INTRODUCTION
Thank you for the opportunity to address you today.
As you may know, I've been invited to talk to you about the future of financial services in Australia.
Alan Kay, the father of personal computing, once said:
"The best way to predict the future is to invent it."
Now while Government's should never try and invent or prescribe how an industry should develop in the future, Government's must plan and implement regulatory regimes that provide the necessary flexibility for developments in any market.
Before I delve into a discussion on our financial markets and the Government's role, it is worth taking a brief look at the broader picture.
This Government's sustained reform program and responsible fiscal and monetary policy management - has created a solid foundation for Australia's future economic growth.
This is true not only for the economy as a whole, but also for specific sectors such as our dynamic financial services industry.
Our efforts have been praised by both the OECD and the IMF.
The IMF expects that Australia will continue to be one of the strongest economies of the developed world in both 2003 and 2004.
The OECD also rated our economy as one of the best performers amongst all OECD economies.
These are report cards that the Australian Government is justifiably proud of.
Despite weak global economic conditions, and pressures flowing from the war in Iraq and the conflict in Afghanistan, the Australian economy has remained resilient.
Economic growth remains strong despite the worst drought in a century.
This performance is underpinned by strong investment, particularly business investment.
The OECD attributed this success to the Australian Government's "dogged" pursuit of economic reform, and held us up as an example to be followed by the rest of the world.
FINANCIAL SERVICES INDUSTRY
How has the financial services sector contributed to this bright economic outlook?
Our financial services sector is one of the fastest growing sectors in the economy, recording average annual growth of around 5 per cent between 1986 and 2002.
This was well above the average annual growth rate of 3.3 per cent for the economy as a whole.
As a result, the financial services sector is now the third largest sector in the Australian economy, contributing around 6.6 per cent of GDP.
While Australia traditionally imported capital and financial services, we now have a booming export sector. Financial services exports have expanded rapidly over the past 15 years, reaching $1.5 billion in 2001/02.
That's an average annual growth rate of 12.5 per cent.
Also, there are about 4,000 significant financial institutions in Australia. Together, they control about $1.9 trillion in financial assets.
In the 15 years since financial deregulation, daily turnover across all financial markets in Australia has grown, on average, over 20 per cent.
In addition, Australia has become one of the major managed funds marketplaces in the world. And the largest in the Asia-Pacific outside Japan.
The Reserve Bank of Australia estimates that funds under management have grown at an average annual rate of 11 per cent since the late 1980s - and are now equivalent to about 86 per cent of annual GDP.
It will come as no surprise that the Australian Government's retirement income policy is one of the major reasons for this growth in funds.
Compulsory employer superannuation contributions are now set at nine per cent.
Around 88 per cent of all workers are covered by this system. So growth in assets is mandated and will continue.
THE REFORM AGENDA
How can this rosy picture be sustained? Well earlier, I mentioned the Government's role in shaping the regulatory environment to spur growth in our financial markets.
As many here would appreciate the Government's reform agenda is wide-ranging. However this morning I'd like to focus on recent key reforms that will impact on the financial services industry.
A key principle driving our agenda is the need to achieve the right balance between the needs of business, and the needs of consumers.
GOVERNANCE AND REFORM
We need a regulatory regime that encourages confidence.
This can be achieved by:
Promoting transparency and integrity in our markets;
Providing investors and consumers with the level of protection they need; and
Providing investors and consumers with access to affordable and competitive services.
These principles have shaped this Government's agenda. It is pleasing that we have in partnership with industry been able to design a regulatory framework that is now regarded as among the world's best.
When this Government came to office in 1996, we knew changes were necessary.
Our original reform package (the Wallis Report) made recommendations that were designed to ensure an efficient, responsive, competitive and flexible financial system.
One which is consistent with financial stability, prudence, integrity and fairness.
Over the last five years, the Government has implemented virtually all of the Report's recommendations.
FINANCIAL SERVICES REFORM ACT
The Government's most recent regulatory change - the Financial Services Reform Act, or FSRA - is the last big chapter in the Wallis recommendations.
As many of you here would know, the FSRA seeks to provide:
(a) a harmonised framework for licensing, disclosure and conduct for all financial services providers; and
(b) a financial product disclosure regime that covers all industry segments.
The FSRA is designed to eliminate artificial distinctions between financial products that have previously stifled innovation in the industry.
The FSRA also eliminated the inconsistencies in the regulatory framework that once disadvantaged financial service providers who wanted to compete in global markets.
As with any major reform, further work will inevitably be required to ensure the transition process is as smooth as possible. That said, the Government is committed to ensuring that the FSRA achieves the right balance between investor protection and commercial flexibility, not only in theory but also in practice.
A recent article in The Age pointed out the dangers of over-regulation. Commenting on the British Financial Services Authority, journalist Matthew Lynn compared it to "a monster, spewing forth new rules and regulations".
Lynn went on to say:
"Like some demented great aunt, there is almost nothing on which the FSA does not have an opinion. Nor is any issue so trivial that it is not deemed worthy of a rule, a ban, an edict or a fine."
In contrast, the FSRA provides a principles-based framework. It focuses on regulatory outcomes and minimises, as far as possible, detailed rules. The Government will carefully monitor the reforms to ensure that these objectives are met, without strangling business in red tape.
CLERP
As well as implementing the Wallis recommendations, the Government has been working to reform corporate law through the Corporate Law Economic Reform Program - or CLERP for short.
The latest chapter in corporate reform, CLERP 9, is about restoring investor confidence by corporate disclosure.
It's an important step in strengthening the regulatory framework in the areas of financial reporting... continuous disclosure... and the protection of shareholders' rights.
Investors should be able to trust company accounts. And have access to quality information about the companies they invest in.
This can only occur if two things happen.
Companies need to make timely and accurate disclosures to shareholders.
And sharemarket analysts need to adequately manage conflicts of interest.
As with the FSRA regime the CLERP 9 approach seeks to avoid the highly prescriptive, rules-based approach of the United States Sarbanes-Oxley legislation. That legislation imposes very onerous compliance burdens on companies registered with the US Securities and Exchange Commission.
CLERP by contrast will leverage off and complement the non-legislative moves in international accounting standards and the recently released ASX corporate governance guidelines.
This blend of principles-based legislation and market-based rules and guidelines is the best way of delivering quality reforms without regulatory overkill.
The draft CLERP9 legislation - including measures covering off on more recent controversies in executive remuneration and disclosure - will be released for public consultation in the next few months before they are introduced into Parliament.
CONTINUED IMPROVEMENT
We've come a long way on our road to reform.
But I'd like to assure you that the Government has no sense of complacency.
The CLERP program and other reforms have demonstrated that improving our regulatory regime is a continuous process.
SUPERANNUATION SAFETY AND CHOICE
In 2001, the Government released an issues paper covering a range of matters dealing with the safety and prudential framework for superannuation.
A working group was established to consult on policy options and the Government recently released draft legislation for public consultation to implement reforms in this area.
I also announced that the Government plans to introduce the legislation into Parliament in the Spring 2003 sittings.
A key change is the new licensing regime which will put in place a requirement for all trustees of APRA-regulated superannuation funds to obtain a superannuation trustee licence (STL).
In addition all superannuation funds will need to be registered with APRA prior to accepting contributions. This regime will commence after the end of the transition period for the Financial Services Reform Act, in April 2004.
Of course, as a complement to enhanced safety is the Government's commitment to giving consumers a greater say in their superannuation arrangements.
On 25 May I announced that the Government will increase the momentum for superannuation reform with renewed efforts to implement our election promises.
The Government wants to give superannuation fund members the right to decide where their superannuation contributions go.
We want to give them the right to move their superannuation savings from one fund to another, if they wish to do so, through the implementation of our Choice and Portability policies.
I mean it is really hard to believe in this day and age that anyone could seriously suggest that you cannot have a say about where your own superannuation money goes.
The Government, and indeed most consumers appreciate this point, but they also want information, and that is why we will implement these policies within the context of a substantial education campaign, for which $14 million has already been set aside.
Consumer interests in this area will also be enhanced through improved financial disclosure arrangements. These arrangements, as I referred to earlier, are being introduced as part of the new FSRA regime which will be fully operational by March 2004.
GLOBAL AND REGIONAL INTEGRATION
High on our ongoing reform agenda is facilitating and increasing the overseas growth opportunities - particularly in the Asia-Pacific - for the Australian financial services industry.
We are working to ensure that our regulatory arrangements complement work to reduce barriers to trade in financial services.
We are committed to adopting International Accounting Standards from 2005. This will make it easier for investors to compare the financial accounts of Australian and foreign-based companies. And will enable Australian companies to access international capital markets at a lower cost.
Of course, Australia recognises that in achieving a truly global set of accounting standards, the participation of the world's largest capital market is fundamental.
We're encouraged by the US's move towards more principles-based accounting standards.
We are also encouraged by the "Norwalk Agreement" between the US Financial Accounting Standards Board and the International Accounting Standards Board on greater convergence of US and international standards.
Any progress in this area between the US and the IASB will be welcomed by corporations around the globe.
In addition, while there may be no explicit barriers to market entry, financial service providers may find it difficult to operate overseas because of the cost of complying with local securities laws.
The Government wants to reduce these costs. To this end, we are negotiating mutual recognition agreements across a range of financial services and products with New Zealand, the United States and Hong Kong.
Once implemented, the mutual recognition arrangements will further promote Australia's development as a global financial services centre in the Asian time zone.
At a broader level, the Australian Government is also seeking out opportunities for Australia to increase its trade in financial services with the region.
We recently submitted our initial offer in Services Trade Negotiation as part of the current round of the WTO General Agreement on Trade in Services, held in Doha, Qatar.
We have also played a significant role in advancing the APEC trade liberalisation agenda.
As well, we're progressing bilateral free-trade agreements that include financial services.
We signed a free-trade agreement with Singapore earlier this year. And we are currently negotiating similar free-trade agreements with several nations including the United States and Thailand.
INTERNATIONAL TAX ARRANGEMENTS
And as the Treasurer announced last month in the Federal Budget, the Government also plans to reform international taxation.
The Government's package of reforms will improve the competitiveness of Australian companies with offshore operations.
Active business income earned by a foreign subsidiary and repatriated to an Australian parent will be tax-free.
The Government will also reduce the costs of complying with the controlled foreign company rules.
All these taxation and regulatory reforms will ensure that Australia can continue to develop as a world class regional financial centre.
CONCLUSION
Ladies and gentlemen, the Australian Government is committed to ensuring the long-term health of our financial services industry.
To that end, we recognise the importance of a regulatory framework that balances both business and consumers' needs.
Through six years of thorough and ongoing reform, the Australian Government has shown that we not only believe in the virtues of market freedom, investor protection and quality disclosure - but we deliver on them too.
We have built a robust, pro-growth regulatory framework that encourages efficiency, while facilitating confident investor and consumer participation.
In uncertain times it's critical that the Government does not waver from keeping up the momentum for reform.
Australia's continued ability to compete will depend on this resolve being maintained.
Thank you.