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Key points |
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Fundamental changes – Wallis Inquiry: The Wallis Inquiry identified major trends driving changes in the financial system. Commensurate fundamental changes to the regulatory apparatus were recommended and implemented. |
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Successful outcomes of these changes: The Wallis reforms have served Australia well - brief overview of current economic situation and Budget speech forecasts. |
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Continuing consultation with stakeholders on the regulatory framework: Contribution made by CEDA to the regulatory debate. Government initiatives based on input from industry – response to the Banks Report, Corporate and Financial Services Regulation Review Consultation Paper, and superannuation reforms announced in the Budget. |
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Future regulatory reform: The Government will concentrate on finetuning the regulatory system to produce optimal economic outcomes. |
CANBERRA
25 May 2006
It gives me great pleasure to be here today. I would like to sincerely thank the Committee for the Economic Development of Australia—CEDA—for inviting me and for giving me this wonderful opportunity to speak with you all.
I also want to commend you for the very fine work the Committee does. The State of the Nation Conference is an excellent example of this effort.
Today I’ve been asked to talk about our regulatory framework, and what we need to do to get the balance right.
Given my responsibilities as Parliamentary Secretary to the Treasurer, I will mainly concentrate on the financial and corporate regulatory framework.
Around two weeks ago, the Treasurer delivered the Federal Budget. It was only natural for Australians to watch the Budget with a keen eye to see how it would affect them. And what they found when they looked at the Budget this year was that families did very, very well.
Quite naturally, this can have an extremely positive effect on consumer confidence. And when you combine that very positive Budget effect with other favourable economic indicators, it is quite reasonable to suggest that perhaps some Australian families will now feel that the economic climate is right for them to assess their housing situation.
For example, they might consider some home improvements or even major renovations. They might decide to move house altogether – you know, upgrade to a new or perhaps larger home!
To my mind, law-making by governments is much the same.
When the circumstances in the corporate and financial services sector are quite positive, the effects on government can be confidence-building and encourage change.
On the other hand, any volatility in the financial markets may suggest to a government that it needs to act very carefully. And that, of course, can make it difficult, when it comes to matters of regulation, for a government to strike precisely the right balance.
To extend the analogy I’ve used – when I came to this position, I had to consider whether our relatively new Financial Services Regime needed more than a coat of paint, a “quick fix” as some might say.
I think you could say we are still in the process of ‘renovating’ this regime with a view to creating a simpler framework for consumers and licensees.
At a macro level, our market is now very structurally sound. We have an extremely transparent financial market and our corporate regulator is well-resourced.
The reason it’s in such a good condition is that our financial regulatory system was radically overhauled by this Government when it first came to office.
In that process we created a world-class system with many unique features that show great promise for the future.
However, I firmly believe that if we are to make headway on the issue of regulation there are some refinements—and that’s what they are: “refinements”—that we still need to make to ensure our house is in its best and most liveable condition.
In other words, the house is in pretty good shape.
We don’t need to make extensive renovations. We don’t need to sell up and move into a completely new building.
What we need to do is make some refinements. We need to look at the interior and the exterior of our “regulation home” and critically analyse what we’ve got.
Basically, it’s a sound structure. But what can we do to make this place more liveable and user-friendly - that’s what our regulation law-making is about today.
How we propose to do this is what I would like to talk to you about right now – with a particular spotlight on the corporate and financial services sectors.
In order to do that, we need to look at where we have come from in this debate and where we find ourselves today. Only by doing that will we be able to see where regulation is heading in the future.
So let’s briefly go back to see where we were in 1996 when this government came to office…
Fundamental change – Wallis Inquiry
One of the first things this Government did was to establish the Financial System Inquiry, perhaps better known as the Wallis Inquiry.
When the final report of the inquiry was released in 1997, it described a number of fundamental forces that were driving enormous changes throughout the financial system.
The Wallis Inquiry described the impact of technological developments, the effects of the continued opening of the Australian economy to the global marketplace, and the results of deregulation in the wake of earlier reforms.
The Inquiry concluded that nothing short of radical changes to the regulatory framework could accommodate and harness these significant forces.
Now, the Government recognised the need for these changes and set about implementing the recommendations of the Wallis Inquiry. The reforms have had a decisive and positive impact on our financial and corporate regulatory system as it stands today.
Fundamental changes were made to our conduct and disclosure framework in financial services. To oversee the new requirements the Australian Securities and Investments Commission was established as the sole regulator in this area.
Financial safety was defined as the second key area of concern, with responsibility entrusted to the Australian Prudential Regulation Authority.
The third component of the system was the systemic stability and payments area, which is supervised by the Reserve Bank.
Successful outcome of these reforms
This regulatory framework has been subjected to a number of severe tests over the last few years. One of those was the Asian financial meltdown. Another was the global economic downturn after the dotcom collapse. And, of course, there was the worst drought in 100 years.
I think it is fair to say that the reforms introduced by the Government effectively firewalled Australia from all of those disasters. Unlike elsewhere in the world, the Australian system emerged largely unscathed from the global, regional and local challenges.
But not only did we escape from those major economic setbacks, our exceptional economic track record shows that the Australian economy has continued to expand – as it has done throughout the entire life of this Government – and the result has been the complete elimination of all Commonwealth government debt.
Looking ahead the picture continues to be quite encouraging.
Economic growth is forecast to continue steadily, with GDP expected to expand by 3 per cent in 2006.
The overall driver is expected to be the external sector, based on exceptionally strong growth in the global economy of 5 per cent in 2006.
Unemployment is expected to remain around its current level, which is a thirty-year low.
Also, the participation rate has reached a record level of 64.8 per cent, spread across all age groups.
And I find it especially encouraging to note that the growth in participation has been particularly strong in key demographic groups such as older workers nearing retirement as well as young workers entering the workforce.
Finally, inflation is expected to remain moderate, with a CPI increase of 2 per cent forecast for the coming year.
Continued consultation with stakeholders on regulatory reform
So with all that’s going well, there seems to be on the face of it, no need for change… but as the more than 5 million Australians with their name on a land title deed know, the best time to look at making improvements to your home is when things are going well.
This principle also applies to governments – just because the economy is continuing to grow does not mean we should take our foot off the accelerator.
It is plain to see that further adjustments are required to our regulatory framework right.
It is important to emphasise that we make regulatory changes for one main purpose – to provide the best environment for individuals and businesses to introduce innovations and to grow and prosper, and thereby contribute to the nation’s productivity and overall
well-being.
The Government will continue to consult with business and other stakeholders on how the regulatory framework can be improved.
This is a good place to acknowledge the important contribution CEDA makes to the regulatory debate.
Important recent research conducted by CEDA has focussed on key topics such as the management of our water resources, infrastructure development, and the importance of lifelong learning.
CEDA also started a research project last year into Australia’s competitive position in the global context.
I believe that this is a particularly important topic, given our increasing integration with the economies of our trading partners.
Listening to stakeholders – the Banks Report
But I want to return now to what the Government is planning to do about adjusting our regulatory framework.
As you are aware, the Government has listened to calls made by a range of stakeholders for a review of the regulatory burden imposed on businesses and individuals.
A number of initiatives have been taken in pursuit of the objective of reducing the regulatory burden.
As you will know, the Government appointed a Taskforce chaired by Gary Banks to report on practical options for addressing the problem.
The Banks report has in the meantime been given to the Government. It contains 178 recommendations for actions to reduce red tape.
The Government has already provided an interim response to 86 of those recommendations. A commitment to take action has already been given.
Examples of actions to which the Government has already committed include the halving of the incorporation fee for companies to $400, and allowing companies to make annual reports available over the internet.
A final comprehensive response addressing all the recommendations will be provided by the end of July this year.
Listening to stakeholders – the Corporate and Financial Services Regulation Review Consultation Paper
Now I am going to mention some initiatives I have taken in my own area of responsibility.
As a first step toward the process of creating what I like to call A Simpler Regulatory System, on 7 April, I released the Corporate and Financial Services Regulation Review Consultation Paper.
Work on this paper began in 2005. It is primarily based on feedback I have received from business and the community, as well as information gathered from reviews of the complexity and burden of corporate and financial services regulation.
The consultation paper seeks comments from consumer and industry representatives on 56 issues, to assist with formulating practical measures for simplifying corporate and financial services regulation.
I believe this consultation process is yet another step towards striking the right balance of an open market with sufficient consumer protections.
About half of these issues concern the regulation of financial services. One area I am focussing on is reducing the length and complexity of disclosure information given to Australian investors.
I am doing this so that they, Australian investors, get the right information they need to make important decisions.
The other issues in the paper explore ways to simplify corporate regulation. They belong to a number of areas about which stakeholders have expressed concerns.
For example, I have included a number of items relating to company reporting obligations. The idea here is to ease the compliance burden.
Another area which may be of interest to this audience is corporate governance. One particular issue here is whether to extend the protection given to company directors under the Business Judgment Rule.
This would allow directors to focus more on their business rather than having to worry about compliance with the regulations all of the time. Having said that, of course, a keen eye would need to be cast over any changes in this area.
The Government will not be taking any steps which dilute the Parliament’s intention in this area.
Submissions to the Consultation Paper were requested by the 19th of May. We are now considering which proposals to take forward for implementation, taking into account the views expressed.
I am pleased to report that the Government’s efforts to simplify the regulatory burden have been welcomed by industry. As Richard Gilbert, CEO of the Investment and Financial Services Association, said:
“These reform recommendations are overwhelmingly positive, necessary and welcome. Efficient regulation is a key ingredient in the productivity equation.”
Listening to stakeholders – superannuation reforms
Another example of how the Government is tackling unnecessary complexity is in the area of superannuation.
The Government has introduced a radical simplification of our superannuation regime. The proposal was announced in the Budget to exempt Australians over 60 years of age from paying any tax on their superannuation benefits paid from a taxed fund.
This will not only increase retirement incomes, but will at the same time sweep away large tracts of regulations relating to the taxation and payment of superannuation benefits.
Because the reforms are so radical, they will have a strong impact on retirement products in the market.
They will also influence the advice provided by financial planners and other professionals to clients nearing retirement.
A three month consultation period on the reforms will provide business with the chance to submit comments and insights on critical issues and transitional arrangements.
These reforms have been welcomed by business as they will remove complexity from the tax planning and product perspectives.
They will make it easier for advisers to focus and actually spend more time on their clients’ real needs.
Practice management for financial advisers should benefit, because less time will have to be spent on keeping on top of complex regulatory and tax rules.
So, I have talked about the Government’s response to the Banks Report, my own Consultation Paper, and various measures proposed in the recent Budget.
These are three examples of how the Government is setting out to provide the best environment for individuals and businesses to thrive.
These examples show that the Government is serious about reducing red tape and complexity. We are committed to taking action to achieve this.
How are we going forward?
So let me turn to the critical question - where do we go from here?
Our corporate and financial sectors have been through a period of substantial reform. I recognise that this has created a feeling of “change fatigue” within industry.
If I could return to my home renovation analogy - our house is in good shape. It is built on solid foundations and it is structurally sound, but we do need to make minor modifications to ensure the framework is in keeping with contemporary situations. In other words, we need a little updating from time to time.
We don’t need to re-build or move house. In fact I think that our house is the best in the neighbourhood!
If we can focus on fixing the interior whilst making continual improvements to the exterior, we will all be better off.
Likewise, it is now my main objective to finish these refinements. Consumers and the market in general need time to adjust to these reforms.
So I say: let’s bed these down and keep an eye on things.
I firmly believe that this will be a crucial step in consolidating our successes in optimising the efficiency of these very important sectors.
And this is why we are going through so much consultation with you and other stakeholders.
Our challenge is to have regulations that achieve their objectives with the lowest net cost and the greatest net benefit to society. I refer to this as ‘regulatory yield.’
In short, our focus is now about getting regulatory efficiency right. Our end goal is well-balanced, optimised regulation, to ensure that individuals and businesses have the freedom they need to make their best contribution to the future of our society.
Conclusion
Ladies and gentlemen, I put it to you that we have done a lot of the heavy lifting and that has led to the fundamental reform of our regulatory framework.
However, we still need to make those final renovations – touch up a few things here and there – so that our system can deliver on the desired outcome - the facilitation of a strong, efficient and transparent economy.
This, I believe, will result in a system which enables all Australians to plan their futures with greater confidence.
I hope you will recognise that in ten years the question of regulation has come a long way. I can assure you now that this government will not stop working until we have got it completely right.
Thank you.