LINDSAY TANNER:
We are here today to talk about changes to the regulation of the financial services sector in Australia, in short, to introduce requirements for credit rating agencies that they are licensed as financial services providers, and report annually to ASIC.
So they will be subject to these restraints for the first time.
And to introduce, as flagged some time ago, detailed requirements for disclosure with respect to covered short selling; and a permanent ban on naked short selling. I'll hand over to Senator Sherry, who's got specific ministerial responsibility for these reforms, to talk in detail. Any questions on the specifics of these reforms should be directed to him.
More general questions about the Government's approach to regulatory reform or indeed the management of the economy, I'll be happy to take.
NICK SHERRY:
Well thanks Lindsay. As Lindsay's indicated, I want to announce today some key initiatives in two important areas. One is the supervision of credit rating agencies and research houses; and secondly, details in respect to the implementation of disclosure of short selling.
As you'd be well aware, in the current global financial crisis, we've seen a series of quite extraordinary problems arise, and in respect to credit rating agencies, they were identified in the US as one of the three primary causes of what is known as the US sub-prime crisis.
The role of credit rating agencies in the US has rightly come under strong scrutiny and criticism, and there has been a call for a revamp of the supervision and the methodology's robustness in the approach of credit-rating agencies.
And there's been an international consensus reached at IOSCO, that this needs to be carried out. It's very important for retail and wholesale investors in Australia that we have robust ratings and robust research of financial products. They have a very important gate keeping role for wholesale and retail investors, and they are therefore very important to the confidence in the financial system. Earlier this year, I asked Treasury and ASIC to conduct a review of the regulatory regime on rating agencies, and also research houses.
The report has come back with five recommendations. Firstly, the present time, the ratings agencies have an exemption from the Australian Financial Services licence. That exemption will be revoked.
Secondly, rating agencies will be obliged to have a licence.
Thirdly, rating agencies will be obliged as a condition of that licence to provide an annual compliance report - this relates to their activities in Australia - that covers each and every one of the issues identified by IOSCO in terms of their operational conduct.
Fourthly, research houses will also be required to hold an Australian Financial Services licence. And fifth, ASIC will develop annual compliance reporting for research houses in respect to their Australian operations.
And the Government has accepted each and every one of these recommendations.
In terms of compliance reporting, for the first time rating agencies will have to report on issues such as the quality and integrity of their ratings processes, on conflicts of interest, their responsibilities to the investing public and issuers, and a range of other checks and balances.
Now, in addition to accepting the recommendations, I will be meeting with key investor organisations to discuss further roles in which - and ways in which we can improve the development and understanding of what a rating agency represents, and what a research house recommendation represents.
We're one of the first countries in Australia to conclude its examination of rating agencies and research houses. We're one of the first countries to do so.
And the new supervisory regime being implemented in Australia will be taken to the G20, it will be taken to the various international forums. And we will be using it to take a global leadership position in respect to the supervision of these entities.
The second major announcement I want to make today relates to covered short selling.
The short selling bill, which has been finalised, will be introduced into the House of Representatives today. As I've indicated, in the current global financial crisis, there has been a need to take decisive action, particularly where we've seen some trading practices that involve manipulation or abuses.
Short selling is defined most simply as selling shares, usually that you don't own, on the assumption that they will fall in value. The covered short sale is where a person either borrows an amount of stock, using an illegal stock lending agreement, or has some supporting financial security arrangement to support the covered short sale.
Naked short selling is the same, but in this case the short seller doesn't own, doesn't even have a borrowing arrangement, and doesn't even have a pathway in order to obtain the shares they are actually selling.
That's naked short selling.
What we've seen over the last 10 months is a very extensive debate about short selling, not just in Australia, but around the world.
We identified a gap in Australian regulation and supervision. The Corporations Law of 2001 has a number of gaps in respect to the supervision and the ability of ASIC to take action if market circumstances require, into short selling and also in respect to the disclosure of short selling.
The legislation will fill that gap.
We've had two extensive consultations. There was three months of consultation up to the initial legislation, the draft legislation that I released four or five weeks ago. And we've had a further consultation in respect to the finalised corporations amendment short selling bill. And the bill will contain these key measures: Australia will be banning naked short selling. A comprehensive disclosure regime, which will permit covered short selling which will place an obligation on brokers to inquire of a client whether a sale is a covered short sale when a client places the order.
And then, a direct obligation on market operators to publicly disclose short-selling information they obtain from brokers. There will be an expansion of ASIC's powers to enable it to impose regulations on transactions that are substantially similar; and ASIC will have the power to limit, prohibit, or impose additional conditions on short selling transactions.
And there will be a legislative confirmation of ASIC's previous declarations relating to its temporary short-selling ban. And you may be aware, ASIC has indicated that on 19 November next week, it is its intention to lift the temporary ban on covered short selling in respect to non financial stocks, and in respect to financial stocks on 27 January next year.
It's important we have certainty going forward when this ban is lifted, if that's the decision ASIC takes next week. It's important we have certainty going forward as to how the detail of the disclosure regime is to operate in Australia.
That's why the legislation is being introduced into the House of Representatives today. And we'd certainly want it passed in the next sitting fortnight.
Thank you.
LINDSAY TANNER:
Any questions folks?
QUESTION:
Mr Tanner, can I just ask you a question about Ken Henry's view that people are too reliant on [indistinct] tactics to work out their child care. Did you agree with that view, and what do you think about the idea of, for example, of not having to make everybody file a tax return.
LINDSAY TANNER:
I don't think it will come as a surprise to anyone that the Australian tax system is heavy on complexity, that's been a complaint that has been raised many times in recent years and of course the Income Tax Assessment Act and associated regulatory instruments now stretch to a very, very substantial number of pages, I can't give you the last count but it's certainly a very large number.
And I think the Government will certainly welcome any advice from the commission that we've established that is directed towards reducing complexity. Much of the complexity that does exist in the tax system is driven by the need to fight back against artificial tax avoidance; it's always the big dilemma in tax law, tax regulation that everybody is - needs to pay their fair share.
People that are paying tax, particularly PAYE taxpayers should have confidence that everybody is fulfilling their responsibility and so there is always a balancing focus that needs to be put in place here. But certainly we welcome the Treasury Secretary's emphasis on reducing complexity and we'll look forward to the recommendations and analysis of his commission.
QUESTION:
Mr Tanner is the scope for a tax reform a little narrower now because of the pressure on government revenue from the global financial crisis. Does that give you less room to move with the reform plan?
LINDSAY TANNER:
Look, I don't think so. I think it changes the circumstances obviously but what you're dealing with is a different set of pressures so certainly when the reduction in budget surpluses that is now projected in the midyear economic and fiscal outlook does have an impact but equally the pressure for getting better outcomes because of the difficult economic circumstance we face is increased. So in some respects yes, the task is harder but the pressure to reform is also stronger.
So I don't think that changes the nature of the task, it means, like in a number of other areas, it's both more pressing but in some respects more challenging. I am convinced the Government's up to the task. I believe that this is an important reform agenda, it's not something that's going to be done overnight, it's going to be the subject of considerable debate but I believe it's a central task for the Government to undertake.
QUESTION:
Senator Sherry, on the controls on credit rating agencies, can you give examples of the conflicts of interests that you're trying to stamp out?
NICK SHERRY:
Credit rating agencies are interesting in that initially they were founded by and for consumer groups. Consumer groups would seek a rating of a particular financial entity or business, that's the genesis in the US. And over time, of course, what happened was that they evolved into who has the money to pay for that and of course business have evolved into paying for, and so there's a fairly obvious conflict. If a business is paying for a rating, what is the robustness of that underlying rating?
And that I think was identified as one of the issues in the US. The conflict of interest, there's a very fundamental conflict of interest and therefore the necessity to be able to go in and examine the methodologies, the assumptions being used that underline the rating that is taking place.
And there is no doubt that this was an issue in the US and with these new supervisory arrangements in Australia, a rating agency or a research house, for that matter, which has a similar type of role in our financial system will need to report to the regulator as part of that licensing requirement on their methodology and the way in which they are going about this in respect to their Australian operations. That will give ASIC the capacity, if it identifies conflicts of interest and less robust rating than otherwise should have occurred to correct that.
QUESTION:
Are there other examples in Australia that have caused you concern?
NICK SHERRY:
Well, in respect to research houses, yes. I mean, as I said, research houses are somewhat like credit rating agencies.
Now, if we look at say the collapse of some of the unlisted property trusts that occurred two years ago, which I took a fairly extensive interest in, we identified a range of risks in that area.
One of the issues we identified was the actual examination by the research houses and the robustness of that and then in turn, having examined the investment entity, the reliance of the financial planners, who were making recommendations off the back of the research houses' analysis.
And also, it's not just through a licensed planner. Direct retail investors rely on the integrity and robustness of the research house's analysis.
They commonly read these documents and the research house has given its assessment, so investors directly rely on this.
And so I was certainly aware of these issues in respect to unlisted property trusts when we were in opposition. When the issue of credit rating agencies emerged in the US earlier in the year, I certainly believed it appropriate to look at both credit rating agencies and research houses given the similarity in functions that they are required to perform.
QUESTION:
Finance brokers have got a similar sort of problem with conflicts of interest, what progress have you made in trying to clear up that?
NICK SHERRY:
Well, firstly I am glad you raised that matter because that's another example of the way in which this government has acted decisively. We're going to transfer the remaining 20 per cent of Australia's financial services regulation and supervision from the states and territories, to single standard national regulation of all financial services, a gain, yet another problem in the states.
We've acted and that transfer of mortgage broking regulation, trustee companies, credit card provision and margin lending, are important in the current markets. All of those areas of supervision and regulation, we've reached agreement to transfer to the Commonwealth, single standard national regulation.
To come to your question specifically, that will be done by the end of next year, it's a big, big job of work to strengthen and make our safe system safer and it will involve specific responsibilities. Licensing will take place for brokers for example for the first time, there'll be an independent low-cost dispute mechanism, as I say, making our system safer.
And there'll also be improved requirements and greater emphasis on responsible lending.
QUESTION:
Mr Tanner, the decision overnight by the Bush administration not to use all of its $700 billion bailout package to buy toxic(*) mortgages of banks has had a huge impact on stock markets as we go. Do you agree with that decision, do you think that perhaps - I think a lot of markets a lot of people in other countries were caught surprised by this seeming departure from the original plan of the [indistinct].
LINDSAY TANNER:
Look, I don't think it's appropriate for me to provide a running commentary on the decisions taken by the US administration with respect to the implementation of that plan.
There's obviously a lot of detailed issues that the administration has to pursue in dealing with those things and there of course is speculation today about other uses that that plan may be put to which I am sure you're aware of and which are - probably got some considerable significance for Australia.
I don't think it's appropriate for me to speculate or give commentary on those things. There's no question that these things are of considerable significance to Australia in a wider sense as part of the efforts globally by the major economies to get their activity ticking over at a faster rate and to get through the slowdown that's already well underway in those economies but I don't want to give a specific commentary on that particular point and don't think it's appropriate.
QUESTION:
Senator Sherry, is there a danger in being first out of the blocks on regulating credit agencies? I notice that the Financial Stability Forum has spoken about a different approach which would indeed require credit rating agencies to be to charge the users of their ratings rather than the co... the organisations being rated, the securities being rated. I mean, if the rest of the world heads down a different path aren't we, you know, don't we wind up with a mishmash of regulation.
NICK SHERRY:
Well, I'll make a couple of points. Firstly, that we've conducted a very, very through examination of these areas in Australia and we've done it expeditiously in the circumstances and the times the general financial uncertainty and the climate we live in.
There have actually been a wide range of different solutions offered and then in putting out the press release there's actually a very detailed analysis of these issues worldwide that ASIC and the Treasury have carried out.
For example, in Europe, I know one country has argued for a Government owned rating agency. I understand some countries in Europe have argued for a specific European or world ratings agency supervisory body. We've come to the conclusion that that is not the correct approach. That we need to ensure that we lift the standards in Australia.
The activity in Australia that needs supervising is being done consistently and in consultation with IOSCO. And I met with the head of IOSCO in Madrid earlier this year, who's interestingly an Australian, Mr Tanzer.
So, we've decided on what is the appropriate and better level of supervision for Australia and our circumstances. And, as I've indicated, we will be advancing this solution. But, clearly, the actions we've taken in Australia will be consistent with the general regulatory supervisory liaison that IOSCO is proposing. I believe it will be consistent with that approach.
QUESTION:
Senator, about the short selling bill, the Coalition would like to review it. They might want to hold public hearings, so they say.
NICK SHERRY:
I thought they weren't into reviews. [Laughter] I mean, we've done two reviews of this legislation. Firstly, the short selling legislation, there's been a gap has been around since 2001 - 2001. They had a few years to fix this and they didn't.
And we put out an initial consultation paper when the gap was identified and there are a wide range of submissions from all the interested parties.
Further consultation went over three or four months. I then released an exposure draft of the legislation and there's been another four or five weeks for those parties to present their views.
Now, we have a position where the regulator is likely to lift the temporary ban on covered short selling of non-financials, I think, next Wednesday, the nineteenth. So we need some certainty, because when - when those temporary bans are lifted, the certainty needs to be there around what will be the requirements for disclosure going forward. So we need that certainty.
So, look, if the Opposition wants to have another review, which they're not a fan of, if they want to have another review, so be it. But I would suggest that it's in the interests of the Australian markets, the integrity of the markets, that there is at least the certainty, legislatively, around how this process will occur when it is implemented.
QUESTION:
Senator Sherry, you're reportedly planning today a delay in - in the ASX competition decision, is that correct? Where are you with that ?
NICK SHERRY:
Well, there's no delay.
The issue will be examined and taken to Cabinet. I might just point out there are a significant set of issues, not the least these two matters, and a range of other matters before the Government in respect to the financial services sector. But there's no delay as such.
QUESTION:
Mr Tanner, are you using the secretary of the Treasury as a human shield as Andrew Robb [indistinct]?
LINDSAY TANNER:
If I were Mr Robb, I'd quietly fade out of the public gaze for a time, given his disgraceful performance over the last couple of days. The answer, of course, to both statements is, emphatically, no. The Secretary of the Treasury is a fine public servant who has public responsibilities and the Government has full confidence in him.
We've had a situation, both a few weeks ago and over the last couple of days, where we've had very serious accusations levelled against the Treasury Secretary. Very serious. First, that he was lying to the Government, then that he was lying to the Senate and, more recently, that he and the Treasury have literally cooked the books. These are extremely serious accusations. They're not the kind of thing that you throw around lightly in public life. And there has not been one shred of substantiation, one single piece of evidence advanced to support these accusations.
The suggestion that in some way the Government is using the Secretary of the Treasury for political purposes is laughable. In fact, the politicisation of the roles of our key regulators, whether it's the Secretary of the Treasury or the Governor of the Reserve Bank, is all coming from the Opposition that is desperate to get a headline, desperate to nobble the Government's efforts to tackle the flow-on consequences of the global financial crisis.
They've got a serious question they've got to answer here, is are they going to behave responsibly or are they going to undermine Australian and international confidence in what we believe is one of the best regulatory systems and with the most highly qualified and robust regulators in the world. That's a choice they've got to make and they'd better make it quickly.
QUESTION:
Mr Tanner, [indistinct] to answer yesterday this question, which is whether you would keep the assumption of factoring in interest rate cuts in Treasury's projections. Have you made a decision? And just in relation to Operation Sunlight. When will we - when will there be sunlight given to Operation Sunlight?
LINDSAY TANNER:
I'm expecting the - the latter, to deal with the second question first, I'm expecting that within the next month or so. There's a lot of very arcane detailed work that's involved here, because underneath the broad principles the question of the configuration of systems, the financial reporting systems within Government, and computer systems and all kinds of things, is all pretty complex. So I'm expecting within a month or so, on that second question.
On that first question, the Government hasn't made any specific decision about this matter and, I think, really, that's a matter for Treasury more so than for us, because they have the general task of producing the most robust possible set of forecasts. What we have been dealing with is unprecedented circumstances.
So, in previous times, no assumptions about changing interest rates have been built in, but it's extraordinary that you would have interest rates change so much over such a short period of time and, of course, it's completely extraordinary that you would have the global circumstances that we've had.
Therefore, I support and I accept the decision by Treasury to factor in market assessments of interest rates in its projections, because clearly to have not done so would have led to projections that were less reliable. Whether that's an appropriate thing to do into the medium term future I think is still a matter for consideration and I think it's really something that the Treasury is best advised to determine. It's not necessarily something that would be automatically appropriate in more normal circumstances. That's something that will be considered.
QUESTION:
Two questions. First on Operation Sunlight, and Senator Sherry's just made an virtue of the fact that he's had many [indistinct] disclosure periods for people to look at the various [indistinct] on short selling legislation. Why has this report been kept under wraps for [indistinct]? And are you going to be releasing it with a - with your decision? Is that the game plan (*)?
LINDSAY TANNER:
Yeah. My expectation would be that we would release the report with a formal government response, line by line and, of course, indications of specific decisions. And as I said, I would expect that will occur in the next month or so.
QUESTION:
And, secondly, one of the other things Dr Ken Henry said yesterday was that if there was a need for further stimulus reaction to be provided now, then was it something [audio cuts out] that requires cut backs in government spending or because of the state of the economy we require [indistinct]. As the Finance Minister, could you clarify what is actually the direction of government policy?
LINDSAY TANNER:
I certainly can clarify that, Tim. We, early on in office, made it clear that we intended to conduct a substantial razor gang exercise, an expenditure review exercise, the first stage of which would be a central component of the 2008 Budget.
That was critical to delivering savings of approximately $7.3 billion in the financial year we're currently in.
We also indicated we would have a second round, which was devoted to tackling issues that in most cases were slightly more complex or obscure that we were not confident could be dealt with quickly. So, some savings options can be scoped and determined one way or the other reasonably simply and quickly. Others are more complex. And so we separated the process into those two stages.
We've made it clear all the way through that the purpose of the second stage was not to add to surpluses, necessarily, not to change fiscal settings, whereas the first stage clearly was central to achievement of particular fiscal settings. The second stage was always about liberating more resources for higher priority purposes. That didn't rule out the prospect that improvements gained from the second stage would be used to alter the fiscal settings, but the focus has always been on getting better value for money.
Now, one of the challenges the Government now faces, of course, is that with much tighter fiscal conditions, the wide range of very important priorities that are all there queuing up for additional spending, something that I as Finance Minister am always more acutely conscious of than anybody else, will be competing in tougher circumstances.
So every dollar that we can save from inefficient government activity or low priority programs is a dollar that is available to be invested in something more important.
So there is no inherent contradiction within the Government's fiscal settings. This is a classic efficiency process, and it will inevitably continue all the way into the Budget process.
Given the circumstances that we've got, we can - clearly can't afford to drop our focus on these things, because the fiscal circumstances are now so much tighter than they were, you know, only several months ago.
QUESTION:
So that task is unaffected by the fiscal crisis?
LINDSAY TANNER:
Correct. It's unaffected by the question of fiscal stimulus, because while there is always a quantity issue about spending and revenue, there is a critical quality issue. And this is something I am personally very passionate about, because I don't want to see the Government wasting money on poor administration, on excessive spending, on low priority things, on too many programs bumping up against each other in the same space, when we are at the same time struggling to ensure that we can guarantee that pensioners in this country can get reasonable dignity and living standards. So we've got really important things to do. We've got really crucial priorities that we've got to find money for, and one of the key things that we have to do in order to do that is to maximise the efficiency and the quality of what we do across the board.
Now, that's a never ending task. It's a task that the previous government was not interested in, because revenue was so strong. They were not under any pressure. They were happy to let spending flow in all kinds of ways, and to just keep adding new programs and new things. We can't afford that approach any more. We've got to be much more rigorous. So that's what that process is about and I intend to keep it going.
FEMALE SPEAKER:
Last questions please.
QUESTION:
Senator Sherry, just a quick...
LINDSAY TANNER:
Sorry, yes, we do both have to go.
QUESTION:
one on short selling.
NICK SHERRY:
Yeah.
QUESTION:
There are folks in the market who think that the information on short sales should be held onto for a while, like 14 days or so...
NICK SHERRY:
Yes.
QUESTION:
as in the States.
NICK SHERRY:
Yes.
QUESTION:
Because basically, immediate disclosure forces investors to reveal their hand.
NICK SHERRY:
Yes.
QUESTION:
Now, can you just say why it's important to release it straight away?
NICK SHERRY:
Well, we haven't determined the final period, the time lapse between the gathering of the information and the release of that information. That hasn't been determined yet. There'll be consultation that will go in the regulation.
I'm well aware of the concern of organisations, funds managers, as represented by IFSA(*) for example, I'm well aware of those concerns and the need to strike a careful balance between information that is necessary for the markets, in terms of their efficient functioning and integrity and the need to ensure confidentiality of individual operators and the particular strategies they want to adopt.
I'm well aware of that concern and we will finalise that consultation very shortly. It's in the regulations and I do want to make sure it's done in a way that we do preserve that careful balance between information that is important to the market as a whole, and information that is important to keep confidential for the market operators.
LINDSAY TANNER:
Thanks folks, we've both got 11.15s, so thank you.
NICK SHERRY:
Thanks.