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Wednesday, 2 November 2011
Page: 12540


Mr BUCHHOLZ (Wright) (17:26): I rise to speak on the Corporations (Fees) Amendment Bill 2011. I want to draw to the attention of the House that during the debate I will do my very best to highlight the opposition's concerns about the bill—even though we support it.

Mr Ripoll: Come on, give us the good stuff.

Mr BUCHHOLZ: If you stick around, you will hear the concerns of not only the opposition but also the peak bodies of the industry. The Australian Financial Markets Association and the Stockbrokers Association of Australia raised some concerns about this bill, which hopefully I will outline. But in saying that, the opposition does see merit in this bill and I will also speak to that.

This bill forms a legislative basis for the Australian Securities and Investments Commission to levy cost-recovery fees from participants of licensed financial markets. This marks a quite dramatic change from the current arrangements under which ASIC only levies fees from market operators, not from market participants. Prior to 2009 the supervisory responsibility was transferred from the ASX to ASIC. The transfer took effect in August 2010.

Previously, the supervision of the financial markets in Australia had been co-regulatory in nature, with financial market operators, such as the ASX and IMB Ltd, being responsible for supervising market participants and listed entities, while ASIC was responsible for ensuring that market operators met their statutory obligations. With Chi-X starting trading this week, we now have two exchanges operating in Australia. Sure, the volumes traded on Chi-X for the first week were symbolic, and the range of stocks traded was limited, but we are still talking around $4 million worth of shares changing hands. Tellingly, trading prices on the ASX fell almost immediately. That, ultimately, is what this bill was designed for.

On this side of the House we are big fans of competition within the markets. We believe that the government ought to encourage even more competition in the financial services market. Indeed, competition among financial markets is consistent with the approach recommended in 2009 in a report to government by the Australian Financial Centre Forum. However, these amendments mark a fairly significant change in the way ASIC recovers the costs of fulfilling its duties. As we know, if there is one thing that markets hate, it is uncertainty. Market participants deserve clarity from a government on how much these new fees will be and how they will be levied. Obviously, we feel it is vital that the new cost-recovery regime not be a burden on business. With Chi-X already having undergone a soft launch, the need for certainty is becoming increasingly urgent. The coalition agrees with the need for a single market supervisor; however, this supervisor should provide certainty for business, not uncertainty. We feel that the government would have done better to have had Treasury complete their consultation and release draft regulations outlining a final cost model and an assessment of its impact on market participants before bringing the legislation into this place for a final vote. And I stress that we would have loved to have seen the detail of the regulation before this bill was being put to a vote.

Instead what we have ended up with is a typically slapdash, 'suck it and see' approach. This bill was referred to the House Standing Committee on Economics, of which I am a member, back in September. At the time the coalition's dissenting report recommended:

… that the House of Representatives not pass the … Bill … until the House of Representatives has had an opportunity to also consider the regulations that give effect to the Bill.

Unsurprisingly, the government chose to push ahead regardless—in defiance, it must be said, of what was a completely logical and reasonable course of action. This is a decision the government will ultimately have to live with.

Stakeholders in the industry were generally supportive of the cost-recovery model in the legislation, but they are concerned that it will add to the existing layers of corporate legislation placed on business in Australia, particularly on stockbrokers. In its submission to the House of Representatives committee, the Australian Financial Markets Association noted that their principal concern was with the 'overall ad hoc nature of the cost recovery process across the financial system and the cumulative effect that a multiplicity of new regulation is having on the efficiency of Australia's financial markets'. They also went on to say:

New government regulation and charges that increase friction in conducting financial transactions affect how business views the competitive environment and the relative attractiveness of doing business in Australia compared to other jurisdictions.

The Stockbrokers Association of Australia provided a submission to the committee stating that the amendments would constitute:

… a new cost impost on stockbrokers, which has not been levied before. The proportion of the fees to be borne by brokers—

estimated at around 84 per cent—

and the total dollar amount are, in our submission, excessive and inequitable.

I repeat the point that the Australian Financial Markets Association and the Stockbrokers Association of Australia made. These two peak bodies that have jurisdiction over this bill raised considerable concern that the regulations are currently not on the table. There are currently 83 firms which will be classified as 'participants' under this legislation. On average each firm will be faced with a cost burden of around $310,000. On the face of it, that does not sound unreasonable. But the problem with averages is that they often hide the real story and, indeed, in this case the reality is that the larger brokers who process the lion's share of the turnover are likely to be faced with new fees of several million dollars a year. There may be flow-on costs to customers as a result of that, or there may not. Only time will tell. I would just like to say that I sincerely hope that the decrease in trading fees is not simply absorbed by increased commissions, leaving us in the position of having simply robbed Peter to pay Paul. Peter Stepek from the Stockbrokers Association put it this way:

If the government is intent on pursuing cost recovery, then so be it, but we would like to see a methodology that does not place brokers in an invidious position of having to shoulder fees of this level and possibly then act in ways which defeat government policy in other areas.

The Stockbrokers Association also suggested that fines raised through ASIC enforcement should be applied to the cost of the organisation's supervisory functions in order to reduce the amount that needs to be recovered from institutions through fees.

During committee hearings RBS Morgans raised its own concerns about the compliance burden placed on market participants as opposed to shadow brokers. It seems likely that the fee model of this legislation excludes shadow brokers, effectively placing them at a competitive advantage and rewarding them for being outside the tent.

There are pre-existing concerns about the role of shadow brokers in the Australian financial services sector as well. A recent review by the Australian Securities and Investments Commission found that one in three shadow brokers is already failing to meet the existing regulatory standards required by the Australian Financial services licence. For the benefit of the House, a shadow broker is an organisation that works as an agent underneath a principal operator. That review found that 12 out of 33 significant shadow brokers visited by the Australian Securities and Investments Commission had poor compliance processes—a poorly maintained breaches register, poor risk management, and the provision of inappropriate advice and products. In some instances, licences have been granted to individuals known to have been associated with catastrophic financial losses. Shadow broking operations have been involved in some of the most significant collapses of the GFC including Opes Prime, Lift Capital, Sonray and Chartwell, all of which went out of business owing hundreds and hundreds of millions of dollars.

The number of shadow brokers has increased dramatically in recent years with about 200 significant businesses and 650 in total. These firms basically piggyback their traders on the more highly regulated market participants like RBS Morgans, Macquarie and UBS, and use those market participants to execute, clear and settle client trade-offs on their behalf. The firms have to follow market integrity rules—rules that do not apply to shadow brokers—as well as fulfilling capital adequacy requirements. Current regulations allow the holders of nearly 5,000 Australian financial services licences to basically 'sublet' them to an unknown number of small firms who are then entitled to run financial planning or shadow broking businesses. In a very real sense these shadow broking firms are simply 'renting' their licences. The Sydney Morning Herald recently reported the case of one firm who was subletting its licence to 82 separate individuals and entities. It seems highly likely that this sector of the financial services industry will require significantly closer scrutiny in the near future.

Moving on, while the coalition supports the cost-recovery model contained in this bill in principle, we remain concerned that a great deal of the detail required to effect the objects of the bill will be contained in regulations that are yet to be drafted. It should be noted that, after the bill was introduced, Treasury issued a consultation paper to design an appropriate fee structure. We believe that the consultation should have occurred prior to the bill being introduced to the House. It should further be noted that we are not alone in this view. RBS Morgans are on the record as saying that the timing of the bill was 'unusual, given there was so much still to be settled'.

It might sound like I am being pedantic, but this has the potential to flare up into a real problem. If there is one thing we know about this government, it is that it is fundamentally incapable of getting the right deal. It does not matter if we are talking about pink batts, border protection, or live cattle exports: the 'suck it and see' mentality prevails and we frequently end up with all sorts of unintended consequences. So why, given their track record, would they insist on bringing the bill forward before working through the detail in the regulations?

What the opposition would like to see is appropriate checks and balances to ensure that fees will only be levied to the extent necessary to cover costs; effective governance and accountability arrangements put in place to ensure cost-recovery measures are contained over the long term; and, finally, an undertaking from the government to consider the cumulative effect that the multiplicity of new regulation is having on the efficiency of Australia's financial markets. To me, this would seem an entirely sensible course of action. Unfortunately, the government disagrees. For that reason, the responsibility for any adverse consequences of this legislation will be the government's and the government's alone. However, in saying that, we will not be opposing this bill.