Good afternoon.
First, allow me to say how delighted I am to address the Australian Institute of Company Directors today.
The recent global financial market turbulence has reminded us all of the critical importance of sound prudential regulation.
Today, I would like to update you on the current state of Australia's financial markets, and what the Federal Government is doing to hone our regulatory response. I would also like to discuss other recent developments in our financial markets.
Financial market volatility
As I'm sure you are all aware, the global credit crisis recently took a turn for the worse. It has entered a new and dangerous phase affecting the real economy — jobs and growth.
The Treasurer, Wayne Swan, has described the current situation as "the worst global financial crisis since the Great Depression".
But it's important to remember that we are far better equipped to weather the storm than many other nations. As the Prime Minister recently said:
"We're in very uncertain times here with the global financial crisis, but right now, Australia is better positioned than most countries in the world."
We have underlying strengths that virtually no other country in the world can boast.
We have four of the world's dozen largest AA-rated banks. Banks which continue to be profitable and well-capitalised — despite the crisis unfolding overseas.
And we have limited exposure to US sub prime securities.
Just a few weeks ago, the International Monetary Fund endorsed the strength of our "four pillars", which represent 85 per cent of the Australian banking system.
The OECD expressed similar sentiments on the robustness of Australia's economy last month when it released its 2008 Economic Survey of Australia.
The OECD stated that:
"The economy has stood up well to the ongoingglobal financial market turbulence. So far, the financial sector has withstood the crisis thanks to prudent management, high profitability and strong capitalisation."
This is a strong endorsement — both of our economy, and our financial services regulatory system.
Government response to financial market volatility
Despite our strengths, we also recognise that, as a member of the global economy, Australia cannot be immune from the fallout of events overseas.
Throughout the financial market turbulence, the Government's approach has been to plan ahead… to examine emerging issues… to act early… and to act decisively.
That's why we are working closely with other governments around the world to address the issues and their underlying causes.
And that's why we have implemented several measures over the last few weeks to strengthen growth and protect Australians from the effects of the global financial crisis.
In troubled times, the governments of the world must work cooperatively. As part of this international response, the Prime Minister announced that he would attend the emergency Group of 20 meeting in Washington being convened by the President of the United States. A global challenge demands a coordinated global response and Australia will be arguing internationally for an effective response!
The international response was swift. As global financial conditions deteriorated, governments around the world took unprecedented steps to guarantee the liabilities of their financial systems.
The United States, Britain and members of the European Union have announced significantly expanded guarantees on deposits and new guarantees on bank wholesale borrowing.
Other developed economies have implemented similar programs to safeguard their supply of capital and protect savers and investors.
Here in Australia, the Rudd Government started taking action well before the situation reached crisis point.
Since we have been in office, we have been planning ahead, and making preparations. That's why in the May Budget, we built a strong budget surplus as a buffer against future shocks.
And that's why we have taken decisive, early action.
Over the last 10 months, we quietly implemented a range of measures to maintain the stability of the Australian financial system.
In a series of actions, the Reserve Bank moved to expand liquidity in financial markets.
In May, we announced that we would provide legislative authority for an increase in future Commonwealth Government Securities issuance of up to $25 billion. This move was desgned to strengthen the robustness of Australia's financial system and reduce its vulnerability to adverse shocks.
Deposit guarantees
The next step was to guarantee bank deposits and bank funding.
On 12 October, we announced that, as part of coordinated international action, we would introduce an interim full guarantee on all deposits in Australian-owned banks, building societies and credit unions, as well as Australian subsidiaries of foreign-owned banks.
This action guarantees 15 million deposit accounts, totalling $800 billion. It also guarantees the wholesale fundraising of financial institutions, amounting to about $1.2 trillion.
In other words, we are guaranteeing the fundamentals of this country's financial system.
On 24 October, the Treasurer announced the details of these guarantees.
On the advice of the Council of Financial Regulators, we decided to implement a $1 million threshold on the deposit guarantee. Depositors with investments over $1 million will be charged a fee to receive the benefits of the deposit guarantee.
This fee will ensure that the deposit guarantee does not provide disincentives for market participants to operate in short-term money markets.
The fee will apply from 28 November 2008. Until that date, all deposits and wholesale funding eligible for the guarantee arrangements will be guaranteed without charge.
After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.
The wholesale guarantee fee arrangements will be reviewed on an ongoing basis and revised if necessary.
Insurance protections
Under the Financial Claims Scheme, we will also provide additional protection to policyholders in the unlikely event that a general insurer fails.
Eligible policyholders with claims against a failed general insurer will receive the equivalent in compensation to the amount of the payout they would have received from the insurer.
The legislation to enact the Financial Claims Scheme will build on the power of our regulators to ensure that, if necessary, they can step in during a crisis.
AOFM purchase of residential mortgage‑backed securities
To further underpin the Australian financial system, the Australian Office of Financial Management will purchase an additional
$4 billion in residential mortgage-backed securities from a wide range of Australian lenders.
This move takes the total AOFM purchase of residential mortgage-backed securities to $8 billion.
This initiative will benefit Australia's mortgage market and ensure that this sector of the lending market has access to funding for its operations.
Short selling
Australia's response to the international financial market turmoil includes several other initiatives to ensure the continued integrity… fairness… and transparency of our markets.
Transparency is vital for promoting investor confidence. And in turn, investor confidence relies on the integrity of market systems and the institutions that serve the market.
This is why the independent regulator, ASIC, introduced a temporary ban on short selling... limited the number of allowable "covered" short sales... and increased disclosure requirements for these allowable covered short sales.
ASIC recently announced that it would extend the ban on covered short selling until 18 November this year for non-financial stocks. At this stage, ASIC intends to lift the ban for these companies. The ban will, however, remain in place for financial stocks until 27 January 2009.
In addition, the ASX announced that it amended its authorised product list to prohibit people from entering into "naked" short sale transactions that are not otherwise allowed by the Corporations Act.
While I believe that appropriately regulated and disclosed covered short selling has a role in the effective operation of markets, it is a prudent decision to restrict it at a time of heightened market volatility.
Corporations Amendment (Short Selling) Bill 2008
To further ensure the integrity and transparency of our markets, the Government proposes to introduce legislation to require the disclosure of covered short sale transactions on Australian financial markets.
The Corporations Amendment (Short Selling) Bill 2008 requires sellers to disclose sales of certain financial securities that are covered by a securities lending arrangement. Sellers must disclose to their executing broker, who in turn discloses the sale to the market operator.
We are currently reviewing the submissions we received on the Bill to facilitate its introduction into Parliament this year.
Review of equity derivative regulation
Further demonstrating our commitment to maintaining the transparency and integrity of our markets, we are reviewing the policy settings on the disclosure of equity derivatives, and the regulation of credit rating agencies.
Last April, the Prime Minister announced that Treasury would review appropriate disclosure requirements for equity derivatives, such as Contracts for Difference.
As you would be aware, these instruments give their owners an economic interest in the underlying securities — but not traditional legal rights such as the right to vote or dispose of the securities.
It has been suggested that equity derivatives enable market participants to exercise a degree of de facto control over the underlying securities, while avoiding the ordinary disclosure obligations that apply to legal owners of securities.
In other words, investors may use equity derivatives to avoid disclosure obligations under the substantial shareholding and takeover provisions — thus potentially undermining market integrity and confidence.
The Treasury review will seek to determine the most effective and efficient regime for the disclosure of equity derivative interests.
In line with other jurisdictions, the review may also examine other transactions where non-disclosure could potentially reduce the efficiency and competitiveness of our markets.
Review of credit rating agencies
The review of credit ratings agencies will alsoencompass the role of research houses.
The review has three broad objectives.
First, to examine the issues surrounding the role of credit rating agencies in the recent market volatility, particularly in relation to structured and securitised products.
Second, to analyse whether the circumstances under which credit rating agencies operating in this country have been granted an exemption from holding an Australian financial service licence are still current or justified.
And lastly, to examine, consider and report on the range of issues raised in recent international reports on credit rating agencies, such as those released by the Financial Stability Forum, and the International Organisation of Securities Commissions.
I expect the review process to conclude within a reasonable period.
ASIC strategic review
Ladies and gentlemen, as well as protecting Australians from the effects of the global financial crisis, we are also looking to the longer term and strengthening our regulatory architecture.
The strategic review of ASIC is a good example.
After a comprehensive strategic review of its operations, including a stakeholder survey, the regulator has announced that it will restructure its operations to bring it closer to the markets.
We strongly support this move.
It will ensure that ASIC better understands the markets it regulates… is more forward-looking in its decision making processes… and communicates clearer messages to the market in relation to its activities.
The restructure will also enable ASIC to reallocate its resources towards priority areas. One of the key changes flowing from the review is additional investment in market research and analysis.
The Government is committed to ensuring that ASIC receives the support it needs to meet the challenges of the current market conditions. ASIC's funding in 2008-09 is budgeted at $303.3 million. This represents an increase of about 85 per cent in real terms since 2000‑01.Last Tuesday, the Prime Minister announced that ASIC will receive additional funding of $10 million in 2008-09 and $20 million in 2009-10 to provide "front-line" resources to undertake market monitoring and enforcement activities.
The banking regulator, APRA, will also receive additional funding to meet its additional workload.
These measures will help to reinforce confidence in the soundness and integrity of Australia's financial markets.
National regulation of credit
One of the more far-reaching ways the Government is reforming our financial services regulatory regime is by developing one single, national system to regulate consumer credit.
The Commonwealth took a National Action Plan to COAG to transfer all consumer credit products to the Commonwealth. As you would all be aware, COAG agreed to this landmark decision on 2 October. The transfer of responsibilities follows on from the COAG's decisions earlier this year.
This is an important initiative by the Rudd Government that will address the deficiencies that have long existed in credit regulation by establishing a consistent and robust consumer credit regulation framework.
We will implement national credit regulation in two phases, to make the transition as smooth as possible.
A phased approach achieves the goals of strengthening consumer protection, while minimising disruption to business.
Under the first phase of the plan, the Commonwealth will take responsibility for the existing State and Territory legislation — the Uniform Consumer Credit Code — by enacting it as Federal law.
The new national consumer credit law will not only cover mortgages taken out to buy the family home, it also will be extended to cover mortgages on investment properties to help stop borrowers racking up unaffordable levels of mortgage debt.
It will also establish, for the first time, a comprehensive national licensing regime to be administered by ASIC that will cover all credit providers, brokers and advisers.
Lenders will be licensed by ASIC, which will be given extra powers as the sole regulator to enforce the scheme.
The new national law will emphasise general conduct obligations which will require the provision of credit services honestly and fairly. Specific responsible lending requirements will also be in place to protect consumers from being given loans they cannot afford to repay.
Important safeguards will be built into the national scheme. All borrowers will be able to appeal to an external dispute resolution body to which all licensees must belong.
The Corporations Act will be extended to cover margin lending products and trustee corporations. Organisations which extend margin loans will have to provide product disclosure statements similar to those provided for the First Home Saver Accounts.
The first phase of the new regime will be in place in Commonwealth, State and Territory legislation by the end of June 2009. There will be a two-year transition period for affected businesses.
The second phase of the action plan will look at possible further rules to stem unfavourable lending practices, such as a review of credit card limit extension offers and deceptive advertising practices… an examination of State approaches to interest rate caps… and other fringe lending issues..
Ladies and gentlemen, this is a major step forward.
It means that we will have the kind of system we need — one single, national and standard regulatory system which covers all consumer credit and financial services.
A truly national regime that will help to ensure that the Australian credit market remains active and competitive — both domestically and internationally.
Conclusion
Ladies and gentlemen, in closing, I would emphasise that dealing with the effects of the global credit crisis will depend on a partnership — a partnership between Government and industry.
Everyone in this room can be part of the solution to the issues we now face.
For our part, the Government is tackling the effects of the global credit crisis head-on. Our response is based on the principles of responsible economic management… a comprehensive agenda of reform… and ongoing international cooperation.
In return, I would ask that you continue to deliver the innovation, diligence and sound management that has played such a crucial role in Australia's economic strength.
Thank you.