Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
"What's happened since we last met?"
Address to the Mortgage and Finance Association of Australia National Convention
5 June 2009
Thank you for that kind introduction.
I'm delighted to have been invited to again to address the Mortgage and Finance Association of Australia's National Convention.
I value the important work that the MFAA plays in elevating the role and standards of your industry. And I particularly appreciate your focus on promoting professionalism for your members, and excellence for the benefit of your customers.
I'd also like to thank MFAA for your important contributions to the development of public policy. For example, MFAA was a member of the Industry Consultation Group which advised Treasury on the development of the draft Consumer Credit Reform Package.
MFAA also made submissions to both the Green Paper on Financial Services and Credit Reform in June 2008 and, more recently, the exposure draft of the National Consumer Credit Protection Bill 2009. I'll talk a bit more about the new national consumer credit regime in a few minutes.
Economic outlook for Australia and Government's recovery response
Today, I have been asked to talk about "What's happened since we last met?"
Well, we all know that a great deal has happened since I addressed the 2008 MFAA convention. Over the last year, the global economic outlook has deteriorated sharply. We now face the most challenging global economic conditions since the Great Depression.
Ladies and gentlemen, when I addressed the MFAA convention in May last year, I said that the Rudd Government's first Budget combined nation-building initiatives with programs to redress the balance in favour of working families. I also said that our 2008 Budget began a new era of investment in Australia's long-term future.
To support jobs today by investing in the infrastructure Australia needs for tomorrow.
The 2009 Budget has at its core a $22 billion investment in the infrastructure our nation needs to grow and flourish in the years ahead.
It focuses on an unprecedented push for jobs and productivity, built on the roads, rail, ports and broadband that are the building blocks for sustainable growth.
The measures in this Budget build on the early and decisive action the Government has taken.
And, the success of our economic stimulus strategy was confirmed earlier this week with the release of the National Accounts figures.
During the March quarter, the Australian economy outperformed every other advanced economy. Australia's GDP rose by 0.4 per cent to be 0.4 per cent higher through the year, boosted by the early policy action taken by the Rudd Government and the Reserve Bank of Australia.
This positive outcome is a clear demonstration of Australia's resilience amid the global recession, and compares dramatically with nearly all other advanced economies.
Of the other 22 OECD economies that have reported March quarter outcomes, 20 have contracted. In fact, G7 economies contracted by an average of 2.2 per cent in the March quarter.
And crucially, Treasury estimates that, without the Government's stimulus payments, the Australian economy would have contracted in the March quarter by about 0.2 per cent.
Despite this positive news, it is clear that we are not yet out of the woods. We can expect the full effect of this global recession to have some way to run.
But it is obvious that the Government's economic stimulus strategy is helping to cushion Australia from the worst impacts of the global recession.
And helping to position us to capitalise on the global recovery which lies ahead.
Outlook for housing sector
It was inevitable that the global recession would affect the housing sector.
Dwelling investment fell in the March quarter by 5.6 per cent.
However, strong support for housing activity is expected in coming quarters as the Government's housing stimulus measures and low interest rates flow through to construction activity.
As part of the Economic Security Strategy announced on 14 October, the Government introduced the First Home Owners Boost.
And in the 2009 Budget, the Government announced that the First Home Owners Boost will be extended until 30 September 2009. From 1 October to 31 December 2009, a reduced amount will be paid. And from 1 January 2010, the usual First Home Owners Scheme will apply.
By extending the First Home Owners Boost, we are providing opportunities for more Australians to enter the housing market for the first time. And this demand will support many thousands of jobs in the sector.
Looking ahead, in 2010-11, activity in the housing sector is expected to be supported by strong underlying demand and significant easing in monetary policy. This will set the scene for a solid recovery with expected growth of 11.5 per cent.
Key reforms relating to financial sector
As part of the Rudd Government's broader strategy which has allowed Australia to withstand the worst effects of the global recession, we are making important reforms to the regulation of financial services in this country.
I would like to talk about some of these reforms today.
New national consumer credit system
One of the ways we are modernising our financial services industry is by overhauling our consumer credit system.
The reforms include all consumer credit — mortgages, credit cards, and some investment lending to over 5.7 million Australian households. It also covers brokers and credit advisers.
At the moment, Australian consumer credit regulation occurs under a range of different legal regimes, including both Federal Government and State or Territory government regimes. In other words, there is currently no consistent consumer protection system throughout Australia.
Another issue is that the laws do not currently cover some of the newer and more complex credit products.
To overcome these problems, we are introducing the National Credit Code — one single, national, standard system to regulate consumer credit.
To bring the new national regime into effect, I expect to introduce two complementary pieces of legislation into Parliament this month — the National Consumer Credit Protection Bill, and the Financial Services Modernisation Bill. I expect the new regime to be in place shortly afterwards.
This will be a decisive moment. 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.
Licensing and responsible lending
The new National Consumer Credit Protection Bill will be underpinned by two important principles — national licensing and responsible lending.
For the first time, a national licensing regime will be established. This will require lenders and providers of consumer credit services to obtain an Australian Credit Licence from ASIC, which will have significant new enforcement powers.
The licensing process will take place in two parts. From 1 November 2009, all persons engaging in credit activities will need to be registered with ASIC, and must complete their registration before 31 December this year. They will then have the six-month period between 1 January 2010 and 30 June 2010 to apply for an Australian Credit Licence.
During these transition periods, ASIC will undertake intensive stakeholder consultation to explain the regulatory requirements to stakeholders. ASIC will also work closely and cooperatively with stakeholders to develop guidance material to help industry in the shift to the new regulatory environment.
To qualify for an Australian Credit Licence, lenders and brokers must meet certain criteria. These include meeting minimum training requirements and having adequate financial and human resources to meet their obligations.
It would be important to note that brokers who are already meeting the professional standards required by the MFAA should not be concerned by these requirements.
Lenders and brokers must also meet enhanced standards of conduct, including a requirement to act honestly, efficiently and fairly, and to properly train and supervise people who act on their behalf. Licensees who do not meet these obligations risk losing their licence. Having learnt lessons from the Financial Services Reform experience, ASIC will ensure it enforces these obligations by taking the scale of the licensee into account.
As well, licensees must be members of an External Dispute Resolution scheme. Of course, the MFAA already requires its members to belong to such a scheme, and I applaud you for this.
The introduction of this requirement means that it will apply to all lenders and brokers who provide or arrange consumer credit. This means that there will be comprehensive national coverage, and consumers will have access to a mechanism to resolve credit disputes outside the court system at no cost to them.
A national licensing scheme means that a person who is banned or loses their licence or registration will be excluded Australia-wide. At the moment, there is nothing to prevent a person banned in one State or Territory from continuing to operate as a broker or lender simply by moving to a different jurisdiction.
The Government is also providing an enhanced level of consumer protection by requiring all brokers and lenders to play their part in lending responsibly.
Brokers will need to carry out a preliminary assessment of a credit product for a consumer, ensuring that it is appropriate for their needs. The broker must also assess whether they reasonably believe the consumer would have the capacity to repay the loan.
Lenders will need to take all reasonable steps to assess the individual's capacity to repay, and ensure that the product is not unsuitable for the consumer when they decide to enter a consumer into a credit contract.
For far too long, we saw report after report calling for responsible lending requirements, but the previous government took no action on this issue.
The responsible lending requirements will help to sustain the integrity of Australia's financial system — particularly in these times of financial instability. Just as responsible lending supports economic growth, imprudent lending can not only harm consumers, but — as we saw in the United States sub-prime crisis — can damage the economy.
Enforcement and penalties
We are backing our tough stance on consumer protection with substantially increased powers for ASIC.
ASIC will be able to impose significant sanctions for licensee misconduct, which includes lending contrary to the responsible lending requirements, and arranging imprudent loans for consumers.
Criminal penalties for licensee misconduct include possible imprisonment for up to five years, and fines of up to $220,000 for an individual and $1.1 million for a corporation for the most serious misconduct.
The National Consumer Credit Protection Bill will also provide consumers with a greater level of protection.
The National Credit Code, which you would all know as the Uniform Consumer Credit Code, has been improved in a number of ways.
- It has been extended to cover residential investment properties to provide important protections to "mum-and-dad" property investors.
- We have increased the monetary thresholds under which consumers can request a change to certain terms of their credit contract on the grounds of hardship, or seek a postponement of enforcement proceedings. The old threshold fluctuated around the $315,000 mark. We have increased it to $500,000 and we are also requiring credit providers to respond to such applications within 21 days.
- Credit providers have been prohibited from using essential household goods as security.
- Credit providers are required to give consumers information when a consumer defaults on their contract or a direct debit is dishonoured.
- And we have also reduced the potential for unscrupulous lenders to avoid the application of the law to consumers.
A three-tier dispute resolution system will make it easier and less costly for consumers to resolve disputes. The system consists of access to the licensee's internal dispute resolution process... access to an ASIC-approved external dispute resolution scheme... and access to the Federal Court, Federal Magistrates Court and the courts of the States and Territories.
As well, consumers will have access to streamlined court procedures for "small claim" actions they have started in a magistrate's court, local court or the Federal Magistrates Court.
Benefits for business
Business will also benefit from the new regime.
It will reduce duplication, red tape and compliance costs by cutting many pages of inconsistent State and Territory laws down to just one comprehensive national regime. Over 2,500 pages of law has been cut down and streamlined to one national regime.
As you can see, the National Credit Code not only protects consumers, but is functional for business, and supports international best practice in the consumer lending market.
As part of the specific provisions designed to protect consumers from harmful lending practices, the regulatory environment will now cover margin loans.
This is a major step forward. Until now, margin loans have not been regulated in Australia at all.
Over the past 12 months, in the fall-out from several high-profile financial collapses, many investors lost hundreds of thousands of dollars due to margin loans. And in some cases, they even lost their family homes.
While properly-geared margin lending, backed by full disclosure, does have a place in our financial services landscape, we cannot tolerate ordinary Australians being misled into grossly inappropriate margin loans that can cost a family everything they own.
As margin loans are generally used to finance investments in listed and unlisted securities, the Government has decided to regulate this particular consumer credit product as part of the financial services regime in Chapter 7 of the Corporations Act.
In other words, margin loan borrowers will benefit from the general investor protection regime contained in that legislation. This includes the licensing, access to dispute resolution, and disclosure requirements which apply to all financial products.
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, and 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.
One situation which concerned me deeply was where mum-and-dad investors had been advised to take equity out of their family home, then leverage this debt into buying shares through a margin loan. So the investor had entered a "double-debt" trap, with their home as security.
Under the new responsible lending requirements, the lender will be required to assess a person's "true" loan-to-value ratio. In other words, the lender will no longer be able to assume that the money brought to the table isn't itself debt.
This major improvement will significantly reduce the risk of people losing their home.
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.
This measure is designed to prevent the financial stress suffered by a significant number of margin loan borrowers in the wake of the recent collapse of Storm Financial.
The legislation will also clarify, for the first time, which party is responsible for notifying the client in the case of a margin call. As you would be aware, disputes about this issue also affected the Storm Financial margin loans.
Once again, I would like to thank all the stakeholders who provided valuable input into the draft legislation. I hope we can continue working together to ensure that the new regime provides a sound level of consumer protection.
Another way that we are modernising our financial services industry is by creating a safer and more consistent regime for the regulation of debentures.
The Financial Services Modernisation Bill, which I mentioned earlier, will significantly improve consumer protection for retail investors who invest in debentures and promissory notes
The Bill aligns the regulation of promissory notes with debentures. This is a much-needed change. To put it plainly, the inconsistent regulation of debentures and promissory notes allowed Westpoint to exploit the law.
And once again, it was mainly the mum-and-dad investors who ended up losing everything.
The Bill will harmonise the legal regime to require all retail debentures and promissory notes to be subject to the full range of consumer disclosure and protection measures which are currently applicable only to debentures. This will include the requirement to have a trust deed and trustee arrangements, and to issue a full prospectus.
The amendments also provide transparency for debenture holders by creating a public register of debenture trustees. The register will be established and maintained by ASIC, and will be available online.
This is another area where the previous government failed to act. The reforms which I have just outlined are a decade overdue and will reduce the risk of another Westpoint.
In another first, the Financial Services Modernisation Bill will provide for the national regulation of trustee companies.
At the moment, trustee companies are regulated at the State and Territory level. There are currently ten private licensed trustee companies operating in Australia. Members of the Trustee Corporations Association, the sector's peak body, have about $510 billion of assets under management. Of this, around $24 billion is in "traditional trustee services", for example, acting as a trustee for charitable trusts, in deceased estate administration, and for minors.
The Financial Services Modernisation Bill completely reshapes the regulation of this multi-billion dollar financial services industry, and is another step forward in bringing Australia's financial services regulation into the 21st century.
Under Bill, the "traditional services" of trustee corporations will be deemed to be "financial services". This means that they will be covered by the consumer protection and disclosure requirements of both the Corporations Act and the ASIC Act.
This will ensure that, in providing those services, trustee corporations will be bound by the financial product disclosure, licensing, conduct, advice and dispute resolution provisions of those Acts. ASIC will be the sole national regulator for the trustee companies' sector.
The Bill will also significantly reduce red tape, replacing multiple, often contradictory, state-based regulations totalling about 300 pages with one clear, standard, national regime.
Trustee companies perform a very important role in managing assets on behalf of large numbers of Australians — people who are often amongst the most vulnerable members of our community. The new regime will provide these consumers with greater protection and certainty.
Progress going forward
There have been no less than three separate reviews that have looked into the area of consumer credit. The former government failed to act every single time. These are important reforms that should have been in place years earlier.
The Rudd Government has acted decisively - including in-depth consultation with industry and stakeholders. The exposure consultation period has just closed, and I look forward to introducing these bills into the Parliament in the coming weeks.
Ladies and gentlemen, as I mentioned earlier, our circumstances have changed since I addressed the MFFA convention last year.
And, over that time, the Government's approach has been steadfast. We are not only providing the immediate solutions Australia needs right now, but also looking ahead, paving the way for a strong and sustainable future.
Once again, thank you for inviting me to speak with you today.Thank you.