Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
Financial Markets and the Changing Regulatory Framework
Address to 2010 Annual Stockbrokers' Conference
Crown Promenade, Melbourne
8 June 2010
Good morning and thank you for the invitation to speak to your conference.
I'd like to say at the outset that I very much value what I regard as the very constructive relationship the Government has developed with David Horsfield, Rob Thomas and your organisation.
We are here, of course, at a time of big reform – both in your industry and in the economy as a whole.
Every serious economic reform in this country has attracted controversy and predictions of calamity.
You only need to think back to the debates over Mabo, FBT, CGT, over the repeal of WorkChoices, over the introduction of the Petroleum Resource Rent Tax.
The Government's current economic reform agenda is attracting similar claims of calamity.
Nobody, ladies and gentlemen, should underestimate this Government's determination to introduce serious reform.
We are embarking on this course of reform not because it is easy. It isn't. We are embarking on this course of reform because it is essential for our economic well-being for the decades ahead.
Politicians of all stripes are often accused of short-term thinking, of looking only as far ahead as the next election. But what we are doing with the Resource Super Profit Tax is the very essence of long-term planning for this country's economic future. The revenue raised by the RSPT will pay for absolutely vital long-term reforms. Demographic change – the ageing of the population – means there are two imperatives for governments around the world:
- firstly, ensure a sustainable model of health funding;
- secondly, ensure a sustainable retirement income system.
As our population ages, an increasing share of government expenditure will need to be spent on health.
In 1970, there were 7.5 Australians of working age for every Australian over 65. That number has since dropped to 5 Australians of working age for every Australian over 65.
And, as the Intergenerational Report (released earlier this year) found… by 2050, we will have only 2.7 Australians of working age for every Australian over 65.
This will have a marked effect on government budgets in decades to come -- a smaller proportion of the population as tax-paying income earners; a larger proportion requiring access to health and related services.
All this adds an extra imperative for getting our retirement income policies right.
Health spending already absorbs over 40 per cent of state budgets and expenditure on public hospitals has been growing by around 10 per cent per year.
If current spending and revenue trends continue, the Treasury projects that health spending alone would absorb more than the entire revenue collected by all states within 35 years – and sooner in some states.
Under our proposed health reforms, the Federal Government will take majority funding responsibility for public hospital services and take full responsibility for GP, primary health and aged care. These new arrangements represent a fundamental reform of federal-state financial relations and will improve state and territory budgets, freeing up resources for other vital public services.
The health reform debate is separate to the debate on the Resource Super Profits Tax but they are both discussions about the long-term sustainability of our public policy settings. Fixing our retirement income system is not separate to the RSPT – they are closely linked.
At the same time, we need to focus on funding the retirement incomes of an increasing number of older Australians. The proportion of taxpayers is falling at the same time that the proportion of older Australians is rising.
That is one reason the Government's decision to increase the superannuation guarantee from 9 per cent to 12 per cent is imperative.
For a 30 year old on average weekly earnings today, our reforms mean an extra $108,000 in retirement.
For the pool of national savings contained in superannuation – already worth $1.2 trillion – our reforms mean an extra half a trillion dollars in the next 25 years. This means our collective pool of superannuation is projected to reach $5.8 trillion by 2035.
Such a massive pool of funds, which is currently already the fourth-largest in the world, underlines not only our ambition – but also our capacity – to become a financial services centre in the region.
This is a goal that previous governments have paid lip service to. But it is a goal that we are actually taking active steps to achieve, most notably through the establishment of the Australian Financial Centre Forum, headed by former Macquarie deputy chair Mark Johnson.
The Forum's report set out a number of recommendations to further Australia's push to become a regional financial hub and the Government has accepted nearly all of them.
Financial Market Reforms
One of the report's recommendations urges the Government to grant licences for new trading platforms and exchanges, with a view to introducing financial market competition as soon as possible.1
The Johnson Report noted that Australia already has the seventh-largest equity market in the world by free float market capitalisation – and the second-largest in Asia.2
The report argued that, in order to consolidate this position, Australia needs to respond to the opportunities presented by new niche markets for both exchange-traded and OTC products by providing licences to new market entrants.
The demands of a more mature, more complex industry led us – in a move strongly supported by the Johnson Report – to transfer responsibility for supervising market participants from individual market operators to ASIC.
Obviously, the transfer of market supervision to ASIC is a precursor to allowing competition between markets – and, in March, I announced the Government's support for competition, as well as in‑principle approval of the market licence application of Chi-X Australia.
We know from the experiences of the US and Europe, which have had alternative trading systems for several years, that competitive forces drive innovation and technological developments within financial markets.
Ensuring that Australia's financial markets are internationally competitive in terms of safety and innovation can potentially draw additional liquidity to Australia.
This will be vital for the growth of Australia's financial services industry into the future.
We also expect competition to benefit everyday Australians by reducing trading fees.
Indeed, the benefits of impending competition are already clear to see, with last week's announcement by the ASX of a significant reduction in trade execution fees.
The evidence from overseas has also been compelling.
The London Stock Exchange dropped fees in response to competition in 2008 and restructured its trading fees again last September.
Earlier this year, the TMX Group, owner of the Toronto Stock Exchange, announced a significant reduction in trading fees on its exchanges. This came in response to an announcement by Alpha ATS, TMX's largest competitor, that it planned to undercut the Toronto Stock Exchange's fees by as much as 55 per cent.
Here, Chi-X has stated that it expects to reduce trading fees paid to the exchange in Australia by more than 25 per cent. This reduction in transaction costs for brokers should flow through to lower transaction costs for everyday investors and traders.
Of course, as I have previously made clear, no final decision will be made on Chi-X's licence application until the necessary regulatory framework is in place and all other requirements have been met.
The first step is to complete the transfer of responsibility for market supervision to ASIC. Given the significant nature of this change, it is important that supervision is bedded down and in place before competition is introduced.
The transfer itself will not take place until I am completely satisfied that all the necessary preparations have been made and systems are in place to ensure as smooth a handover as possible. If all goes well, the transfer would occur sometime in August.
I appreciate the Stockbrokers Association's input into the process of preparing for the transfer. I know this is a significant change for participants, involving costs and some initial uncertainty.
So your contribution to this process – particularly your engagement with ASIC – is invaluable.
I have asked ASIC to very proactively engage with the Stockbrokers Association, AFMA, IFSA and the Australasian Compliance Institute to ensure there is plenty of opportunity for market feedback on both the transfer of supervision and the introduction of competition.
Just as I clearly recognise the benefits of competition, so I recognise the complexity of the task we are undertaking and the necessity to get the details right.
The introduction of competition will be a significant change in Australia's market structure, with implications for price discovery, compliance and best execution. I recognise that market participants will require a lead time to adapt to the new environment, and can assure you that I am alive to the need to make sure that industry is prepared.
I also recognise that this is not the only change that participants are having to adjust to.
While a disclosure regime in relation to covered short sales has been operative since late 2008, more comprehensive reporting requirements are currently being phased in under ASIC's supervision.
For the first time, transactional reporting will provide an indication of the proportion of trades in a particular security that are short sales, as well as the overall level of short selling that takes place on the market each day.
This information is useful for regulators carrying out market surveillance and investigating alleged cases of market misconduct, as they can use this detailed information as an audit trail when conducting investigations.
The legislation also requires the reporting of short positions by short sellers to ASIC. This information is aggregated by ASIC and released to the public four business days after the positions are taken.
Positional reporting will provide an indication of the bearish sentiment within a particular stock at any point in time and also the amount of overhang in the stock that will need to be covered at some point by short sellers purchasing shares. For investors, this information may also provide an indication of the level of risk involved in shorting the stock.
This reporting, complemented by the disclosure of securities lending, meets the demand for greater transparency on short selling activity in Australia.
It strikes the right balance between the interest of the market in knowing what short selling is occurring, and the legitimate interests of traders in not having their trading strategies compromised.
The disclosure timeframes were finalised following close consultation with ASIC and industry. It is the most liberal approach we can take which is also consistent with maintaining market integrity.
Another area where the Government is acting to make Australia's financial markets a more modern, competitive, clean and transparent place to trade is in relation to insider trading and other market offences.
Insider trading distorts what should be a level playing field and market manipulation muddies what should be a transparent trading environment.
We simply won't tolerate insider trading or these sorts of offences. That is why we are sending a strong message of deterrence to anyone contemplating this sort of conduct by increasingly penalties for anyone caught and prosecuted.
Individuals found guilty of these offences will face ten years imprisonment and fines of up to $500,000, three times the profit gained or loss avoided. The pecuniary penalties are more significant for corporations convicted of these offences, which have a negative effect, not only on the investors involved, but also on the broader economy.
And, because we know that these sorts of offences are difficult to detect and have, in the past, often gone unprosecuted, we are increasing ASIC's evidence-gathering powers.
Legislation I plan to introduce into the parliament in the next fortnight will ensure the regulator has access to the kind of direct evidence that can be compelling, such as incriminating statements made in telephone conversations, emails or text messages.
These changes will provide ASIC with access to the same sort of evidence already available to the Australian Competition and Consumer Commission.
Of course, we are ensuring that appropriate safeguards will be in place, requiring that any interception be conducted by the Australian Federal Police under a judge-issued warrant.
The new laws will also make it more difficult for offenders to destroy incriminating evidence before ASIC can enforce a search warrant. ASIC will be able to apply for a search warrant under the ASIC Act without first having to issue a "notice to produce", which currently gives offenders a window of opportunity to destroy incriminating material.
Access to share registers
Another area where we are working to clean up our financial markets is our move to restrict access to company share registers. This change – which we plan to introduce into parliament in the same piece of legislation as the market offences reforms – will prevent unscrupulous operators from making unsolicited below-value offers to purchase shares from vulnerable shareholders.
Legislation will stop thousands of small-time investors from getting ripped off and from losing faith in the regulation of our financial markets.
Despite efforts to stop this practice by requiring what, to many of us, seems like clear and frank disclosure, many Australians – often the elderly or the vulnerable – have been conned into handing over their shares for well below fair value.
I've seen plenty of examples of this in my electorate and I get plenty of complaints about it as Minister. This is one business model I make no apologies for stamping out.
The new laws will ensure that a company will only have to hand over a copy of its member register if it is sought for a "proper purpose". Associated regulations will specifically preclude seeking a copy of a share register for the purpose of making off-market offer for shares in a listed company, other than as part of a genuine takeover offer.
This legislation deals with a clear case of market failure, alleviates the compliance burden for businesses that have to deal with many requests for access to share registers and provides consumer protection for thousands of less sophisticated shareholders.
The reforms contribute to our work to rid the market of dodgy players, and restore the faith of all Australians in the integrity of our markets.
All these changes I have outlined today – from structural reform to smaller changes – are being for the long-term benefit of the industry and for the participants in it.
Of course, I recognise that many of these changes bring associated burdens of upgrading IT systems and technical skills.
While there will necessarily be a settling-in period in relation to the transition of supervision to ASIC and the introduction of competition, ultimately, the Australian market will be better for the changes we are currently introducing.
In conclusion, can I again thank the Stockbrokers Association for your engagement. In a period of substantial reform, you have provided me with invaluable feedback. And I look forward to that ongoing feedback as we bed down these reforms.
1 Australian Financial Centre Forum report, Australia as a Financial Centre: Building on Our Strengths, November 2009, pp 92-3.
2 Australian Financial Centre Forum report, Australia as a Financial Centre: Building on Our Strengths, November 2009, p 34.