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Tuesday, 11 September 2012
Page: 10235


Mr ROBB (Goldstein) (18:07): We have just heard a contribution from the government, from the member for Robertson, who made some fairly disparaging remarks about my colleague as she opened her remarks. I do not think the member for Robertson, having listened to her now for a few minutes, is really one to judge what is riveting or not, on that performance. But I do say that we support this initiative. It is a good initiative. It is a good thing that small investors will be able to access government bonds through a retail facility. Again picking up the member for Robertson's rhetoric, I would not get too carried away. It is a good thing—I am not putting it down—but I do not know that it is one of the greatest financial reforms in the nation's history. It is not going to add great depth and liquidity to the Australian bond market. It is a good initiative. It is an important one, but let's not get carried away. There are further important steps that I think need to be considered in this regard.

The fact of the matter is that, as the member for Robertson has said, there is a cultural issue which seems to militate against investments in debt rather than in equity products. What we have found is that compared with other countries, despite having substantial superannuation funds, the proportion of those funds held in products which give an annuity or a fixed return is much, much lower than what is typically the case in retirement funds elsewhere in the world. Currently, out of the $1.3 trillion, about 16 per cent is in investments which give a fixed return. I think the US is next at about 30 or 35 per cent, but typically for the developed world we are talking about 45 to 50 per cent as the proportion of retirement fund assets invested in products which give a fixed return.

With many Australians having significant superannuation holdings, going through the global financial crisis and finding that the money put aside for their retirement was substantially diminished because of the preoccupation of so many of our super funds with equity products rather than a combination of equity and debt products, people have suffered accordingly. So there is a greater interest in, and there should be a greater interest in, doing whatever we can to encourage a greater portfolio spread amongst investments, including among self-managed funds.

The large super funds have been able to access government bonds and securities through the wholesale market. This initiative does not increase liquidity for banks or large insurance companies in their investment portfolios across fixed products. But self-managed funds, which are becoming increasingly attractive—I think they are now the biggest fund as a category within the range of superannuation fund organisations—have not been able to access wholesale funds. I think that perhaps the most important part of this initiative is that we will now find an opportunity for people running their self-managed funds to have access to a product which may return less but which has much greater safety, security and certainty about the return.

The other thing is that this initiative will not add new money or new liquidity in any great sense. The government debt is out there and is accessible now on the wholesale market to our large institutions. But we know that Australian companies are issuing more than $26 billion to global markets in corporate bonds, yet only about $6 billion was issued in the domestic market. A lot of that is to do with the complexity of issuing and often the difficulty of purchasing government securities compared with other products.

This may well lead and should lead to consideration of a broader retail corporate bond market, which may attract companies and some of that $26 billion, which would be extremely important. That would be a reform of great moment because it would potentially attract a significant part of that $26 billion, which is currently being placed overseas on the corporate bond markets, back to Australia. When you have issues such as Basel III and the increasing demands and restrictions, if you like, on our major banks and other financial institutions in terms of the capital base that they are increasingly required to hold, we do need to look very seriously at a range of products which will attract more capital and more diverse forms of capital into our financial market.

In this bill in particular, though, we have in front of us not an opportunity for the retail corporate bond market but an opportunity to reinstate a retail market for government bonds not dissimilar to that which existed some 20-odd years or 30 years ago.

There are distinctions, though, and they are important ones, in the way in which this has been structured, which again we support. The government has chosen a model of indirect beneficial ownership to facilitate the retail trade, which basically means that retail investors will not acquire legal ownership of the actual debt security; they will acquire a financial product—a depository interest, as it is called—which will be linked to the government security and linked to its performance. The product will provide the purchaser with a beneficial stake in the government securities. It is a neat way of providing a system where selling can be done through intermediaries and managed so that the clearing and settlement facilities for debt can be dealt with efficiently and without too great a cost. The current system, as it has stood, has not been equipped really to deal with settlement of trading directly to retail investors. Hopefully what we have before us will overcome that problem where the market has been inaccessible to retail investors, albeit that it is simply for government bonds in this case.

While this is a small step towards adding depth and liquidity—and access, more importantly—to the Australian bond market, there needs to be further clarity about the actual mechanics of this model on a couple of fronts. Firstly, there should be equalisation of tax treatment for income from equity investments and income from government securities. Currently, investors are able to receive a tax concession in the form of an imputation credit on dividend income received from equity investments, while interest income received from government securities is taxed at marginal tax rates when held by an individual. A tax incentive for income from equity investments creates a distortion in investment choice which will need to be addressed by the government with regard to the legislation we have before us.

Secondly, there needs to be an education process in order to inform retail investors. Again I state the importance of self-managed superannuation funds, where there is a large body of investors who could and should be considering these sorts of investments in many cases, to give greater certainty and to have a body of investments which are secure because they are government bonds. There needs to be an education process in order to foster the development of this market. It should be accompanied by measures which foster the promotion of a market in conjunction with the industry.

Finally, the arrangements for prospectus requirements will need to be reviewed. Currently, the government has exempted issuers of government security depository interest from having to provide investors with product disclosure statements, giving the AOFM sole responsibility for preparing disclosure documents for retail investors.

The other issue is an issue which was dealt with some years ago, when the previous government, the Howard government, found itself in a situation where it had no government debt. That was related to strong financial management. It is not a problem that confronts this government, which has record debt and rising—and all the states where there have been Labor governments are lumbering under masses of state government debt. We have gone from debt which, in net terms, was nearly zero to debt now approaching, in gross terms, half a trillion dollars. The issue that Peter Costello confronted, as to whether we should have the issue of government bonds at all, will not have to be to addressed again for a long time, I suspect. But it was resolved—I think importantly—that, given the complexity of the market, and all the range of investors these days, a government bond market, both wholesale and retail, is important and we do need to have government bonds available for those purposes, to provide that greater liquidity. As I said, that is not a problem that will confront this government. In fact, it will hand over at some stage—hopefully at the next election—to us.

Mr Shorten: Don't count your chickens!

Mr ROBB: I said that I hope that at the next election it will hand over to us. As my colleague said in this chamber just a few minutes ago, it seems always to be the case that Labor gets in, spends the money, creates a problem and then we are required to fix up the mess. Then, when we do, we get pilloried, as the Queensland government and the New South Wales government are getting pilloried on a daily basis in this House for trying to get the books in order, for trying to get some semblance of sound financial management back into government. No doubt we will confront the same problem.

Finally, I just want to make the observation that we should not stop with a government retail bond market. There is every good reason to look to a corporate retail bond market. It is grossly underdeveloped at the moment. It is extremely difficult, if not impossible, to really access. It has a concentration of issuers and relatively short maturities. The key to adding genuine depth and liquidity in debt markets is through the serious development of a corporate retail bond market. Once this bill is through and bedded down, all eyes should turn to that exercise.