Introduction
Ladies and Gentlemen
I am delighted to have the opportunity to speak here today at the Asia-Pacific Risk and Insurance Association's fourth Annual Conference.
Organisations such as APRIA and the prestigious events they host play a vital role in building bridges across the financial sector. Forums such as these help cross the divide between academics and practitioners, industry and government and between the different countries in our diverse and vibrant region – the Asia-Pacific.
That the Asia-Pacific countries indeed comprise a region, not just geographically, but economically as well, has been brought home forcefully in the rollercoaster ride of the past few years.
The recent economic turmoil and subsequent strong rebound, particularly in the region's financial markets, has demonstrated both the opportunities and dangers afforded by the processes of integration commonly referred to as globalisation.
Freer trade and investment flows, driven in part by new technologies, have brought about real and substantial gains to the region.
But it has also tied our fates together like never before. Globalisation means that the health of our economies can be affected by the health of the economies of other nations.
While it is impossible to ignore these bonds drawing us together, we should also recognise that a diversity of experience continues to co-exist in the region.
One notable difference, and one which forms the backdrop for my speech today, is the very different experience of the Australian economy compared to many of our close neighbours during the Asian crisis.
In February of this year, the IMF released a report on Australia that highlighted the "extended period of non-inflationary growth and the remarkable resilience of the Australian economy in the face of the Asian crisis".
One of the underlying factors for Australia's strong performance was the capacity of our financial markets to maintain the stability necessary for them to perform their basic functions.
While a number of factors contributed to this welcome outcome, undoubtedly the key reasons lay with the Government's commitment to sound macroeconomic policies and on-going structural reforms.
It is this focus on continuing reform by the present Government that I wish to highlight today. In particular I would like to focus on the ongoing reforms undertaken by the Government in the financial services sector.
The Role of Regulatory Reform
Strong financial markets do not happen by themselves. They require a robust regulatory framework – something that cannot be developed overnight and without a great deal of effort.
Without this framework, as the recent Asian crisis forcefully showed, the financial sector can act as a point of vulnerability for the economy as a whole.
Indeed, one of the major lessons from the recent turmoil is the need for transparent, efficient and neutral government regulation of the financial sector.
This is the platform upon which dynamic, accessible and robust markets for financial products are built – a factor that is now clearly recognised in the region.
As Dr Richard Hu, the Singaporean Minister of Finance, recently noted, "it was apparent from the crisis that Asian economies needed stronger regulatory systems to create an orderly and robust market environment".
It has been a priority of the highest order for this Government since its election in 1996 to create a financial regulatory framework that meets these goals. To achieve this, the Government has undertaken sweeping and ongoing reforms to the regulatory arrangements of the financial sector.
These reforms have been instrumental in improving the global competitiveness of the Australian financial sector and its ability to attract investment, without compromising its stability, integrity and fairness.
The Australian Experience
While some of you are undoubtedly familiar with the thrust of Government reforms in the financial sector, in recognition of the diversity of my audience I will recap our major achievements to date.
And let me assure the audience, this Government's appetite for reform is far from sated!
Any recount of the Government's reforms must begin with the Wallis Report, which reported its findings to the Government in March 1997.
The recommendations of Wallis, of which almost all were accepted, have led to a virtual overhaul of Australia's financial regulatory framework.
It has not been easy, but the results clearly justify all the hard work. Indeed, the IMF has hailed these recent changes as "pathbreaking reforms which put Australia at the forefront of international practice".
Our regulatory approach has become the blueprint for governments not only in our region but in Europe as well. Howard Davies, head of the new British financial regulatory body, has recognised the Wallis Report as a source of inspiration for the recent overhaul of the UK's regulatory arrangements for the financial sector.
The ambitious goal of the Wallis proposals was to adopt a functional approach to regulation rather than a framework based on product or institutionally specific lines.
A significant change that facilitated this shift in the approach to regulation was the consolidation of financial sector regulators.
Two new agencies – the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) – now provide prudential regulation, consumer protection and market integrity regulation across all financial products.
Banks and other authorised deposit-taking institutions, managed funds, as well as life insurers and general insurers are all regulated by these overarching agencies, creating immediate synergies.
APRA – the prudential regulator – is harnessing these synergies to move towards the ultimate goal of harmonising the prudential arrangements across all the financial service industries it regulates.
The underlying philosophy of this approach is to treat like risks in a like manner, where appropriate and practicable, promoting competitive neutrality and preventing contrived regulatory arbitrage.
The latest example of this is APRA's current wide-ranging review of the prudential arrangements for general insurers.
Our life insurance regime is already considered one of the most sophisticated in the world and the review of the general insurance regime will likewise ensure it meets international best practice. A further plank in the Government's overhaul of financial system regulation falls under the banner of CLERP (or the Corporate Law Economic Reform Program).
The underlying objective of CLERP has been to ensure that both corporate regulation and financial services regulation more generally take- account of the impact of regulation on corporate decision making and market behaviour.
The first tranche of the CLERP reforms commenced earlier this year and resulted in fundamental changes to the Corporations Law in the areas of fundraising, takeovers, corporate governance and accounting standards.
The second tranche of reforms were released for public consultation in February of this year in the form of the Financial Services Reform Bill and focus specifically on the financial service industry.
These changes will result in an integrated regulatory framework covering a wide range of financial products, including securities, derivatives, general and life insurance, superannuation, deposit accounts and means of payment facilities.
It will apply to the activities of existing financial intermediaries such as insurance agents and brokers, securities advisers and dealers, and futures brokers, as well as any other person carrying on a financial services business.
The reforms which the Government has put in place under the CLERP Act, and the further CLERP initiatives contained in the Financial Services Reform Bill will put in place a flexible, technologically neutral and responsive regulatory framework. They will further assist the financial services industry to develop in a market that is being reshaped by technological developments, increasing globalisation and changing consumer requirements.
Australia as a global financial centre
The strength of the Australian financial sector during the Asian crisis and our path-breaking reforms have highlighted Australia's capacity to participate fully in the strong global growth in the financial services industry.
It is in this light that the Government launched the Centre for Global Financial Services, now known as Axiss, the objective of which is to enhance Australia's position as the regional provider of global financial services.
My esteemed colleague, the Minister for Financial Services and Regulation, the Hon Joe Hockey, has made this initiative a priority of the highest order.
In his role as 'Global Financial Services Ambassador', Minister Hockey has highlighted the unique credentials of Australia as a centre for global financial services in the Asia-Pacific time zone.
A key component to this strategy has been to heighten international awareness of these – at times unrecognised – benefits of doing business in Australia.
In particular, the Government has highlighted three key advantages Australia enjoys that provide substance to our ambitions to become a global financial centre.
- Australia's financial markets have developed naturally, providing a secure basis for investor opportunities. The markets are liquid, transparent and well run, and offer a wide range of sophisticated products.
- Australia's workforce is multilingual and highly educated.
- Finally, as I have stressed throughout this speech, Australia has a secure business environment, offering a sound and effectively regulated financial sector, world-class commercial infrastructure and political stability.
The Government's key role in promoting Australia as a global financial centre is to ensure the overall economic and regulatory framework continues to be of international best practice – a role we are amply fulfilling as I have outlined today.
And this is without referring to the most significant tax reform program in Australian history!
The implementation of the GST (goods and service tax), together with the progression of business tax reform in the context of the Ralph Review of Business Taxation, will further boost our global credentials as a place to do business.
The intense international competition for financial services business means, however, that Australia needs to pursue actively its role as a global financial centre.
An issue which I should touch on given I am in Western Australia is the recent High Court challenges to the constitutionality of the Corporations Law. The Federal Government has been urgently trying to resolve the issue with the State Governments and I would strongly urge particularly Western Australia and South Australia to come on board with the proposal to refer necessary powers to the Commonwealth to ensure that we maintain consistent and comprehensive regulation of our financial services industry on a national basis. Need I say more than without this we strongly jeopardise our position as a major financial centre.
The importance of reform for the insurance sector
I would like to end this speech by drawing on my earlier remarks and highlighting the importance of regulatory reform to the insurance industry.
Firstly, it must be emphasised that the forces bringing rapid change to financial markets, including insurance, mirror those that are transforming regulatory frameworks around the world.
It is necessary for businesses, like Governments, to adapt to these forces if they wish to prosper in an era of globalisation.
While the global insurance market is enormous, holding 34 per cent of all financial assets in the OECD area in 1996, it will need to adapt rapidly to this new and challenging environment.
For the insurance sector, like all financial service providers, the key transformations are consolidation and convergence. Companies must increasingly compete globally, especially in mature industries such as insurance.
And to compete globally, companies must be lean and efficient, while offering an expanding array of products to ever more discerning and demanding consumers.
To meet these new pressures, insurers have entered an unprecedented wave of merger and acquisition activity throughout the global insurance industry. While merger activity peaked in 1998, last year still ranked as one of the three biggest years ever for merger and acquisition activity.
Consolidation is not just taking place between insurers however. The barriers – both regulatory and technological - which once segmented the financial sector, are rapidly dissolving. Institutional differences between banks, insurers, fund managers and securities brokers are blurring, driven not least by rapid advances in IT and new financial products. While this activity is taking place in the market, Australia has started to adapt its regulatory framework to these pressures as demonstrated by the Wallis reforms and more recently the proposals in the Financial Services Reform Bill.
Conglomerates, such as allfinanze and bancassurance companies, are changing the face of the insurance market. Diversified financial service providers, offering an array of risk and financial management products, will increasingly become the norm, not the exception.
To realise the gains from these market transformations, financial service providers, including insurers, need to face the challenges in front of them in the knowledge that the regulatory framework provides flexibility and transparency, while providing a level playing field for all.
This is the vital facilitating role that Governments can play. We have reviewed our laws to remove unnecessary red tape and have carefully reformed our system so that business and consumers alike can reap the rewards of an efficient and flexible financial system.
The distortionary effects of ill-thought out, archaic or excessive regulation are just too costly in a world where markets react with great rapidity to developments, regulatory or otherwise.
Conclusion
The financial sector, including insurance, has a significant role in creating wealth and employment in the region. To fulfil this role, the region as a whole must work together to continue with the ongoing process of reform.
I'm sure this 4th Annual APRIA conference will provide a fruitful and stimulating environment to address these challenges.
Australia's reform experience shows it requires both time and effort. But the rewards for all are great.
Thank you for the opportunity to speak to you all today, and finally, for our overseas visitors, I hope you enjoy your visit to the beautiful city of Perth.