Mr GARETH EVANS (12:43 PM) —The recent and continuing events in Asia show as clearly as anything possibly could show us that good financial system management and regulation is absolutely essential to any country's economic health. Not only must the legal regulatory system be properly structured, but also the implementation of that legal regime has to be free from political interference and must be conducted in a transparent and accountable manner. Banks and deposit taking institutions have to run on a proper prudential basis. People have to be able to trust them.

Australia has enjoyed a very sound financial system since the end of the Great Depression. This fundamental soundness and strength has occurred under a number of different regulatory regimes over the decades. However, the consistent theme has been one of successful, effective, confidence building, confidence sustaining regulation. This does not mean that the appropriateness of specific regulatory regimes, or practices or rules do not vary over time; of course they do. But it is the key to a strong and healthy financial system to have an effective system in place that is appropriate to the times.

The fundamental issue before us in considering this large package of legislation is not whether to regulate our financial system—that is a given—but rather how we can reorganise to the extent necessary the current regulatory arrangements to better deliver the objectives of a sound and efficient financial system. Commercial and technological convergence has really become the order of the day in every advanced industrialised country, with banks, life insurance companies, general insurance, superannuation funds, credit unions and banking societies all doing a lot of the same sorts of things which previously had operated in different markets but now are involved in converging market environments.

In the context of that reality in the continuously evolving financial sector in Australia, the Wallis inquiry, or the financial system inquiry, was established to evaluate the results of financial deregulation that have occurred so far and to recommend a future regulatory structure for Australia's financial system. The package of 11 bills which we are dealing with now proposes to implement the recommendations of the Wallis inquiry.

I will address my remarks under several different headings reflecting the complexity of this—first of all, the structure of market regulation that is proposed by Wallis and now implemented by this legislation, and in that context I would like to say something about depositor protection. I also wish to talk about the implications of the legislation for the vexed problem of bank and major financial institution mergers, and would then like to address the consumer protection issues that are thrown up by this package.

So far as market regulation is concerned, the bills propose a complete reorganisation of the regulation of the entire financial sector. Key aspects are, first of all, the abolition of the existing regulatory arrangements which were quite industry specific. The Reserve Bank, the RBA, regulated banks; the Australian Securities Commission, or ASC, regulated companies; the ISC, or Insurance and Superannuation Commission, regulated insurance and superannuation entities; and we had an Australian Payments System Council regulating several aspects of the payments and banking systems related thereto.

Then we have got by this legislation the creation of two new regulatory bodies to take over these myriad functions: ASIC, or Australian Securities and Investments Commission; and the Australian Prudential Regulation Authority, or APRA. I had occasion the other day to welcome the appointment of the Deputy Governor of the Reserve Bank, Graeme Thompson, as the Chief Executive Officer of APRA. I say now it seems to us an excellent appointment reflecting the reality of the continuing connection between the new regulator and the former Reserve Bank and the necessity indeed for that connection to be very visibly maintained. The remaining element of the structural equation is the creation of a new statutory body, the Payments System Board, within the RBA but with statutory responsibilities for payment system matters.

ASIC is to be based on the old ASC. It will be the pre-eminent consumer protection and market integrity regulator. In addition to the corporate regulatory functions that it has inherited, ASIC will initially take on the consumer and market integrity functions for the insurance and superannuation sectors and some aspects of banking and the payments system. Eventually this regime will extend across the whole financial sector.

APRA, by contrast, will be responsible for prudential regulation—in essence, managing the financial health of all deposit-taking institutions: banks, building societies, credit unions, insurance companies and super funds. The single licensing and regulation approach that is involved here is expected to result in better and more consistent outcomes.

The new model of a single prudential regulator and a single market regulator, when it is finally fully implemented, will overcome a couple of fairly obvious weaknesses with the current arrangements. One is the split between the Commonwealth and state and territory regulator rules, with the Commonwealth hitherto being pretty much confined to banks and insurance but with the state and territory rules applying to building societies and credit unions, with differing restrictions and differing cost recovery regimes impacting on the competition potential between these various institutions. The other problem was the fragmented consumer protection regime where similar products were being overseen by different regulators with often different rules applying.

Against all that background of proposed change, I say very clearly at the outset that the opposition supports the general approach that has been adopted in the Wallis inquiry in its conclusions and accordingly in this legislation, which seems, so far as we have been able to tell in the time available, to implement without any particular glitches the intended acceptance by the government of those major Wallis recommendations. We do recognise the benefits that should flow from the new arrangements when they are fully implemented.

There are a number of issues raised in the proposed arrangements governing staffing of the new institutions. There are some questions that arise especially about the transfer of staff to APRA. Other issues may also arise in relation to staffing in respect of transfers to ASIC. The opposition is concerned to ensure that employees get a fair deal in the context of these institutional reforms, and this is one of the issues that we would like to see closely examined by the Senate committee to which we are proposing to refer this legislation in the normal course.

One of the key issues in the design of any prudential regulatory regime is obviously the question of depositor protection. Given its central importance for the savings of ordinary Australians, we have been concerned to look closely at what is proposed here to ensure that there is no drifting away from the kind of commitments that depositors need to their interests by the appropriate regulatory regime.

There has for a long time been a general assumption by a great many people in the community that bank deposits are specifically guaranteed to the last dollar by the Reserve Bank. That is and always has been an incorrect assumption. At best there is an implicit guarantee arising from the operation of sections contained in division 2 of part II of the Banking Act and section 86 of the Reserve Bank Act. But that implicit guarantee has never been legislatively explicit and certainly there has never been anything in the legislation that provides an absolute guarantee. What there has been is provisions enabling the ready intervention by the Reserve Bank in the affairs of banks that have been in difficulty in this respect with arrangements to ensure that they trade out of those difficulties, to the extent possible, and that in the event of a winding up the depositors do get preference over all other creditors.

That has worked in the past to the extent that the system really has not been put under test in terms of having final payouts to be made. Nonetheless, it was part of the Wallis inquiry's concern to ensure that, particularly in the context of a broader set of regulatory arrangements encompassing other deposit-taking institutions as well as the banks, the limitations on the existing depositor protection arrangements be well understood in the community.

They recommended that the system be overhauled, in effect, to do several things: firstly, to maintain unequivocally—and this is done in the legislation—the existing preference for bank depositors and to extend that to all other approved deposit-taking institutions. Secondly—and they seem to have done this in a way that does not cause us any particular difficulty, although this may be an issue that would deserve further attention in the Senate committee—they have sought to remove some of the language that does perhaps create a misleading impression that there is an absolute guarantee of a payout in the event of a bank or institutional collapse.

What the legislation also does in its application is, in effect, improve the capacity of the regulator to intervene quickly in cases of failure or potential failure of a deposit-taking institution, recognising that this, in practice, in the real world, is the most effective method of protecting depositors. As always, it is much better to get in first, before the horse has bolted, to ensure that you have got that close supervision and the capacity to steer an institution through a rocky period. That has always been part of the regime for the banks; it is now here for all of them in a way which is, on the face of it, quite well thought through.

The question always arises in this context about the desirability or otherwise of a system of deposit insurance and/or more formal guarantees for the protection of deposits. However, I think it is really a pretty compelling argument that the moral hazard and other kinds of risk associated with these sorts of arrangements are simply too large to ignore and that, on balance, it is preferable to go the other way. I think the disastrous case of the US savings and loans industry demonstrates pretty effectively just how such a system can in fact work against the very objectives that it attempts to meet.

So we generally accept the model that is proposed as the appropriate one to be implemented here. Of course here, as elsewhere, the key to the success of this type of arrangement is the proper resourcing of the regulator and ensuring that it is capable of competently discharging the functions vested in it. We will be continuing to watch very closely what happens when it comes to actual implementation in this respect.

The next issue that squarely arises under this legislation is the whole question of the policy applicable to bank mergers and other major financial institution mergers. The Financial Sector (Shareholdings) Bill 1998 , one of the package which is before us, proposes to standardise the rules applicable to significant shareholders in prudentially regulated financial institutions. The bill will subject all such institutions to a 15 per cent shareholding limit by any one person and that person's associates, or such higher percentage as the Treasurer may determine as being in the national interest. So you do have this residual executive discretion to determine what kind of concentrations will be permissible.

The operation of the current law is being standardised and streamlined across institutions, which will certainly assist major financial services groups in terms of their own administration. The law has been strengthened too, in some respects, so the Treasurer can declare a person to have practical control of an institution regardless of the actual shareholding and, indeed, require the person to relinquish that shareholding. All of these provisions in the legislative structure before us are considered by us to be, on the face of it, reasonable, and they are not opposed.

However, that is the legislation. What matters of course is the way all this works in executive practice, and I make clear that support for this new legislative regime should not signal Labor's support for any change to our basic approach to mergers of the major institutions.

We have always adopted a policy which would preclude the merger of any of the four banks: ANZ, NAB, Westpac and the Commonwealth. Moreover, we have taken in the past a strong view also that the two major life offices—AMP and National Mutual—should be regarded as of equivalent stature. So it is not just a four pillars policy but really a six pillars policy that we have had. We have taken the view, and continue to take the view, that such mergers are, on the face of it, not in the national interest and we are concerned about the implication of them occurring.

Certainly, so far as the major banks are concerned, Australia already has one of the most concentrated banking systems in the world. Further mergers, in our judgment, between the major banks would lead to even greater concentration without overwhelmingly obvious compensating advantages. A recent study by Professor Kevin Davis shows that only the Netherlands, Ukraine and Finland have more concentrated banking sectors than Australia does.

The decision of the government, announced at the time of its response to Wallis, to scrap the six pillars policy does create the prospect of a gargantuan new institution that would not only itself have a lot of market clout but also in fact put a great deal of pressure on further acquisitions and mergers between the other players. The six pillars policy, as it was known, which has now been abandoned by the government, probably needs to be a little bit rethought to the extent that you are no longer talking simply about six pillars, but perhaps nine or even more than that at the moment as a result of other mergers, acquisitions and regroupings that have in fact been occurring.

You do have a situation now, with the Citigroup tie-up with the Travellers group in the United States, which has got flow-through implications for Australia, of other major players emerging in the Australian financial sector in addition to the ones I have mentioned—the Colonial State Bank, which is the product of course of the merger between Colonial Mutual and the old State Bank of New South Wales, Suncorp-Metway in Queensland and St George, which has now absorbed the Advance Bank. All of these are pretty significant players in the scheme of things. None of the non-bank institutions have quite the same order of magnitude of market capitalisation as the more familiar four banks, but nonetheless they are very major players.

I simply want to say that, so far as all of those players are concerned, without adopting an approach of absolute prohibition in terms of our own policy approach, we will certainly look with a very narrow, beady and circumspect eye at any proposal for further concentration of any of the institutions that I have mentioned because of our anxiety about the anti-competitive implications of that. Certainly, so far as the big four banks are concerned, our position is maintained as one of very real concern about the downside risks there.

The Treasurer, Mr Costello, made it clear at the time of his announcement that the government had a kind of watching brief on this issue, that its position was going to be governed by its satisfaction on the question of how much competition was around, particularly in the small business sector. Recent developments, just last week with Westpac and now the Commonwealth Bank breaking some of the high interest rate barriers to small business loan access, seem to have given a new lease of life to speculation about the imminence of government approval for mergers. No doubt there is not going to be anything very exciting happening before the election, because this government is all too conscious of the very strong feeling in the community about the job loss and service loss that seem inevitably, irrevocably and endemically associated with merger activity of this kind, but I want to make it clear that the opposition is not persuaded by any of these developments that any fundamental conditions have changed, and our view would be one of resistance to any of the big four operating in this way.

One of the big problems in all of this is the way in which mergers in the past—quite apart from what the banks have been doing anyway individually to reduce their cost pressures—have had a devastating effect on the availab ility of employment and services, particularly in rural and regional Australia. In the past three years, the majors have closed more than 100 rural branches, and there are more than 600 communities across Australia that no longer have access to a financial institution. It really is the last straw when the last bank leaves town. I have seen it in communities, particularly in my home state of Victoria, where the Premier has closed country hospitals—12 of them gone since 1992—and shut down their local schools, 350 of them, and when the bank goes it really is the final blow to confidence. The banking committee in this parliament has been told that, when the bank branch closes, supermarket sales tend to drop 20 per cent and local firms battle to manage to keep enough cash to attract investment and they lose customers to the nearest banking town. Baring McIntosh has estimated that the merger of two major banks in Australia would wipe out 35,000 jobs. In our judgment, it is just in nobody's interest to allow further concentration and a further shrinking of banking services and banking jobs. The Treasurer should rule out that option, do so without weasel words and make a commitment which extends into the life of the next parliament.

Of course, if you are going to talk in terms of banking and what has been going on particularly in rural Australia, it is important to understand that, irrespective of merger activity, there has been a deterioration in the availability of major bank services to the bush. We sought to anticipate this problem when we were in government by, among other things, initiating a program of credit care which has fostered the development of new credit union services in country areas. Thirty-nine new credit unions have been set up in isolated areas as a result of that program. This program has been maintained by the present government—so far anyway—and I hope it will continue.

I do want to take this opportunity to add a reference to one further source of hope for rural communities in Australia that I have seen as a result of an initiative of a regional bank—the Bendigo Bank in rural Victoria. They are on a path towards establishing lower scale banking services in small towns that the majors have actually given up on. They are trying to develop a system of joint ventures with the local community. They are offering their banking licence, their infrastructure, their expertise, their cheque clearing, their training capacity and their name to small communities that want a banking service again. The idea is that the community in turn pays for the bricks and mortar—maybe the building which a major has just vacated or part of a newsagency, at the other end of the spectrum, or a council office or something of that kind—by raising shares among the local people. The shareholders thereby have a vested interest in the success of the venture; they share the profits.

The Bendigo Bank—to whom I have talked about this in recent times—believes there will be a tremendous incentive to bank locally if you can get that degree of local shareholder commitment to these new exercises and that it will halt the flight of capital and business to the bigger banking towns. Just a couple of weeks ago, two Victorian towns, Rupanyup and Minyip, signed up for the first pilot branches to be open 2½ days a week. A great majority of business owners who have been surveyed said that they are looking forward to transferring their business to those branches. Nhill, another Victorian town, looks like going down the same path. Bendigo Bank is negotiating with 30 other rural communities, and I hope this at least is one response to the crisis of rural banking that will actually make a difference.

Before I move on finally to consumer protection, one other structural point I want to mention about banks is the foreign ownership of the major banks. I just want to say clearly for the record that, while the Wallis report says there should be no special restrictions on foreign ownership of the major banks, and while that view has been broadly picked up by the Treasurer who has committed himself only to saying that it will not be open slather on foreign ownership, we believe that there should be a very firm prohibition against foreign takeovers of any of the four majors, and that remains our position.

Finally, on the consumer protection side of things—about which there is really quite a lot to say in the short time available—our concern, first of all, is that the proposed new regulatory institutional structure may give insufficient weight and effectiveness under the new ASIC badge to the kind of performance that we have come to expect from the ACCC in the past. In the absence of any details having been given by the government as to funding and staffing arrangements for ASIC and how many of the actual personnel are going to be taken over and how much of its capacity for effective action is going to be taken over as distinct from just the name, it is difficult to be confident about what will occur. The ACCC can boast an excellent track record in this area. They have taken on the banks when they have engaged in false and misleading advertising against the new mortgage originators. They have investigated collusion by the banks in lowering housing interest rates. They have played a major education role: for example, issuing a widespread publicity campaign on credit cards and their hidden traps. They have always acted quickly and with a degree of imagination. In particular, I think of that case where Bankwest was accused of running a disinformation campaign against the new non-bank lenders and their home loans. The ACCC jumped in quickly and, instead of seeking to have a fine imposed on the bank, required Bankwest to publish an honest document guiding consumers through the home loan maze.

While the ACCC will retain its powers under the Trade Practices Act and the prices surveillance legislation, nobody has any idea about how this is all going to work in practice. It will be up to the new organisations to work out some memorandum of understanding and up to the executive government to supervise all of this in a way that will be effective.

When it comes to everyday consumer issues like bank fees and charges, we are very concerned, particularly given the general attitude of this government, that consumers are going to be held out to dry. The Treasurer has been advocating for some time to simply let things rip in this respect, relying on `red-hot competition' to bring fees and charges down. The Wallis report gave him ample succour and nourishment in this respect, recommending that the banks be free to set their fees and charges to cover their costs with no government powers of suasion or discipline over them. Consumer power was supposed to do the job. But consumer power by itself, we found, did not work during our period in government and certainly is not working now. Even before Wallis, as housing interest rates fell and the income flow from that fell away and margins started contracting, the banks started in a big way raiding fees and charges.

By January 1997, as David Luff reported in a very interesting article in the Daily Telegraph of 15 January, banks were earning `billions of dollars through a raft of new fees and charges'—more than 200 of them, from account keeping fees to charges for overuse of ATMs, to new high cheque clearing fees, to hikes in charges for duplicate statements and EFTPOS on over-the-counter transactions, and so the list went on. One in every $3 earned by the banks, Luff reported, was now earned in fees and charges. Wallis simply allowed the banks to continue the raid. By November 1997, fees and charges had jumped 10 per cent in a year and the banks had grabbed an extra $617 million in fees and charges. In February of this year, the Financial Review reported that the banks had made $6.3 billion in fees and charges in the past 12 months.

Under the so-called `red-hot competition' that we are seeing at the moment, consumer power is not stopping fees spiralling upwards again. The Commonwealth Bank announced another new round of price hikes last November, with many of them hitting now. The Pensioners and Superannuants Association say that some of their members are paying an extra $13 a month in fees and charges. But the Commonwealth is actually at the most generous end. The NAB is increasing its fees from 1 May on everything from other-bank ATM withdrawals to overdrawn cheque accounts. Westpac is increasing audit fees to business customers by 50 per cent. ANZ is cutting the number of free over-the-counter transactions for the disadvantaged from four a month to two a month—a real cheese-paring exercise there. No wonder that a recent survey by the ACA—the consumers association—found that 80 per cent of bank customers believe that the federal government should regulate bank fees.

What is the Treasurer doing about this? He talks constantly about merely `jawboning' the banks into doing the right thing. That is as far as he will go. There is no talk from the present Treasurer or government about using the powers available to him under the Prices Surveillance Act and directing the ACCC—or its new body now, ASIC—to formally monitor bank fees and charges. He should recognise that what we are seeing here is a classic case of market failure, and the government should do something about it. There needs to be government intervention. There needs to be an adoption of the recommendations of the PSA, which, in 1995, said that fees and charges should be monitored for three years to provide regular public reports and consumer information on fees and allow government and consumers to check the progress made by the banks in restructuring their fees and charges to promote greater efficiency.

In August 1995 our former Treasurer, Ralph Willis, wrote to the banks and informed them that he would direct the PSA/ACCC to formally monitor fees and charges. In November, the new ACCC was directed to begin drafting terms of reference for formal monitoring but, after the election, the present Treasurer decided to ignore this recommendation, and all bank customers have—as I think I have now demonstrated—paid the price. The point that really needs to be emphasised is that it is the disadvantaged—the elderly, the geographically isolated, pensioners, students and low income earners—who have suffered most from this hands-off attitude. In 1995 we also demanded that the banks offer a cheap basic banking product to protect the disadvantaged, with at least one free over-the-counter transaction a week. The banks were given until early 1996 to introduce that new service and we indicated that, if they failed to deliver, we would look at regulation. By Christmas 1995, that had worked to the extent that all banks had introduced a basic banking product. What has happened is that this basic, no frills banking product for the disadvantaged is now quietly being whittled away bank by bank—from four free services a month to two free services and so on.

Jawboning did not achieve the breakthrough. It had to be more. It had to be the threat of actual action—first of all, formal monitoring and then, beyond that, the possibility of further more direct government intervention. The truth of the matter is that, unless governments accompany the kind of legislative structures which are here set out and which we have indicated support for with an appropriate commitment to genuinely getting out there and protecting the interests of not only the institutions but also their depositors and all those who are customers and participants in this financial situation, the legislation will not do the job that it needs to do. Legislation has to be accompanied by executive commitment and executive sympathy and understanding, particularly to those in our community who are less well able to cope for themselves against the kinds of disciplines and rigours imposed by the banks, who traditionally, along with the other financial institutions, have been notoriously insensitive to such people. (Time expired)