Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
Address to the Australian Chamber of Commerce
Friday, 22 January 2010
Good afternoon and thank you.
I was particularly keen to take up your invitation to speak today.
This Chamber represents the Australian diaspora in action, as well as the commitment of other friends who know and understand the Australian economy.
It also illustrates the strength of Australia's economic engagement with Hong Kong.
The fact that this is the largest Australian Chamber of Commerce outside Australia and the second largest international Chamber of Commerce in Hong Kong is an indication of the depth and breadth of our engagement with Hong Kong, with 50,000 Australian expatriates living here and 5,000 Australian companies represented here. So I'm happy to be here to thank the Chamber of Commerce for the work you do in cementing that engagement.
Of course, much of that is in the field of financial services which has been the focus on my visit here.
When we were in Opposition, Labor identified financial services as a key area for improvement in trade performance, where Government-imposed barriers to improved performance needed to be identified and removed.
The Financial Services portfolio itself is one that had been dormant for a long time in Australia. The fact that the Prime Minister has reinstituted a Minister for Financial Services and designated that Minister as a Member of the Cabinet shows how seriously the Government takes our financial services sector and the need to do more to promote Australia as a global financial centre.
We still see this as an area of great opportunity.
Australia's Competitive Advantages
We have a range of competitive advantages when it comes to promoting Australia as a financial services centre.
One advantage we must capitalise on is the strength of our economy. Australia's economy has been one of the world's best performers in the midst of the global financial crisis. The Australian economy grew by 0.5 per cent in the year to September 2009. This made Australia one of only three advanced economies to have recorded positive growth in the year to September 2009.
As the dust settles Australia is clearly emerging as one of the more resilient of the developed economies. Indeed, Nouriel Roubini, speaking at the Asian Financial Forum yesterday, noted that Australia, along with Canada, was the best placed of the world's advanced economies. This is consistent with the findings of a survey by Swiss business school IMD, whose World Competitiveness Yearbook ranked Australia as the world's third most resilient economy in 2009.
In financial services, the World Economic Forum has ranked Australia as the second most developed financial centre in the world, due primarily to the stability of Australia's financial institutions over the last 12 months. With four out of the world's nine AA-rated banks being Australian, we have a good story to tell when it comes to the strength of our financial and regulatory system.
Of course, one of the reasons for this performance has been the size and sophistication of our pool of managed funds, a direct result of Australia's superannuation system, which has some similar features to Hong Kong's Mandatory Provident Fund.
Australia's $1 trillion pool of contestable private pension savings is the fourth largest in the world and, according to Watson Wyatt, over the 10 years to 2008, Australia was the fastest growing of the world's 11 largest pension markets.
Australian Treasury estimates that, 25 years from now, this savings pool will have grown to $5 trillion, which will equate to 120 per cent of Australia's forecast GDP of $4.2 trillion.
The constant flow of funds from Australia' compulsory pension system, which has been in place since 1992, is an important driver of growth in this savings pool.
These funds have been at the disposal of the Australian economy.
In the 2009 Australian financial year, at a time when liquidity was being rapidly withdrawn from markets around the world, Australia remained an attractive place to raise capital.
Australian-listed companies raised $90 billion of capital. Investor support, including from Australian institutional investors, helped to restore the capital base of companies that together employ over 1.6 million Australians.
The skills that have been built up in managing this massive pool of funds in Australia have been a vital factor in the development of our financial services industry. Our funds management industry has capability across liquid asset classes such as equities and fixed interest, as well as illiquid assets such as infrastructure and property. Australia also has strong experience in investment consulting and financial planning, as well as the governance and administration of pension products.
Yet, for a nation that has built up such experience and expertise in managing wealth, our level of international engagement is relatively low. For example, it is extraordinary that under five per cent of all those funds under management come from overseas. In Hong Kong 64 per cent of funds are sourced offshore, while in Singapore, 80 per cent of funds are sourced offshore.
This is one area where Australia has so much scope for improvement. We need to be leveraging off our experience and spruiking our financial management skills.
We've taken some steps to do so and are considering what further steps we need to take.
Some of these reforms include:
- Cutting the withholding tax on certain foreign distributions from managed investment trusts from 30 per cent to a final rate of 7.5 per cent; this has transformed Australia from having the highest withholding tax rate in the world for these distributions to effectively having the lowest.
- Changing the attribution rules and the deemed capital account treatment of the sale of shares, units and property from Managed Investment Trusts – based on advice of the Board of Taxation and the Australian Financial Centre Forum.
- Announcing our intention to repeal and replace the Foreign Investment Fund provisions with a narrowly defined anti-avoidance rule. The Controlled Foreign Company rules will also be modernised and rewritten.
Australian Financial Centre Forum
In addition to these measures, we also established the Australian Financial Centre Forum, with a mandate to examine policy settings and identify strategies to position Australia as a leading financial services centre in the Asia-Pacific region, one that would attract global business to Australia and to the broader Asian region.
Obviously there is some competition between various countries of the region for financial services centre status. But there is also much to gain by cooperation between the countries of the region in financial services issues.
Greater cooperation with other Asian financial centres has the potential to realise significant benefits for all concerned. These potential benefits include:
- increased competition and greater choice for regional consumers and investors, resulting in lower prices and improved quality of service;
- greater access and decreased regulatory costs for Australian financial service providers wishing to expand their businesses within the region; and
- stronger relationships between the relevant regulatory bodies in the region leading to more effective enforcement outcomes.
For example, in 2008, Australia and New Zealand entered into the Trans-Tasman Mutual Recognition of Securities Offerings scheme. This scheme allows various financial products to be offered in both jurisdictions using the disclosure documents required in the home jurisdiction.
Research conducted by ASIC has found that this scheme has significantly reduced the legal costs of conducting trans-Tasman offerings.
Recently I was pleased to release the Forum's report – Australia as a Financial Centre: Building on our Strengths. The Government is currently considering the Report's recommendations in the report on how we may promote Australia as a financial services centre.
The report makes 19 recommendations – ranging from the creation of an investment manager exemption, the enhancement of the offshore banking unit system, the abolition of state insurance taxes and a range of others.
While I've been in Hong Kong, I've been heartened to hear the Johnson report has been noticed and welcomed by the local financial services industry. Similarly, the financial services industry in Australia has strongly welcomed the Report's recommendations.
We are taking each recommendation seriously and working them through. Some will need to be considered in conjunction with the Independent Tax Review being chaired by the Secretary of the Treasury, Ken Henry.
One of the key recommendations of the report is the establishment of an Asian Region Funds Passport. The Asian Region Funds Passport could operate in a similar way to the European Undertakings for Collective Investment in Transferable Securities — or UCITS — framework.
For example, a fund manager would be able to offer products to retail investors in any country in the region as long as the fund manager complies with a core set of regulatory requirements applicable to all fund managers in the region.
An agreement like this would provide fund managers with significantly increased scale, and investors with a much broader range of products to invest in.
The current lack of regulatory integration in the region — when compared with regions like the European Union — and other issues like tax uncertainties for people investing in foreign funds means that the establishment of a regional funds passport may take some time to realise.
In so many other nations the financial services sector has been a drag on economies throughout this crisis but it's certainly not something we would say of our region.
This financial crisis is an opportunity for the Asia-Pacific region. For years to come, the world's investors will be looking to see who got through this crisis the best: which system of prudential regulation worked? Which financial institutions got through this crisis the best? Which nations survived the global financial crisis?
The Australian Government will continue to promote greater cooperation within the region as a means of promoting Australia as a leading financial centre in the region. Greater cooperation with other Asian financial centres has the potential to realise significant mutual benefits.
Thanks again for the work the Chamber does collectively and each of you individually, in promoting engagement between Australia, Hong Kong and the broader region. I also welcome and encourage your commitment to the expansion and promotion of Australian financial services.