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Economics Legislation Committee

LOVE, Mr David, General Counsel, Australian Financial Markets Association


CHAIR: Welcome, and thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I advise witnesses that answers to questions on notice are to be returned by Friday 20 November. I now invite you to make an opening statement and then we will ask you some questions.

Mr Love : I welcome very much the opportunity to address the committee on this important piece of legislation which is of considerable interest to our membership. The Australian Financial Markets Association is a member driven and policy focused industry body that represents participants in Australia's financial markets and providers of financial services. AFMA's membership reflects the spectrum of industry participants, including banks, corporate advisers, stockbrokers, dealers, marketmakers, market infrastructure providers and treasury corporations. Particularly in relation to this legislation, we represent the institutions that enable foreign investment to occur. I note that, given the nature of this legislation and its definitions, the term 'foreigners' is very broad because it depends on the shareholdings that companies have. Many institutions in our membership that would be thought of as quintessentially Australian, such as the major Australian banks, because of their foreign shareholdings, are actually foreign persons for the purposes of this legislation and acting as intermediaries in it.

AFMA is supportive of the need to protect the national interest from potential threats and recognises the importance of the policy objectives behind these changes. However, it is also important that the government achieves an appropriate balance between national security considerations and ensuring that Australia remains an attractive location for foreign investment. We note that foreign investment will be the key to both Australia's recovery from the severe economic impact of COVID-19 and international competitiveness going forward.

In relation to this legislation, even though there are many aspects to it in regard to direct investment, our focus, because of who we represent, is particularly on intermediary financing rather than, as I said, the broader issues around the impacts, which are very wide-ranging, on direct investors. Generally, the wording of the legislation, to us, is not in contention here. Our focus has been much more on the implementation side of this legislation and the regulations that are associated with it that have been separately consulted on.

The explanatory memorandum to the bill states that the government will narrow the scope of the moneylending exemption—and this is really where we are focused today in our testimony—so that it does not apply when foreign moneylenders are obtaining an interest in a sensitive national security business or land under the moneylending agreement. While this change to the moneylending exemption will be set out in the Foreign Acquisitions and Takeovers Regulation, AFMA seeks to highlight that a broadly drafted change to the exemption will have a constraining impact on economic activity if not properly handled in a practical way in its implementation by FIRB.

We were rather taken aback in September by the consultation—a very short consultation period of two weeks—regarding changes to the moneylending exemption under section 27 of the legislation, which will require foreign persons who are prospective lenders to seek approval from FIRB. Prior to taking security interests for the purposes of the moneylending agreements where the interest is related to national security business assets or lands or other matters, it would appear from the way things were worded that you would need prior approval to financing the acquisition by another person if the content of the secured assets were national security business assets. What we are talking about in this case, to be quite clear, is contingent interests. If you are lending money or if you are issuing bonds which are secured by national security business assets, it raises the question of whether or not you would need prior approval. This was not clear in the way the legislation and the draft regulations were worded. We understand that national security business will be defined in the regulations, as we have just heard from the previous testimony. It's clear it will cover a great range of key infrastructure that is commonly financed through project finance on a secured basis, including, for example, gas pipelines, ports, transmission lines and telecommunication infrastructure.

We noted with interest that the explanatory memorandum indicates an estimated increase of two applications to be received by FIRB as a result of the changes to the exemption, which surprised us, given the broad capture we believed it might have.

Senator O'NEILL: Sorry, I lost a contact with what you were saying there. Could you go back to the beginning of that little section?

Mr Love : During the consultation period we were looking at the moneylending exemption that has been removed here. We are concerned that there is a possibility that if you have a contingent interest—that is, if you take security over national security business assets if you are a group of lenders, or if you are issuing debt over it and you are acting for the debt holders, you would have to seek prior approval through the FIRB process. It was not clear if you would have to seek prior approval on a contingent interest.

Senator O'NEILL: Thank you.

Mr Love : There has been subsequent discussion with Treasury the responsible ministers which may indicate that that was not the intention of the Treasury. We are still unclear about that. I suppose what we are saying is that if you had to seek prior approval if you are a lender and you are taking such an interest, that is an extraordinarily difficult situation to put the financial institutions into, given the amount of participation they have in a very broad range of activities. So we are concerned, particularly around this, that it would introduce impractical prior approval requirements there.

The real difficulty about this—we are talking about the regulations and not the legislation itself—is that we were only given a very short two-week period to actually have a look at all of this and try to work it out. I can assure you that there was considerable concern from all the major financial institutions in this country—as I said, not only people you would think of as foreign persons or foreign banks but also many of the big major Australian financial institutions—about how this would all work in practice. What we were particularly disappointed in, I suppose, was that, given the response of these changes, there had not been significant prior consultation with the industry about the removal of the moneylending exemption, which was originally put in place for very good reasons in the current legislation and the way it currently works.

I think what we now have said to Treasury is that we hope we can find a workable way forward. In fact, this is the key area we are seeking in our testimony—for the committee itself to give direction to Treasury that it needs to carefully look at the implementation and talk in much more depth with the finance industry about how this is to work in practice, because the red tape burden is absolutely enormous. The costs that may be associated with having to go through these approval processes would add a lot of burden to the industry if that were to be the case. We hope that it is not the case, that we have misapprehended the intentions, but I don't think there has been any clear indication from the government, or the Treasury in particular, about exactly how this is to work. This is a very undeveloped part of the whole process.

More importantly, we've got to look at the resourcing of FIRB too, and, Senator O'Neill, you've already raised the question about the resourcing of FIRB to ensure it is able to handle the volume of work that is likely to be generated. I will stop there. I'd just emphasise that, for the areas we're dealing with—and we're talking about an implementation that's going to occur on 1 January 2021—there has been no prior preparation at all, nor any talk of a transition period, for how this is done and how you'll go about the process of crystallising if you have to enforce an interest in the matter. So there's a plethora of issues that I don't expect the committee to go to in technical detail, but we feel that a lot more work needs to be done on this legislation, particularly on the regulations that will implement it. I'll stop my statement there.

CHAIR: Thank you very much for that; I really appreciate it. I'll kick off with one question, and then we'll go to Senator O'Neill. Can you give the committee a practical example of the kind of transaction that you fear would be captured under the current regime, or delayed under the current regime?

Mr Love : We are concerned about syndicated lending, and we put some examples of this to Treasury. This is the common way that lending occurs. When we're talking about national infrastructure matters, like gas pipelines and these types of things, we're talking hundreds of millions of dollars. Normally, the primary vehicle for the initial getting the project going is to finance it through lending. This is done through syndicated lending, where a group of banks come together.

If you look at the legislation, it's unclear at the moment whether or not you would have to approach FIRB to get prior approval. Normally you appoint a security holder for the syndicate, the syndicate security holder, to hold those secured assets in the event that you need to enforce your interest, if they default on their payments to the syndicate banks. You would then have to go through an approval process there. A discussion about whether or not it would only result where you actually needed to crystallise your interest, in the sense that the borrower had defaulted—we're talking about the direct investor here—whether or not the investor itself defaults, and how you would go about enforcing that enforcement process—whether or not you might need to approach FIRB at that point, which would be a better outcome, certainly a much less impactful outcome—might be, hopefully, a way forward on these matters.

I also note that it is very common, once you have a project well underway and you have the initial financing all in place, to, after a period, refinance the transaction through debt issuance by the investor themselves. That would be intermediated, once again, through banks. The processes around the secured asset and dealing with that sort of situation need to be clarified and clearly understood.

There is a lot of machinery and technical detail in relation to this. This is the bread and butter of the finance industry, with the way it works. There's an enormous amount of legal complexity in ensuring that you are able to secure your assets in a way that you can enforce them in the event of defaults, and there is crossover with other legislation, such as the Personal Properties Securities Register. We have the sense at the moment that while FIRB is very clearly focused on the national security aspects of this legislation—and we heard from Mr Jennings's testimony about where that's going—there has been very little thought and preparation on the investment side of this legislation and how it all works in practice.

Senator O'NEILL: I think we're at the heart of it. What's the big rush with the legislation? I understand the pressing concerns of the nation around national security. COVID's made everybody much more aware of how interconnected we are. But, Mr Love, by comparison to other pieces of legislation I'm sure you've had interactions with, is this an unnecessarily rushed experience of very complex legislation that has significant impact on the work that the entities that you represent here will need to engage?

Mr Love : I think I would summarise and say there is quite a bit of legislation being rushed through at the moment. There's a lot of work on the whole Hayne royal commission recommendations and very much things that we as an association are involved with, which are also on a reasonably fast track. But the proposals in this legislation, in a way, especially because they came up during the COVID-19 period, did catch our industry by surprise. As I said, we might have expected this, given that issues of how to protect these things are of a very longstanding nature and just about every other country that we deal with has them. I was talking with our UK counterparts recently about similar matters and they said: 'We've had all such legislation in place. It's not terribly surprising. It all works reasonably well.' I was finding out how it worked in the United Kingdom, for example, as a comparison point. It's unsurprising, therefore, that Australia needs to improve its national security legislation for all the good reasons we hear from our national security friends here to secure our national interests. But these things are very complex. You're dealing in very complex ecosystems which currently exist here.

Senator O'NEILL: Do you think that explains why there are some parts of this in legislation but huge amounts left to regulation and the discretion of the Treasurer and a lot of that is yet ill defined and so it's kind of half legislation and half, 'We'll make it up as we go'?

Mr Love : That's quite a common approach to legislation—

Senator O'NEILL: Under this government?

Mr Love : No. That's under 20 years of recent governments. I include all sides of politics in this. It is a criticism that we have that general ideas are put in place in the legislation and not enough detail and guidance is given to the particular regulators and administrative bodies that are tasked with putting it in place and too much is left to, basically, administrative discretion and to the rule-makers themselves. They're given a wide fiat to make rules up as they come along.

Senator O'NEILL: Are you talking about the Treasury department and in particular the staff that make up the Foreign Investment Review Board part of that?

Mr Love : Yes. I'm a previous senior Treasury official, so I have a reasonable level of understanding of how all that machinery works within there. FIRB traditionally has been, as you've already noted, a fairly underresourced area with a reasonable level of staff through-put and a need to rely, as we've previously heard—

Senator O'NEILL: Mr Love, can I invite you, as I invited Mr Jennings, to put forward, given your experience in Treasury, at least a preliminary outline of what you think it would take to properly staff Treasury to do the job that your sector, which is pretty much the entire banking sector and financial service providers, would need. Can I ask you what is probably an uncomfortable question. What is the ill, what is the wrong, that the government or Treasury officials are trying to fix by putting this in? Is it as simple as somebody's had a look and said: 'Alright, we've got our transmission lines for electricity. That matters to pretty much all of us. That is a matter of national security'? If a foreign entity has a call on money that isn't paid to them and the asset that they have is our transmission line, does it matter that that foreign entity might be hostile? Is that the ill that this part of the legislation is trying to overcome on behalf of the Australian people?

Mr Love : I believe it's articulated in the explanatory memorandum that there are remote possibilities of mechanisms that could be found as so-called loopholes that you could use to try to do these things if you had evil intent, I suppose, against Australia. Those are the fears. I'm not a national security expert; I'm not going to give an opinion on what is the reality there.

Senator O'NEILL: But that's the reason that this legislation is being advanced. The thing that you're arguing against today is 'please don't make us get approval for lending before we give it' and 'please don't make us expose all of the foreign entities that are engaged in providing finance to Australia because it will be a red-tape nightmare'. I hear what you're saying and I understand the additional cost that brings to business, but the reality is that that risk is what is being mitigated in this legislation, isn't it?

Mr Love : From the industry's point of view, we would see that as an extremely remote risk. It's a theoretical one, we acknowledge, but an extremely remote one and certainly not the intention that we would see with most financial intermediaries in this process. But there are ways to deal with those things. You could have different processes involved with, basically, the general certification of financial institutions which, as I said, are doing this on a very regular basis.

Senator O'NEILL: So something like Senator Brockman's suggestion about favoured nations that are long-established liberal democracies would present less risk on a risk profile?

Mr Love : It's a very difficult thing to look at financial institutions in the sense of nations, in that sense. Most financial institutions have fairly broad based shareholdings these days if they're listed globally. You can think of the US or European firms or even from other countries such as China these days where they are listed entities. Their shareholdings can be very, very dispersed, so just focusing purely on where, nominally, an institution has its home jurisdiction, I don't know is necessarily the answer. As I've said, even what we would think of as major Australian financial institutions can be foreign persons for the purposes of this legislation.

Senator O'NEILL: So does it need to be a bespoke assessment of each application?

Mr Love : We're talking about financial institutions that engage in a process on a regular basis; they are lending to many people. As we are hearing, the possibility that national security business infrastructure could actually be a very, very wide theme if we're talking about and hearing about zero thresholds and those sorts of things. You're talking about a constant, about every sort of transaction there. It's better to think of the possibility of looking at financial institutions, looking at their business, what they are doing, who they're owned by, on a regular basis maybe, on a periodic basis, to look at their fitness to participate in syndication or other intermediation in relation to those fundraisings. So you're saying that that financial institution has gone through a process once maybe for a period of several years of being looked at, of being considered whether or not it presents national security threats. If they get a clean bill of health, then they can participate, basically, and have a certification that says they can participate. These are simple processes.

Senator O'NEILL: Have you offered those models to Treasury? Or was the consultation too short to allow you to proceed?

Mr Love : Those ideas have been floated with Treasury.

Senator O'NEILL: Does the current draft address your concerns?

Mr Love : The regulations that we saw, no. The ones that were consulted on in September, late September, no; that is what's caused us maximum concern now.

Senator O'NEILL: Could you provide in writing for the committee what your suggestions are and what they would seek to remedy?

Mr Love : Yes. We are assured of the goodwill of Treasury to look through and work on these things and we would like a sort of dialogue with the rest of industry, because we're not the only representatives. So rather than come forward with fixed proposals, Treasury would be encouraged to have a dialogue with the financing industry in the broader sense.

Senator O'NEILL: Are you suggesting we should question whether consultation has happened or whether advising the industry has happened? They're two different things, aren't they?

Mr Love : In our view, it has been inadequate.

Senator O'NEILL: Clearly, you're concerned that some of the detail about how this is going to work is very unclear, particularly as it's going to be determined via regulation. Given your concerns at this point of time—and I'm sure your sense of national pride in making sure that Australia remains a safe haven, which is how we feel about it right now in this COVID-19 year—do you think this bill, as it's currently drafted, will have a negative impact on foreign investment? Do you have concerns about sovereign risk—as it's commonly understood, not Mr Jennings's definition?

Mr Love : There are concerns around sovereign risk at this stage. The call-in powers and the 10-year period that you can have call-in powers have certainly caused comment in the industry. We haven't, ourselves, specifically gone in that direction, and we understand there can be a range of debate there. As I said in my opening comments, we are supportive of the legislation itself, which is what you're tasked to look at. We're not saying that that necessarily should be held up. What we are really talking about is the implementation and transition and, basically, how the regulations will work underneath this legislation, particularly with regard to the money-lending exemption.

Senator O'NEILL: Can I ask on more question, Chair? Do we have enough time?

CHAIR: Yes. This will need to be the last one.

Senator O'NEILL: There'll be questions on notice, because I certainly haven't had a chance to ask about the review mechanisms and sunset clauses et cetera. The bill is also proposing to amend the definition of significant action, so a change of control is not required for certain acquisitions to be called in for consideration, to capture passive increases in holdings of securities, amend definition of Australian business to include state and territory government businesses, and expand tracing rules to unincorporated limited partnerships. And it makes a range of amendments to the decision period, orders prohibiting proposals and greater information sharing domestically and internationally. There's quite a lot there. Do you have a view about any of those particular elements, Mr Love? There is significant change embedded in what's proposed—that we know about.

Mr Love : AFMA itself—because, as I said, we are dependent on the member feedback that we receive—has not gone into detail on those particular issues at this stage. We are aware—

Senator O'NEILL: I'm sure it's not because you're not interested, Mr Love. Is it simply because this is a very rushed piece of complex legislation that hasn't been given sufficient scrutiny?

Mr Love : Certainly attempting to go through all the implications of how this works from a direct investment point of view—and your questions go to the actual direct investors, as opposed to the intermediaries I'm particularly speaking on behalf of today—I am very aware of comments by our friends at the Business Council and the Law Council regarding the sorts of practical issues associated with these matters, but we have not sought to provide expert views on these matters at this stage, because that does take considerably more thought and it could take quite a bit more time.

Senator O'NEILL: You're aware the committee has to report by the 26th of this month. It looks like the government will want to push this piece of legislation through before Christmas. I'm sure it will make a nice announcement. I wonder what it's going to be like living with it, though.

Mr Love : Well, our difficulty is that the legislation, from an implementation point of view, starts on 1 January.

Senator O'NEILL: Are you ready for that?

Mr Love : Our members are not ready for that. We've received clear views from our members that they are not ready.

Senator O'NEILL: If they're not ready, what does it mean?

Mr Love : They simply can't conduct transactions or act on behalf of their clients at this stage. They'll have to delay matters until systems and procedures are put in place. Our members are in financial institutions that absolutely must comply and avoid all risk with regard to breaching any part of the law. That's the highest priority, I think, for financial institutions in this day and age.

Senator O'NEILL: Thank you very much.