Thank you Sally for that very warm introduction, and thank you to the Financial Services Council for inviting me today.
It’s a pleasure to once again join you for the annual Leaders’ Summit.
The financial services sector – as the largest segment of our economy at 10 per cent, and employing more than 430,000 people – has been critical to Australia’s growth story.
If anything, it will continue to increase in importance as we seek to attract even more international investment, as well as exporting our skills and experience around the world.
Australia is, and must continue to be, at the forefront.
Australia has, after all, one of the world’s largest funds management industries and a renowned, highly skilled financial services workforce.
We know that there is great opportunity for our financial services sector to grow and provide services and products beyond our shores.
Already, China is Australia’s largest services export market and is worth around $9 billion a year.
Its middle class alone is tipped to increase to a billion-or-so people by 2030.
Indeed, ANZ predicts that the Asian financial system is on track to be larger than those of the United States and Europe combined by 2030.
So we need to make sure we are facilitating opportunities for Australia to export its financial services expertise to the Asia Pacific region.
As you have said to us, it is critical that Australian resident fund managers are able to compete to secure mandates for investment on a more level playing field with fund managers operating out of financial services hubs like Singapore and Hong Kong.
That is why the Turnbull Government has acted to provide regulatory certainty regarding the tax residency of investment manager regime entities.
We have also provided certainty on managed investment trusts working closely with industry representatives on its design.
While this new regime has been well received, we know that there are still some barriers to entities seeking to opt into the regime and we will continue to work with you to fix these.
Corporate collective investment vehicle regime
Another way the Government is facilitating opportunities for the sector is by introducing a new corporate collective investment vehicle or CCIV regime — which will complement the Asia Region Funds Passport that is under development.
A CCIV will be able to be used to export Australian financial services through the Passport, because a corporate collective investment vehicle is well understood internationally, and can also be used here within Australia.
By harmonising Australia’s regulatory regime with overseas best practice, we can boost the exportability of our managed funds and increase competition and product choice for Australian consumers.
Acknowledging its importance and potential, the Government will shortly consult on core elements of draft legislation to give effect to the new CCIV regulatory framework, with similar steps on a new tax framework to follow.
As most of you know, the Government has commenced consultation on the withholding tax arrangements that apply to foreign investors in Australian-based managed investment schemes. We understand how important this issue is and are working to resolve it in the near future.
High standards in the financial sector
Given the importance of the banking and financial services sector to the lives of Australians, it’s right for us to expect high standards from financial institutions.
I want to make one point on the Royal Commission in response to the comments yesterday from Mr Bowen.
The worst of the scandals in the financial industry – Trio Capital, Great Southern and Storm Financial – happened in the years after the GFC and under the former Government. Not caused by them, but certainly on their watch.
There have been a host of actions, inquiries and new bodies set up by this Government in response to those scandals.
There would be some here today who might say “too many”.
But for the Opposition’s part, rather than acknowledge what this Government has done to fix the excesses of the past and prevent them from happening again, they are moving the goalposts of their proposed inquiry to new areas such as FinTech and looking at how our regulators work.
The Royal Commission has become an inquiry looking for something to inquire about.
Of course, we don’t want to see a repeat of these scandals. But nor do we need a formal, legalistic, endless talkfest following on from the sensible and considered reviews and reforms the Government has already put in place. What we need is for the Government to take action now.
And that is what we are doing – completing the difficult job of delivering the reforms our financial services sector needs to protect consumers.
Already the Government has strengthened the resources of the Australian Securities and Investments Commission; reformed the conflicted remuneration of the life insurance advice sector; and strengthened the professional standards of financial advisers by setting up the new Financial Adviser Standards and Ethics Authority under the Chairmanship of Cathy Walter AM.
We know that many Australians have felt their complaints of poor conduct in the sector have not been examined and progressed in a satisfactory manner, if at all. This has undermined trust and confidence in the sector and had a detrimental impact on peoples’ lives.
Today I am announcing the next critical step in making sure Australians are able to resolve their financial complaints in a timely and proper manner.
The Government has established a transition team to bring the Australian Financial Complaints Authority – AFCA – into being.
AFCA will provide a critical one-stop-shop for external dispute resolution, as recommended both by the Ramsay Review and the report of the Small Business and Family Enterprise Ombudsman.
It will provide access to justice in a timely manner, with an independent arbiter and compensation where appropriate.
It will replace the current inconsistent and narrower system which comprises the Financial Ombudsman Service, Credit and Investments Ombudsman, and the Superannuation Complaints Tribunal.
Respected former Reserve Bank of Australia Assistant Governor Dr Malcolm Edey will lead the transition and the transition team.
Dr Edey is widely respected both internationally and domestically for his extensive knowledge in a broad range of economic fields. Dr Edey has been a member of the RBA’s senior policy committees and was Deputy Chairman of the Payments System Board.
He will bring with him the knowledge, experience and leadership to ensure that AFCA is operational by 1 July 2018.
Because consumers will be able to approach AFCA to resolve all financial complaints, there will no longer be uncertainty or confusion about which body has jurisdiction to hear a particular dispute.
Where complaints involve multiple issues, or multiple financial services providers, resolving those complaints will be smoother.
AFCA will also be able to hear disputes of a significantly higher value, which provides greater access, so more consumers and small businesses can have their case heard, and receive fair compensation if they have wrongfully suffered a loss.
Taken together, this major reform means that more consumers and small businesses will enjoy a free, fast, fair and binding dispute resolution service.
Once legislation to establish the AFCA has passed the Parliament, the focus of the transition team will shift to overseeing the operational transition from the existing schemes to AFCA.
The transition team will – of course – consult extensively with industry and consumer stakeholders, as well as the Financial Ombudsman Service, Credit and Investments Ombudsman and Superannuation Complaints Tribunal.
Last-resort compensation
Related to the creation of the new one-stop-shop, the Government has asked the Ramsay Review to also consider the establishment, merits and potential design of a compensation scheme of last resort.
This is to be considered along with the merits and issues involved in providing access to redress for past disputes.
These are both important issues.
Firstly, it’s important to consumers who have wrongfully suffered loss and been awarded compensation, but have not received that compensation due to the insolvency of the financial services provider.
Secondly, it’s important to consumers who, for a variety of reasons, have not had access to external dispute resolution for past cases.
If left unaddressed these issues will further undermine trust and confidence in the financial system.
I welcome the FSC’s recent contribution to the debate by engaging Cadence Economics to undertake research into the potential costs involved in considering a compensation scheme.
The Ramsay panel will take this research into consideration in making recommendations to Government.
And the Ramsay Review is making good progress. In May, the Ramsay panel publicly released a Supplementary Issues Paper for consultation.
Consultation on this paper closed late last month and I look forward to hearing the Ramsay Review’s views on the submissions.
The Review will provide part 2 of its final report on these two new issues to Government by early September, and in the meantime, I encourage the industry to continue its engagement in this important process.
Superannuation Reform Package
It is the Government’s view that it is always better to prevent harm before it occurs rather than attempt to cure it when it does.
As you know, this year we have reached a milestone in the superannuation industry.
It has been more than 25 years since compulsory superannuation was introduced. And yet the architecture of that system that has seen funds under management grow from around $136 billion to more than $2 trillion – an almost 1,300 per cent increase – has changed very little.
This is despite significant change in working patterns and the superannuation sector more broadly.
For instance, people no longer typically work in the same job or even the same industry for life.
And the single industry single employer funds that were the hallmark of the 90s are virtually non-existent, replaced by public offer funds which now manage over $1 trillion in public offer money.
Superannuation funds make up the second largest sector of the financial system, with assets larger than both Australia’s annual gross domestic product and the collective value of stocks listed on the ASX.
Given that this $2 trillion largely represents the forced retirement savings of millions of Australians, and given that some projections have the sector doubling to over $4 trillion in just over 10 years, the government has a duty to protect members money through the highest standards of transparency and accountability and a stronger regulator to ensure those funds are managed in the best interests of members.
This is why earlier this week I announced a package of sweeping reforms that has been developed with a single-minded focus on improving outcomes for members.
Our “Superannuation Accountability and Member Outcomes” package will ensure that every hard-earned dollar that Australian workers’ are entitled to receive from their employers is paid. And that every dollar that is compulsorily contributed into the superannuation system is managed in their best interest – not used to further the interests of others, whether they are shareholders, individual directors or related parties, including employer groups and trade unions.
It will do this by giving more power to individual members to hold their superannuation fund trustees, executives, actuaries and auditors to account.
One such mechanism will be a requirement for funds to hold an annual members meeting.
This is already a longstanding requirement for the public companies in which superannuation funds invest their members’ money.
To ensure that these meetings themselves do not become an expensive regulatory burden, ultimately borne by increased costs to members, funds will be able to hold these meetings electronically.
To support members to become more engaged, and exercise this power, the reforms will also introduce a new requirement for funds to report and publish annually more granular and transparent information about how the fund is being managed, including information on how the fund sets its fees and the way it spends members’ money.
Making it easier for consumers to opt-out of their automatic insurance in superannuation
A second element of the package I want to highlight – noting the volume of work that is taking place across the industry through the Insurance in Superannuation Working Group – is making superannuation more consumer-friendly by ensuring that when people join a fund they can opt-out of automatic insurance provided in a simple and straight-forward way.
In 2017 we should not have a system which puts unnecessarily high hurdles in front of consumers who are trying to take action to maximise their retirement savings – for example, by requiring an old-fashioned letter to be written before the premiums stop being deducted from your account.
To achieve this, the Government has tasked APRA with ensuring that it is easier for consumers to opt-out of insurance, whether that is online or over the phone. APRA will work with industry to implement these important changes.
Strengthening supervision and enforcement
Of course, it is important for Australians to be confident their funds are protected and being used for their benefit.
So it is incumbent on us to make sure the system is delivering on the objective of providing income in retirement.
To do this we need a regulator with appropriate powers to hold superannuation fund trustees to account and apply proportionate penalties for breaches.
The Government will introduce fines and or criminal penalties on directors that breach their duties to members.
This aligns the superannuation director penalty regime with that applying to directors of managed investment schemes.
We will give APRA the power to direct a trustee where it has prudential concerns about a superannuation fund.
This allows APRA to intervene quickly to avoid escalation of the issue and, most importantly potential loss to members.
We will also give APRA the power to reject a change in the ownership of a corporate trustee.
Given the importance of the superannuation system and the potential detrimental outcomes that may arise through the mismanagement of funds, no one should be able to own or control a superannuation fund without APRA’s approval.
It is important that funds should only be owned and or controlled by people that are considered to be suitable.
This will reduce the potential for fraud against superannuation fund members.
Lifting the bar for fund performance
MySuper products – default products that should be designed by trustees to provide a simple, cost-effective product to members – currently see considerable variation in net returns and fees, resulting in a wide range of outcomes for members.
Furthermore, those who are signed up to default funds are not necessarily engaged with their superannuation balances.
The default market is, therefore, of particular concern to the Government and so we are making changes to improve fund performance and focusing on better outcomes for members.
This includes requiring trustees to assess their MySuper products against a broad range of features and metrics each year.
This will give APRA more ability to take action where it has concerns.
Trustees will also need to sign-off on the quality of their MySuper products and how the operation of the fund, including fees and expenses, is in the interests of members.
APRA will also be able to refuse or cancel a MySuper authorisation, where it believes that the fund may not comply with its obligations.
The Turnbull Government’s superannuation agenda for 2017 is critical for the system’s future for the next 25 years.
So for those who say they care about getting the financial architecture right; for those who want to do more than simply talk about transparency and accountability, but deliver it; for those who want to protect members funds and give the regulator the powers necessary to achieve this; there is no reason to delay these important reforms.
Concluding remarks
Let me thank the FSC once again for inviting me — and to everyone here for the opportunity to continue the conversation.
It’s a busy time. A lot is happening.
A lot needs to happen.
This is an industry that has the power to add incredible value to the lives of everyday Australians.
It is a driver of growth in our economy.
But there is more work to be done.
We cannot shrug our shoulders and leave it to chance. We must confront the tough questions, and embrace solutions.
Not to do so is a disservice to this industry, and to consumers and small businesses.
That’s why the Government has committed to a number of reforms — ones that will restore confidence and set the industry on a path to thrive.
And I am confident that with your continued support, we can do exactly that.
Thank you again, and enjoy the rest of the conference.