Introduction
Thank you for your kind welcome and for the invitation to join you today.
Soon after stepping into this role late last year, I set out the Government’s agenda for the issues and industries that lie in my portfolio as Assistant Treasurer.
Since then, I’ve had the opportunity to consult and collaborate with representatives across several industries, including the financial services sector. The conversations I’ve had have confirmed to me that our agenda is the right one: that it is in tune with the needs and goals of Australia’s financial sector and the broader economy.
As 2014 opens, that agenda is well underway.
Today I’d like to talk about parts of that agenda that will be of most interest to you, and give you something of a progress report on what is happening in each one.
I’ll cover the Future of Financial Advice reforms and Superannuation in some detail, but I will also mention more briefly the Financial System Inquiry, and some other developments of interest that are approaching or just over the horizon.
Financial System Inquiry
Firstly then, a quick update on the Financial System Inquiry.
As you know, the last full-scale inquiry in the sector was 15 years ago. Since the Wallis Inquiry, much has changed in the financial sector.
While our financial industry has served us very well, it has been transformed over the years by international economic and financial crises, a substantial regulatory reform agenda, the growth of superannuation, changes in industry structure, new competitive dynamics, technology, innovation and broader macro-economic trends.
It is vital that the financial industry continues to serve us well, which is why this inquiry is a high priority for the Government.
The Inquiry will be chaired Mr David Murray AO, former CEO of the Commonwealth Bank of Australia. Mr Murray will be supported by a committee comprising Professor Kevin Davis, Mr Craig Dunn, Ms Carolyn Hewson AO, and Dr Brian McNamee AO, and will draw on the expertise of the finance, business and academic community.
The Inquiry has broad terms of reference and is charged with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth in the decade and more ahead of us.
The Inquiry will help to fashion the future of our financial services industry in a positive and co-operative environment. Above all, it will be an agent for growth — not a vehicle for more regulation.
Submissions for the first round of consultations close at the end of March. I encourage you to have your say.
FOFA
Turning now to the FOFA reforms, I know this is an area in which you have a strong interest, and on which you have already had much to say. The Government has heard you, and our agenda for FOFA is, I believe, largely reflective of the feedback we have heard from the industry.
As I’ve said before, we support the underlying goals of FOFA, but we believe that in its original form it went too far; unnecessarily increasing red tape and costs for the financial services industry.
Consistent with our election promise, we are committed to unwinding the regulatory overreach of FOFA.
In December last year, I announced a package of amendments to the FOFA legislation, which included implementing 16 recommendations of the Coalition’s Dissenting Report that were still relevant, as well as a number of other measures.
Where legally possible, the Government will implement the measures through regulations and make subsequent amendments through primary legislation, at which stage any interim regulations will be repealed.
Treasury’s preliminary analysis estimated that the proposed FOFA amendments will save the industry roughly $190 million a year, with further savings of around $90 million in implementation costs. Consumers should be the ultimate beneficiary, as businesses pass the savings on to their clients.
These savings will contribute to the Coalition’s target of reducing red tape and compliance costs by $1 billion a year.
Now to some more specific aspects of the FOFA legislation.
The best interests duty is an important element of the FOFA legislation. We understand that it was intended to increase trust and confidence in the financial advice sector. However, the duty has created uncertainty, without realising all the initial policy intentions.
In particular, the catch-all and scaled advice provisions have resulted in significant legal uncertainty within the industry. Many have argued that the catch-all provision makes the safe harbour unworkable and removing this provision will restore confidence to industry.
The best interests duty will continue to provide a high degree of protection against poor quality advice, as advisers will be required to satisfy six provisions to prove that they have acted in their client’s best interest.
The Government is also in the process of amending the best interests duty to better facilitate the provision of scaled advice. This is consistent with our goal of ensuring that Australians have affordable access to a well-functioning financial advice market.
Our proposed amendments will leave no doubt in the minds of advisers that they can offer scaled advice, which will increase affordability and improve consumer access to the financial advice system.
The Government also remains committed to removing the opt-in requirement, which has proved expensive for industry to implement. This requirement has created practical difficulties while doing little to increase consumer protection. Again, the cost savings realised by industry as a result of the removal of opt-in should be passed on to consumers.
This is important. The Abbott Government has sought to strike the right balance of consumer protection and ensuring affordable and competent advice is available.
The laws which we have in place for financial advice are sound and well balanced. They provide an excellent basis on which to consider the payment of commissions that currently exist in other parts of the financial services sector. The Government remains committed to ensuring that commissions do not provide the basis for mischief making and do not have a perverse effect on pricing that ultimately impacts the consumer and the provision of certain products to the market.
In terms of the timeframe for amending the legislation, we are on track to deliver our amendments on time.
Earlier this week, we released a package of draft amendments for consultation. This package will be available for public consultation until 19 February.
The consultation process will give us an opportunity to refine the draft amendments to ensure that the legislation will ultimately realise the intended policy outcomes.
The legislation is on track to be introduced into Parliament late in the Autumn sittings, for debate in the Winter sittings. The Regulations are expected to be finalised in late March.
Superannuation
Let me turn now to our superannuation system.
Today, our pool of superannuation savings is worth roughly the equivalent of our national GDP: around $1.6 trillion; and it’s expected to grow strongly in the coming years, to be worth around $8 trillion (in nominal dollars) by 2039-40.
Our system is strong and fundamentally sound. That’s why before the election we committed to make no unexpected detrimental changes to superannuation. Saving for retirement is a long-term decision, so it’s crucial for Australians to have certainty, and to have faith in the stability of their superannuation system.
While we committed to making no unexpected detrimental changes, we have also committed to a number of improvements, including:
- working with superannuation stakeholders to prevent inadvertent breaches of the contribution caps from resulting in a disproportionate penalty;
- paying superannuation on paid parental leave;
- improving governance in superannuation;
- implementing a superannuation clearing house through the Australian Taxation Office;
- reviewing the regulatory barriers restricting the availability of income stream products in the Australian market; and
- reviewing the minimum payment amounts for account-based pensions, to assess their appropriateness in light of current financial market conditions.
We are also:
- prioritising the efficiency reforms of SuperStream;
- pausing the increase in the Superannuation Guarantee rate; and
- repealing the low income superannuation contribution.
SuperStream
The SuperStream reforms came out of the Cooper Review of the governance, efficiency, structure and operation of Australia’s super system.
They are designed to make the processing of everyday superannuation transactions easier, cheaper and faster, and they will also improve data quality, reduce the number of lost accounts, encourage the use of technology and improve the way rollovers and contributions are made.
Ernst and Young has estimated that SuperStream could generate savings of up to $1 billion annually.
We have prioritised these reforms because of the significant improvements they will make to our super system for the industry and for consumers.
Pausing the increase in the Superannuation Guarantee
The gradual increase in the Superannuation Guarantee rate was part of a package of measures related to the Minerals Resource Rent Tax. Given that we’ve proposed the repeal of the MRRT, we are also appropriately rephasing the Superannuation Guarantee rate.
We will pause the legislated increase in the Superannuation Guarantee rate so that it stays at 9.25 per cent for two years. After 30 June 2016, it will gradually increase to 12 per cent by 1 July 2021.
Given the Superannuation Guarantee rate will only be paused for two years individuals’ retirement incomes will still gradually increase over time, helping people to achieve higher retirement incomes.
Repeal of the low income superannuation contribution
Another measure attached to the MRRT which we are repealing is the Low Income Superannuation Contribution: a payment that effectively refunds the tax (up to $500) on superannuation concessional contributions for low income earners. This came at a significant cost to the Budget, with the Government borrowing money to pay for the Low Income Superannuation Contribution.
We will, however, revisit superannuation incentives for low income earners once the Budget is back into a strong surplus.
Announced but unenacted measures
A number of other measures come under the heading of ‘announced but not enacted.’
The previous Government left behind 92 tax and superannuation measures that it had announced but not enacted.
Of these, we’ve announced that 34 measures would proceed, three would be amended and the rest would not go ahead.
One significant decision was to not proceed with the measure to impose a tax on earnings in excess of $100,000 from superannuation assets supporting retirement income streams.
Industry representations established that this tax would involve a significant change to the way superannuation funds are currently taxed and would require substantial changes to the reporting system of funds.
The measures we are proceeding with include:
- penalties for the promoters of illegal early release schemes; and
- more flexible administrative penalties for SMSFs that break the rules, rather than the ‘all or nothing’ penalties available at the moment.
Restoring stability and certainty to Australia’s superannuation system is vital. Improving regulation and governance and enhancing transparency in the superannuation system is a key step in that direction.
To this end, last November I released the discussion paper ‘Better regulation and governance, enhanced transparency and improved competition in superannuation’. The consultation period is drawing to an end, with the closing date for submissions being 12 February.
The discussion paper brings together policy issues arising from the Government’s election commitments, as well as outstanding aspects of the current legislative regime.
The paper canvasses the issues of trustee board governance, improved transparency, and enhancing competition in the default superannuation market.
We believe Australians in default superannuation funds should benefit from genuine choice and competition. We want to ensure that any MySuper product can compete freely in the default superannuation market.
We are committed to appropriate provision for independent directors on superannuation trustee boards. This is important because independent directors can provide an external, dispassionate perspective, enabling boards to benefit from a diversity of views; and they can provide a check on management recommendations. We also want to see more women on the boards of superannuation funds. This is another way we increase the presence of women at the higher echelons of business in Australia and certainly boards will be enhanced by the diversity of views around the table.
Enhancing transparency of information is another key area which we are committed to because it is critical to an efficient and effective market-based savings system. The discussion paper seeks stakeholder views on a choice product dashboard, which would provide core information about a superannuation product in a one-page document. A product dashboard will enable easy comparison of a product’s features and allow consumers and employers to make more informed decisions about superannuation products.
We are aware of industry views that would prefer to delay introduction of the choice dashboard and portfolio holdings requirements. These are currently scheduled to commence from 1 July 2014.
A key issue that I will be engaging with the superannuation industry on this year is the relationship between the superannuation industry and investment in infrastructure.
I am passionate about building on the reform already announced by the Government to improve the effectiveness of Infrastructure Australia and to encourage State governments to recycle capital by selling assets to finance investment in greenfields infrastructure and the extent to which brownfields infrastructure is opened for investment by superannuation funds.
The G20 provides an excellent forum to bring together policy makers, financiers and builders to identify practical ways of increasing long-term infrastructure financing.
Other developments
Not surprisingly, our first year in office will be a busy one. In the next 12 months we will be considering the recommendations from the Commission of Audit, the Financial System Inquiry and the ‘root and branch’ review of competition laws and policy, as well as implementing the amendments to FOFA.
Alongside these announced commitments, we are also looking into a range of other issues, as part of our productivity and deregulation agenda. Let me quickly flag a few of these.
Asia Region Funds Passport
One of Treasurer Hockey’s first acts after being sworn in last September was to formally sign the Asia Region Funds Passport Statement of Intent, along with his counterparts from Singapore, Korea and New Zealand. They were in Bali for the APEC Finance Ministers annual meeting.
The Asia Region Funds Passport will provide streamlined access for Australian fund managers to markets in regional economies, and give Australian consumers greater product choice.
The Statement of Intent formally commits signatories to consult publicly on the proposed arrangements for the Passport with a view to participating in the initiative from its inception. Consultation is expected to occur in the first half of this year, paving the way for the introduction of the Passport in early 2016.
We intend that, over time, the membership of the Passport will span the region. As the Passport matures and more economies become ready, we will make sustained efforts to sign on more members.
I hold as a priority for 2014 completing the implementation of the outstanding Johnson Report recommendations. Australia as a financial services hub and a key player and contributor in financial services in our region is vitally important. We have an outstanding financial services industry in Australia and it is the role of Government and my role as Minister for financial services to promote our skills, knowledge and expertise around the world and particularly in our region.
Crowd-sourced equity funding
Another issue that the Government is looking into which might be of interest to the financial services industry is crowd-sourced equity funding. This is becoming increasingly popular across the world as a way of promoting financing for innovation. Some of you may have heard Malcolm Turnbull recently after his trip to the US where he was in Silicon Valley and elsewhere, speaking with leading American technologists and financiers. This sort of funding is becoming increasingly popular and we want to see if we can adapt it properly to Australian conditions.
The Corporations and Markets Advisory Committee is currently working on this issue and is scheduled to report to the Government in April.
The report will consider whether there are opportunities to further encourage businesses, particularly smaller start-up firms, to use crowd-sourced equity funding to pursue innovation and growth while ensuring that appropriate protections continue to be in place for retail investors. The Government will also continue the work we have begun on employee share schemes.
Looking ahead
With my office I recently completed our planning and strategy process for 2014. There is a lot on our agenda.
Looming large will be the G20. Work will continue on financial regulation. We need to ensure the reforms in train are finalised and that financial systems meet the growth needs of the world economy.
I will also shortly announce a process by which to look at the professional standards of financial advisers, working cooperatively with the industry to develop this. I envisage that this would include training, indemnity insurance and any proposed move to a national exam. These issues need to be examined as part of a considered process and not on an ad-hoc basis.
We will also be looking at opportunities to modernise disclosure to assist consumers and of course business. These could include adopting just-in-time approaches, use of new technologies and better use of reference material.
There are ongoing concerns held by industry, superannuation funds and now the government about the life insurance industry. My office has been actively speaking to all players and I have asked Treasury to develop a consultation process so that the many issues can be brought together in a coordinated approach and there can be a frank exchange of ideas with all stakeholders about what needs to be done to address pricing, availability and the deficiencies in the current life insurance market.
Separate to that, in the more general insurance market, we are doing a lot of work in some parts of Australia where insurance premiums have gone through the roof. I’m thinking particularly in areas like North Queensland where I’ve visited several times recently and heard some real horror stories about the jump in insurance premiums in places like Cairns. It is important for us to look at what is driving some of that and ways in which we can mitigate the increase. We have a partnership with the Queensland Government to do that.
On the markets side, I am keen to continue and expedite work on over-the-counter derivatives reform, complete a market licensing review and consider addressing any barriers to competition in the market.
Conclusion
As everyone in this room knows, a strong financial services sector is vital to the strength of Australia’s economy. To allow it to flourish and so support Australia’s economic growth, we need to make sure regulation of the sector is effective and practical, and does not reach beyond what is necessary to protect consumers and support the industry.
We are committed to doing just that, and I look forward to working with the business community to make the sector strong in the years ahead.
Thank you for your time and I look forward to discussing these issues further with you.