Good morning.
I’m delighted to have been invited to address KPMG’s flagship event.
We Australians are well known for our innovation and ability to adapt to our unique environment.
Mervyn Victor Richardson was an Australian who knew all about doing that. He was a true innovator. He developed the famous Victa lawnmower to help us turn pasture and bush into lawn. He made the prototype from a peach tin, a two-stroke motor, a few pieces of metal and four wheels. It is now proudly displayed in the PowerHouse Museum here in Sydney.
Our skill at innovation and adaptation has served us well in other areas.
For example, I believe the Howard Government has been pretty good at coming up with innovative responses to the events that have come along to challenge the Australian economy.
We recovered quickly from the Asian financial crisis and the economic fallout from September 11. We also have our own particular challenges, like periods of prolonged drought which, in particular, affect our primary industries.
Just last week, the IMF commended Australia’s continued strong economic performance.
In its annual assessment of the Australian economy, the IMF noted that Australia is now in its 14th year of economic expansion.
It also noted that “Australians’ incomes have turned around decisively” since the early 1990s.
This impressive economic record has not come about by accident. Rather, it is the result of a sustained process of innovation and reform in almost every area.
The IMF commended Australia’s “exemplary setting of economic policies”. It went on to note that the resilience of our economy “reflects increased flexibility at the microeconomic level” as well as “prudent and flexible management of monetary and fiscal policies within transparent medium-term policy frameworks”.
The IMF also stated that the Government is well-placed to implement additional far-reaching structural reforms to help Australia remain “one of the strongest performing economies among the economically advanced countries”.
It is now almost twelve months since my appointment as one of the three Australian Government Treasury Ministers. So I would like to take this opportunity to reflect on my first year in the job and offer you some insight into my thinking on the financial services sector and our economy in general.
Development of financial markets
Like our economy, our financial services sector is strong — and growing.
To give you just a few examples…
Our finance and insurance sector produced 8.5 per cent of GDP last year. That’s more than the construction, mining and agriculture sectors.
Our stock market is now the 9th largest in the world. In 2004, about 55 per cent of adult Australians owned shares. The average share portfolio was worth over $41,000.
In terms of total funds under management, Australia ranks fourth largest in the world — even higher than Japan. Last December, our total funds under management grew to US$635 billion.
The major driver behind this growth is superannuation funds, which represent the accumulated retirement savings of Australians. These amount to about 70 per cent of total funds under management, and are predicted to continue to grow strongly.
One reason why Australia’s financial markets are strong and growing is the sound regulatory system established by the Howard government.
We are stimulating productivity and economic growth by restraining and refining government regulation.
I would like to briefly outline one important initiative in this area. And that is the financial services reform refinements which I have been closely involved with.
When I was appointed last year, one of the first things I wanted to do was reduce the compliance burden on financial service providers — without in any way undermining the important consumer protections the legislation provides.
Financial Services Reform Act
The Financial Services Reform Act commenced in early 2002 and provided for a two-year transitional period, which ended in early 2004.
The Act is a far-reaching and important piece of policy and legislative reform that is reshaping the Australian financial services landscape.
By providing a single harmonised regulatory framework for our financial services industry, it has improved the quality and level of information available to consumers.
No government can legislate to guarantee that financial markets retain the confidence of the public.
But they can implement policies which build stakeholder confidence in those markets.
This is precisely what the FSR legislation does.
As I mentioned earlier, over half of adult Australians own shares. This is largely because the Government has long promoted the benefits of public share ownership. Not only as a means of providing a broader source of capital for Australian companies, but also to help secure the financial future of the Australian people.
This is why the integrity and public standing of financial markets and their participants have extremely far-reaching consequences. Consequences which can extend to the whole community.
So, measures which enhance that integrity will produce extensive benefits.
Financial Services Regulation – Refinements
Since my appointment, I have met with many industry and consumer representatives.
And I have yet to meet anyone who disagrees with the fundamental objectives of the Financial Services Regulations.
However, there are clearly some practical, day-to-day issues that need fine-tuning.
FSR Proposals Paper
I am committed to ensuring that the financial services regulations operate as effectively as possible.
We also need to ensure that financial services regulation serves the interests of consumers.
As you are aware, after I released my proposals paper in May, an extensive round of consultations was conducted across Australia.
I expect to release the draft regulations for public consultation very soon. And I expect the final regulations will be in place by the end of the year.
CPA report
The work to refine our financial services regulations is already paying dividends.
CPA Australia is the largest professional organisation in Australia with more than 105,000 members of the accounting and business professions.
It has just released a report into the impacts of the Financial Services Reform Act.
The verdict?
A year after the reforms were introduced, over a third of consumers believe that the quality of the financial advice they receive has improved.
This is clear proof that the Act is working. It is proof that the Australian Government’s intention was right, and that the industry as a whole needs to be congratulated for embracing the reforms.
Regulation — sharing the responsibility
I would like to emphasise that these regulatory refinements have not been developed by Government working alone. They have been developed through an extensive consultative process with stakeholders.
I am firmly committed to the process of productive consultation.
And I believe in striking the right balance between regulation and risk.
The British Prime Minister Tony Blair recently gave a speech on this very topic. He spoke of the strong pressure on government to remove every conceivable risk that could materialise.
In his speech, Tony Blair asked:
“A civil servant who fails to regulate a risk that materialises will be castigated. How many are rewarded when they refuse to regulate and take the risk?”
While I agree with Mr Blair’s sentiments, I think attributing the blame for over-regulation to overzealous legislators is too simplistic.
Some responsibility lies with business itself. And perhaps to a lesser extent, with the broader community.
As a Parliamentarian, I wholeheartedly support light-touch, principles-based regulation, and I prefer substance over form.
But from my own experience, I know that it’s difficult at times to sustain this approach.
It’s particularly difficult to advocate light-touch regulation in the face of legitimate public pressure to act swiftly and decisively to stamp out egregious corporate conduct.
Similarly, it’s hard for government to maintain a hands-off approach in circumstances in which business seeks guidance and more so, certainty.
So the question that arises is - what can be done to improve Australia’s regulatory framework?
The way I see it, if the problem is tripartite — flowing from the behaviour of legislators, business, and the community — then so is the solution.
I believe — both as a parliamentarian and as a former businessman — that it’s important for the Australian Government to take the opportunity — and to engage in the challenge — of reviewing regulation in all its forms, to ensure that it supports and facilitates trade and commerce.
But even with the best of intentions, my parliamentary colleagues and I can’t address this issue on our own. It’s only with the support of business and the community that we can begin to critically assess where we are, and where we want our regulatory framework to be.
Business can assist in a number of ways. Primarily, business can reduce the red tape to which it’s subject by supporting appropriate commercial conduct.
Businesses’ behaviour can be influenced by self-regulatory mechanisms such as codes. But these are effective only where there are sanctions for improper conduct which are proportionate, and are imposed on delinquent entities.
Business can also do its bit in achieving a more flexible and more competitive regulatory regime by accepting — and it’s a truism — that principles-based legislation will not mandate specific conduct.
The business sector will always need to use a degree of interpretation as to what the legislation is designed to achieve. And, necessarily, this will expose business to some risk.
This is a trade-off that business needs to be prepared to make.
The third measure in the fight against regulatory overkill relies on the community as a whole. The community can assist business and government in reducing red tape by doing two things.
First, by embracing education, particularly in the area of financial literacy. And secondly, by accepting that everything in life carries some degree of risk.
A more commercially and financially savvy population will encourage Government to adopt a more accommodating approach in achieving consumer protection outcomes.
The community can build on this by supporting a non-interventionist attitude from Government.
It will be difficult — if not impossible — to lighten the regulatory load on business if the community tacitly continues to adhere to the view that the “State” should bear the ultimate risk of mum-and-dad investment, rather than investors bearing the risk themselves.
Ultimately, while we as legislators must accept a measure of responsibility for the tangled regulatory web, business and the community have also made their unique contributions.
To eliminate over-regulation, the commercial world and the broader community must work co-operatively with governments at all levels.
We must all work together to achieve a framework in which regulatory benefits demonstrably outweigh the burden of regulation.
Financial services market: Policies and regulation
I’d now like to discuss one of the most critical challenges facing Australia.
Like other OECD countries, our population is ageing.
Research undertaken by the Government indicates that if we take no action to manage the economic effects of this process, we can expect a significant deterioration in public finances in the longer term.
Our estimates indicate that if we take no action, the gap between government spending and revenue will increase to at least five per cent of GDP. Or about A$87 billion in today’s dollars.
What is the Government doing to respond to this challenge?
We have already put in place several measures to ensure we are well-positioned to meet the financial challenges of an ageing population.
I should add that in its recent report, the IMF commended the Government for the steps we have already taken in this regard.
These include the extremely low levels of debt this Government has achieved… a well-targeted and therefore affordable social welfare system… a resourceful health system… and a comprehensive retirement income policy, which includes both mandatory elements and incentives to promote private savings.
Secondly, this Government remains committed to further developing our policy response to maintaining fiscal sustainability.
For example, the Government recently introduced measures to encourage a phased transition to retirement. This will help to keep mature-age workers in the workforce.
The Future Fund is another initiative to mitigate the effects of our ageing population. It was established to fully cover the Australian Government’s unfunded superannuation liabilities. These currently amount to over $91 billion and are expected to grow to around $140 billion by 2020.
A third policy response is encouraging private saving as a means of easing the burden on public finances. This, of course, requires well-functioning financial markets based on a sensible regulatory regime.
I believe the reforms to our regulatory framework which I outlined earlier are going a long way towards encouraging the Australian people to invest and save.
Because Australian consumers are better informed and better protected than ever before, growing numbers are participating in financial markets.
International developments and opportunities
I would now like to briefly touch on international developments and opportunities.
Financial markets worldwide are becoming increasingly integrated. This is creating many opportunities for domestic and foreign participants.
The Australian Government strongly believes in the benefits of opening up and liberalising financial services markets. This is not limited to Australian companies going overseas.
We also believe that foreign providers of financial services can deliver significant benefits to Australian consumers, in the form of more competition, lower costs and innovative products and practices.
Australia’s open financial markets offer many opportunities for foreign financial services providers.
We have already established a very liberal regulatory and licensing regime. Our regulator, the Australian Investment and Securities Commission, has granted class exemptions to wholesale financial service providers from markets such as the USA, UK, Singapore and Hong Kong to enter and compete in the Australian market.
Australia is a leading proponent for further opening up of financial and other services markets through international agreements. We are actively pushing to implement relevant measures in a number of forums.
One example is the Doha round of the World Trade Organization, where Australia has made a very ambitious proposal for the liberalisation of trade in services.
So far, other countries have not been able or willing to match the terms offered by Australia. Much work remains to be done to achieve the objectives set for the Doha Round.
We have also finalised negotiations on the Australia-United States Free Trade Agreement, which entered into force at the start of this year.
The Agreement’s Committee on Financial Services has started its work, where we are seeking to gain improved access for Australian financial service providers to the US market.
Australian and American officials are exploring the possibility of achieving greater United States recognition of Australian regulatory frameworks governing securities and collective investment vehicles.
While discussions are still at an early stage, progress in this area is important because of the potential to lower costs by reducing the need for Australian financial services providers to comply with overlapping Australian and US regulatory frameworks.
We are also negotiating a further four Free Trade Agreements with ASEAN in partnership with New Zealand, the United Arab Emirates, Malaysia and China.
In all of these negotiations, Australia is pushing for significant concessions in trade in services — a challenge that I’m sure will provide further opportunities for the Australian economy to grow and prosper.
Conclusion
We Australians pride ourselves on our individualism. We don’t slavishly follow overseas practices – for the very good reason that they may not work for us.
Rather, like Mervyn Victor Richardson, the innovator whom I referred to earlier, we also develop our own home-grown solutions when necessary, to meet the unique challenges that come our way.
For the Australian Government, this means developing partnerships and working closely with industry and other stakeholders to find the solution which will achieve the best results for both consumers and industry. It is always a matter of sincerely striving to get the balance right between consumer interests and industry flexibility.
The growth of our economy and the health of our financial markets is proof that this approach works for us.
I hope that all of you here have a productive conference today and I wish you well.
For those of you who may have come from abroad, I sincerely hope you gain a deeper understandingof the operation ofAustralia's financial services sector. It is strong. It is growing and it is efficient.
And, most importantly, it relies on strong partnerships between all stakeholders,both domestically and globally.
Thank you.