Almost a year ago to the day, I outlined to this Chamber the Government's progress on advancing Australia as a financial services centre. The Financial Services Hub Summit convened by the Prime Minister and I in July 2008 recommended regular updates to the House on progress in promoting Australia as a financial services centre, and I am very pleased to provide this update.
Our financial services industry is one of the most sophisticated and stable in the world. Financial services is Australia's largest industry, contributing 10.8% to growth and employing 400,000 Australians.
We continue to come across new opportunities for job creation and examples of resilience in the sector.
In fact just this week, ING officially opened a new superannuation and investments operations centre in Wollongong. The centre will support an additional 250 jobs over the next three years – bringing the centre's workforce to 600 in the Illawarra.
The ING centre will predominantly focus on operational administration and call centre roles. Other roles to be recruited could include IT development and project related roles. The centre's four-and-a-half star green rated building cost $41 million, took two years to build and employed 1,100 workers during construction.
I mention this as an example of the types of benefits that flow from our ambition to promote Australian as a financial services centre.
Beyond these more immediate contributions to the economy and employment, a well functioning financial system is vital for broader economic prosperity and in addressing future challenges including the need to grow and manage our retirement savings as our population ages.
Australia has always had a lot to offer in terms of its quality of life, the integrity of its corporate governance system and the quality of its workforce. The financial crisis has also highlighted the strengths of our financial sector and of our regulatory framework.
This Government has long recognised that the Australian financial services sector has a great deal of untapped potential. Our exports and imports of financial services are low by international standards. For example, while Australian-based investment managers manage $1.1 trillion of assets on behalf of domestic investors, they source only about $53 billion from overseas sources1.
Remedying this situation requires a Government that is willing to make a commitment to sensible on-going reform.
On 26 September 2008, the Government announced the establishment of the Australian Financial Centre Forum to recommend ways we can position Australia as a leading financial services centre.
The Forum consisted of a diverse and highly experienced panel of industry experts headed by Mark Johnson AO, a retired deputy chairman of Macquarie Bank, and supported industry reference groups and a dedicated Secretariat. The Forum engaged with a broad range of stakeholders including regulators, professional service groups, education providers, union representatives and international and domestic financial services companies.
On 11 May, as part of the 2010 Budget, the Government announced its response to the recommendations in the Australian Financial Centre Forum Report (the Johnson Report).
Our response provides in-principle or direct support for nearly all of the 19 recommendations in the report.
These include:
- the introduction of an Investment Manager Regime, providing greater certainty around the tax treatment of foreign funds managed by Australian investment managers;
- the establishment of an online regulatory gateway, providing domestic and international investors with a one-stop shop for basic information about the Australian market; and
- the development of an Asia Region Funds Passport, which would involve a multilateral framework to enable a complying retail investment fund in a country that signs up to the passport framework to offer its products in each of the other signatory countries.
We have already made progress on the recommendations in the report, in addition to introducing other initiatives to enhance our international competitiveness.
For example, on 31 March, I announced support for competition between markets for trading in listed shares in Australia and in principle approval of the market licence application of Chi-X Australia.
This announcement is in line with a Johnson Report recommendation, which encouraged competitive, efficient and innovative equity markets, and is a vital step in the development of Australia as a financial services centre.
The Government also announced the release by ASIC of class order relief allowing listed entities which meet ASIC's criteria to issue bonds to retail investors using a simplified process.
This initiative will help to further develop our retail bond market, and is in line with a key recommendation of the Johnson Report.
As the Johnson report notes, Australia's equity market is well developed and significant on a global scale – being seventh largest globally and the second largest in the region behind Japan.
However, our debt market is relatively small. A deeper and more liquid Australian corporate bond market will make it easier for Australian businesses to diversify their funding sources as an alternative to borrowing from the bank.
Over time, this is expected to put competitive pressure on bank lending rates to business, and also reduce the amount of wholesale funding which our banks are required to raise in international capital markets.
We also announced the decision to phase down the interest withholding tax paid by financial institutions, including local subsidiaries and branches when they pay interest on borrowings from their overseas parents.
This reform also extends to Australian-owned financial institutions borrowing from related parties overseas, and any financial institution accessing offshore retail deposits, which they on-lend to Australian business and consumers.
These changes will provide an extra boost to banking competition, as well as promoting Australia as a financial services centre, and represents action on another Johnson recommendation.
To ensure we continue to make progress, the Government has appointed an ongoing Financial Centre Taskforce.
The taskforce will comprise Mr Mark Johnson AO as Chair,
Mr Paul Binsted, Ms Jo‑Anne Bloch, Mr Alf Capito,
Mr Phil Chronican, Mr Jeremy Duffield, Mr Craig Dunn,
Mr Shane Finemore and Mr Paul Schroder.
The taskforce will continue its work in promoting Australia as a financial centre for the region and facilitate industry input into the design of a range of proposals, including the Asia Region funds management passport and the Investment Manager Regime.
Response to the reforms
The Government's response to the Johnson Report united a wide range of stakeholders in their praise for the reforms.
On the 13 May 2010, the Australian Bankers Association said the following:
"This demonstrates the Government's continuing commitment to enhancing Australia as a financial services centre – the Government's response is a first good step to addressing some of the market and regulatory barriers to building Australia as a regional leader in financial services."
On the 26 May 2010 the Finance Sector Union noted
"The Federal Government's plan to position Australia as a major financial services hub is widely supported by finance sector workers, and the Johnson Report recommendations should be adopted to ensure growth in the industry, and flow-on benefits to the economy."
Unfortunately for current and prospective workers in our financial services sector, the Coalition has abandoned Australia's strategy of becoming a major financial services hub.
In a speech to the Financial Planning Association in March, the Shadow Minister for Financial Services, the Member for Cowper, declared that the Government should be "taking the Johnson Report more seriously, because it contains some innovative measures to encourage international financial trading in Australia."
Just two months later, the Coalition announced its opposition to the Government's proposed reduction in interest withholding tax, which is consistent with a key recommendation from the Johnson report on Australian as a Financial Services Centre.
So dismayed were the Australian Bankers Association that bi‑partisan support for a sensible plan for growing Australia's financial services sector was being abandoned, they issued a press release declaring:
"The banking sector expects the Australian Government to take a strategic and coordinated approach towards further developing Australia as an international Financial Services Centre. These tax changes were a good first step in that direction, and that's why opposing the changes is short-sighted."
It's disappointing that the Coalition has so little to say about the future of the financial services industry, that their May 2010 policy manifesto devoted more space to past policy announcements, than their future plans for ensuring Australia becomes a more significant financial centre.
For a long time, the previous Government had a slogan of promoting Australia as a financial services centre, but they backed this up with little policy action. Unfortunately, recent events show they are still strong on rhetoric but very light on action.
Centre for International Finance and Regulation
But Mr Speaker, the Government is committed to real action to promote Australia as a financial services centre even if the Coalition is not.
As part of the 2010 Budget, I was also pleased to jointly announce with the Prime Minister a further measure which is consistent with these aims — the establishment of a Centre for International Finance and Regulation in Australia.
The Government will provide funding of up to $25 million for the Centre over the next four years.
As a regional centre for excellence in financial system regulation and innovation, the Centre will provide tertiary education and training for financial regulators from Australia and the Asia Pacific. It will also undertake research into innovation in the financial sector, and best practice financial regulation.
One of the key themes underlying the work of the Centre will be to address ways to foster financial sector innovation, while ensuring the risk inherent in the financial system is appropriately managed through best practice regulation.
The Centre's work will inform government, regulators and financial industry practitioners in Australia and the region.
It will contribute to regional financial system stability by developing and supporting students, academics and researchers from the Asia Pacific region and by building regional capacity.
The establishment of the Centre for International Finance and Regulation will complement the Government's response to the Johnson Report, and will help to advance regional engagement.
A university or consortium of universities will be selected by tender to host the Centre. This selection is expected to take place by the end of this year.
Policy reform
The Government is committed to promoting Australia as a financial services centre, not as a noble ideal, but because of the many benefits it would bring to our nation.
I'm very pleased with the fact that each one of the Rudd Government's three Budgets has included measures to promote Australia as a financial services centre.
Our first Budget included cuts in the withholding tax for distributions from Australian managed funds to offshore investors. A significant reform, long called for by the financial services industry. As a result of gradual reductions in our withholding tax rate from 1 July this year, Australia will have one of the lowest rates in the world.
Last year's Budget included the abolition of the Foreign Investment Fund provisions, again a very significant reform that will make a contribution to Australian being a financial services centre.
And of course this year's Budget contained the measures I've already outlined.
Superannuation and financial advice reforms
The primary motivator of our superannuation policy is – and must always be – a comfortable retirement income for Australians.
This has not, of course, meant that improved retirement incomes for Australians have been the only benefit of our superannuation system.
The skills that Australia has built in terms of wealth management as a result of our superannuation system are, in my view, the single most important factor in our competitiveness as a financial services centre.
And the sheer size of our retirement savings pool means that Australia is regarded as a serious player in the world's wealth management sector.
Australia's superannuation pool was projected to grow to $5.3 trillion by 2035. The superannuation reforms we announced on 2 May will add another half a trillion to that amount.
Growing our pool of funds under management can only have positive implications – very positive implications – for our ambition to be a significant financial centre.
These reforms together with the "Future of Financial Advice" reforms are vital to the development of Australia as a financial services centre.
In relation to the reforms to financial planning, I would argue very simply that it would be impossible to ask those in other countries to place their trust and confidence in our financial planning industry if Australians do not.
This point was made very clearly by the Johnson committee, which observed that realisation of opportunities to attract overseas capital to Australia "is dependant on, amongst other things, the reputation and integrity of Australia's financial advisory sector being maintained and, where necessary, improved".2
To this end, their report argued that resolving conflicts of interest in the financial planning industry is "consistent with ensuring that the reputation of Australia's financial sector, in particular funds management and financial planning, is maintained overseas, a prerequisite for greater international engagement."3
Sadly and almost inexplicably, this Government's reforms to financial planning are being opposed by the Coalition, as are our improvement to superannuation.
Beneficiaries of the reforms
Increased trade in financial services will increase Australia's growth prospects and standard of living. Through improved economies of scale, this would reduce the costs of financial products for Australian consumers and businesses. And by encouraging competition and efficiency, it would improve the range and choice of financial products available to consumers and promote increased exports of financial services.
Positioning Australia as a financial services centre in the region would also mean that we would be able to offer increased job opportunities for a range of skilled workers in the financial sector.
This is one area where the Government sees so much scope for improvement. The opportunities for leveraging our financial services skills and expertise, in the region and beyond, are potentially enormous.
Now, with these decisions and reforms well advanced, I don't want anybody to be under the impression that we feel we have done all there is to do; that there isn't more to be done.
Reform to promote Australia as a financial services hub is an ever-receding finishing line. As we reform, so will other nations. And we will need to respond.
Australia's advantages, along with this Government's ongoing commitment to sensible reforms, will lay the foundation for the next wave of jobs and growth in the industry and for greater competition and choice for Australian consumers and businesses.
1 Australian Bureau of Statistics Managed Funds Australia No: 5655 (Dec 2009)
2 Australia as a Financial Centre – Building on Our Strengths, page 30.
3 Ibid