Good afternoon ladies and gentlemen. And thank you to CEDA for inviting me to speak today on what I believe is a revolution in Australia's financial services sector.
Today is an important milestone in the Howard Government's Corporate Law Economic Reform Program. Today I am releasing the Financial Services Reform Bill the draft legislation coming from CLERP 6.
With these proposals, we move one step closer to building a new regulatory framework for the financial services industry.
It's now just over 2 years since we first released the initial policy paper that put this process in train.
And before I get into the detail of the draft legislation, I think it's worth remembering why we embarked on this reform in the first place.
As you know, the Howard Government came to office 4 years ago with a commitment to establish Australia as a global financial centre.
That commitment has been a touchstone for the significant financial reforms we've undertaken since then.
Every reform has been based on the simple premise that it must improve Australia's global competitiveness and Australia's ability to attract investment.
That, in turn, leads to sustained economic and employment growth. That is the reference point for all our financial reforms.
Financial sector and corporate law reform has played a vital role in that quest. It is a hallmark of the Howard Government and we are world leaders in it.
The regulatory framework we've put in place since 1996 gave our financial system and economy the resilience to weather the difficult times.
Indeed, we enjoyed the fastest growing economy in the developed world at a time when 7 out of our top 10 trading partners were in recession or depression.
We have experienced 10 consecutive quarters of economic growth of 4 per cent a year or more, the longest sustained period of prosperity in almost 30 years.
Ladies and gentlemen, our financial services industry is growing rapidly and changing dynamically. This change is driven largely by technological developments developments which for the first time in over 200 years are smashing the tyranny of distance under which Australia has laboured with the result that as each day passes the world comes closer to our doorstep.
And so the Financial Services Reform Bill builds on this and establishes an integrated regulatory framework for all financial products. And this regime comes about for a few reasons:
Firstly, there has been an explosion in the complexity and diversity of financial products. This explosion has partly been driven by consumer demand. Consumers are becoming more sophisticated in managing their financial affairs and are demanding more and better products.
Just this week the ASX released figures that showed Australia had the highest level of share ownership in the world. Now, 54% of Australians own shares. This in part is a result of better investor education.
And I firmly believe that the increase in the range and type of financial products provides great opportunities for Australia to showcase its world class financial services research and training.
I will continue to work towards the development and promotion of financial services education in Australia to complement the regulatory development comprised in the FSR Bill so that Australia can continue to build its reputation as a global financial centre.
Secondly, significant technological developments and the globalisation of markets have dramatically transformed the financial services industry. This trend will continue with improvements in global household access to the Internet.
Thirdly, more competition in the industry with that development of the Internet has lead to the blurring of boundaries between traditional financial service providers. How long will it be before AOL and Time Warner look to supplement their product range with a financial service provider?
But while all of this has been going on - the law has not kept up. The Wallis inquiry found that when it came to financial products and the people selling them there was piecemeal and varied regulation.
It is in this context that CLERP 6 has been examining the regulation of financial products, service providers and markets. This examination is the genesis of the FSR Bill that I am announcing today.
Today's reforms will reduce compliance costs by putting in place a single regulatory framework.
They will provide a technological neutral framework that can accommodate the technology of tomorrow.
They will remove unnecessary distinctions between products and so avoiding regulatory arbitrage.
And they will also boost competition through a competitively neutral regulatory regime that will facilitate product innovation while ensuring consistent consumer protection
That is, the FSR Bill will facilitate developments in the financial services industry while ensuring a fair deal for consumers. Consumer sovereignty is a guiding principle for these reforms.
Our goal is to build a regulatory framework relevant to this new environment. A regulatory framework that is consistent, flexible, adaptable and cost effective, a framework that encourages innovation and a framework that enhances consumer protection and promotes market integrity.
That's what we've set out to achieve.
We understand reform places demands on those affected by it, with new processes to be learnt and changes to be administered.
That's why we've taken the time to get this package right, so we can deliver reforms that are workable and that can sustain a cost/benefit analysis of the existing law and the proposed changes. Anything less would be a waste of your time and ours.
I know you've been following the progress of financial services reform with great interest, from the release of the initial policy paper in December 1997 through to the Consultation Paper I released last year.
I've met with many of you regarding these reforms and, if I haven't spoken to you directly, I'm sure either my office or someone from the Treasury has. We've received a lot of submissions. At last count there were well over 120.
The submissions and consultation sessions have proved an invaluable source of feedback on a ground breaking and sometimes difficult reform process. I think it's fair to say the proposals have moved on significantly from where they stood in March last year and address many of the concerns raised in the submissions we've received.
So, I'd like to take this opportunity to thank you for your interest and, most importantly, your involvement in this reform process.
The draft legislation I'm releasing today is very much a team effort between the Government, the financial services industry and consumers. It's a progress report on the work we've done together to bring these reforms to life.
I've spoken on a number of occasions about what this draft legislation will cover, when enacted. Some of the better known features include the flexible definition of financial product, the single licensing regime for financial service providers and uniform conduct and disclosure standards.
By now, all of you are familiar with those issues.
So today I'd like to concentrate on some of the major changes reflected in the draft legislation, particularly in the areas of credit, commission disclosure, product disclosure and opting up.
In relation to credit, the Consultation Paper proposed that credit not covered by the Uniform Consumer Credit Code should be included in the definition of "financial product".
Providers of such credit would therefore have been subject to the licensing, conduct and disclosure requirements of the new legislation.
However, many submissions expressed concern about the inclusion of non-consumer credit in this regime and the possibility that, in creating a Commonwealth regulatory regime for non-consumer credit to sit beside the existing UCCC (Uniform Consumer Credit Code) requirements creates unsupportable complexity and unintended opportunities for regulatory arbitrage. This would result in a legislative framework that could not be supported on a cost benefit analysis.
And in light of those concerns, the Government has decided against the inclusion of non-consumer credit in the Bill.
However, at the Commonwealth level, ASIC will take over administrative responsibility from the ACCC for general consumer protection provisions in relation to non-consumer credit.
The Government's decision not to include any form of credit at this stage was also taken in a context where the UCCC has recently been the subject of a Post Implementation Review, and is being reviewed this year under the National Competition Principles. The outcomes of these reviews need to be given time to take effect.
When we have had time to assess their effectiveness, and some experience of the operation of ASIC's new consumer protection jurisdiction over credit, the Government will be in a position to decide whether a broader review of credit generally is warranted. The time for such a decision will be 2 years after the start of the FSR Bill.
The second area I'd like to elaborate on is commission disclosure. This is a topic that has generated a vigorous debate.
The March Consultation Paper proposed full up-front disclosure of commission for all financial products.
Broadly speaking, there were two differing views on this issue. Participants in the insurance sector, in particular, raised concern about commission disclosure for risk insurance products.
I see commission disclosure as a key element of my enduring commitment to consumer sovereignty. We must ensure that consumers get meaningful information, so they can make informed choices. This is an integral part of the financial services reform proposals that I am presenting today.
I believe the approach we've adopted in the draft provisions maintains the integrity of up-front commission disclosure while acknowledging the legitimate concerns of a range of stakeholders.
As you know, commission disclosure takes place at several points in the transaction between financial service provider and client.
The FSR Bill focuses on identifying the purpose of commission disclosure at each of these points in the transaction. This purpose will then determine the level, degree and format of disclosure.
A financial service provider will be required to provide their client with a Financial Services Guide at the time of first contact, such as when the client first meets the financial service provider.
The guide will provide the client with key information about the provider and the services that are to be provided including the fees to be charged or the commission paid.
Where personal advice is provided the adviser must have a reasonable basis for providing that advice and produce a written Statement of Advice for the client. The Statement of Advice must include details of any benefit that might influence the adviser's advice.
This approach recognises that where a commission includes payment for back office services, that portion of commission does not need to be disclosed.
At the same time, there will be prohibitions on false and misleading conduct, which will prevent this part of the commission being loaded up in order to avoid disclosure.
Where information is provided about specific products the consumer must receive a Product Disclosure Statement enabling the client to assess the features of the products and to make an informed decision about whether the product suits their needs.
Further, details of commissions will only need to be disclosed in the Product Disclosure Statement, where the commission will ultimately reduce the return to the client. The practical effect of this will be that commission disclosure may not be necessary for non-investment products, such as risk insurance.
I would urge those interested in this issue to have a good look at the revised approach and give us your comments.
The third area I'd like to address is product disclosure, where the Consultation Paper sought comments on two different approaches.
The first was a directed disclosure approach to all financial products other than securities. Securities, including managed investments, would remain subject to the fundraising provisions of the Corporations Law.
The alternative proposal brought superannuation and the investment components of life insurance under the general disclosure test of the Corporations Law fundraising provisions, along with managed investments. All other financial products would be subject to a directed disclosure approach.
A majority of submissions supported a directed disclosure regime -- but suggested that its application be extended to cover managed investments.
The Government has listened to the arguments and adopted a directed disclosure regime that includes all managed investment schemes as sought by many of your submissions.
I believe this approach will enable consumers to make more informed decisions about financial products and make it easier for them to compare the products.
An issue of concern for many during the consultation period was the process known as "opting up".
The Consultation Paper proposed a mechanism by which a retail client could, in some circumstances, opt to be treated as wholesale client, thereby foregoing the protections afforded to retail clients.
Many submissions raised concern that retail consumers could be too easily convinced to opt up to wholesale client status and that the process for opting up was overly complicated.
Given the concerns expressed about opting up, the Government will NOT pursue this proposal.
I'd like to also briefly mention the draft provisions dealing with markets and clearing and settlement facilities.
The new regulatory regime provides a flexible framework that encourages innovation and competition in markets and clearing and settlement facilities.
Many of the submissions on these proposals suggested some fine-tuning, which in many instances the Government has accepted.
The financial services reform legislation will fundamentally alter the process of regulating exchanges and clearinghouses recognising the diverse range of markets and platforms that have been and will be developed in the years ahead. If we want to remain the home of the largest pool of liquidity in the region our framework must be capable of developing and adapting to the challenges of change.
In my role as Minister responsible for Australia as a financial centre I am acutely aware of the, structural changes to the ownership and organisation of exchanges (especially those resulting from the demutualisation of exchanges). These changes have exposed increasing tensions between the regulatory environment and the commercial realities in which exchanges operate.
The New York and London Stock Exchanges are both in the process of following the lead established here when the Australian Stock Exchange demutualised in 1998 meanwhile proposals for the demutualisation of the Sydney Futures Exchange are being actively examined.
Not only are the ASX and SFE major players in the region and globally but we also have Newcastle Stock Exchange about to be re -launched; the Bendigo Exchange is well on the way to reactivating, Austock, ADX and the Partnership Group just to name a few may make a significant contribution to the state of Australia's financial markets.
The challenge for the Government is to ensure the probity of the managers of markets and the preservation of our national interests in a world that is undergoing deep and powerful change on a scale not seen since the industrial revolution.
The Government is currently considering a number of proposals designed to meet the new challenges faced by our markets. I expect to be able to make an announcement on this over the next few weeks.
Ladies and gentlemen, the course of reform is not an easy one. It requires large doses of courage and hard work. But, as our experience has shown, it can produce dynamic shifts in economic performance, so long as the framework is right.
And with today's Financial Services Reform Bill I think we've come a long way towards getting that framework right.
I'd like to thank you for the contributions you have made to this package over the last 2 years.
I might mention that following a number of representations to me from industry I have also asked the Companies and Securities Advisory Committee to consider the issues associated with granting security interests over uncertificated securities. Similarly, I have asked CASAC to look at issues associated with cross border securities lending. The views of CASAC will provide the Government with valuable input into the development of the final form of the FSR Bill.
Of course we welcome your feedback and we will be progressively considering your comments as we approach the closing date of May 12.
It is therefore in your interests to get your comments in early.
The FSR Bill can be accessed through my website (www.joehockey.com) and hard copies will be available in the Ausinfo bookshops next week.
Our commitment to a speedy timetable for the passage of this bill remains firm. I want to introduce the FSR Bill to Parliament in June, pass it through the Senate as soon as possible, and have it in place, with appropriate transitional measures, to begin 1 January 2001.
Ladies and Gentlemen, I firmly believe that the reform of our existing financial services regulation is essential if we are to continue to build our credentials as a centre for global financial services.
I have no doubt that our reforms will be copied overseas. It was done with Wallis and it will be done with CLERP 6. But the fact remains that the hard work was done here first, we are a global centre of excellence in the development of this type of regulation.
I know that the world is watching: if we get the formula for a new model of financial services regulation right that will be just one more reason why Australia should be the global financial centre in the Asian time zone.
Thank you.