholder approval must be sought for any termination payment exceeding one year's base salary. The amendments will extend the range of executives whose termination payments are subject to shareholder approval. They will also broaden the definition of termination benefit to include all types of payment and rewards given at termination.
Productivity Commission Inquiry into Executive Pay
As well, the Government has referred the broader issue of executive remuneration to the Productivity Commission. The Productivity Commission is due to report to the Government by the end of this year.
I can assure you that the Government is committed to ensuring that Australia's executive remuneration framework is practical, workable and equitable.
As well, we want to strengthen the accountability of company management in setting remuneration and make executive remuneration more transparent for shareholders and the broader community.
The Terms of Reference for the Inquiry include: the role of executives in considering and approving remuneration packages; the role of boards and board committees in developing and approving remuneration packages; the role of other stakeholders, including shareholders in the remuneration process; and the role and regulatory regime governing remuneration consultants, including any possible conflicts of interest.
The PC Inquiry will also consider, in light of the presence of large institutional shareholders in Australia, such as super funds, and the prevalence of retail shareholders, the role of these types of investors in the development, setting, reporting and consideration of remuneration practices.
National consumer credit reforms
The second key policy I would like to briefly cover this afternoon is national consumer credit law.
Well before the global financial crisis hit world markets and the Australian economy, Kevin Rudd, Wayne Swan, Lindsay Tanner and I had discussed the need for action on consumer credit.
We agreed that should we win Government in 2007, a Rudd Labor Government would quickly seek agreement with the States and Territories for a nationally consistent and clear regime which covered the remaining credit and financial services not yet regulated nationally.
We wanted a new approach for consumer credit in Australia. One built on responsible lending and consumer protection.
To this end, in June last year, I released the Financial Services and Credit Reform Green Paper. And in March and July, the Prime Minister secured the agreement of State and Territory leaders to transfer consumer credit to the Commonwealth.
On the back of the Green Paper and further COAG agreement on the details, I announced the Rudd Government's $71 million National Consumer Credit Action Plan for single, standard, national regulation of consumer credit for Australia.
This Action Plan was structured around three core goals — boosting consumer protection, cutting red-tape for business and delivering on the Government's commitment to modernise Australia's key financial services.
The new national consumer credit law will establish, for the first time, a comprehensive national licensing regime which will be administered by ASIC. The regime will cover all credit providers, as well as credit and mortgage brokers and advisers.
Before the end of this month, I will release the draft legislation for the new regime in the form of two draft bills.
I expect to introduce the National Consumer Credit Protection Bill and the Corporations Amendment Financial Services Modernisation Bill into Parliament by the middle of the year.
This first bill will contain the new national consumer credit code, which sets the framework for the regime; responsible lending conduct provisions (which will include an assessment of the borrower's capacity to repay the credit being offered); licensing of credit providers and greater enforcement powers for ASIC to police the new regime.
Shortly afterwards, the Government will release the second Bill. This will address margin lending, trustee companies and debentures.
At the request of the States and Territories, we have agreed to defer full passage of both bills until September to allow the states to pass their relevant referral legislation in time. This request was formally made through the Ministerial Council on Consumer Affairs and was agreed to by the Commonwealth this month.
We understand that this arrangement is also supported by industry stakeholders.
As was always planned, licensing will start on 1 January next year, and this signals the beginning of the new national regime.
The second phase of the Action Plan will be rolled out in 2010. During this phase, we will consider possible further rules to stem specific unfavourable lending practices, including credit card limit extension offers, deceptive advertising practices and other fringe lending issues.
Ladies and gentlemen, as you can see from my words this afternoon, the Government is working on several fronts to mitigate the effects of the global financial crisis.
We are supporting jobs and investing in future economic growth.
We are working internationally as part of the global solution.
And we are creating a fair marketplace for all Australians.
Once again, thank you for inviting me to speak with you today.