Acknowledgements
Thank you to the Australian Finance Industry Association for hosting today's conference. AFIA has an important history beginning with the Australian Finance Conference in 1958 and no doubt will continue to make a contribution to policy development in the finance sector for many years to come.
I want to start by acknowledging the focus of this conference: 'taking charge of the change'.
With the Royal Commission due to provide its final report in February of next year and a wide range of significant financial reforms also under way, it's a pivotal time for the finance industry.
Overview
Today I want to speak to you about three areas that are critical to the Australian Finance Industry:
- The state of our economy
- The significance of the financial services sector and ongoing implications of the Financial Services Royal Commission
- Small business access to finance
1. State of the economy
2017-18 marked Australia's 27th consecutive year of annual economic growth. This is remarkable given the major economic events that have occurred during that period, including both the Asian Financial Crisis and Global Financial Crisis, the decline in the terms of trade of around one-third from its peak in 2011 to its trough in 2016, and the 6 percentage point fall in mining investment as a share of nominal GDP.
While still too early to say definitively, the unwinding of the mining investment boom and its associated drag on the economy increasingly appears to have run its course.
The fall in mining business investment in 2017-18 was the smallest since the peak of the mining investment boom, with firms starting to increase their investment in machinery and equipment.
Total business investment grew for the first time in five years and non-mining investment grew at the fastest rate since 2004-05. Notably, this expansion of non-mining business investment has been broad-based, across a wide range of industries and states.
Australia's key economic indicators are sound. In 2017, Real GDP grew by 0.9 per cent in the June quarter 2018 to be 3.4 per cent higher through the year and over 1 million jobs have been created since the election of the Coalition Government in 2013.
Indeed, Australia's labour market continues to perform strongly. Employment growth is above its long-run average with employment increasing by almost 350,000 persons in 2017-18, the strongest financial year of employment growth since 2004-05.
The participation rate is also elevated at 65.6 per cent, pleasingly driven up by rising female participation in recent years which the unemployment rate, now at 5 per cent, is at its lowest level since 2012.
Encouragingly, we are also starting to see signs of the strength in the labour market flowing through to wages with the September quarter Wage Price Index recording its strongest growth in three years at 2.3 per cent through the year. This is in line with the Budget forecasts and expected to lift further as the labour market continues to tighten – a view shared by the RBA.
It should therefore not come as a surprise that Australia's AAA credit rating has recently been reaffirmed. Australia is currently one of only ten countries to be rated AAA (or equivalent) by all three major credit rating agencies.
Pleasingly, the most recent global rating agency to reaffirm our rating, Fitch, pointed to "Australia's fiscal position having strengthened over the past year", noting "sustained spending restraint under the Government's budget repair strategy" and our "credible commitment to fiscal consolidation" as reasons in support of their affirmation of our AAA rating.
I take great confidence from the continued broad-based strength and performance of the Australian economy. But it's also clear that there are emerging risks to the continuation of this growth.
While global economic growth remains strong, downside risks to the global economy have increased since the Budget in May. Some of the issues impacting on the global economy are well known and include trade tensions, emerging economy debt, and a faster-than-expected tightening of monetary policy in advanced economies.
At home, while it is too soon to know the ultimate economic impact of the drought conditions being experienced across much of the country, dry weather has largely persisted since the 2018-19 Budget and is weighing on the outlook for Australia's agricultural production and exports.
With regards to the household sector, while we must not be complacent, several factors provide comfort including the fact that household assets are five times greater than its debts and APRA's regulatory measures which, as the RBA singled out last week, have "meaningfully reduced vulnerabilities associated with riskier household lending and so increased the resilience of the economy to future shocks."
2. Significance of the financial services sector
Australia has one of the strongest and most stable banking and financial services industries in the world performing a critical role in underpinning the Australian economy.
As at June 2018, banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies and the superannuation industry held a combined $7.9 trillion in assets (RBA).
The system as a whole contributed $163 billion to the Australian economy in 2017-18 or almost 9% of annual GDP. It employs around 450 000 people (3.5% of the workforce).
It is because of the very scale and wider significance of the financial sector that it is essential that it regain the trust of the Australian public.
The Government also has a role to play in ensuring that the financial system operates in interests of those it serves – consumers, businesses and the wider economy. The Coalition has a strong record of reform when it comes to the financial system. We commissioned the Campbell Inquiry which reported in 1981 and the Wallis Inquiry which reported in 1997 and both were catalysts for major financial and economic reform – ranging from the floating of the dollar to our current system of financial regulation.
Following our election in 2013, we initiated the Financial System Inquiry, Chaired by David Murray AO, which went on to make 44 recommendations.
As a result of this Inquiry and a significant number of subsequent reviews and inquiries commissioned by the Government, we have passed legislation that has introduced over 17 key reforms, including the Banking Executive Accountability Regime, the establishment of a one-stop-shop for financial disputes (the Australian Financial Complaints Authority) and have committed to raising the professional, ethical and educational standards of financial advisers, including establishing the Financial Adviser Standards and Ethics Authority.
The Government has also introduced legislation into Parliament that covers another 8 key reforms including providing tougher penalties for breaches of the Corporations and ASIC Acts and establishing 'design and distribution obligations' and 'production intervention' powers for ASIC.
Finally, there are over 11 further initiatives that the Government has announced and on which it is finalising legislation - including the Consumer Data Right and allowing cooperatives and mutuals to more easily raise capital and in doing so improve competition in the market.
At the same time, we have provided additional funding to both ASIC and APRA as well as committing an additional $51.5m to the Commonwealth Director of Public Prosecutions and the Federal Court to deal with additional enforcement action relating to misconduct in the financial services sector.
As I said when the Interim Report of the Financial Services Royal Commission was released, it shone a very bright light on the poor behaviour of the financial sector. Greed was singled out as the motive with short-term profits pursued at the expense of basic standards of honesty. Clearly, this cannot be allowed to continue.
While I am determined to take all necessary steps to ensure that these issues are addressed and do not recur, I will also be very focussed on ensuring:
- Consumer and business access to financial services;
- Stability of the financial system;
- Competition; and
- Economic growth.
It is critical that the Government response is mindful of these wider implications.
3. Small business access to finance
Let me turn to the final topic I wanted to address with you today: Small business access to finance.
According to the latest available ATO statistics (2015-16), there are over 3 million small businesses with annual turnover less than $10 million, employing around 5.7 million workers.
These small business people are, in the words of Sir Robert Menzies, "the strivers, the planners, the ambitious ones" and represent the backbone of the country.
The problem is around one-fifth of businesses report that they have found it difficult to access finance. In addition, the proportion of small businesses that perceive it to be relatively easy to access finance has recently declined.
The recent RBA report on Access to Small Business Finance found that entrepreneurs consider:
- access to finance for start-ups is very limited;
- banks are reluctant to extend finance without real estate as collateral; and
- the process to obtain finance is lengthy and onerous.
According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), sources of capital for growth are scarce and expensive.
AFIA knows these issues well having been a participant at the Reserve Bank roundtable on innovations in small business finance held in June 2018. At the time, AFIA said:
Entrepreneurs find it hard to borrow funds when they first start their businesses, and when they are looking to expand. There is a heavy reliance in small business lending on housing collateral and personal guarantees. Entrepreneurs also find loan application processes burdensome, and it can be difficult to compare products across lenders.
In the past week, I've made some significant announcements to improve small business access to finance. The package of reforms includes:
Establishing a $2 billion Australian Business Securitisation Fund, administered by the Australian Office of Financial Management, to lower funding costs for smaller banks and non-bank lenders, which would improve access to financing for small businesses.
This fund is designed to address a market failure where non-bank lenders or small banks outside the big four are unable to access funding on competitive terms. This is because existing securitisation markets are not sufficiently developed as to allow these lenders to repackage their loans to investors.
With a larger pool of funds at their disposal, lenders will be able to extend more credit to SMEs at lower prices. These loans can then be used for a wide range of business purposes including supporting cash flows, expanding or renovating operations, investing in inventory or new equipment.
Encouraging the creation of the private sector-owned Australian Business Growth Fund to fill equity financing gaps. This would involve banks and other financial institutions collectively owning a fund that would make equity investments into businesses looking to scale-up.
While the private sector-owners would determine the commercial features of the fund, drawing on international experience, the Growth Fund could make investments between A$2-25 million to businesses with revenue between A$5 100 million, taking a minority stake of 10-40 per cent in the business.
The Growth Fund would be expected to follow similar international precedents. For example, since its establishment in 2011, the United Kingdom's Business Growth Fund has invested some $2.7 billion in a range of sectors across the economy.
Improving the ability for small businesses to offer employee share schemes to help employers attract, retain and motivate employees and grow their businesses.
The Government is simplifying the current regulatory framework, reducing the time and cost burden for businesses — an initiative that is particularly important for start-ups in early stages of growth.
As part of the plan to simplify and extend the current regime we are increasing the value limit of eligible financial products that can be offered in a 12 month period from $5,000 per employee to $10,000 per employee.
A strong small business sector means more jobs for Australians and more opportunities to build vibrant local communities across the country.
Closing remarks
Through prudent economic management, the Government is working to create a stronger economy. Our economic fundamentals are sound —we're creating jobs and allowing Australian businesses to grow, but we recognise the global risks.
The Government understands that a stable financial system — services that Australians can have confidence in — underpins our economy.
We're taking action to better protect consumers, to ensure banking executives are held to account where they fail to comply with the law and to ensure regulators have the resources and powers they need.
And finally, we've announced significant measures to enhance small business access to finance and cut red tape.
Taken together, these measures form part of the Government's ongoing plan for a stronger economy.