30 April 2009

Address to the Singapore Chapter, CPA Australia, Conrad Centennial Singapore


'Australia's Policy Response to the Global Financial Crisis'

Good afternoon.

Thank you for that kind introduction. I must say I'm delighted to be here.

I'd like to thank CPA Australia and its Singapore Division for jointly hosting this forum. In particular, I would thank Mr Low Weng Keong, Deputy President of the Board of Directors, CPA Australia, and Mr Chaly Mah Chee Kheong, President, Singapore Division, CPA Australia.

Around the world, the current economic crisis has highlighted the vital role of CPAs in providing the leadership and expertise the global financial system needs right now.

As the President of CPA Australia, Richard Petty, said last month:

"The business world is faced with serious challenges. The skills and perspective so characteristic of the accounting profession will be integral to addressing those challenges."

Relationship between Australia and Singapore

Our two nations have long enjoyed a close relationship.

That relationship is expressed in the joint Singapore-Australia declaration, A New Partnership. This 1996 agreement encompasses mutual cooperation in cultural, economic, political and security matters.

I have just this morning held bilateral meetings with the Singapore Minister for Finance and the Minister for Law and I can testify that 13 years on from that agreement, and many more years on from the formation of our deep and abiding relationship, forged during the Pacific War, our relationship remains deep and strong.

Note a few weeks ago that our Prime Minister Kevin Rudd was here and several key Ministers will follow my visit during 2009.

Testimony to our bilateral economic relationship is the fact that Singapore is Australia's largest trade and investment partner in ASEAN. And our fifth largest trading partner overall.

Our nations also have a significant investment in each other.

According to Singapore's Economic Development Board, more than 1,300 Australian companies operate in Singapore. As at 31 December 2007, Australia's investment in Singapore totalled $AU17 billion, while Singapore's investment in Australia amounted to over $AU32 billion.

Our close economic partnership has undoubtedly been strengthened by the Singapore-Australia Free Trade Agreement, which has been operating since 2003.

I anticipate that these links will be further strengthened by the ASEAN-Australia-New Zealand Free Trade Agreement, which is expected to enter into force no later than 1 January 2010.

And of course, our two nations are engaged in significant cooperation and dialogue on major regional and global economic, political and security issues.

This includes our joint work in forums such as the East Asia Summit, APEC, and the ASEAN Regional Forum.

Speaking of regional forums, I would like to thank Singapore for its initiative in offering to host the next Regional Policy Forum on International Financial Reporting Standards.

IFRS continues to be adopted across both the Asia-Pacific region and globally. It is now required or permitted in over 100 countries.

The IFRS Regional Policy Forum provides a valuable opportunity for policy-setters within the Asia-Pacific to exchange ideas, and to gain a better shared understanding of the financial reporting issues which affect our region.

The forum also enables delegates from within the Asia-Pacific region to continue working towards achieving common global accounting standards.

Impact of recession on Asian region

Ladies and gentlemen, we are all well aware that the world is in dire financial straits.

Global GDP is currently forecast to contract in 2009 for the first time in 60 years. Most major advanced economies are now in recession. In fact, the global recession is expected to result in lost output of around US$4 trillion in this year alone. That's more than 16 times the size of the Singapore economy.

While balance sheets in Asia remain relatively healthy, it was inevitable that the region, with its higher than average dependence on trade, would be affected by the global recession.

Exports are collapsing, investment is slowing significantly and domestic demand is moderating sharply. Equity markets remain depressed... and foreign exchange reserves in a number of countries have fallen.

By any standards, the region has experienced an immense, surprisingly sharp, and largely unanticipated shock.

Fortunately, most Asian countries have attacked the downturn head-on, announcing large fiscal stimulus packages and interest rate cuts to combat growth.

I understand that Singapore has announced its own fiscal measures to help your people and businesses to weather the recession and to support continued bank lending.

International responses to the global financial crisis

A global challenge demands a global solution.

That's why Australia has played a leading role in encouraging G20 members to adopt a coordinated response to the global financial crisis.

Prime Minister Rudd was one of the key proponents of the two G20 Leaders' Summits that were held in Washington and London.

Together with South Africa, Australia was also a co‑chair of the G20 working group established after the Washington Summit on the reform of the International Monetary Fund. This group paved the way for the significant reforms Leaders agreed to at the London Summit.

Australia also played an important role in securing agreement by G20 Finance Ministers and Central Bank Governors to adopt a set of principles for dealing with toxic assets. Action in this area is crucial to the success of fiscal stimulus measures designed to restore global economic growth.

G20 Leaders have delivered several major outcomes.

These include an unprecedented fiscal injection — estimated to total US$5 trillion by end of 2010 — to assist global economic recovery.

The G20 has also worked to ensure that key international financial institutions have the resources to assist member countries to deal with the crisis. The G20 agreed to treble the resources of the International Monetary Fund. Japan, the United States and EU members have already each committed about $US100 billion.

As well, the G20 supported an additional US$100 billion in lending by multilateral development banks. This includes a 200 per cent capital increase for the Asian Development Bank, which will support higher future lending to developing economies.

In addition to these measures, G20 Leaders have made a strong commitment to increase the influence of developing countries in international financial institutions, particularly the IMF. It has become clear that existing arrangements need to be re‑balanced to reflect the recent shift in the relative weights of advanced and developing economies in the global financial system.

The global financial crisis has also exposed major deficiencies in the regulation of financial markets.

Through the G20, the world's major economies have agreed on the need to adopt better national standards of regulation and to improve cooperation between national regulators.

Since the Washington Summit, international standard-setting bodies have been working hard to develop better and stronger regulatory frameworks. This work is being coordinated by the Financial Stability Forum, which has been enlarged and re‑established as the Financial Stability Board with a stronger mandate to ensure global financial stability.

All G20 countries are now members of the Financial Stability Board, as well as the European Commission, the Netherlands, Hong Kong, Singapore, Spain and Switzerland.

As a longstanding member of the Financial Stability Forum, I expect that the Monetary Authority of Singapore will continue to make a valuable contribution to the ongoing work of the Financial Stability Board.

The Financial Stability Board has already developed new standards on compensation and cross‑border crisis management. In the future it will oversee the development of new standards to extend the regulatory perimeter and mitigate pro‑cyclicality in prudential regulation. Together with the IMF, it has also been charged with monitoring overall progress in implementing the action items agreed by G20 Leaders at the London Summit to strengthen financial regulation and supervision.

A final key objective of the G20 has been to counter protectionism.

Trade plays an important role in boosting global growth and prosperity. And of course, trade has played a particularly important role in the development of Singapore.

There is a strong recognition within the G20 of the potential for both trade and financial protectionism to undermine efforts to restore capital flows and stimulate economic growth. So I am pleased that the London Summit produced a robust commitment to promote global trade and investment and to reject protectionism. To ensure that we deliver on this commitment, Australia also agreed to submit our policies to regular external review by the WTO and other relevant bodies.

Australia's response to the global financial crisis

The global financial crisis has affected nearly every country in the world. And Australia has been no exception.

But we have withstood its worst effects. This is due to two main factors — the underlying strengths of the Australian economy, coupled with swift and decisive Government action.

The fundamentals of the Australian economy are sound.

We have a strong regulatory framework.

We have four of the world's strongest banks.

And Australia has had very limited exposure to the sub-prime sector which was the tipping point for the United States' economy, and created a ripple effect throughout the world.

Supporting these fundamental strengths, the Australian Government acted quickly to cushion Australia from the worst impacts of the global recession.

At a regulatory, systemic level, we have:

  • Put in place a 100% guarantee of bank deposits and also of wholesale term funding for our banks;
  • Legislated for a financial claims scheme
  • Developed the Australian Business Investment Partnership (ABIP) and a separate special purpose vehicle to support concerns in relation to vehicle purchase finance and commercial property financing.

At the macro stimulus level, we implemented range of stimulus responses.

This includes a $10.4 billion Economic Security Strategy, a $15.2 billion cross-federal package, a $4.7 billion Nation Building infrastructure package and now a $42 billion Nation Building Plan - a major economic stimulus for the Australian economy.

This has proven to be a sound strategy.

The Australian Treasury estimates that the Nation Building Plan alone will support up to 90,000 jobs in 2008-09 and 2009-10. And that the initiatives in the Plan will boost economic growth by about ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.

The most recent analysis from the OECD underscores the importance of Australia's decisive and early action.

The OECD's Interim Economic Outlook demonstrates that Australia's economic stimulus measures, with their strong focus on direct government investment, are amongst the most effective of all OECD fiscal packages in terms of stimulating activity and supporting employment.

It is here I would note the similarly significant steps taken by the Singapore Government through the Singapore "Resilience Package".

I am advised that the Resilience Package, announced in January this year, amounts to a stimulus of the Singapore economy of some 8.4% of the Singapore GDP or more than $20 billion Singapore Dollars.

This is decisive and appropriate action.

Australia's corporate law reforms

Turning now to Australia's corporate law reforms...

Since being elected in 2007, the Australian Government has introduced a series of corporate law reforms to both strengthen our regulatory system and help us weather the economic crisis.

I would like to briefly outline some of this work.

Credit rating agencies

As you would be aware, the regulation of credit rating agencies has come under scrutiny in the fall-out from the global financial crisis.

We strongly believe that any issues with credit rating agencies are a worldwide concern that must be tackled globally. This is why Australia's response has been to contribute to, and work with, the globally coordinated efforts of the G20 and IOSCO to improve the oversight of credit rating agencies.

In a world-leading move, from 1 July this year, all credit rating agencies in Australia must hold an Australian Financial Services Licence, and comply in the form of annual comprehensive compliance reports to our regulator, with the updated IOSCO Code of Conduct as a condition of licensing.

We also want to reduce over-reliance on ratings. I have held a series of roundtables with industry to improve the due diligence of those who use ratings, and the disclosure of information by rated entities.

Short selling

Another issue which has been highlighted by the global financial crisis is short selling.

In September 2008, the Australian corporate regulator, the Australian Securities and Investments Commission, or ASIC, implemented a temporary and total ban on the covered short selling of financial stocks.

This decision aligned with the actions of securities regulators around the world to limit the activity of short sellers.

ASIIC has now lifted its bans on the covered short selling of non-financial stocks. However, ASIC has decided to retain the ban on short selling of financial stocks until, at least, 31 May 2009. This reflects the systemic importance of financial institutions in the Australian economy.

National regulation of consumer credit and financial services

Well before the global financial crisis hit the headlines, the Australian Government decided to take action to bring the regulation of Australia's financial services into the 21st century. This includes all consumer credit - mortgages, credit cards, investment lending to over 5.7 million Australian households.

But also brokers and credit advisers, margin lending - that is, debt borrowing to purchase securities, usually on-market - plus trustee corporations, debentures and non-deposit taking institutions.

This represented the last of Australia's financial services industry not to be fully and nationally regulated. In a global environment, having six states and two territories regulating this area was unsustainable.

As mentioned, at the moment, Australian consumer credit regulation occurs under a range of different legal regimes, both Federal Government and State or Territory government.

This means that there is currently no consistent consumer protection system throughout Australia.

In 1996, each State and Territory government agreed to a Uniform Consumer Credit Code. The Code was designed to provide consistent consumer protection throughout Australia.

But since then, some State governments have extended the scope of the Uniform Consumer Credit Code in their State.

This means that consumer protection laws are not applied consistently throughout Australia.

Another problem is that the laws do not currently cover some of the newer, and more complex, credit products. The current regulations may not ensure that consumers are properly informed of all the risks associated with these products.

To be perfectly frank, our current system does not work very well. It is confusing. It creates far too much paperwork. It is very inefficient. And worst of all, it is unfair to consumers.

To overcome these problems, the Australian Government will introduce one single, national, standard system to regulate consumer credit.

Because this is a very large-scale project, we are implementing it in two phases.

Under the first phase, the Federal Government is taking responsibility for the Uniform Consumer Credit Code by enacting it as Federal law.

Work on this phase is well underway. On Monday just this week, I released for public exposure the National Consumer Credit Protection package that will create a new national regime regulating credit consistently across Australia for the first time.

I expect to introduce the National Consumer Credit Protection Bill into Parliament in the next few months and this regime will be in place shortly thereafter.

The law will cover all forms of consumer lending, and all credit providers, as well as credit and mortgage brokers and advisers. It will also be uniform in all jurisdictions across Australia.

This is an important step forward for us. It means that, for the first time, we will have one, standard, national regime which applies equally to all credit consumers and all credit providers, right across Australia.

The new national law will be based on two important principles — responsible lending and consumer protection.

Credit providers will need to provide credit services honestly, fairly and responsibly. They will also need to make sure that the loans, or other credit services, that they provide are suitable for their clients, and that the clients can afford to repay.

Lenders will no longer be able to extend credit without checking their client's credit history, or analysing their capacity to repay.

These rules will give consumers a new level of protection. We expect to see far fewer cases of people with loans they cannot repay.

The responsible lending rules will be complemented by a comprehensive consumer protection regime.

All credit providers will need to be licensed under a new, national licensing regime, to be administered by our corporate regulator, ASIC.

Lenders will need to meet entry standards before they can offer their products and services to Australian consumers.

And once they have become licensed, lenders will need to meet continuing standards of conduct. These standards will be higher than those that currently exist at the State and Territory level.

Credit providers who do not meet these standards must either improve their conduct or leave the industry.

Credit providers who breach the provisions of their licence — particularly the rules relating to responsible lending — could have their licence to provide consumer credit withdrawn.

The second phase of the new consumer credit law will be rolled out in 2010. During this phase, we will consider possible further rules to stem specific unfavourable lending practices, including credit card limit extension offers, deceptive advertising practices and other fringe lending issues.

Executive remuneration

Both the G20 and the Financial Stability Board have identified remuneration practices as a contributing factor to the global financial crisis.

A review of the causes of the crisis has revealed that many financial institutions pay their employees in a way that encourages them to take inappropriate risks. Some incentive structures encourage excessive short-term risk taking at the expense of longer-term sustainability.

In Australia, our strong prudential and corporate reporting framework has held us in good stead. This is one of the reasons we have not seen any mainstream financial institution collapse, nor any financial institution needing capital injections from the Government.

Our remuneration framework is also sound. But it is clear that some aspects require further strengthening and modernising.

APRA review into executive remuneration

Australia's Prime Minister Rudd has advocated reform of executive remuneration arrangements in financial institutions to remove incentives for excessive and short-term risk-taking.

In October 2008, the Prime Minister announced that the Government, together with the independent regulator, the Australian Prudential Regulation Authority, or APRA, would examine how we could take steps on executive remuneration to avoid excessive risk-taking in Australia's financial institutions.

In response to this request, APRA has been participating actively in the Financial Stability Board to develop principles for sound executive compensation. The report of the Financial Stability Board was endorsed by the G20 London Summit on 2 April. This work is helping APRA to refine its approach for Australia's needs.

APRA is scheduled to release its discussion paper next month for consultation with interested parties.

Termination benefit payments

Excessive termination payments or "golden handshakes" have caused concern in Australia for some time. And they are clearly problematic in the current economic climate, particularly when they are seen as "rewards for failure".

This is why the Australian Government will curb excessive termination payments by reducing the threshold for shareholder approval. This will ensure that termination benefits that exceed the threshold will require shareholder approval, regardless of whether they are made to directors or executives.

We have drafted and will shortly release amendments which will require that shareholder approval must be sought for any termination payment exceeding one year's base salary. The amendments will extend the range of executives whose termination payments are subject to shareholder approval. They will also broaden the definition of termination benefit to include all types of payment and rewards given at termination.

We are committed to ensuring that Australia's executive remuneration framework is practical, workable and equitable.

As well, we want to strengthen the accountability of company management in setting remuneration. And make executive remuneration more transparent for shareholders and the broader community.

Financial Services Working Group

Upon coming to Government, we also moved quickly to address the growing flaws in our financial product disclosure arrangements.

Under the regime in place, we were witnessing an explosion in extremely lengthy allegedly investor protective documents.

I know there are several lawyers in the room today - and indeed I am the Minister for Corporate Law - but what we faced was Latin-like documentation that was written by lawyers primarily for the protection of their clients. And those clients we not the mum and dad investors.

So we formed the Financial Services Working Group to rip these documents apart one-by-one. In their place we are developing, in coordination with industry, simple, clear, retail focused disclosure documents of no more than 4-8 pages.

This is a breakthrough from the 100-150 page tomes that we passing as disclosure and it's a major improvement for consumers and a cost saver for the finance sector.

Australia's Future Tax System and comprehensive review of our superannuation system

I have intentionally spoken today about corporate law. As many of you would know, I am also Australia's Superannuation Minister, and it's been a very busy year on that front.

Finally I wanted to mention two very significant processes - one underway and one shortly to be underway in Australia that I know you will have an interest in.

After lunch today, I am meeting with the CEO of the Singapore Central Provident Fund and I will save most of my views on super and pensions for then.

But first a few words about Australia's Future Tax System review. As many of those here would be aware, upon coming to Government, the Prime Minister and Treasurer announced a comprehensive review of Australia's taxation system.

This review is also dealing with the inputs side of our retirement incomes system. As an update, the review is progressing well and the Government looks forward to its findings in late 2009.

We have now also moved on a critical and complementary examination - this looking at the superannuation system and its outputs.

On Tuesday this week, I released an Australian-first communiqué signed by the Government and each and every key part of our superannuation sector.

The communiqué highlighted the strengths of our system, and called forward a comprehensive and mature review of the efficiency, structure and operation of our system.

Over the coming weeks, a significant level of further detail will be forthcoming.


Ladies and gentlemen, as you can see from my words this afternoon, the Rudd Government is working on several fronts to mitigate the effects of the global financial crisis.

We are supporting jobs and investing in future economic growth.

We are working internationally as part of the global solution.

And we are creating a fair marketplace for all Australians.

I hope that my talk has been informative for you. And once again, I would like to extend my sincere thanks for inviting me to speak with you today.