31 May 2013

Strengthening Australia's Financial Markets in the Asian Century, Keynote Address to 2013 Annual Stockbrokers' Conference

Good morning, and thank you for the kind invitation to address the Stockbrokers Association of Australia's 2013 Annual Conference.

Today, I'd like to talk to you about how the Gillard Government is strengthening Australia's financial markets in the Asian Century.

As the Asian Century unfolds, our financial markets will be one of the keys to securing Australia's future prosperity.

It's vital that we strengthen Australia's financial markets because of the important contribution the sector makes to national wealth. The financial services industry is one of the largest in our economy, contributing about 11 per cent of real gross value added to our economy in 2012.

Strong financial markets are vital for another, more important, reason.

A strong financial system is essential for a resilient economy.

The Global Financial Crisis showed the world just how fragile confidence in financial systems can be.

As everyone here knows, Australia already has one of the strongest financial systems in the world.

In November last year, the IMF again endorsed the strength of our financial system in Australia's second Financial System Stability Assessment. The IMF stated that, “Australia's financial system is sound, resilient, and well-managed — major banks are conservatively run, well capitalised and profitable, and they are likely to withstand severe shocks”.

And in the wake of the Global Financial Crisis, Australia has remained one of only eight countries to hold a AAA credit rating.

Our stellar international reputation is the product  of decades of financial market reform, followed by the decisive actions this Government took to support the flow of credit during the GFC, and foster stable and competitive markets in the wake of the crisis.

But this is no time to rest on our successes.  As the Treasurer said recently, it's imperative that we stay ahead of the game.

We need to keep moving forward so we can continue to build the kind of sophisticated, competitive and stable financial system that supports continued growth.

So that we can expand and integrate into the markets of the Asia Pacific.

So that we can support Australia's transition from mining to non-mining growth.

And so that we can create Australian jobs in Asia, while continuing to employ hundreds of thousands of people in our financial services sector here in Australia.

The Government's White Paper, Australia in the Asian Century, set out the path ahead. When the Prime Minister commissioned the White Paper in September 2011, she described it as “a national blueprint for a time of national change”.

The White Paper set out broad strategies to enhance the efficiency and resilience of Australia's financial system. These will enable Australia to forge the productive and resilient economy we need to become better integrated with the economies of the Asian region.

The White Paper also set out the way forward for working with our regional partners to promote financial integration in the Asia-Pacific — efforts which will have flow-on benefits for the stability of Australia's own financial system.

Together, these efforts will help to ensure sustainable, diversified and competitive financial markets for Australia.

Fostering a stable and competitive banking system is one of the key strategies in the White Paper to enhance the efficiency and resilience of our financial system.

During the Global Financial Crisis, the Government acted swiftly to ensure the stability of our financial system and the continued flow of credit to our economy. We introduced the wholesale funding guarantee, the Financial Claims Scheme and allowed covered bonds.

More recently, we took several additional measures to boost the competiveness of our banking system and further increase its resilience. These steps included banning exit fees on mortgages… investing in the securitisation of smaller lenders… and promoting different banking options, through the Competitive and Sustainable Banking System reform package.

As well, the Australian Government is working to further increase the resilience of our financial system, and enhance the ability of financial institutions to withstand funding stresses. These measures include advancing the financial stability reforms agreed by G20 countries, including implementing the Basel III capital and liquidity standards.  

Another key strategy set out in the Australia in the Asian Century White Paper is ensuring that we have a more efficient superannuation system.

Australia's national super savings pool is worth around $1.5 trillion — about the same size as our GDP — and is projected to grow to over $6 trillion by 2037. Superannuation assets are a key reason why Australia has one of the biggest pool of funds under management in the world.

As this pool of assets continues to grow, we can expect the Australian superannuation industry to look for more diversified assets and emerging markets, particularly in the Asia Pacific region.

Superannuation funds are looking to Asia for investment. For example, AustralianSuper already has significant exposure to Asia and emerging markets more generally.  Currently around six per cent — or about $3 billion of the balanced investment option's assets — are in Asia. This figure is expected to grow to around $7 billion by 2016.

Another opportunity for Australia's superannuation industry is to “sell” our retirement income system to the Asia-Pacific region.

This has the potential to expand Australia's reputation as a leader in the managed funds industry, enhancing our role as a powerful and sustainable economy in the Asia-Pacific.

The White Paper set out a third major strategy to strengthen Australia's financial markets — removing impediments to developing a deep, liquid and diverse corporate bond market.  

An efficient corporate bond market will harness our national savings, so that more investment is domestically funded. This will make us less reliant on offshore wholesale funding markets.  

A more vibrant retail corporate bond market would also provide competitive pressure on bank lending rates, freeing up bank balances for lending to the domestic market, particularly small businesses.

Simple corporate bonds also provide an attractive investment option for older Australians. Australians are relatively active equity investors but would benefit from being able to diversify into longer-term, lower risk and less-volatile fixed-income streams.

On 20 March 2013, the Government introduced the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 into Parliament.  The Bill was developed after extensive consultation with key industry stakeholders on ways to best develop the retail corporate bond market in Australia.

The Bill progresses reforms designed to streamline the disclosure requirements for retail corporate bond prospectuses and the liability for company directors if they breach these requirements.

The reforms introduce a mandatory, two‑part prospectus regime for simple retail corporate bonds... refine the liability provisions in the Corporations Act 2001… and establish a framework for parallel trading of simple corporate bonds in both the wholesale and retail markets.

These reforms establish a simple corporate bonds regime to ensure that the bonds issued under the regime will be simple, high-quality “vanilla” debt. This will help to build investor confidence and establish a strong foundation for future growth.

Once retail investors have become familiar with the new regime, and when issuers see the benefits of making offers of corporate bonds in the domestic retail market, the simple corporate bonds regime can be expanded to include a wider range of bonds.

We have also implemented reforms to enable retail trading of Commonwealth Government Securities, such as Treasury Bonds.

For the first time, retail investors can buy and sell Commonwealth Government Securities in a similar manner as when they buy listed shares, including buying and selling Commonwealth Government Securities online.

Another way the Government is enhancing Australia's financial system is by working beyond our shores to strengthen the economic and financial architecture of the region.

We are working with our regional partners to promote open, well-regulated and resilient financial markets across the Asia-Pacific.  This is one of the key priorities of the Australia in the Asian Century White Paper.

We are working to secure a stable, competitive, innovative and financially-connected region — one which will be critically important to Australia's future prosperity.  

We are building on the work of APEC on regional economic and financial integration. For example, last month, the Australian Government invited industry leaders from across the Asia-Pacific to a Symposium in Sydney.

Over two days, ministers, central bank governors, senior government officials, academics and industry representatives from across the region discussed a proposal by ABAC — the business arm of APEC — to create an Asia-Pacific Financial Forum to support an appropriate regional financial architecture.

Based on the discussions at the Symposium, ABAC will now refine the Asia-Pacific Financial Forum proposal, and present it to the APEC Finance Ministers' Meeting in Bali in September 2013.

The Asia Region Funds Passport is another Australian-led initiative designed to strengthen the economic and financial architecture of the region.

The concept of the Asia Region Funds Passport was first put forward at an APEC Policy Dialogue in October 2010. A group of 13 APEC economies has been developing and testing the Passport concept.

The Passport will allow cross-border marketing of funds between countries that agree to a common framework.

Developed specifically to benefit the region, the Passport will provide cost-effective funds intermediation, linking the growing pool of investors in the region to investment opportunities. In this way, it will unlock savings and re-cycle Asian savings within Asian capital markets — rather than exporting excess capital to Europe and North America.

The technical model for a pilot Passport is to be presented to APEC Finance Ministers at their September 2013 meeting. At that meeting, it is envisaged that a small group of APEC pilot economies will formally commit to implementing the Passport.

To meet this timeframe, a Working Group comprised of Australia, Korea, New Zealand and Singapore has been established to accelerate development of the Passport.

The Passport is a real opportunity for Asian economies to further develop the funds management industry in the region, providing greater choice and diversity for Asian investors.

Ladies and gentlemen, the initiatives stemming from the Asian Century White Paper are helping Australia to become fully integrated with our region… to deal confidently with the challenges of the Asian Century… and to make the most of the opportunities it presents.

I'd now like to talk about some of the other ways this Government is promoting fair, efficient, stable and open financial markets to support the long-term prosperity of Australia.

We have introduced competition in exchange trading. This initiative has not only reduced transaction costs, but also creates incentives for exchanges to improve service quality and be more responsive to the needs of their clients.  Competition will also spur innovation.

We have also confronted industry concerns regarding the lack of competition in clearing and settlement services.

The Government has accepted advice from the Council of Financial Regulators to defer consideration of whether to introduce competition in cash equities clearing for a period of two years. In the interim, the Government has obtained a commitment by the ASX to adopt a Code of Conduct in relation to transparency, governance and access arrangements in relation to cash equities clearing.

The deferral reflects the Government's responsiveness to industry concerns regarding the impact of other regulatory reforms, and the impact that continued depressed market turnover is having on industry profitability.

At the end of the two-year trial period, the Code will be reviewed, and the case for competition in this area will be reassessed.

The Government has also looked closely at the issue of OTC derivatives clearing. In December 2012, the Treasurer announced the Government's openness to competition in OTC clearing. The ASX is developing a domestic solution. LCH has also expressed interest.

Competition in OTC clearing should drive down costs and result in a better range of clearing services.

In many ways, the licensing regime is the foundation of well-functioning markets. That's why we are reviewing the licensing arrangements.

We need to ensure that the licensing regime reflects the increasingly global nature of markets, and the extent of cross-border provision of services.

Within the existing licensing framework, the Government has approved new market entrants in line with our commitment to promote a more competitive environment. Most recently, we have signed off on the FEX and LCH licences, as well as the APX relaunch.

The Government's grant of a clearing facility licence to LCH in relation to FEX will permit the first overseas-based clearing facility in the Australian market.

The entry of LCH is a very significant step in the evolution of Australia's financial markets — one which underscores the Government's commitment both to competitive financial markets, and to foreign investment and appropriate foreign participation in the provision of Australia's financial market infrastructure.

Of course, we are not blindly supportive of market innovation and evolution.

We are well aware that financial markets are not an end in themselves. Rather, their role is to support the parts of the economy that contribute to growth by producing goods and services — the real economy.

With that in mind, we closely follow market developments and assess how they serve the needs of real investors and businesses seeking capital.

For example, we have looked closely at dark pools and high frequency trading — looking past the hype and looking for real evidence of their impact.

On that point, I'd like to commend ASIC on the quality of its taskforce reports.

It's clear that there are real issues in relation to dark pools and HFT — for example, in relation to the impact on price formation of fragmentation of liquidity off the lit markets, and in relation to the risks of “flash crashes” posed by rogue algorithms.

But many of the other concerns being floated have not been substantiated.

The Government is responding with sensible solutions based on vigorous analysis of hard data.

We have consented to some market integrity rules and further measures are being consulted on at the moment.

The Government has also been taking action to ensure markets are safer.

We have completed the major task of transferring market supervision from the ASX to ASIC.

We have developed and introduced improved regulatory frameworks.

We have also ensured that ASIC is well-resourced to address risks to market integrity and stability.

As well, the Government is continuing to work on improving the regulation of financial markets infrastructures. For example, we are ensuring that Australia has adequate crisis resolution arrangements in place.

In the last sittings of Parliament, I introduced the Corporations and Financial Sector Legislation Amendment Bill 2013. In part, that Bill introduces amendments to support the porting of client positions of failing clearing participants. This will provide greater protections for clearing clients. It will also facilitate international mutual recognition of our domestic regulation of clearing facilities.

I should add that the Bill introduced amendments to enable information sharing between domestic regulators and ESMA, to support continued access by Australian fund managers to market their products in the Eurozone.

In addition to this work, the Government is also progressing major reforms arising from Australia's G20 commitments in relation to the trade reporting, clearing and on-platform execution of OTC derivatives. These reforms are designed to identify and manage systemic risks arising from the OTC derivatives markets.

We are taking great care to ensure that any reforms are tailored to the needs of our domestic markets.

Trade reporting reforms are well under way. ASIC is consulting on rules that are scheduled for introduction in the second half of the year.

In relation to our G20 commitments on the clearing of OTC derivatives, we have stated a preference for using a mixture of market and regulatory incentives — including capital and margining requirements — to drive an increase in the uptake of clearing. This reflects Australia's practical approach to implementing our commitments.

It's worth adding that the introduction of clearing mandates internationally is also driving increased levels of central clearing by domestic participants. We expect the regulators to provide the Government with another OTC derivatives market assessment in the coming months. This will assess whether our incentives-based approach is working, or whether any domestic mandates should be imposed in the short term.

By creating attractive financial markets which inspire confidence… flexible and efficient regulatory frameworks… markets which are open to competition… and markets that are open to foreign participation, we are creating an environment that promotes Australia as a financial services centre and positions Australian businesses to engage within our region.

Before closing today, I'd like to briefly update you on another of the Government's major achievements in the financial services industry — the Future of Financial Advice reforms.

The FoFA reforms are designed to improve the quality of financial advice, strengthen investor protection, and strengthen trust and confidence in the financial planning industry.

Ultimately, the Government believes these reforms will encourage more Australians to seek financial advice, and provide growth opportunities for the sector.

While the stockbroking industry may well benefit from increased investor confidence in Australia's financial services sector, stockbroking was never the intended target of the reforms which, as you would know, have their origins in the collapse of firms such as Opes Prime and Storm Financial.

That's why the Government has provided several exemptions for stockbroking to ensure that the industry will not be unfairly affected. As you know, these exemptions allow firms to continue to remunerate their brokers through brokerage fee arrangements, and to pay stamping fees.

The Government is also progressing exemptions to ensure that the stockbroking industry will continue to be able to charge brokerage fees where clients undertake trades using borrowed funds, such as margin loans.

We are also pursuing exemptions to ensure that the fee arrangements between market participants and online white-label broking service providers will not be subject to the ban on conflicted remuneration, where these services do not provide investors with personal advice.

These exemptions reaffirm the Government's commitment to ensuring that the stockbroking industry is not unduly impacted by the FoFA reforms.

However, I would like to take this opportunity to remind the stockbroking industry that it will continue to be subject to the requirements under the FoFA reforms to act in the best interests of its clients.

In line with this, the Government has asked ASIC to undertake a two-year review of all stockbroking-related exemptions, so that it can be confident that the exemptions provided to the industry are working as we intend.

Ladies and gentlemen, the Government is continuing to work —both at home and abroad — to foster the kind of stable, resilient and competitive financial system that will secure our fortunes in the years ahead.

Once again, thank you for inviting me to speak with you today.