3 July 2001

Backing Australia's Ability with the Financial Services Reform Bill 2001


Speech to the Committee for the Economic Development of Australia, Sydney

Thank you Dick for inviting me to speak to CEDA today.

When I last addressed CEDA back in February I spoke of the Government's wider political and reform agenda and, particularly, some of the hurdles confronting achieving these reforms.

The most significant of these was the uncertainty over Australia's Corporations Law following the Hughes decision in the High Court.

Now, five months later, that uncertainty has been resolved and the result is that the new Corporations Act is scheduled to start on 15 July 2001.

This has meant the long-awaited Financial Services Reform Bill was able to be pass through the House of Representatives early last Friday morning.

As I have said to CEDA before, this Bill is one of the most significant changes to financial services in Australia.

It is a critical reform for an industry which is a cornerstone of economy. Directly financial services organisations employ over 333,000 people however all Australians rely on the industry's products and services.

The Australian financial services industry is not steeped in the rich history associated with names like the Morgans or the Rothschilds that have dominated American and European banking. Australian financial services have been dominated by institutional names working closely with the Government's support.

However our industry has come a long way in the last thirty years and today it is probably one of the most dynamic and innovative sectors of our economy.

Reputation alone cannot push back the forces of globalisation. Rapid technological change is helping to increase consumer expectations. Today consumers expect better service at less cost. They want greater returns on more diverse investments.

Well the Government is responding by backing Australia's ability in financial services. We believe the Australian financial services industry can respond to increasing consumer needs and through the Financial Services Reform Bill we are putting in place a regulatory regime to meet those challenges.

The Financial Services Reform Bill delivers the third instalment of the Government's Wallis Inquiry.

Recently it has been suggested, particularly by my political opponents, that Wallis has somehow "failed", based on the HIH collapse alone.

I would suggest that to come to such a conclusion is tantamount to draining Sydney Harbour because a boat sank. It is intellectually dishonest for the Labor Party to express its support for the Financial Services Reform Bill whilst decrying the recommendations of the Wallis report which they supported in Parliament in 1998.

The FSR Bill is based on the premise that it is no longer possible for different institutions, services and products to be regulated under separate frameworks.

It harmonises licensing, disclosure and conduct regulatory frameworks for all financial products, markets and service providers.

The Bill will bring the regulation of the financial services industry in line with current developments in the industry. Importantly it will prepare the industry for the challenges of the future.

By removing regulatory barriers to technological innovation, the FSR Bill enables the Australian financial services industry to compete on a global platform.

Critically, Australian financial service providers will be able to tackle the challenges brought about by e-commerce. Australia will no longer be inhibiting its own players through inefficient domestic regulation.

While the Bill will enable Australian providers to be prepared for the global market place, it will be flexible enough not to disadvantage specialist providers and small businesses.

The Bill as passed is the result of collaborative process following an extensive consultation with industry and consumers.

We have already incorporated numerous recommendations put to us, and we will continue to listen to industry and consumers, and be responsive to their needs.

In fact, in the debate on the Bill in the House of Representatives I moved some further amendments to address issues raised with me following the introduction of the FSRB.

Some further refinements will also be moved in the Senate. In particular, the parts of the Bill dealing with the taping of telephone conversations during takeovers will be narrowed to telephone calls to retail clients.

Concerns raised by media organisations about the Bill's impact on the freedom of the press will also be addressed so that the Governments position is very clear: the Government has no intention of stymieing the reporting activities of the media.

The extensive consultation process over 3 years has produced, what I think most would agree is, a regulatory regime that is workable for industry, while at the same time achieving the Government's objectives.

That is not to say that everybody is completely happy with every element of the Bill.

For example, the not-for-profit sector of the superannuation industry claims that it should be exempted from the Bill.

Corporate funds and industry funds say that they are "not like other financial products". I should say that this is not the first time I have heard this claim!

Not surprisingly, this argument has been echoed by the Labor Party.

I would like to take this opportunity to clarify some of the confusions, which the Opposition continues to perpetuate.

I note reports this morning that the Government has ignored the concerns of some sections of the corporate superannuation sector. This is not the case.

The Government's fundamental position is that people who are looking after the money of others should be competent and capable of doing so.

Where those funds are savings for retirement, there is an even greater community expectation that high standards will prevail.

I have indicated all along that the licensing obligations on not-for-profit funds will be significantly dependent on choice of fund legislation.

When choice commences, all funds will be subject to the licensing and disclosure obligations under the FSR Bill.

However, before the introduction of choice, the Government recognises that lighter touch regulation is appropriate, and only public-offer funds, which excludes most corporate and industry funds, will be subject to licensing under the Bill. This reflects the current situation.

Even when choice is introduced, the regime applying to industry and corporate funds will be flexible.

The Government acknowledges that in some industry funds, the trustees may not have direct financial services expertise.

But they must be responsible to ensure that proper systems are in place, and that proper expertise is hired to help run the fund.

Obtaining expertise through outsourcing will be acceptable, but the core responsibilities will remain with the trustee.

In other words, the trustees might not know the answers but its up to them to find someone who does.

Additionally, the fact that these funds are already APRA-supervised will be taken into account. For example, they will not have to meet an extra capital requirement.

The Government will not impose extra costs on these funds when there is no extra consumer benefit. But where the protection of consumers is at stake, we will not shirk from ensuring that high regulatory standards are met.

As with all major legislative reforms, there are always competing interests that need to be balanced and some compromises reached.

However, I think we've got that balance right.

This is shown by the ongoing support for the Bill from the financial services industry.

The Government will continue its consultative approach as it develops the regulations to support the legislative framework. In addition to broad public consultation, Treasury has set up an FSR Implementation Consultative Committee to consult more intensively on the regulations.

The first tranche of draft regulations is expected to be released this month.

The transitional arrangements too have generally been well received. The Government has been mindful of the need to ensure that the financial services industry is not unduly disrupted by the changeover.

The legislation allows for a period of up to 2 years for parties to satisfy licensing requirements. The transfer of existing license holders to the new arrangements will be smoothed as they will generally be able to exchange old licences for new.

The Government remains committed to seeing FSR's transitional arrangements start on 1 October this year.

We want to give the financial services industry and its consumers a regulatory regime that will be in step with their current and future needs.

Every effort will be made to progress these reforms through Parliament as quickly as possible.

The Government envisages that under the new regulatory framework the industry will flourish with an efficient, competitively neutral system that provides financial safety and market integrity.

But to makes sure the new regime operates at its full potential, we have to encourage compliance. And the way to achieve this is through processes, through education and through the efforts of industry bodies.

In this regard I would like to note my support for the efforts of industry bodies such as the Association of Compliance Professionals of Australia.

Such bodies show that industry itself can contribute to the regulatory framework, through consultation and their efforts to promote industry standards of practice.

Ladies and gentlemen, the reforms I have discussed today are critical for an industry and important for the economy.

It is an industry in which some of the country's best and brightest people work.

Many of these people work in Australia and a number of these people work offshore.

The Leader of the Opposition announced yesterday that he wants more of these smart Australians to return to home.

He thinks we don't have the skills and the know-how to make Australia an even greater country. I don't agree - I believe that we have to back Australia's ability.

So does the rest of the world.

The World Competitiveness Report, issued each year by the Institute of Management in Switzerland, recently ranked Australia first out of 49 countries in the availability of finance skills.

This is because of the quality of our universities and it is because we have created a booming and sophisticated financial services industry.

It is an industry that relies on innovation, research, skill and stamina.

It is one of our few truly global industries.

Today, financial services represents 7 per cent of the Australian economy, more than agriculture and mining combined.

If Mr Beazley wants to attract the smartest people offshore back to Australia then he needs more than a hope and a plan to build the educational equivalent of a baseball stadium from "Field of Dreams".

Australians work offshore for a number of well documented reasons. However one is closely linked to Mr Beazley's Field of Dreams. Mr Beazley must explain how he is going to pay for the construction of Knowledge Nation.

I can tell you now that the Labor Party will look to increase taxes on people earning more than $60,000 a year. As you would be aware our top marginal tax rate is 48.5% at $60,000.

Compare this to the United Kingdom where you have to earn the equivalent of more than $A106,000 to get into the top tax bracket, but then you get taxed at only 40 per cent for anything above this.

Or the United States where its smartest people have to earn well over $A500,000 to be top tax payers.

As part of the original ANTS package, the Government tried to increase the top tax threshold but it was the Labor Party and the Democrats who opposed that in the Senate.

Knowledge Nation won't attract our smartest people back to Australia because Knowledge Nation is going to slug our smartest people with higher taxes.

And if this is not the case, the Labor Party can now rule out higher taxes for people earning more than $60,000 a year. Of course there are many smart Australians who today don't earn $60,000 a year - but we want them to!!

The reality is that the biggest threat to a clever country is higher taxes for clever people.

The Government is backing the Australian Financial Services Industry with a fair and reasonable tax system.

But Ladies and gentlemen our work remains incomplete until all the regulatory framework is put in place.

I will continue to consult with industry to develop a regulatory framework that is effective in a dynamic environment.

And this can be only be done through a constructive partnership involving ourselves and your industry backing Australia's ability in financial services.