First, please allow me to thank the Insurance Council of Australia for inviting me to address your Regulatory Update Seminar.
The Insurance Council of Australia has always played a valuable role in the industry. I appreciate your ongoing support for the work of the Financial Services Working Group to improve the effectiveness and quality of product disclosure documentation.
And more broadly, I also welcome your commitment to assist the insurance industry to meet consumer needs... encourage improved service standards across the sector... and promote appropriate self-regulation.
In fact, the insurance industry is a prime example of self-regulation and prudential regulation working well together to achieve efficient market outcomes.
This morning, I would like to update you on the impact of the global financial crisis, and how the Federal Government is honing our regulatory response. I would also like to give you a brief update on current regulatory reforms, as well as key insurance issues and reforms.
Financial market volatility and Government's response
We are all well aware that the world is facing the most significant upheaval in global financial markets in living memory.
What was initially seen as a relatively isolated deterioration in the "sub-prime" segment of the US mortgage market has had a ripple effect throughout the world.
2009 is shaping up as a very tough year for the global economy - and a tough year for Australia as well.
The deteriorating global outlook has seen growth forecasts slashed for 2009. The IMF is now forecasting a collective budget deficit of seven per cent of GDP for advanced economies.
Australia cannot be immune from the effects of this crisis. A budget deficit is now forecast for 2008-09 of $22.5 billion, or 1.9 per cent of GDP.
The Rudd Government reaffirms its commitment to deliver budget surpluses, on average, over the course of the economic cycle.
As the economy recovers, and grows above trend, the Government will take action to return the budget to surplus.
Nation Building and Jobs Plan
In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs and invest in nation building.
That's why the Rudd Government announced yesterday a $42billion Nation Building and Jobs Plan to support jobs. And to invest in future long-term economic growth.
Treasury estimates that the Nation Building and Jobs Plan will support up to 90,000 jobs in 2008-09 and 2009-10.
The initiatives in the Nation Building and Jobs Plan will provide a boost to economic growth of around ½ per cent of GDP in 2008-09, and around ¾percent to onepercent of GDP in 2009-10.
Key measures funded by the Nation Building and Jobs Plan include:
- free ceiling insulation for around 2.7 million Australian homes
- constructing or upgrading a building in every one of Australia's 9,540 schools
- building more than 20,000 new social and defence homes
- one-off cash payments of $950 to eligible families, single workers, students, drought-affected farmers and others
- a temporary business investment tax break for small and general businesses buying eligible assets
- and a significant funding increase for local community infrastructure and local road projects.
By investing in jobs and long-term economic growth, the Plan strikes the right balance between providing immediate support for jobs now, and delivering the long-term investments we need to strengthen future economic growth.
In fact, for every $1 spent providing immediate stimulus to the economy, the Government has invested more than $2 on long-term investments that will generate future economic growth.
The $42 billion Nation Building and Jobs Plan builds on the stimulus measures already implemented by the Rudd Government to support economic activity and jobs.
These stimulus measures include the $10.4 billion Economic Security Strategy... the $300 million program to build local community infrastructure... the $15.2 billion COAG funding package... and the Nation Building Package announced in December 2008.
As this new year unfolds, the Rudd Government will continue to tackle the effects of the global financial crisis head-on.
Clearly, there can be no quick fixes. But I can assure you that we will continue to take whatever steps are necessary to support growth and jobs during these testing times.
And in the Treasury portfolio, I will continue my work of ensuring that our regulatory system operates effectively and efficiently. In developing critical regulatory reforms, I am always mindful - particularly during this volatile period - of the need for responses that are measured... far-sighted... and sound.
I would like to briefly outline some of these recent initiatives.
In September 2008, the Australian Securities and Investments Commission implemented a total ban on covered short selling.
This decision aligned with the actions of securities regulators around the world to limit the activity of short sellers. The measures were designed to restore market confidence during a period of unprecedented and volatile economic conditions.
This ban was never intended to be permanent. As part of a staged and measured approach to the reopening of covered short sales, ASIC lifted its ban on the short selling of non-financial stocks from 19 November 2008.
However, given the systemic importance of financial institutions to the Australian economy, ASIC recently decided to further extend its ban on short selling of financial stocks until 6 March this year.
The Government welcomed this decision, as it complements other Government initiatives designed to ensure the ongoing stability of Australia's financial sector.
Corporations Amendment (Short Selling) Act 2008
To further ensure the integrity and transparency of our markets, the Government recently enacted legislation to permanently strengthen the regulatory framework which governs short selling.
In December last year, the Government passed the Corporations Amendment (Short Selling) Act 2008. The Act provides the market with certainty about the scope of ASIC's powers to regulate short selling.
The Act also bans the practice of "naked" short selling, subject to ASIC exemptions. Given the potential for naked short sales to result in settlement failure and market manipulation, this move will help to boost investor confidence.
And finally, the Act establishes a disclosure framework for covered short sale transactions. This will reduce the scope for market speculation about short selling activity.
One of my priorities for 2009 is to finalise the detailed aspects of the disclosure framework. We are drafting regulations to govern issues such as the timing and manner of any disclosure. Once the regulations are in place, the ASIC interim disclosure regime introduced last year can be withdrawn.
The Government will, of course, liaise with industry as we develop the regulations.
As well, we are monitoring the outcomes of the recently-established IOSCO taskforce looking into the regulation of short selling to see whether this work identifies avenues for strengthening the existing regulatory regime here in Australia.
National regulation of consumer 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 2October 2008. The transfer of responsibilities follows on from COAG's decisions earlier last year.
This important initiative by the Rudd Government will address the deficiencies that have long existed in credit regulation by establishing a consistent and robust consumer credit regulation framework.
To make the transition as smooth as possible, we are implementing national credit regulation in two phases.
This phased approach strengthens consumer protection, while minimising disruption to business.
Under the first phase of the plan, the Commonwealth is taking responsibility for the existing State and Territory legislation - the Uniform Consumer Credit Code - by enacting it as Federal law. Work on this phase is well underway for delivery by the end of June 2009. There will be a two-year transition period for affected businesses.
As I have stated previously, the new national consumer credit law will not only cover mortgages taken out to buy the family home, but will also 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, including margin lending providers, as well as 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, fairly and responsibly. 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 Treasury conducted public information sessions to explain the details of the new regime, which were very well attended.
The second phase of the action plan will be worked on after the first phase has been bedded down. It 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.
Financial Services Working Group
The new consumer credit regime will receive a significant boost from the efforts of theFinancial Services Working Group.
The Government established the Financial Services Working Group to facilitate the creation of disclosure documents which are short, simple and readable. Documents which will better enable consumers to understand and compare the full range of financial products.
The Financial Services Working Group has already produced a four-page product disclosure statement for the First Home Saver Accounts.
Last month, the Financial Services Working Group began consultations with industry on a new, national, margin lending regulatory regime. The new regime will include new short-form, plain English product disclosure documents.
By 1 July this year, there will be one, single, standard, national regime for regulating and supervising margin lending. This will provide much greater protection for investors as well as cost savings for product providers.
Margin lending providers will have to be licensed by ASIC and those who provide advice on margin lending will need to be trained to provide that advice. For the first time, margin lending will be properly regulated in Australia.
Investors will be informed about the risks of margin lending, as well as the potential rewards of the product - all in plain English. We have already started discussions with industry on delivering these greatly simplified documents.
It's important that investors not only receive clear advice about why a particular product or strategy is being recommended to them, but also what's in it for the person or firm recommending it.
That's why disclosures in the new short-form product disclosure statement will include all fees and charges, including the commissions paid by margin loan providers to advisers who sell the product.
Conservatively geared margin lending may have a role in a balanced investment strategy. But it's critical that potential investors are fully informed about how margin lending works in both rising and falling markets.
The new, clear disclosure regime will fill this information gap.
I understand that Kerrie Kelly has been proactive in developing a framework to assist ICA members to simplify insurance documentation. Users are the ultimate beneficiaries of industry efforts to simplify this documentation and you should be congratulated on this work.
The important work of the ICA clearly compliments the work that is currently been undertaken by the Financial Services Working Group. That said, I encourage the ICA to continue on its path to simplify insurance documentation that, over time, has become complex and difficult for end-users to understand.
Mutual recognition arrangements
Another important area of corporate law reform is the mutual recognition of securities regulation.
As well as making it easier for overseas investors to invest in Australia and vice-versa, mutual recognition reduces red tape... enhances cross-border law enforcement activities... and enables greater capital flows between Australia and overseas destinations.
In August last year, the Chair of the US Securities and Exchange Commission, Christopher Cox, the ASIC Chair Tony D'Aloisio and myself signed a mutual recognition arrangement between our respective agencies.
The arrangement will provide Australian investors with greater access to US markets, while maintaining strong investor protection and ensuring market integrity. It will also make Australian markets more attractive and accessible to investment from the United States.
I should add that Australia is the first country with which the US has sought such an arrangement. This testifies to the strength of our law... our regulators... and our financial services industry.
The agreement with the US is Australia's third mutual recognition arrangement. The first was with New Zealand and covers securities offer documents. The second arrangement was with Hong Kong and covers the sale of retail funds to investors in each other's market.
Review of credit rating agencies
The global financial crisis has prompted universal consensus for improved regulation of credit rating agencies. Their role has come under scrutiny due to their involvement in providing inaccurate ratings of structured financial products in the lead-up to the US sub-prime crisis.
The Rudd Government is prepared to take decisive action to upgrade the supervision of credit rating agencies to promote and maintain confidence in our financial system.
On 13 November, Iannounced significant reforms to the regulation of credit rating agencies and research houses.
Following the review, ASIC will require rating agencies to have an Australian Financial Services Licence. This is to ensure that our financial system meets the highest standard of regulation.
Rating agencieswill now also be required to issue an Annual Compliance Report. The report will outline in detail to ASIC how they have complied with the recently updated International Organisation of Securities Commissions Code of Conduct Fundamentals forCredit Rating Agencies.
These moves will also enhance the efforts of international bodies to work towards streamlining global regulation of credit rating agencies. Australia's efforts in this area complement the work of the US Securities and Exchange Commission.
ASIC will alsostrengthen its oversight of research houses by requiring them to issue a similar annual compliance report to cover management of conflicts of interest, as well as the procedures, methodologies and assumptions which underpin research house advice.
By requiringrating agenciesand research houses to report annually on the quality and integrity of their ratings processes, conflicts of interest management and responsibilities to the investing public and issuers, the Rudd Government is boosting the integrity of our financial system.
Key insurance issues and reforms
I would now like to briefly outline some key issues and reforms in the insurance field...
Financial Claims Scheme
The Financial Claims Scheme allows eligible policyholders to gain early access to the payment of insurance claims in the event that a general insurer fails.
The scheme has been on the drawing board for some time. But its introduction gained momentum as the crisis engulfing world financial markets became increasingly acute late last year.
The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008, which enacted the Financial Claims Scheme, received Royal Assent on 17October2008. The scheme became operational from that date.
The scheme encompasses two strands - the Early Access Facility for Depositors, on the banking side. And the Policyholder Compensation Facility, which deals with general insurance.
The Early Access Facility for Depositors is designed to ensure that depositors in a failed authorised deposit-taking institution have timely access to their deposit funds, which they would otherwise receive through the liquidation process under the depositor preference arrangements.
In the unlikely event that a general insurer fails, the Policyholder Compensation Facility will provide eligible policyholders who have valid insurance claims with early access to funds they would otherwise receive as a result of an insurance claim.
The Policyholder Compensation Facility will be administered by APRA. It provides a mechanism that supports the "retail end" of the general insurance market through targeted eligibility criteria. Broadly speaking, this covers individuals, small businesses and not-for-profit organisations.
Other crisis management measures
As a part of the Financial System Legislation Amendment Act, the Government has also introduced a range of measures that will enhance the ability of regulators to act comprehensively and decisively in relation to a failed general insurer.
Regulators now also have a greater capacity to recapitalise or transfer the business of a distressed general insurer or life insurer.
The broader crisis management arrangements also allow for compulsory recapitalisation of institutions, including general and life insurers. These arrangements will also enhance the ability to transfer the entity's businesses to protect policyholders or to ensure financial system stability.
An appropriation is included in the both the Insurance Act and the Life Insurance Act, for an amount up to $10billion, to support a contract or arrangement to protect policyholders and maintain financial system stability.
Insurance Contracts Act Review
As you know, the previous Government conducted a review into the Insurance Contracts Act 1984. An exposure draft bill was released for public comment in early 2007.
The Insurance Council of Australia has provided valuable input on the Bill, meeting with Treasury officials on several occasions. A number of changes have been made to the Bill as a result of those discussions, including changes to the draft provisions relating to electronic communications.
Significant progress has been made on the Bill, and I expect to see it introduced into Parliament later this year.
Ladies and gentlemen, I opened my address to you this morning by speaking about the global financial crisis. I would like to close by restating the words of our Prime Minister at the Annual Australia Day Luncheon. Speaking of the crisis, Mr Rudd said:
"We are all in this together - within Australia, across the world."
That is why our response to the crisis is based on continued international cooperation, together with responsible economic management, and a comprehensive agenda of reform.
And that is why we all have a role to play.
Dealing with the effects of the global credit crisis will depend on a partnership - a partnership between Government and industry. Between Government and professional associations such as the Insurance Council of Australia.
Everyone in this room can be part of the solution to the issues we now face.
I trust I can rely on your ongoing professionalism, advocacy and support.