I must say, I am very pleased to be here to speak with you today – not only are the issues you are discussing interesting, but the temperature in Queensland is a good 20 degrees higher than in Canberra, where I have been spending too much time lately! Ethics, Integrity and Innovation is the key theme of your conference this year and, from where those outside the business community are standing, the expectation is that these issues should be at the heart of all businesses, particularly those in the financial services industry. It is essential for industry participants to discuss and debate these themes; what they mean, where they are complementary and where they are inconsistent, what the expectations of Government, shareholders and consumers are and what responsibilities modern businesses have as good corporate citizens. The conference organisers have asked me today to address questions around regulation and Government and political perspectives of regulation as it relates to these key themes. As Minister for Revenue and Assistant Treasurer, I am in the fortunate position of being actively involved in the regulatory challenges within the Treasury portfolio. Treasury is a unique portfolio that includes taxation - the Australian Taxation Office and the Inspector-General of Taxation, as well as what we describe as market regulation – corporations law, competition law, insurance law, banking and prudential regulation, and consumer law, to name a few.
Involvement in the Treasury portfolio provides an interesting insight into the role of regulation of markets and corporate behaviour and the even more challenging question of how that regulation should be achieved.
But before I take you into the dark depths of some of the regulatory challenges within the Treasury portfolio, I would like to first make some remarks about why regulation, ethics, integrity, innovation, effective markets and good corporate behaviour are important to the community more broadly.
Of course, it all starts with the economy.
Leaving aside the importance of communities and families, the fundamental piece in the puzzle in this wealthy country of ours is the economy.
The Howard Government believes strongly, passionately, that a strong economy benefits all.
It is surely true that all Australians, no matter where they are or who they are, benefit from a dynamic, buoyant and productive economy that creates wealth, jobs, opportunities and Government revenue to pay for services such as health, education, aged care, defence, transport, etc.
The Howard Government is focussed on keeping the economy strong – so that:
- people can find work and keep jobs;
- interest rates for homebuyers are kept low;
- older Australians can look forward to dignity in retirement, and
- families have more choices.
With ongoing strong economic management, Australians can continue to build their wealth, provide opportunities to their children and families and the community more broadly.
It is through this prism that most Treasury policy decisions are made.
It is within this context that regulatory decisions are taken.
That is one of the reasons why, since the Howard Government came into office, the policy work in taxation, competition and consumer policy and corporations law have been shifted from other portfolios into the Treasury portfolio. They have joined a range of other policy areas that are vital to the functioning of many business markets.
Policy making, legislation and regulation within the corporate and financial services sector doesn't just happen because those of us at Parliament House don't have enough to do.
It happens because there is an identified need. Because there is a market failure or a need to protect consumers, or some other reason to make the market more effective, more competitive or more innovative.
The goal is to get the framework right and to create greater incentives and opportunities for success (while ensuring protections are in place).
The Regulatory Balancing Act
Those of you who have been close to the legislative and regulatory process will know that at the highest level, the philosophical level, it throws up many challenges.
These challenges are not for the faint hearted. But it is important to get them right.
In a small economy by world terms which generally punches above its weight, the importance of getting the regulatory balance right should not be underestimated.
Australia and Australian companies are part of a global market. Australian workers are in demand overseas. We are a medium economy operating in a global marketplace and we need to be efficient, versatile, flexible, innovative and competitive.
Regulatory responses require open and robust debate and consultation to get them right.
Some of the obvious challenges involve balancing the desire for more simple regulatory solutions that are principles based, against black letter law solutions that are more complex and may offer greater certainty for some but can't possibly offer certainty for all.
There is the balance of ensuring that consumers are adequately protected and businesses have appropriate standards in place, against the need to ensure that regulation doesn't stifle competition, strangle innovation or raise barriers to new entrants in the market.
There is the desire for simplicity and consistency. The preference to apply one set of rules across as broad a base as possible, along the lines of the FSR regime. But not to be so focussed on one size fits all that the regime is insufficiently flexible to recognise differences in market participants and consumer needs.
There is the dichotomy of having independent umpires in the form of statutory bodies with the role of enforcement and compliance, but the fact that Government is, at the end of the day, where the buck stops as to whether or not the regulatory arrangements are well directed and are working.
If there is a regulatory failure, the Government will step in.
There is the obvious preference for self regulation and good corporate governance rather than overregulation and heavy handed regulators but the system must produce an appropriate framework that balances the rights of shareholders and consumers.
And, last but certainly not least, there is the democratic, political, parliamentary process which often demands compromise.
And let me say, dealing with the Senate is no soft touch!
With challenges like this to negotiate, a surprising amount has been achieved over the past 8 years.
Howard Government's Regulatory Revolution
As you would be aware, there has been a regulatory revolution in this country since 1996 when the Howard Government came to office.
Some of the regulatory changes seem distant memories – Wallis, for example. The complete restructure of the Corporations law, another. The most significant tax reform in history, a third example.
These and other structural and regulatory changes have been essential because the world is not a static place. We need to ensure that Australian businesses can remain competitive in a global environment while ensuring there are appropriate standards to protect consumers and create more transparent and effective markets.
As I travel around and speak to business people, accountants, lawyers and others, I am interested to hear the views of what more can be done to ensure that the framework and the balances are right.
There is always room for improvement. And that doesn't always mean more regulation, but it can mean less regulation or more simple regulation.
Many come to me with lists of demands. Others are fatigued and call for a period of consolidation. Either way, it is essential that business, the professions, industry groups, consumers and other stakeholders are involved in forward progress.
CLERP in Australia
As you know, the Howard Government has been progressively modernising and improving Australia's corporate governance framework since taking office.
The latest instalment of the corporate law economic reform program, CLERP 9, contains measures to enhance auditor independence, achieve better disclosure and increase corporate accountability through improved enforcement measures.
This is particularly relevant given the international debate that has raged about corporate governance .
As investigators have sifted through the corporate wreckages of Enron and Worldcom in the United States and HIH and OneTel in Australia, it has been important for legislators to review the frameworks in place and perhaps upgrade them to address the systemic failures that have been identified.
Improved disclosure, transparency and accountability are key factors in restoring and enhancing investor confidence. Well informed and confident investors will ultimately improve the operation of the market, which in turn will provide benefits to business and the economy generally.
The CLERP reforms are a key example where the Government has tried to strike a balance between the need for improved accountability whilst not being overly prescriptive.
For example, this Government does not believe that it should be sitting in boardrooms and fixing remuneration for executives. Companies should be given the flexibility to pursue talent and reward innovation and wealth creation. Stifling innovation and wealth creation would undermine our international competitiveness and economic growth.
On the other hand, the Government considers that the basis of remuneration packages for senior company executives should be clearly disclosed to shareholders.
Accounting standards
The CLERP program has already seen significant reform in accounting standards setting processes – such as new arrangements for the Australian Accounting Standards Board and the Financial Reporting Council.
With increasingly large international capital movements across the global economy, the move towards a single-set of high quality standards will allow direct comparisons between Australian and foreign company financial statements.
While Australia already has its own set of high quality accounting standards, it is important to remember that we represent less than two per cent of the world's capital markets.
This means that investors and fund managers located in places like New York and London, have little incentive to become familiar with our particular standards.
A uniform set of global standards will reduce the risk premium foreign investors apply to overseas companies with unfamiliar accounting standards. This will benefit Australian companies by reducing the cost of capital.
I note the FRC confirmed its commitment to the 1 January 2005 transition date for international accounting standards.
Although I acknowledge there will be some issues to resolve in the brave new world of international accounting, at least there is the certainty that it will go ahead.
The Government's recent Budget has given the Council an additional $3.4 billion for 2004-05 in order support its role in ensuring a smooth transition to the international standards.
Insurance reforms
A number of participants here today are from the insurance sector, and I am sure it will not be news to you that over the past few years, the Government has significantly reformed the regulatory structures surrounding the industry.
Insurance is a particularly good example of the regulatory balancing act I mentioned earlier, because of the uncertainties inherent in an industry that deals in the managing and transfer of risk.
In trying to increase the stability of the industry, the Government and the regulators were faced with the ever-present tension between efficiency and safety, between maintaining adequate reserves while allowing for competitively price premiums.
I can tell you this tension is very real and very important.
In an environment where all the pressure is directed towards lower premiums, it is vital that those with an understanding of the industry can stand up for the balance, and make the point that insurance from a company that's premiums are so low it can't meet its financial obligations is not cheap, it's worthless.
Despite these tensions, the Government went ahead and upgraded capital adequacy requirements, making them more risk sensitive and undertaking a health check of the industry through the reauthorisation process.
While the industry is no doubt more stable and sustainable as a result of the reforms, it should be remembered that APRA's goal is not, and never has been, to prevent any failures, it is to minimise them.
Safety of institutions as an absolute objective would be so restrictive on the financial services sector that innovation would be stifled and competition would be crippled. The cure would be worse than the disease.
But this does not mean we do not continue to strive for a safe and stable, but dynamic industry, continuing the regulatory balancing act.
Financial Services Reform Act 2001
On 11 March 2004 the Financial Services Reform Act introduced a uniform licensing, disclosure and conduct framework for financial service providers.
The new regime has been designed to improve the integrity of the financial services market – to provide consumers with greater confidence about the quality of the financial services they receive, and to enhance their ability to make informed investment decisions.
In typical Australian fashion, many did not lodge their licensing application until the last moment but in the time honoured Australian way, the overwhelming majority of industry participants are now licensed.
It may be that compliance with the disclosure obligations does not require the excessive levels of disclosure often suggested by legal advisers or internal compliance officers.
Documents that are overly long or contain unnecessary information may defeat a central aim of the new regime, which is to ensure consumers have sufficient information to make informed choices. I understand that the Regulator, the Australian Securities and Investments Commission (ASIC), holds a similar view.
ASIC has publicly stated it that it will be taking a pragmatic approach to enforcing the new licensing and disclosure regime. It will continue to work with industry bodies to develop model disclosure documents and guidelines for financial service providers.
Financial literacy
While the new FSR regime has raised the bar on standards and disclosure in the financial services industry, I am sure you will agree that disclosure to someone is one thing, but it takes certain skills for a consumer to be able to understand what is being disclosed.
That is why I have appointed the National Consumer and Financial Literacy Taskforce, chaired by Paul Clitheroe. The Taskforce is working on the first ever national strategy for consumer and financial literacy.
The 15-member Taskforce includes educators and representatives from industry, regulators, community and welfare organisations as well as small business.
One of the goals will be to help educate Australians about simple risk-and-return concepts. About saving and budgeting. About compounding. About living within your means.
Many people live beyond their means, or, as Paul Clitheroe has said, many people are doing 110 in a 60 kilometre zone. They are putting themselves in financial jeopardy, they are investing without doing research or understanding the risks, they are falling for some of the oldest scams in the book.
The Taskforce will propose a way forward to harness and augment existing consumer and financial literacy programs and information – within and outside the formal education sector.
It is important work. With improved consumer and financial literacy, ordinary Australians will be better equipped to improve their wealth. We will have disclosure on the one hand and financial literacy on the other.
Corporate ethics and governance
Government regulation must be accompanied by a strong set of corporate ethics that encourages directors and employees to operate in an open and honest manner.
The community's expectations of the safety of financial institutions are, understandably, higher than those for other corporations.
The Government's philosophy is that "sunlight is the best disinfectant" and that optimal corporate governance practices are achieved through transparency and disclosure rather than by directly adjusting the substantive rights of various stakeholders.
Government encourages corporations to adopt appropriate governance structures so we can avoid unnecessary overregulation.
Of course, the fundamental importance of director accountability is recognised in the Corporations Law where certain minimum obligations and responsibilities have been imposed.
And recently the Government passed legislation to implement a licensing regime for superannuation trustees, providing greater protections for the retirement savings of all Australians.
However, there is a fundamental question of how far we should go in legislating best practice. Let's face it, no amount of regulation can completely eliminate unethical corporate behaviour.
I was interested to read some comments by Marilyn Carlson, the head of the Carlson Companies who apparently recently said: "it's an unfortunate situation when you can't make up enough rules to make up for a lack of character".
Ultimately it is impossible for Governments to regulate away poor ethics or poor corporate governance. And these types of failures can be catastrophic.
Business has a lot to live up to and decision makers must continually strive to do so – in the interests of their companies and Australia generally.
Labor's alternative
Without wanting to make this a politically charged speech, I feel it is appropriate to make a few remarks before I close, about the alternative that a Labor government would offer.
In an election year, thoughts will inevitably turn to whether the grass might be greener on the other side.
I encourage you all to objectively assess the alternatives you are presented with but it is true to say that recent past elections have not presented as stark a contrast as that presented by the forthcoming election.
Labor favours a heavy handed approach in virtually all areas of corporate and business regulation.
Labor wants to force all superannuation funds, regardless of size or preference, to offer investment choice of at least five different funds.
Labor wants to ban entry and exit fees and regulate reporting arrangements.
There is no doubt the financial services sector will face a heavier regulatory burden – not only for your own businesses but also your clients.
Labor will regulate corporate salaries and they will turn the clock back on the employment and workplace relations environment.
Trade practices rules will be re-balanced in a way that will increase uncertainty, enforcement of secondary boycott provisions will be taken from the ACCC and big business will be facing the prospect of being split up if they are deemed to have too much market power.
Labor's record when it comes to assisting corporate Australia lacks insight, understanding and commitment to the needs of business.
Conclusion
The Government has done much, but there is much more to be done.
A strong business sector can only exist if there is a strong economy.
Economic management requires careful planning, hard work and sound choices in difficult situations. Economic management is not an accident or a fluke.
It is only if the Government gets the economy and the regulatory environment right that business and industry can have confidence and get on with what they do best.
I look forward to continuing on with the many challenges ahead and I am sure the Financial Services Accountants Association will continue to have much to contribute to that progress.
Thank you