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Tuesday, 11 September 2012
Page: 10227


Mr HOCKEY (North Sydney) (17:27): Some people say that it is very hard to get agreement in this place, but here I am, in the company of my colleagues, with two people in the public gallery to witness this moment: we are rising in support of the government's legislation to amend Commonwealth government securities legislation. The Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 seeks to establish a market for retail investors in Commonwealth government securities. The government has chosen to facilitate the trading of Commonwealth government securities to retail investors through an indirect beneficial ownership structure. The bill does this by making amendments to the Commonwealth Inscribed Stock Act 1911—which I am sure the people in the gallery have read!—in order to facilitate the trading of retail Commonwealth government securities on financial markets and to allow the Australian Office of Financial Management to carry out the administrative duties arising from the retail market.

The bill also amends the Corporations Act 2001—that was my bill. I introduced that bill into this place with the most significant referral of power from the states to the Commonwealth since income taxing powers. This amends the Corporations Act 2001 in order to ensure that investor protection measures and market integrity provisions apply to the retail CGS market.

The coalition welcomes the idea of opening up investment in Commonwealth securities to the retail market. It has many benefits. Investing in Commonwealth securities allows people to invest in the future of their country—you would hope—and to contribute in a direct sense to the building of the nation—that is, of course, if the debt is being used to build the nation. Unfortunately it has been used, in the main, to paper over the cracks of deficit budgets under Labor over the last four years.

Having Australian households investing in Commonwealth securities helps to finance the government's debt from domestic sources of capital and reduces reliance on overseas financing. This is particularly important at present, when around three-quarters of Commonwealth government securities on issue are held by offshore investors—in fact, it is probably more than that at the moment. Improving access to Commonwealth securities also facilitates a broadening of investment choices for the retail sector.

It is widely noted that Australian superannuation investments are overly weighted, arguably, towards equities when compared with retirement fund investments in other countries, such as the United Kingdom and the United States. An OECD analysis of retirement income systems shows that equities are by far the largest asset allocation for Australia—nearly 55 per cent, compared to the United States at 45 per cent and the United Kingdom at just 40 per cent. Treasury analysis has shown that domestic equities measured as a percentage of GDP for Australian super funds have risen from just over one per cent of GDP from 2003 to 2007 to just over three per cent of GDP from 2008 to 2011. Of course, there was a period in late 2008 and early 2009 when the equity capital markets raised $103 billion, essentially from superannuation funds, in lieu of rolling over debt or to add to the capital of existing businesses, and that in itself represented a substantial increase.

This year's Budget Paper No. 1 noted:

Since 2008 there has been a substantial shift in superannuation funds' asset acquisition away from foreign equities and debt securities towards domestic equities …

This overweighting to equity seems in part to reflect a lack of alternative investments, particularly in domestically issued, fixed-interest securities. The opening up of the Commonwealth securities market to retail investors, along with the development of an active and liquid secondary market, should help facilitate the development of investor interest in private-sector corporate securities. The long-term objective should be the development of active secondary markets and retail investments in a full range of private and public debt instruments.

Of course, Australian retail investors were once readily able to invest in Commonwealth securities through the mechanism of Australian savings bonds. These were available from 1976 until 1987. They were hugely popular because, particularly during that period, they were high yield and a safe investment which carried no price risk. What I mean by 'no price risk' is that they could be sold before maturity at face value on a month's notice and without penalty after a minimum holding period, no matter what happened to yields in the interim since the date of purchase. Despite their popularity, these ASBs were discontinued—in part because there was a very high administrative cost associated with running them and introducing them.

Under the legislation before us, the mechanism for retail investment will be different from that of the old ASBs. As stated previously, the government has chosen to facilitate the trading of Commonwealth government securities to retail investors through an indirect beneficial ownership structure. Under the model being put forward by the government, retail investors will not acquire the legal ownership of the government bond. Instead, they will purchase a financial product known as a depository interest, which is linked to the underlying Commonwealth government security. This is not quite the same as American depository receipts, but it is not totally different either. Forms of beneficial ownership are already available in Australia for other types of securities. There are two main types of depository interest currently traded on the Australian securities exchange. The first type is CHESS units of foreign securities—known as CUFS—which are issued by foreign entities in order to facilitate the training of their equity on the ASX. The second type is depository interest issued in respect of private sector debt instruments.

Under the government's proposal, the depository interest provides retail investors with beneficial ownership of the underlying Commonwealth government security. Retail investors will receive their periodic interest and principal payments from the proceeds paid by the government in the same way as they would have if they were the legal owner of the security. The deposit interest will be available in minimum units of $100. The depository interest will be tradeable through market makers appointed by the ASX. These market makers will charge a fee for their services. The coalition expects that competition between market makers will keep the fee to reasonable levels, provided that there is sufficient demand.

The coalition welcomes the opening—or rather the reopening—of the Commonwealth securities market to retail investors. It also welcomes the security of the product, because a bond issued by a corporation is of greater security than an equity. In the event of a company falling over, a bondholder usually ranks ahead of equity or shareholders, so corporate bonds generally are a more secure investment. But, in the retail space, one of the reasons that there is a drift towards shares over equities is that you can receive a fully franked dividend. This is so in a number of cases with a number of companies with a share, but you do not get the same beneficial tax treatment with a corporate bond. Having said that, obviously this does not apply to the Commonwealth government, because we do not have shareholders but constituents. The benefit of this is that in a retail market it effectively becomes a benchmark yield and, therefore, hopefully—this is one of the reasons we support this—it will start stimulating greater retail interest in the corporate bond market, which at the moment is very small.

The bill has given issuers of CGS depository interests exemption from the product disclosure statement requirements under the Corporations Act. This is a very good thing. Many product disclosure statements are unreadable. It is interesting: the government excludes itself from the product disclosure statements but expects everyone else to put them out. That really says it all about the red tape which this government has become rather famous for. It does not want to apply the red tape to itself, but all the issuers of bonds and everyone else out there—anyone who buys a financial product—has to have one of the convoluted product disclosure statements.

Mr Bowen interjecting

Mr HOCKEY: I introduced them, but they were never meant to butcher commercial activity in the way they have, with their extremely onerous requirements. In their place, the bill requires the Australian Office of Financial Management to issue disclosure documentation for all retail investors on the basis that this would be more efficient than having the nominee companies prepare and release the information. So let's give the government a rare tick. This is good; we are heading in the right direction.

The government have, on average, introduced 11 new regulations a day since they were elected—18,000 new regulations. Mr Deputy Speaker Murphy, you would be appalled at that. The government has introduced 18,000 new regulations since they were elected back in 2007. I think they have only abolished 86. They have introduced 18,000 regulations and they have abolished 86. That is outrageous, as I am sure you would know, Deputy Speaker.

Unlike the old Australian savings bonds, the new depository interests will not be redeemable for the price that we talked about that was paid. Their market value will vary in line with movements and yields. That will mean that the redemption value prior to maturity will be uncertain. They may be worth more than what was paid for them or they may be worthless. Retail investors need to understand that there is virtually no credit risk, although if these guys keep running the budget the way they are, you never know; but I am not going to suggest there is credit risk with the government. Although we did just see South Australia under Labor downgraded from AAA by the ratings agencies, which is hugely disappointing. Compare and contrast that with New South Wales and Queensland, which are working desperately to hold their current credit ratings—and this government criticises them for it, but that is by the by.

Mr Bowen: You support the education cuts?

Mr HOCKEY: You know what, we always have to repair the job when Labor gets in. We always have to do the hard yards.

The DEPUTY SPEAKER ( Mr Murphy ): The member for North Sydney should address his comments through the chair.

Mr HOCKEY: Well, the minister interjected, and I am just addressing the minister's comment. It is always up to us to do the heavy lifting, Mr Deputy Speaker. You would appreciate this. Labor is elected, they spend all the money and then we have to come in and fix the joint. That is exactly what is happening in Queensland, New South Wales and Victoria. Why do we have to climb the mountain every time? We saw the hypocrisy of the Treasurer today, when he was crying crocodile tears about job losses in Queensland, saying it was outrageous that there are job losses in Queensland, and his own budget papers show that he is sacking over 3,000 people here in Canberra.

Mr Laming: Oops!

Mr HOCKEY: Yes, crocodile tears—not a surprise from this government.

In order to facilitate a deep and liquid corporate bond market, there needs to be a sufficient volume of bonds on issue. In the wake of what we have just discussed, I want to issue a warning to this government that facilitating a greater pool of investors and a bigger supply of potential capital through the opening of the Commonwealth market to retail investors should not be used as an excuse to increase the overall level of government debt. This government is already at modern-time record levels of debt. If there were a debt Olympics, these guys would have just won gold. Since coming to power in 2007, they have increased the debt ceiling limit from $75 billion in 2008 to $200 billion in 2009 to $250 billion in 2011, and this year they say, 'We are going to run surpluses and start paying off the debt, but we need to increase our card limit to $300 billion.' How many of us would love to be able to go to the bank and say, 'We are going to increase our own credit card'? They are going to pay $12 billion a year in interest. That is 1½ national disability insurance schemes each year, or, to put it another way, that is the carbon tax and the mining tax and more each year just to pay the interest on the Labor Party debt. Well done, Labor!

In only 4½ short years the government has turned around the good ship of state from $70 billion of net assets to $143 billion of net debt. It is quite an achievement. I suspect people like Alan Bond would have gone to jail for that, but not these guys: they pat themselves on the back and tell each other they are doing a great job and how important it is to keep the ship of state on track.

In the budget handed down in May we saw the deficit for the last financial year double in only 12 months. They said: 'Don't worry. We are going to have a deficit of $22.6 billion. We are determined to contain that deficit, so that is why we are going to have a flood levy. We are going to impose a flood levy on Australians of $1.72 billion because we are so determined to keep the deficit at $22 billion and start paying off the debt.' Lo and behold, what happens? The deficit goes from $22 billion to $44 billion.

Lucky you had that flood levy. Gee, that was a great idea. Let's impose a flood levy, undermine consumer confidence, undermine business confidence. But it will all be okay, because we will maintain the state of the budget, and the budget deficit doubles. Well done, Labor. Who knows what the final budget outcomes will look like? We know what they are up to: they are freezing grants and shuffling money between years, desperate to get that ever elusive surplus. The problem is that they are leaving us with a structural problem that may well take a generation to fix, because what they are doing is betting on a mining boom—a mining boom that their own resources minister said has come to an end—which undeniably will have an impact on revenue.

There are a few issues here that need to be addressed. In order to foster that liquid and deep corporate bond market the government should think about the issue of equalisation of tax treatment between income from equity investments and income from debt. I am not saying in any way that we would reduce that but, if you want a liquid retail bond market, it is an issue that does need to be addressed. As I said, the after-tax yield on Commonwealth securities may not look all that attractive relative to the fully-franked returns on equities but, if there is a change of government, companies will be more profitable, the return on equities will improve and there will be less need to have government debt.

As it stands, investors are able to receive a tax concession in the form of franking credit, which I addressed a little bit earlier, and that is an incentive to go with equities over debt. What we saw in the May budget this year was the government abandon its mining-resource-rent-tax-funded initiative to offer a 50 per cent discount on interest income earned by households. The tax incentive in the form of a franking credit on equity investments compared to the tax treatment of interest income from CGS will impact the minds of some investors when deciding on their investment strategies. Without any policy initiatives to dress the equalisation of tax treatment for CGS, it is difficult to see how retail investors will react to the establishment of a new market. Further to this, the coalition also believes that an education process should be undertaken to inform retail investors of the steps the government has taken in order to foster development of the market. This should be accompanied by measures to promote the new market. Obviously, these initiatives should be undertaken in conjunction with industry.

Finally, I would like to use this opportunity to restate the coalition's commitment to a financial system inquiry. I have been calling for a root and branch review of the financial system for over three years. I even released draft terms of reference for such an inquiry. I am not saying those terms of reference are definitive. Obviously there are a number of issues that need to be addressed, but it is our policy to have a son of the Wallis financial system inquiry or a granddaughter of Campbell—given that we do not want to be sexist in any way. The Campbell inquiry was the first major inquiry into financial services system, initiated by John Howard. To his credit—I am feeling so magnanimous today—Paul Keating deregulated the banking system, provided licences to new entrants to the market. That was hugely important although a little rocky during the eighties with the free availability of credit, but it was a systemic change initiated by John Howard. The coalition in government initiated the Wallis inquiry of the financial system, which was hugely important in helping to inoculate us against the volatility that came with the global financial crisis.

The signature initiative to come out of Wallis—which I would suggest should not necessarily be revisited—was the three-pillars approach to financial system regulation. Having the Reserve Bank deal with the general economic issues, having a separate prudential regulator and having a corporate regulator together was a hugely important initiative. During the financial crisis, each of the three pillars was able to deal with the challenges and they were able to work together—unlike the Financial Services Authority in the UK—each addressing a different crisis riddled part of the global crisis. It meant that our resources were well deployed across the agencies and could deal with the challenges of that crisis.

As stated at the outset, the coalition will support the passage of the bill. I have outlined a number of initiatives for the Commonwealth to consider following this. We do want to see a deep and liquid corporate bond market. Government securities are important in setting a benchmark yield curve for the corporate bond market. As I said before, I would like to see longer-dated Commonwealth government issuance, which would help to create a benchmark yield curve for the market. I expect that will have to wait for a change of government, but we will watch with interest how this goes and we will support the bill in the House.