Thank you for the invitation to come along here this morning and speak with
you – it’s an opportunity I welcome and appreciate.
Henry Ward Beecher was regarded by many as the greatest clerical orator of the
nineteenth century. As you may know, his career was not entirely without controversy.
But an observation he once made is extremely relevant to what I will be talking
about today.
Beecher said:
“A law is valuable not because it is law, but because there is right in it.”
Now, I believe we can make exactly the same point about the Howard Government’s ongoing program of regulatory reform for financial services and markets.
The program of reform is valuable not because it is a program of reform. It is valuable because there is right in it.
The reform program is helping to create the conditions that will enable the financial services industry to operate more effectively. And that will allow Australians to achieve three extremely important – or “right” – things:
- It will help them to build wealth;
- It will encourage them to save for their retirement; and
- It will help them to manage risks through insurance.
I am very aware of the fact that in working towards those three key objectives, we need to get the balance right.
That is, we need to balance the benefits of regulation against the costs to consumers and industry.
And I think it is fair to say that we are getting closer to achieving an appropriate balance.
The Howard Government has an unparalleled record of economic achievement that has come about as the direct result of the policies and reforms we have introduced.
That’s not just me saying that, the record says that.
Over the past decade, unemployment has dropped from 8.4 per cent to a 28-year low of 5.1 per cent.
Ten million Australians are now in work, compared with 8 million a decade ago.
Over the past decade, real household disposable incomes have increased, on average, by 30 per cent. And over the past decade, average household wealth has increased by 80 per cent.
According to the OECD – when you take into account after-tax income and benefits – Australian workers enjoy either the highest, or the second highest, disposable income in the industrialised world.
Much of this success is due to the policies the Howard Government has introduced — sound macroeconomic policies combined with ongoing micro-economic reform.
A key focus of our micro-economic reform has been the regulatory framework governing Australian corporations and, most importantly, the Australian financial system.
Today, I’m going to talk about the improvements we have made and I’ll discuss briefly the future of regulation in the financial services market.
FINANCIAL SERVICES REGULATION
The Financial Services Reform legislation – “FSR” for short – is a far-reaching and important piece of policy and legislative reform. It has reshaped - and continues to reshape - the Australian financial services landscape.
By providing a single, harmonised regulatory framework, FSR has improved the quality and level of information available to consumers.
No government can legislate to ensure that financial markets retain the confidence of the public. But a government can implement policies which instil confidence in those markets. That is precisely what the FSR legislation has set out to achieve.
The Howard Government has always recognised and actively promoted the benefits of public share ownership.
The Government sees it not only as a means of providing a broader source of capital for Australian companies, but also as a way to help the Australian people secure their financial future.
That is why the integrity and public standing of financial markets and their participants have extremely far-reaching consequences – consequences that can extend to the whole community.
Therefore, any measures that will enhance the integrity and public standing of the financial markets will result in extensive benefits.
Financial Services Regulation – Refinements
Since my appointment in October last year, I have met with many consumer and industry representatives.
They have given me extremely valuable feedback about the effectiveness of the FSR program. Some of the feedback has been good and, surprise, surprise, some of it has been not so good.
I have, of course, read closely the report of the Financial Sector Advisory Council on industry experience with the FSR legislation.
And I have also consulted with Treasury and ASIC to gain their insights on the operation of the FSR legislation.
It is clear to me that there is strong support for the basic principles underlying the new Financial Services arrangements.
Most of the program is meeting the Government’s objectives.
However, it is also abundantly clear that some areas of the current framework could be refined to improve outcomes for both consumers and industry.
For example, the content requirements of the various disclosure documents are resulting in documents that are excessively lengthy and complex. Or, in the case of oral disclosure, telephone “scripts” that are also excessively lengthy.
Clearly, this isn’t in line with the requirement that information be presented to consumers in a “clear, concise and effective” way.
After all, disclosure documents are designed to help consumers make informed investment decisions. Lengthy and complex documents undermine this important goal.
As well, the expense of producing lengthy disclosure documents places an unreasonable burden on service providers. And, in many instances, the increased cost is passed on to consumers.
Given the importance of the regulatory framework to the operation of our financial services industry — and the importance of this industry to the Australian economy — it’s vital that we get financial services regulation right.
We need to achieve the right balance between costs and benefits.
And we need to ensure that financial services regulation serves the interests of consumers.
FSR Proposals Paper
I am committed to ensuring that financial services regulation operates as effectively as possible.
It’s my job to find out why we are getting less than effective outcomes.
I am going to establish whether, or to what extent, the less than effective results are the product of flaws in the legislation, or whether they are a consequence of the way the legislation is being interpreted by members of the industry.
In early May, after giving a lot of consideration to community concerns, I released a paper containing proposals for refinements to the legislation.
I know that many of you will have read that paper: I’m pleased to say that the proposed refinements have, on the whole, been welcomed by industry.
By way of example, your association’s Managing Director and CEO, David Horsfield, has said that the proposals, quote “will significantly improve the operation of the FSR regime, without compromising the important investor protection measures already in place”, unquote.
David also commended the paper on the grounds that it was based on substantial industry and consumer consultation – something that I believe is vital to improving FSR.
In terms of your industry, the paper is significant because it proposes refinements that will improve the operation of the disclosure requirements and deals with other pressing issues such as the provision of secondary services.
On the issue of disclosure, the paper acknowledges that the Statement of Advice requirements can be improved. And it offers some recommendations.
For example, the paper addresses the situation that advisors face when they’re dealing with clients with whom they have an ongoing relationship.
If the advisor has already given a client a Statement of Advice, then the advisor shouldn’t have to prepare subsequent Statements if there has been no significant change in the client’s personal circumstances.
That’s just one of the commonsense proposals the paper contains.
Personally, I believe that the information that is required to be disclosed in the Statement of Advice can also be reduced, without limiting the value of the disclosure document to consumers.
The paper also recommends changes to the Product Disclosure Statement, Financial Services Guide, and oral disclosure requirements.
In addition to disclosure, there are some other aspects of the requirements where changes are necessary.
As I mentioned earlier, the paper proposes amendments in relation to secondary services “look through” issues. Essentially, two basic principles underlie the refinements proposed:
- The first is that it shouldn’t be necessary for a secondary service provider to comply with the Financial Services Guide requirements where an intermediary is able to provide, and accepts responsibility for providing, the services of the secondary service provider.
- The second is that an intermediary shouldn’t have to give the client a secondary service provider’s Financial Services Guide where it is otherwise made available.
Because the secondary service issue is so complex, and so important, particularly in your industry, I am going to make sure that I receive as much feedback as possible about the proposals outlined in the paper.
To make sure I get that feedback, I have put in place and am overseeing a process of consultation that will deliver a broad cross-section of community views.
That illuminating feedback will be coming from a wide range of representatives throughout the industry and also from a broad spectrum of consumers.
I want to ensure that all industry players — large and small — get the opportunity to express their views.
The SDIA has already been actively involved in the consultation process – it provided us with a number of helpful comments at a roundtable held in Sydney just last week.
I can’t promise that the Government will agree with every suggestion we receive. But I can assure you that all suggestions will be carefully considered.
MARKET INTEGRITY
I cannot overstate the importance of ensuring the integrity of Australia’s financial markets.
Market integrity is fundamental to the liquidity, depth and efficiency of Australia’s financial markets.
The financial services industry — and capital markets more generally — are vitally important in encouraging long-term international investment flows and, ultimately, a strong and vibrant Australian economy.
Market Integrity – Role of the ASX and ASIC
I’ll now turn to another issue that is of particular relevance to your industry.
And that is the role of ASX in ensuring market integrity and the demarcation of responsibility between the ASX and ASIC.
Various commentators have expressed concern that the regulatory roles of the ASX and ASIC are not sufficiently clear.
For example, I have heard comments that the Exchange rules regulating the conduct of brokers overlap with the conduct and licensing requirements in Chapter 7 of the Corporations Act.
In the light of the oft-repeated concern that demutualised exchanges have a conflict between their commercial interests and supervisory role, it has been suggested that the ASX should no longer have a role in both admitting entities to list and overseeing compliance with the Listing Rules.
After the new CEO of the ASX announced recently that the Exchange is reviewing its operations, this debate received a great deal of publicity.
I would like to clarify a few things here from the Government’s viewpoint.
First, the Exchange’s oversight of broker behaviour.
Secondly, its oversight of trading on the market.
And thirdly, the compliance of listed entities with the listing rules.
The ASX has frontline responsibility for supervising its market. This is done through the Listing and Market Rules.
ASIC is the statutory regulator, and administers the Corporations Act.
The functions of ASIC and the ASX are complementary, and do require good communication between the two organisations.
So, while ASX surveillance of trading patterns may indicate transactions which may be in breach of the Corporations Act, the information will be provided to ASIC which then undertakes further investigations and prosecutes where appropriate.
The obligations on the ASX as a market operator flow from the Corporations Act.
For example, it must, to the extent that it is reasonably practicable, do all things necessary to ensure a fair, orderly and transparent market.
To comply with this, the ASX has arrangements to manage conflicts of interests, to monitor the conduct of its participants, and to enforce compliance with its operating rules.
I am not aware of any evidence of a change in the intensity of ASX’s supervision since its demutualisation.
The Government believes that the current regulatory relationship between the ASX and ASIC is robust and working well.
But that’s not to say it’s perfect.
Of course, I will be greatly interested in the conclusions the ASX arrives at in its current review of its operations.
Any proposals for change would need to be carefully considered, and all interested parties would need to be fully consulted, before any changes were adopted.
Anti Money Laundering
To change tack slightly, I know that your industry – in addition to working with FSR – is also dealing with the proposed anti-money laundering measures.
Australia has an enviable international reputation as a secure and prosperous financial centre. And the Government is committed to maintaining that reputation for both consumers and industry.
That is why, through legislative reforms, we are implementing the revised recommendations of the Financial Action Task Force on Money Laundering.
The reforms will involve new or extended obligations for the investment banking and stockbroking industries, including “know your customer”, record keeping and the reporting of suspicious transactions.
The Government has consulted extensively with relevant industries to ensure the new obligations complement existing practices.
The reforms will improve our ability to prevent and detect abuses of our broader financial system. They will support Australia’s contribution to global anti money laundering and counter-terrorist financing initiatives.
As a member of international forums such as the United Nations, the International Monetary Fund, the Financial Action Task Force on Money Laundering and the associated Asia-Pacific Group, Australia contributes to global and regional initiatives to combat money laundering and terrorist financing.
The new obligations will support our participation in these initiatives by strengthening Australia’s link in the global economic chain, and by providing better information that we can use to detect and prosecute offenders.
Anti Money Laundering – The Role of Industry
Potentially, financial and other service providers are targets of criminals who wish to channel proceeds of crimes into legitimate investments.
Such businesses have a responsibility to ensure that they themselves — and through them, the wider financial system — are not vulnerable to exploitation by criminal organisations.
Sound risk-management practices, incorporating customer due diligence, record keeping and reporting of suspicious transactions, are essential in the fight against money laundering.
Industry participants can avoid the need for overly restrictive regulation by sensibly managing their risks.
I want you to know that the Government will continue to work with the stockbroking and investment banking industries, and other stakeholders, to ensure there is flexibility in the new program, particularly where there is a risk of terrorist financing.
There will be an ongoing role for the regulator, AUSTRAC, to issue rules and provide guidance, based on close consultation with stakeholders.
Individual businesses will be responsible for developing and implementing for their organisation robust anti money laundering programs that complement the legislative reforms.
CONCLUSION
I hope that what I have had the opportunity to tell you today goes some way to inform you about how the Howard Government is fine-tuning the regulatory arrangements for financial services.
I want you to know that I am committed to working diligently with all of you to ensure that together we arrive at the balance that is right for all stakeholders.
I do believe we are moving in the right direction, progressively crafting a more effective regulatory framework.
- A framework that works as it was intended…
- A framework that meets the needs of both consumers and industry and …
- A framework that balances the benefits of regulation against the costs to consumers and industry.
All of the things we are doing are things that need doing.
We need to ensure that the financial services industry operates at an optimal level, and in an orderly and transparent manner.
We need to do this to create wealth and financial security for all Australians.
And we need to do this now — not for the sake of it, but, as we established at the beginning of this talk today, because “there is right in it”.
Thank you.