15 April 2002

"The New Era of Financial Services Reform - The Way Ahead" - Address to the Australian Institute of Company Directors, Perth

It is ironic to be here talking about the implementation of the Financial Services Reform Act and it is worth mentioning the history of that legislation. I commenced the process of the Corporate Law Economic Reform Program and part of that was a thing called CLERP 6. The initial aim of that reform was to harmonise the regulation of securities and futures. We obviously had two chapters of law dealing with those financial products and clearly there was convergence of the financial impact of those products. Having two separate laws dealing with those two financial products was regarded as anachronistic.

We then had the committee chaired by Stan Wallace which brought down the Wallace Report and suggested in a very simple and concise recommendation that we should harmonise and similarly license all financial products and all financial advice provided. So all of a sudden we had the concept of a new 'simplified' law to ensure that all financial advice providers, stockbrokers, financial planners - everyone who provided financial advice about financial products would be licensed under a single regime.

CLERP 6 was negotiated with all of the stakeholders just before October 1998, when we had to go through that democratic institution called an election and I then handed it over to Joe Hockey in about November of 1998. I brought Joe into my office and said: 'Look, Joe, this is the biggest thing you are going to have to deal with. It is an enormous undertaking. For God's sake grab it and get it into law as quick as you can'. Of course what happened, all of the groups that I had got around a table and banged their heads together and loosely got them to agree to a way forward, started unravelling the whole thing when they had a new Minister and the result was three years of negotiations, consultations, discussions, drafts and re-drafts. The legislation I put through the Senate on Joe's behalf late last year was finally enacted on March 11 this year.

But I think that the delay and the process have probably ended up creating a better piece of law. I also have no doubt that there will be problems with the implementation but I am heartened by the enormous goodwill that all of the players have shown towards the process and it is a credit to Joe Hockey, who had to manage that process with ASIC and with the treasury officials through that time, that it has moved into place relatively easily. In terms of further implementation issues, there are some that we have already fixed with changes to the law itself. I put through some amendments in the last sitting week of Parliament in March.

We have obviously imposed a raft of regulations, which we hope will reflect the intention of the law and, of course, ASIC have been putting forward policy statements very rapidly as well. Can I just say that I intend personally ensuring that the consultation process that started around the beginning of CLERP 6 then FSRA continues.

I have had feedback from people working in the markets about problems with the law and the regulations and the policy statements and we rapidly respond to those, but I will during June and July be hosting some roundtables between stakeholders, the Treasury officials and the relevant ASIC people, to basically just look at where we are at after three or four months. I want to see to what extent we need to finesse the law or the regulations or the policy statements to ensure that the original CLERP philosophy to make the Corporations Law a body of law that facilitates business in Australia, that encourages business to raise capital, to merge and acquire each other, to basically ensure that free enterprise blossoms in this country as opposed to being weighed by unnecessary regulations is adhered to. My own view of FSRA is that if it is not properly managed it will cut across that philosophy.

I think the benefits of the regime are significant. I think most people in the market recognise that. They recognise that if we are going to have a dynamic free enterprise society then you can't have just anyone hanging up a shingle and saying that 'I am a financial planner and I can give you advice' We have seen more in this State then probably any other State in Australia over the last few years of what can occur when good, honest people have their life savings put into investments based on bad advice -- based, in some cases, on fraudulent advice which has destroyed not only the financial base of those people but their entire lives. And that is through bad regulation. I think most of us in this room today would know that having a sound regulatory framework is absolutely pivotal.

My very strong view is that we do need to deliver more, that the reforms that we have started off in this country across the whole range of the Federal Government's program, be it industrial relations, fiscal reform - turning the deficits of Labor into the surpluses of the Coalition, community services and welfare reform, corporations law reform or in financial sector reform generally, that the work has really only just commenced. The world is changing at a more rapid rate than it was in the mid 90s when we assumed power and the corporations law and the changes in the corporate environment have sped up in that time.

I intend announcing in a few days the establishment of two new chapters of CLERP. CLERP 9 will be a review of the continuous disclosure provisions. It will be looking at disclosure generally. It will be looking at moving us more into using internet-based communication with shareholders, so that if you are able to communicate with your shareholders using the internet for all of the sort of notices that are required to be sent out by companies or managed funds, you will be able to entirely do that over the internet and will not need to use paper again once you have done that. There will be a whole range of reforms again to reduce costs to business in relation to improving corporate disclosures to shareholders and potential investors. I will also be going to the business community and asking them that in relation to all the previous CLERP reforms, are there any further improvements you would like put in place and again we will be vigorously seeking to achieve an improved corporate law environment for Australia.

As you mentioned, Mr Chairman, I am heading to Washington tonight. I will be talking to key congressional leaders about the progress of their inquiries into the Enron collapse. I will be talking to them about their response to those problems in America which have been quite significant but most importantly I will be talking to them about the need for a single set of reporting standards across the whole world. I think that it is quite obvious from the sort of capital flows that are occurring across borders now that the economic reality, the corporate reality is far ahead of financial reporting standards.

It is almost inconceivable that in an almost successfully globalised world, where most companies are trading across borders on an hourly, daily, minute-by-minute basis, that financial reporting standards in America, Australia, Europe, Great Britain and Asia are so different. It is quite a regular thing to find companies reporting in the US and Australia and other jurisdictions in one place reporting profits and using the same fundamental economic facts reporting a loss in another jurisdiction. I believe it is in Australia's interests, where we are only less than 2% of world capital markets, that we take a lead to the extent that we can We don't over-rate our influence but we should not under-rate it.

Australia can take a lead in driving the world towards a global accounting standard and the proposition that I will be putting to political leaders and regulators in the US is that we should work together to get a global accounting standard in place prior to the year 2005. It is an ambitious target but I think it is one that is achievable and I think if anything, the Enron collapse and the failure of at least one US GAAP standard in relation to accounting for special purpose vehicles should bring into stark focus for US regulators and legislators that having unique standards in different jurisdictions is bad generally for mankind.

Just to illustrate what happens in the Australian context is that I am trying to do a major project on looking at just how much investment money is flowing between the various zones, between the UK and the US, Europe and the US, Europe and Australia, Australia and the US. Ensuring that artificial regulatory barriers to the flow of those investment funds through arcane financial reporting differences between jurisdictions I think, is a cause that Australia needs to take up and I think we have to have a totally hard nosed assessment of where Australia should go.

If the US isn't interested in international accounting standards, where we have put a lot of effort of the last three years, then we have to fundamentally reassess whether we want to keep putting resources into IAS or whether we should be working with the US to harmonise Australian standards to the US GAAP and just see how the Europeans react to that. But I don't have a preconceived idea, all I am saying is that Australia should not be issuing its own accounting standards anymore and that we should be leading an international fight towards having one set of global accounting standards by the year 2005.

Could I also say that ASX figures certainly underline this international flow. They are saying that there is $500 billion worth of funds invested through super and managed funds at the moment and they are anticipating that within 10 years that will be $1500 billion. So it is an enormous investment pool. I know that we would like to see that increase and I also know that if you put artificial barriers to where that investment money goes, either through regulatory impediments or, just as importantly, through tax impediments, that that will diminish the outcomes.

And the outcomes should be investment money flowing to the very best and most efficient use, that the market is well informed, that people can move their investments depending on the performance of companies, the performance of economies, the performance of the underlying assets and that will create the best outcomes. It will ensure that the best technologies get put into place that the very best of our research and development activities get commercialised more rapidly and that the benefits of that are in R&D and that research generally will benefit mankind and create profits that we can tax.

Could I conclude, Mr Chairman, by saying that I will be ensuring that the Perth business community is connected unlike never before to the processes of the Federal Government in this portfolio. If you have got something to contribute to corporate law, business law reform, even dare I say it competition law reform, I will be setting up a series of formal and informal consultations in Perth and I welcome you becoming a part of that.

I thank all who have so actively assisted me when I was in the portfolio previously. I look forward to spending the next couple of years breaking down the barriers within the corporations law and the corporate regulatory environment to make it easier to do business in Australia but, most importantly, making it easier for people to locate head offices in Australia, for Australian companies to invest overseas and to expand overseas and just as importantly to welcome foreign investment into Australia.

It is a pleasure to be here with you today and I look forward to taking questions and to engaging with you as the years go by.