Introduction
Good afternoon.
It is a pleasure to be here today to discuss the future for financial services and superannuation in Australia. This is an area for which I have limitless enthusiasm although I'm sure my family often wishes this were not the case!
I am the first minister of any Australian government to have exclusive responsibility for superannuation. As Minister for Superannuation and Corporate Law, I oversee a number of key areas including the policy and administration of superannuation.
Beyond superannuation, there are an extensive range of reforms and initiatives that need to be advanced in the wider area of financial services.
The Government is committed to ensuring Australia's financial system operates efficiently and effectively. To ensure this, change is essential in some key areas.
National Regulation of Financial Services
One issue of significant interest is the work being carried out to progress national financial services regulation.
Regulation of the industry is currently a three-way split between the Australian Government, the States and Territories and industry self‑regulation.
Quite simply, eight sets of regulation by each State and Territory is inefficient. This system imposes an unnecessary regulatory burden on the providers of financial services.
The financial services industry is increasingly global in both scope and nature. It is constantly crossing jurisdictional boundaries. Issues in the mortgage market tend to be national in nature, with similar problems being experienced in all jurisdictions across Australia.
Some jurisdictions have departed from the Uniform Consumer Credit Code, leading to compliance cost issues and gaps in regulation.
Widely supported reforms have been delayed by the complex inter‑jurisdictional hoops through which we must jump to amend the Code. The provision of mortgage advice and margin lending remain largely unregulated.
There are 3 important consequences of this regulatory environment:
- regulatory gaps can be exploited by unscrupulous providers;
- the level of protection for consumers may depend on where they live; and
- there are significant compliance costs for businesses operating in more than one jurisdiction.
A single national regime for the main types of financial services provided to consumers is a logical evolution of the regulatory environment. This is exemplified by the sub-prime crisis in the US, which has been exacerbated by the state-based regulation of mortgage providers in the US.
The Government plans to ensure that mortgages and investment loans will be regulated under uniform national legislation … and that mortgage brokers, non-ADI and ADI lenders will be subject to nationally consistent licensing, conduct and advice provisions.
At last week's COAG meeting, the Australian and State governments discussed the transfer of power to allow for the federal regulation of these areas.
In the coming months, we will be releasing a Green Paper which will set out detailed options for these reforms.
Product Rationalisation
Another area of work in the financial services field is the introduction of a product rationalisation mechanism. This would help move customers out of outdated managed investment products and into modern ones.
Such rationalisation can potentially benefit everyone involved. The operation of legacy products imposes costs and risks on both the industry and investors.
However, transparency and fairness must be of paramount consideration in developing a mechanism to protect the interests of investors.
Around 20 submissions were received in response to the Treasury Product Rationalisation Issues Paper released last year.
I would like to take this opportunity to publicly thank IFSA for its detailed submission. Its contribution to this discussion has been, as always, both practical and considered.
The Government will now take advice on the submissions and the development of a possible mechanism.
Financial Services Working Group
As with every big industry, the financial services sector has a number of significant issues that need to be addressed.
One for which I have particular concern is ability of investors to access and understand the information being provided to assist them in making informed decisions.
This is epitomised by the quality and length of disclosure documentation. I am determined to see this problem is resolved. I am committed to seeing that industry produces simple … standard … and readable disclosure documents.
Last month, I announced the tripartite Financial Services Working Group. This has been established by myself and the Minister for Finance and Deregulation, Lindsay Tanner. It is comprised of officials from Treasury, the Department of Finance and Deregulation and the Australian Securities and Investments Commission.
The Working Group is charged with cutting lengthy and unreadable documents in the financial services sector.
It will examine disclosure documentation in a staged process. As a first step, it is exploring the development of a concise Product Disclosure Statement for our newly announced First Home Saver Accounts.
The Working Group is also examining the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The group will identify current obstacles to this advice, the removal of which will facilitate improved access and choice for all Australians.
A consultation paper is being finalised and will be released soon.
IFSA was represented at the inaugural industry information session held at the end of February. It is also a prominent member of the industry advisory group which will be enhancing the expertise and creativity of the Working Group itself.
I understand that a meeting took place recently to discuss the work that IFSA has already undertaken to promote consolidation of information within Product Disclosure Statements.
Further a key component of the work ahead will also involve development of a risk-rating system that will be clear and understandable.
The State of Australia's Financial Markets
Overview
I would now like to discuss the state of Australia's financial markets. Following a prolonged period of positive economic conditions and rapid financial innovation, the international financial system is now facing some significant tests from which Australia has not been immune.
In August last year, events leading to substantial financial market turbulence began to unfold. The rapidly rising default rates in US sub‑prime mortgages led to major global banks having to accept substantial write downs.
The issue then became one of uncertainty concerning the level of risk associated with these mortgages. Their packaging into subsequent financial products by institutions and sale into global financial markets accentuated this uncertainty.
Large losses on these and other structured credit products has put significant pressure on banks' balance sheet positions internationally and led to a dramatic erosion of confidence in inter-bank lending markets.
A number of sources of funding have disappeared as a consequence, severely impacting on the depth and liquidity of the market.
The fallout from global turbulence and uncertainty has added to the strain Australians are already facing due to inflationary pressures.
Australians rely on financial markets for their financial security in retirement and personal savings. It is natural that they are concerned by the pressures placed on our domestic markets.
Whilst the Australian stock market has been affected by the turmoil in international financial markets and this will impact on superannuation fund returns, overall the super system is healthy, strong and well regulated. Super returns over the last five years have delivered impressive returns of around 70 per cent in aggregate.
We should also not lose sign of the fact that superannuation is a long‑term investment. Over the past 35 years, Australian superannuation has delivered excellent real returns of 4.9 per cent over and above inflation to 30 June 2007.
While the Australian economy has so far proven to be resilient, we are of course not immune from the challenges abroad.
We are therefore committed to ensuring fair, orderly and transparent financial markets. Such concepts are central to retaining market integrity, investor confidence and well functioning markets.
As a whole, Australia's financial markets have responded extremely well to global pressures. Our market regulators have reacted proactively in taking a range of actions to deal with the emerging issues.
There has been much discussion in the media about margin lending, short selling and securities lending. I would like to note that such practices, when conducted in good conscience and transparently, add to the depth and liquidity of Australia's financial market.
Furthermore, financial product innovation is central to continuing market efficiency.
However, investors are becoming increasingly worried that their hard earned savings could fall victim to professional traders who exploit perceived regulatory loopholes.
The Government and regulators are very concerned about any allegations of market misconduct.
We have been working closely together throughout this period to examine the key issues to ensure the protection of investors from deliberate market manipulation.
With my strong support, the Treasurer wrote recently to both ASIC and the ASX, commissioning reports on the adequacy of current regulation. We remain in close contact with the regulators.
While the current regulatory system has performed well under pressure, recent issues have highlighted the need for some fine tuning. As a result, the Government will pursue a legislative change to Corporations Act to address an ambiguity around covered short selling and disclosure.
The Treasurer and I have now informed the regulators of this decision.
The system is sound, but our advice from the frontline – from the ASX – is that there is a definitional ambiguity in the Corporations Act in relation to covered short selling.
Treasury is currently working with ASIC and the ASX to determine the most appropriate form of legislative change to ensure that the current disclosure requirements apply to such covered short sales.
This will mean the market will have improved access to information about the level of short selling, covered and naked, thereby promoting transparency in the marketplace.
In the interim, we've asked the regulators to meet with Treasury and progress reforms to the ASX Market Rules to further clarify and strengthen the disclosure of short selling.
On balance Australian markets are performing effectively given the pressures they are under. Our regulators will continue to closely monitor the situation.
Our economy depends on a stable financial system and the Government is committed to ensuring the integrity of Australia's financial markets.
We are ensuring the protection of everyday investors … promoting confidence in Australia's financial markets … and maintaining the attractiveness of Australia as an international investment destination.
Mutual Recognition of Securities Regulation with the US
The quality of Australia's financial system and the strength of our economy make us an attractive place to invest. We will continue to play a direct role in furthering cross-border financial flows for the benefit of the economy and investors.
While much work has been successfully done in Australia to ensure that our domestic regulatory framework strongly supports system stability, the globalisation of financial markets means that we must work with other economies to enable more effective international surveillance to identify systemic risks and promote global stability.
The Government believes we must be an active participant in a coherent global economic policy response to the challenges posed by the current turbulence in financial markets. To this end, the Prime Minister has emphasised the importance of policy coordination between governments in supervising the technical work being done by international financial market standard setters on issues around transparency, crisis management and system stability to provide for coherent, efficient regulatory enhancements that support global economic development.
During the Prime Minister's recent visit to the United States, he and the Chairman of the Securities and Exchange Commission, Mr Christopher Cox, made the historic announcement of an agreement to explore the possibility of a mutual recognition of securities regulation arrangement between our two countries.
This is very important for Australia and the United States. From the Australian point of view, the arrangement could mean that an Australian market such as the ASX could operate trading screens in the US with minimal regulation by the SEC over and above that required by ASIC.
The trading would be for the secondary trading in securities markets. The arrangement could also mean that Australian stock brokers could provide advice on Australian listed securities in the US under reduced regulatory requirements.
Mutual recognition is dependent on a number of key policy requirements. Most significantly, the foreign and host regulatory frameworks must be of similar quality and reciprocal arrangements must be in place.
Australian officials and their US counterparts have begun comparing our respective regulatory regimes and ironing out any differences, paving the way for a mutual recognition arrangement.
Mutual recognition with the US offers the scope for a wide range of benefits aside from reducing red tape. In the longer term, it will provide incentives to further stimulate capital flows between Australia and the US and increase secondary trading on foreign and host markets leading to increased liquidity.
Importantly, increased co-operation and coordination between ASIC and the SEC will contribute to enhanced law enforcement and help to reduce criminal cross-market and cross-national transactions.
Given these important developments with the US, I would also like to indicate Australia's willingness to enter into mutual recognition arrangements with countries that have similar quality regulatory frameworks to those operating in Australia.
As I have stated above, the Government is committed to ensuring that Australia maintains its position internationally as a hub for financial services.
Lost Superannuation
I would like to now turn to issues more specifically within superannuation which is, after all, the most common investment for Australians after the family home.
One particular matter which I have watched over the past decade with some concern is the continued growth of superannuation reported on the Lost Members Register.
The register uses information supplied by superannuation funds. Its intended purpose is to assist individual members to identify their superannuation and consolidate their accounts. Monies associated with the accounts listed on the register are still held by the funds on behalf of the so‑called 'lost' members.
Over the last decade, I have watched with concern as the amount of superannuation identified as 'lost' has grown significantly. As of June 2001, 3.8 million accounts — with a total value of $5.5 billion — were reported on the Lost Members Register.
By June 2007, these figures had grown to nearly 6.1 million accounts on the register, with a total worth of approximately $11.9 billion. In other words, the numbers have nearly doubled in just six years.
I am very sure that a large number of these accounts could be more correctly defined as 'inactive', in that the account owner is aware of the account, but not motivated to do anything about it.
Even with such inactivity taken into account, there remains a worryingly large figure under consideration.
Lost accounts represent approximately one in five of all superannuation accounts. That is around one lost account for every two Australian workers.
The sheer number of accounts in question suggests that many Australian workers will access a lower savings on retirement than that to which they are actually entitled.
And, as many of you will be all too aware, the number of these accounts collectively increases superannuation fund running costs.
In past years, we have witnessed the complex and costly attempt of the previous Government to address the failure of the system. Quite evidently, tracking down lost members through a mail-out is not a successful strategy.
There is a lot of red-tape involved — individuals have to find the fund … find the account … fill in forms … and provide proof of ownership.
Some big changes need to happen. In the near future, we will be carefully examining the appropriate steps to be taken in rationalising the register.
My preference is the option of reuniting Australians with their lost accounts by introducing an automatic consolidation system using our Tax File Number system. Under this option, the Tax File Number would be used to automatically transfer lost accounts into the current or last active account.
I am confident that we will be able to develop a sensible approach to this important issue through consultation with industry.
Self Managed Superannuation Funds (SMSF)
A second area of focus is that of self managed superannuation funds.
On the 14th of February, I announced that consultation had commenced with a range of industry organisations and practitioners about these practices.
I also recently addressed the self managed superannuation funds Professionals' Association of Australia, where I raised a number of important issues that are facing the sector.
While I won't go into the same detail as I entered into last month, suffice it to say that the SMSF sector is mostly very sound. That said, I want to make sure that, at the margins, we strengthen the sector. ATO advice shows that some trustees are not as aware of their legal obligations as they should be.
Trustees must ensure that the superannuation fund operates strictly in accordance with the trust deed and statutory requirements of the fund.
Trustees should possess relevant investment skills and expertise and should be aware of the Superannuation Industry Supervision Act prudential requirements relating to investments.
If they do not fulfil these requirements, they should not be trustees, because they are doing their members a gross disservice and, quite possibly, breaking the law.
Recent ATO data have turned up a number of interesting statistics.
For instance, 21 per cent of participating self managed superannuation fund trustees had 'low' or 'low to medium' knowledge of their obligations … 30 per cent could not explain what the 'sole purpose test' was … 15 per cent of trustees did not have an investment strategy … and 25 per cent were unaware of the restrictions on the type of assets that could be acquired from related parties.
In comparing SMSF fees and costs by fund size, generally the smaller the asset size of the fund, the greater the ratio of operating expenses to total fund asset size. The same ATO survey found that that the ratio of operating expenses to total assets:
- is 10.51% for fund with assets of up to $50,000, and
- ranges from 3.55% to 2.63% for funds in asset ranges between $50,000 to $200,000.
This ratio drops to 2.26% for funds with assets between $200,000 and $500,000.
We supported the previous government in its introduction of the Super Safety arrangements and the extensive upgrade of trustee duties, responsibilities and education in 2005. However, these changes were not applied to the self managed superannuation fund sector.
While the evidence provided by the survey shows that the majority of the sector is well managed, a significant minority may not be.
A robust governance system is needed to ensure the security of the retirement incomes of all Australians. Those who choose to use self managed superannuation funds are no less important for their decision.
There are several strategies that can be pursued to address the shortfalls within the sector. Education for trustees is one possible way forward. I am currently seeking views on how best to resolve these issues.
Tax Free Superannuation Lump Sums for Terminally Ill
On 13 February 2008, we introduced legislation into the Parliament to make superannuation lump sum payments tax free when paid to persons suffering from a terminal medical condition. This measure will assist in relieving financial stress which individuals and their families suffer due to their illness. I am pleased to note that we have backdated the start date on this initiative to 1 July 2007.
First Home Savers Accounts
I would like to conclude with a few remarks on our new First Home Saver Account, which is an important initiative that will have significant ramifications for the financial services sector.
On 8 February 2008, the Treasurer and the Minister for Housing released the First Home Saver Account discussion paper. The paper outlines the proposed features of the accounts and how they will operate.
In addition to promoting private savings, First Home Saver Accounts may help to put downward pressure on inflation and interest rates. The accounts will also create opportunities for providers to develop innovative products to service the first home saver market.
We are working closely with industry to ensure that the accounts are an attractive and competitive product for both industry and savers. We are firmly committed to minimising compliance costs as far as possible.
The Government is currently considering submissions received from industry, including IFSA, and the community in response to the discussion paper. The final details of the accounts will be announced over the coming months.
Conclusion
While I could talk for much longer on these issues, I am conscious that today I am only providing a summary of what we envisage for the future.
As always, there is too much to be said and too few hours in the day.
Since my appointment as Minister, I have pursued rigorously the matters which frustrated many long hours of opposition. It is very pleasing to be able to effect important and meaningful changes impacting positively on the lives of many Australians.
With the changes that I have touched on today, we will add greater strength, transparency and efficiency to the Australian financial system – a system that by any range of comparative data is one of the best in the world.