Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Australia's Securities and Financial Markets – Surviving the Crisis, Backed By Decisive Action
Address to the Securities and Derivatives Industry Association of Australia National Conference
29 May 2009
Good morning and thank you for that kind introduction David.
I'm delighted to be here today to address the Securities & Derivatives Industry Association's (SDIA) National Conference.
Before I make some comments on the major issues at play in my portfolio that impact on those here today, I would take this opportunity to say a few words about the SDIA.
I and my Ministerial colleagues, particularly those of us in the Treasury and Finance areas, greatly appreciate the value that the SDIA brings to the securities, investment and broader finance sectors.
It's been a tough time recently but having an industry group, particularly one led by as balanced and respected an advocate as David Horsfield, is an important element in the strength and future of the sector.
In addition to policy input, we all benefit from the SDIA's strong focus on professional development for your members – it plays a critical role in keeping industry standards high and reputations strong.
Economic outlook for Australia and key Budget measures
Ladies and gentlemen, I would now like to say a few words about the general economic conditions we face and about last fortnight's Budget.
When I addressed the SDIA conference last May, I said then that the Rudd Government's first Budget combined nation-building initiatives with programs to redress the balance in favour of working families. And, that our 2008 Budget began a new era of investment in Australia's long-term future.
A year later, the global economic outlook has deteriorated sharply. We now face a global recession and the most challenging global economic conditions in 75 years.
While we find ourselves in changed circumstances, our mission remains constant and Australians can be confident about our nation's future.
Despite conditions, we are weathering the storm better than most of other countries because we acted early and decisively to support jobs and cushion our economy through critical economic stimulus plans.
What I would remind everyone today is that the large majority of the National Building stimulus package, is just that – geared to nation building.
Nearly 70% of the stimulus package is nation building infrastructure with the biggest school modernisation program in Australia's history, major investments in roads, in rail and in ports, hospitals, broadband and world-leading solar projects.
This program is a prime example of where a government, during a global recession, must step in and stimulate our economy and support jobs and small businesses,
We don't shy away from that because to do otherwise would guarantee our country a deeper recession, a slower recovery and hundreds of thousands more Australians out of work.
The importance of the financial services sector
The Rudd Government understands that a key part of our economic recovery is a vibrant, strong, diverse and growing financial services sector.
As I've said, it's been a historically challenging year for you all.
Although I would note that we have recently seen some encouraging signs of recovery – what our American friends have called "green shoots".
As we all know, across 2008 and into early 2009, we saw the ASX/S&P200 index drop by 53.9% from its peak on 1 November 2007 to its lowest point on 6 March 2009.
But by the close of trading last Thursday, 21 May, the index had risen 2.5% since the start of the calendar year. That's a 21.3% rise since the low point on 6 March.
We have to keep all this in perspective, and clearly it will be some time before the storm passes and the world returns to calmer waters, but the securities and financial services sector, and its health, is critical to our overall economy.
In 2007 for example, based on ABS data, financial and insurance services accounted for a full 8.6% of Australia's Real Gross Value, generating $81 billion.
That means real jobs for Australia.
This is why we have endorsed a Financial Services Hub strategy and established the Australian Financial Centre Forum to keep Australia at the forefront of regional financial services.
This is also why the Government has made a number of strategic reforms to our corporate and financial services regulator structure to keep our market strong and regulated at global best practice standards.
I would now like to address some of these reforms and announce a further step to add to the integrity of our market framework.
Reforms to our market framework
Well, since we last talked, hasn't short selling become the barbeque stopper few ever expected it to be!
Regardless of your views on short selling, it has been a source of deep concern for market regulators and members of the community all around the world.
As Minister, I have always been clear and consistent on this point – disclosed and transparent covered short selling, devoid of any market manipulation or rumourtrage, is an acceptable market practice that can aid true price discovery and add liquidity.
It is in support of this that the Government passed the Corporations Amendment (Short Selling) Act in December. This legislation, as you likely know, banned naked short selling outright, expanded and clarified ASIC's powers and put in place a comprehensive disclosure regime.
Within the next few weeks, the Government will put into place further detailed Regulations that will establish a final disclosure regime.
I can confirm today that the disclosure regime will be comprehensive and will entail full positional reporting. Some observers have said this should have occurred before now, but as all of you know in this room, this is a major change that will bring with it new obligations and some new costs.
I don't make decisions of that magnitude lightly.
And the irony of being criticised by the Opposition in relation to the timeframe for these regulations is not lost on me, or any other long term observers of our market.
For many, many years the now Opposition allowed a loophole they allowed to be put in place to be exploited to avoid any disclosure of covered short selling.
Now in less than 18 months we have a comprehensive legal framework, expanded regulator powers, transactional reporting and will very shortly have a positional regime.
My final comments on short selling are on the issue of the lifting of the ban on the covered short selling of financials.
As you would all know, on Monday this week, ASIC lifted the final component of a range of temporary bans on covered short selling, meaning the market is now fully open once more.
ASIC of course made its independent decision by reviewing the market environment, both here and internationally, and in light of the strength of our financial/banking system, which is well capitalised and well regulated.
On that basis, ASIC advised the market that:
"ASIC has reviewed market conditions and considers that the balance between market efficiency and potential systemic concern has now moved in favour of the ban being lifted."
ASIC has assured the Government that its monitoring systems are in place to fully regulate market activity and that, should it be necessary, it is fully ready and prepared to reinstate any ban.
ASIC advised the Government that it would put additional resources into assessing trading to identify any potential aggressive short selling, closely monitor stock lending reports and gather additional market intelligence on order flow, particularly by hedge funds.
It is also closely monitoring credit default swaps and derivatives trading.
Most importantly, using the expanded powers provided by the Government's short selling laws, ASIC has confirmed that it will not hesitate to reimpose the ban immediately and without consultation if it considers market conditions warrant such action.
This is exactly why the Government moved early and decisively to put this important reform legislation in place.
Another way we are modernising our financial services industry is by overhauling our consumer credit system, including margin lending.
The National Consumer Credit Protection Bill 2009 includes all consumer credit — mortgages, credit cards, and some investment lending to over 5.7 million Australian households. The reforms also cover brokers and credit advisers and put in place, for the first time in our country, a responsible lending obligation on credit providers.
For the first time, Australia will have one, standard, national regime which applies equally to all credit consumers and all credit providers, right across the nation.
This will result in over 2,500 pages of inconsistent State and Territory legislation being repealed, and replaced by a streamlined, clear and modern Bills to apply across the whole of Australia.
In addition, I have announced the Financial Services Modernisation Bill 2009. This equally important Bill covers the national regulation of margin lending, trustee corporations and the harmonisation of the regulation of debentures.
I know the proposed margin lending rules will be of interest here today, so I will take a moment to outline the effect of the draft laws.
As margin loans are generally used to finance investments in listed and unlisted securities, the Government has decided to regulate this particular product as part of the financial services regime in Chapter 7 of the Corporations Act.
This means that margin loan borrowers will benefit from the general investor protection regime contained in that legislation.
This includes a number of important measures. For example, lenders and advisers will have to be licensed and regulated by ASIC.
Consumers will have access to independent, free and fast dispute resolution services.
And importantly, financial advisers will be required to only provide advice that is appropriate to the client's needs and circumstances.
As well, the regime will include several specific measures that apply exclusively to margin loans.
In drafting the legislation, care has been taken to draft a definition of margin loans that captures both standard margin loans, as well as non-standard structures such as those used in the past by failed entities such as Opes Prime.
This is an important point. Non-standard margin loans contained some features that many borrowers found difficult to understand. This meant that some investors suffered significant losses when the loan providers failed.
Capturing these types of margin loans within the regime will ensure that potential borrowers are properly informed about the special features of these loans and what they may entail.
Margin loan providers and financial advisers will also be covered by the responsible lending requirements.
In particular, they will need to consider the impact on borrowers who have taken on additional debt to set up a margin loan, and may have used their home as security for that debt.
Lenders and advisers will be able to provide or recommend a margin loan in these circumstances only if they are reasonably sure that the borrower can afford the loan without suffering substantial hardship.
Another important feature will be that the product disclosure material for margin lending is currently before the Government's Financial Services Working Group to ensure it begins its life as clear, plain English, simple disclosure that serves the purpose of informing, not confusing, consumers.
I would note that this working group continues its program of simplifying the legacy of FSR, and we'll be announcing major new developments in the very near future.
Finally, the margin lending legislation will also clarify, for the first time, which party is responsible for notifying the client in the case of a margin call.
The draft legislation was developed in close consultation with stakeholders and I would like to take this opportunity to thank everyone who contributed to this process.
Important taxation measures
The Government has moved in a number of ways to ensure our taxation system also supports a strong securities and financial services sector.
We have delivered on our commitment, made while in Opposition, to reduce the withholding tax on the distribution to non-residents by Australian managed funds.
This was quite a controversial announcement at the time. However, on 1 July 2009 the relevant withholding tax rate will go to 15 per cent and on 1 July 2010 it will go to 7.5 per cent – one of the lowest rates in the world.
This is an example of the Government identifying artificial barriers to the competitiveness of our funds management industry, and financial services sector more generally, and eliminating them.
As part of the 2009-10 Budget, the Government announced further initiatives to promote Australia as an international financial services hub by reducing the regulatory burden on foreign investment fund rules in Australia.
The managed funds sector has long maintained that the foreign investment fund rules regime imposes significant compliance costs and an uncompetitive tax burden on Australian fund managers.
Some foreign investors have previously alluded to the current treatment of foreign investment fund rules as a potential barrier to investment in Australian managed investment schemes which would ultimately lead to foreign domiciled investors electing not to invest in Australian managed investment schemes.
This reform – which will change the rules into a narrow anti-avoidance tax provision – will significantly reduce these compliance costs which in turn will enhance this sector's global competitiveness and attractiveness to foreign investors.
With this new reform Australia is again positioning itself to be an international financial services hub and working to foster fresh thinking to boost financial exports.
Core liquid capital requirements
I understand that my Opposition counterpart made a range of comments yesterday on the issue of core liquid capital requirements, blaming the Government for some degree of uncertainty.
I would take this chance to remind everyone, including Mr Pearce, that under our market rule arrangements, it is the market or clearing house license holder, in this case the Australian Securities Exchange and the Australian Clearing House themselves, that develop and progress market rule changes.
Under legislation put in place by the now Opposition of which Mr Pearce is a part, the Minister of the day has a very limited role, and this is to either allow or disallow a proposed rule.
I, along with all industry participants I spoke with, agreed with the need to look at the issue of core liquid capital as this goes to the integrity of our system
And almost everyone accepted the proposed first step up to $2 million by January this year.
That's why I did two things – I accepted the rule change, thus allowing the first step up to occur, and simultaneously commissioning ASIC and the RBA to undertake a review of the second step, including its timeline, justification and quantum.
These independent and well-respected regulatory agencies reported to me in the form of the Review of Participation Requirement for Central Counterparties.
The Review found that there was a strong in-principle case for ACH to set minimum capital levels, and although there is no single answer as to what level the minimum should be set at, the Review noted that over the medium term it does not see a case that alternative arrangements would be unambiguously superior to those proposed by ACH.
The independent Review findings reinforce my decision of late 2008 to permit the initial increase in capital requirement.
In relation to the timing of further increases in minimum capital the Review found that recent market developments, particularly in the Australian third-party clearing market, mean the original timetable proposed to me by ASX/ACH, for capital increases should be reassessed and a more gradual implementation was recommended, with an increase to $5 million by mid-2010 and then to $10 million at some stage thereafter.
Unsolicited share offers
I'd now like to discuss another area of the market framework that has given the Government cause for significant concern – it is a practice that has not exclusively arisen as a result of the global financial crisis but it is certainly exacerbated by it.
I am referring to the continuing practice by some businesses of making undervalued — and often predatory — unsolicited off‑market share offers to shareholders of publicly-listed companies.
The people who make these offers access the share registers of companies to obtain shareholders' contact details and shareholdings. They then frequently target the aged, the frail or those who may not fully comprehend the outcome of an off-market sale.
Today, I pleased to announce two Government actions that are aimed at bringing the net of the law tightly over this unacceptable behaviour.
First, I am publicly releasing a comprehensive range of reform options to dramatically change the rules around access to share registers and the regulation of unsolicited off-market offers.
Secondly, we will be immediately introducing regulatory change to increase the disclosure requirements for offers where the payment is to be made through instalments over several years.
I will return to this second announcement shortly, but first I want to run through the key reform proposals I am putting on the table today.
Reform proposals on share register access
While many people recognise the poor value of many of these offers, more vulnerable investors, particularly the less financially literate, continue to accept them when they are not in their financial interest.
We are seeking stakeholders' views on the appropriateness of the current regulatory framework, and on a range of possible options for reform.
The Government is not moving against legitimate off-market trading of securities and we are very aware of the need for a well-functioning set of rules to govern such transactions, but will not stand by and watch innocent retail investors be taken advantage of by unscrupulous companies and the individuals who run them.
Often these retail investors are either new to share ownership, often through a demutualisation, or may not be fully aware of their rights under these offers.
In more recent times, there has been concern expressed by some industry and consumer organisations, by several of our largest listed companies and by the main share register providers, regarding a sharp increase in requests to access registers, including by some charitable organisations.
We are determined to address the concerns that have been raised by some industry groups, but will not go forward and act in this important area without open discussion of the issues facing the sector.
One option I am announcing is to introduce a "proper purpose" test for access to company registers.
Under this option, we would amend the Corporations Act to expressly grant a company the ability to prevent members or third parties from accessing its registers unless the members or third parties satisfy the company that they wish to access or take copies of the registers for a 'proper purpose'.
If members or third parties are refused access to a company register, they could seek an independent review of the decision, for example by a court or through private external dispute resolution.
Guidance on which purposes would satisfy the proper purpose test could be set out in the law, in explanatory or guidance material, or left to develop by commercial dealing and judicial precedent.
The United Kingdom recently introduced a proper purpose test into its Companies Act 2006. This test applies to all access, both requests for inspection or copies of registers.
In its 2008 report, the relevant Parliamentary Joint Committee recommended that the Corporations Act be amended so that access to member details of non‑substantial shareholdings would be subject to a proper purpose test.
Another important area of concern is the fee structure and costs associated with register access.
Australia's corporate governance framework aims to balance transparency and accountability with limited compliance complexity and cost.
For these reasons, share registries of publicly listed companies must be available for public viewing and to allow good shareholder communication and transparency. While shareholders have free access to share registries to enable them to exercise their rights as shareholders, external parties are required to pay a fee to cover the cost of supplying the register.
Currently, if a register is not kept on a computer the company can charge up to 50 cents per page. If the register is kept on a computer, the company can charge 'a reasonable amount that does not exceed the marginal cost to the company of providing an inspection'.
A recent court decision concerning an individual attempting to gain access to a share registry to provide low-ball offers has interpreted the meaning of a reasonable amount and marginal cost to the company.
In that case, the Federal Court suggested that the current rules for determining cost presents a level of unintended complexity that is impeding the original intention of the provisions.
The Government recognises that the definition of marginal cost is unclear and needs to be addressed.
Amongst the options I have released today, there are reform options such as allowing the full cost of maintaining and providing the register be charged to the requester, adopting a negotiated fee that would suit each individual situation, replacing "marginal" cost with a reasonable cost definition, and prescribing that the fee for access to member registers be aligned with the takeovers prescribed fee.
Reform proposals for greater investor protection
A second set of options focuses more specifically on enhancing investor protection.
Over the years I have received numerous letters and phone calls from constituents angry and confused about these unsolicited, and often unfair share offers.
Today I am floating several options to further boost consumer protection initiatives in off-market share offers.
One of these options is to provide a between one and three month "cooling off" period for the accepting shareholder to withdraw from the low-ball contract or acceptance document before the contract becomes binding.
Another reform may be to provide companies with a pre-emptive right to intervene in sales that do not reflect the market value of shares. Companies would have the option of organising a broker to purchase the shares for market value, instead of the sale at the low‑value price proceeding.
Further we are today raising the possibility of establishing a "do not contact" register and an option of more closely prescribing the format of the offer document, to include consumer warnings, not dissimilar to the health warnings on cigarette packets.
In considering possible options, the Government is mindful of the need to balance investor protection concerns with protecting the long‑standing rationale for open and accessible company share registers for legitimate uses. And of course, we also want to avoid imposing unnecessary regulatory burdens on business.
The former government attempted to address these issues by requiring certain levels of disclosure regarding current market price compared to the offer presented. Off-market share purchasing companies have now developed ways around this by offering to purchase the shares over a longer period of time.
These companies are providing offers well above the current market price but in some cases these are being paid for in instalments over the next 20 years.
Immediate Regulations on instalment payments
To complement the set of options and to combat exactly this problem, I am also announcing today that we will move to immediately put in place substantially increased disclosure requirements for offers where payment is to be made through instalments over several years.
Many of the most egregious offers are done by way of instalment, often as means to deceive the share owner about the amount they will receive for the shares being sold.
The Government will now require buyers to provide additional information on the details of the instalment payments and the present value of the offer relative to the market value.
This additional information will better inform consumers about the risks of offers which on face value can mislead them by suggesting that a reasonable price is being offered. These changes to the regulatory regime are scheduled for implementation by the end of June.
The options paper is available on the Treasury website and the closing date for consultation is 24 July.
I would encourage SDIA members to provide comments.
Just last week, Australia's three key market regulators, namely the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), working as the OTC Working Group, released a national Survey of OTC Derivatives Markets in Australia.
The group was formed to monitor international industry developments and assess the Australian OTC derivatives market in the context of an April 2008 Financial Stability Forum (now Financial Stability Board) recommendation and the Rudd Government's ongoing focus on maintaining the highest degree of regulatory standards.
This survey importantly concluded that market risk is low in relation to OTC derivatives market activities in Australia. I welcomed this finding and noted that the level of activity and magnitude of existing exposures in the Australian OTC derivatives markets are quite low by international standards.
The survey also found Australian industry and participants reacted sensibly to the challenge of the global financial crisis, by improving OTC processes and moving to reduce and manage risks.
I would like to take the opportunity to thank the derivatives industry, led by the SDIA, for their mature market response.
I would also note that ASIC will also continue in its current global leadership role on OTC issues by co-chairing an international stakeholder meeting in Madrid today as part of the International Organisation of Securities Commissions (IOSCO) report Task Force on Unregulated Financial Markets and Products.
ASIC has played a global leadership role on this project, and I would like to take the opportunity to congratulate our corporate regulator on representing Australia's interest in robust global financial markets.
This supports you, the market participants, as you go about your derivative business.
Finally on the regulation of the derivative market I would take the opportunity to flag today that within the next fortnight I will be releasing the Government's preliminary thinking on the regulation of both long and short equity derivatives.
This – as you would appreciate – is a complex and international issue and I look forward to engaging with you on it across coming months.
Ladies and gentlemen, as I mentioned earlier this morning, our circumstances have changed significantly since I addressed the SDIA conference in May 2008.
Over that time however, the Government's approach has been steadfast — to not only provide the immediate solutions Australia needs but also looking ahead, paving the way for a strong and sustainable future.
In my own area I have overseen a range of examinations of important market issues that have been rapidly brought to decisive action:
- credit ratings agencies – reviewed and now on the path to licensing and compliance reporting;
- short selling – reviewed, laws passed and naked shorting banned;
- state regulated financial services, including consumer credit and margin lending – Green Paper released, COAG agreement reached, a two hallmark Bills shortly to be introduced into Parliament;
- golden handshakes – commitment made, Bill released with introduction in a matter of weeks;
We are achieving these outcomes by strategic decisions to reinforce our market regulatory framework as and when needed.
Once again, thank you for all for the ongoing role your playing in this endeavour and for inviting me to speak with you today.