Mr HOCKEY (Financial Services and Regulation) (8:59 PM) —The Financial Sector Reform (Amendments and Transitional Provisions) Bill (No. 1) 1999 and cognate bills represent the second stage of the Wallis financial reforms, which were initiated in response to the report of the financial system inquiry, chaired by Stan Wallis. As I noted in my second reading speech, the aim of the second stage is to transfer regulatory supervision for building societies, credit unions and friendly societies from the states and territories to the Commonwealth. This is fundamental reform that will provide a new regulatory system that is less cumbersome and duplicative than the state and territory financial institution system. It will enable the non-bank deposit taking sector, including building societies and credit unions, to provide a more effective source of competition for the banks in the retail market. They will operate under the same rules as banks and will be prudentially regulated by the Australian Prudential Regulation Authority, APRA, and regulated as companies by the Australian Securities and Investments Commission, ASIC. There will be a single regulatory framework for life insurance companies and friendly societies which also recognises the special features of friendly societies.

The opposition has expressed concern that the government's four pillars policy will be undermined by the Financial Sector (Transfers of Business) Bill 1999 . This is not so. The four pillars policy remains intact. APRA will, of course, take into account government policies when assessing applications. In addition, concerns have been expressed that decisions may be made which fail to take into account the operation of other acts such as the Financial Sector (Shareholdings) Act. In response, I note that subclause 43(4) of the transfers of business bill enables other acts to be prescribed by regulations to ensure their independent operation. Subclause 11(2) of the transfers of business bill provides that APRA must not approve a transfer of business if it would be contrary to the purposes of an act prescribed under the provisions mentioned in subclause 43(4).

The government intends to prescribe the following acts as a minimum under subclause 43(4) of the transfers of business bill. They are: the Trade Practices Act 1974, the Financial Sector (Shareholdings) Act 1998, the Insurance Acquisitions and Takeovers Act 1991, and the Foreign Acquisition and Takeovers Act 1995. I urge the Labor Party not to be sidetracked by this illusory factor which they have created in their own minds about four pillars. This bill provides APRA with the prudential supervision power to transfer businesses that are in financial distress. I will repeat that: this bill provides APRA, who has the prudential supervision of financial institutions, with the power to transfer businesses that are in financial distress and subject to all the points that I have made before. It deals explicitly with it. The Labor Party has a history with financial institutions that have been in distress. Given their history, given their record of dealing with banks, whether as a customer of a bank or as a shareholder in a bank, I urge the Labor Party not to stand between this very important bill and the prudential supervision of financial institutions.

I make one final point: these bills are intended to take effect from 1 July this year. We have the support of the credit unions, the friendly societies and the building societies for it to take effect from 1 July this year. We want it to come into effect as soon as possible. The states have all agreed—that is, the Liberal and Labor states and territories—with these bills. They want them to take effect as soon as possible. They want one regulatory regime for various parties. Unfortunately, the Labor Party stands in the way.

I want to take a moment to reflect on the lack of prudential supervision of financial institutions in the past. The House is surely aware that the state banks were not prudentially supervised by the RBA when they were operating, unless it was a voluntary reference. As far as I am aware, the state banks of South Australia, Victoria and New South Wales were not prudentially supervised by the RBA. The effect of that was to allow those financial institutions to run out of control. In the case of the State Bank of South Australia, it decided to build its loan book from around $4 billion to around $23 billion in a matter of five or six years. The net effect of that was to put enormous pressure on the bank and on its internal controls. There was very little supervision of the loan book.

At the same time, the State Bank of South Australia started up an arm called Beneficial Finance, an investment banking arm. Beneficial Finance was making loans that would make the hairs curl on any prudential supervisor. They were making loans right outside of their charter. The effect of that was that, when the great credit crunch that Paul Keating said we had to have came and interest rates shot up to 21 per cent, all these bad loans came home to roost.

As the South Australian Liberal Party said prior to the last election, the South Australian State Bank cost an estimated $13 billion to the people of South Australia. It effectively destroyed what had been the excellent financial record of South Australia up until the mid eighties. Operators like Tim Marcus Clarke were allowed to get away with blue murder by John Bannon. There was no prudential supervision of the state's financial institutions with the net effect being that the people of South Australia had to pick up the pieces of the Bannon-Marcus Clarke partnership. They are still paying for it and they will be paying for it for a generation.

The same lack of prudential supervision applied in Victoria. The State Bank of Victoria decided that it wanted to get into a more aggressive side of lending. Therefore, Tricontinental was set up. In my experience, and I have some intimate knowledge of this, Tricontinental took charge of horses as security for loans. When we went to go and find those horses, the security for multimillion dollar loans, I was advised, `The horses are in the local supermarket. If you go to the third row on the fourth shelf, you'll find a can of Pal dog food, and that's probably where the horse is.' That is because the horses were worth nothing to begin with. Tricontinental was using the savings of Victorians to take charge of horses that were barely performing and that were of no value.

So when it came to the great Keating credit crunch, what happened? All these bad loans came home to roost. It was a tragedy because the people of Victoria ended up paying for the bad lending tactics of the State Bank of Victoria and Tricontinental. The net effect was that Keating had to come and bail out the State Bank of Victoria. He said the Commonwealth Bank—he liked dealing with the Commonwealth Bank—would take the good loan book and they would leave the bad loan book with the government and the people of Victoria. In the case of the State Bank of New South Wales, I would like to think that I have some knowledge of this, but I will refer to Trevor Sykes's book, The Bold Riders. Trevor Sykes's book opens up with the classic example where the State Bank of New South Wales was proposing to lend money to Bond Brewing that in one loan was almost greater than the entire capital of the State Bank of New South Wales.

This is the great 1980s, that wonderful time when there was no prudential supervision of financial institutions. I think the opposition agrees with us—that is, we do not want to go back to the bad old days of the 1980s. We do not want to go back to the days when there was no prudential supervision of financial institutions. That is why governments stay out of owning financial institutions. That is why we have set up APRA under Wallis. APRA are going to supervise all financial institutions. That is why we specifically give them the power to transfer business activities within those financial institutions to another financial institution if that financial institution is in distress. I have dealt with that explicitly. I have cited the number of acts that will be prescribed, particularly the Trade Practices Act. Any bank mergers will require approval under the Trade Practices Act, specific approval.

Under those circumstances, we are not going to be sold off with a Labor Party searching for something to stand on. We are not going to be sold off on that. We are going to stick to our guns, because this side of the House believes in the proper prudential supervision of financial institutions. That side of the House opposes it at every point. We believe in the proper activities of financial institutions where people putting their money in banks, building societies, credit unions and friendly societies know that at the end of the day they have a very good chance of getting their money back and that it is not going to be lent on some stupid activity which state banks across Australia acted on in the 1980s. We are past those days.

This is the final step to the end of the 1980s. I would be severely distressed if the Labor Party decided to oppose the proper prudential supervision of financial institutions. You cannot hang your hat on this. You oppose us on everything we do—tax reform, youth wages, Telstra, industrial relations reform, everything. Now you are going to oppose us on this—Wallis reforms, reforms that have been lauded by the International Monetary Fund as being world path breaking reforms, regulatory reforms and prudential supervision that are the envy of Asia, our nearest neighbours. In this case, the Asian region wishes it had regulatory reform like this and prudential supervision like this. We are taking a very strong stand on it. We are leaders in the region and are regarded as leaders in the world in prudential supervision. We will continue to push ahead with these reforms, notwithstanding the obstruction of the Labor Party at every point.

Question put:

That the words proposed to be omitted (Mr Crean's amendment) stand part of the question.

The House divided. [9.17 p.m.]

(Mr Deputy Speaker—Mr F.W. Mossfield)

Ayes . . . . . . . . . . . . . . . . 70

Noes . . . . . . . . . . . . . . . . 61

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Majority . . . . . . . . . . . . 9

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Question so resolved in the affirmative.

Original question resolved in the affirmative.

Bill read a second time.

Message from the Governor-General recommending appropriation announced.