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Wednesday, 26 November 2008
Page: 11475


Mr PEARCE (12:00 PM) —I rise this morning to make some remarks on the Corporations Amendment (Short Selling) Bill 2008. The bill introduced by the government which is currently before the House represents some positive outcomes but also, regrettably, some dangerously negative outcomes. We in the opposition strongly support an appropriate disclosure regime and the resultant enhanced market integrity that goes with that. We support measures that enhance greater disclosure and transparency. The strength and the integrity of the Australian financial markets are of course of great importance not only to so-called ‘mum and dad’ investors but also to institutional investors and superannuation funds, to mention a few. It is of the utmost importance that disclosure that provides the basis for a strong and honest marketplace exists in this country. However, we will not support ambiguity and uncertainty, nor will we support a circumvention of proper parliamentary process.

Whilst supporting schedules 1 and 2—to which I will return shortly—the opposition will move to amend the bill to remove schedule 3. I will move this amendment during the consideration in detail stage of the debate. Schedule 3 is an empty vessel which vainly attempts to provide a legislative base for the disclosure of covered short sales. The matter at stake goes beyond the adequate regulation of the market. At the heart of this schedule is the principle of sound governance. This principle will be done great harm by the Rudd government’s poorly conceived and grossly inadequate attempt at legislation in schedule 3. It has become absolutely clear through our discussions with industry and other stakeholders, together with the evidence presented at the recent inquiry of the Senate Standing Committee on Economics, that there is enormous concern with the way in which this particular schedule has been constructed—that is, its immense lack of detail, clarity and substance. Make no mistake: schedule 3 is a dangerously lazy outline which threatens the very certainty and strength which our market relies heavily upon. After holding an extensive process of consultation, all the government has presented to the parliament is this inept schedule which will create more instability and uncertainty than the current status quo. The opposition wants the government to do the work that needs to be done and then come back to the parliament with a schedule in a new bill which has the detail and certainty required within it.

The opposition is in agreement with the government over the actions represented by schedules 1 and 2. Schedule 1 clarifies ASIC’s power in relation to short selling. ASIC is given the authority to regulate all aspects of short selling. Any confusion over which entity has regulatory oversight for short selling would be removed. We support this measure. Schedule 2 bans so-called naked short selling, which becomes the default position. I note that ASIC is left with a regulatory carve-out to allow naked short selling where it sees fit. It is my understanding that naked short selling represents less than two per cent of all short sales conducted in Australia. It therefore clarifies and provides certainty to the broader marketplace. These first two schedules are clearly positive measures. ASIC and the ASX have already been able to ban and regulate short selling through issued orders. They nonetheless deserve our support for the purposes of clarity.

I will now come to the reasons why the opposition intends to move an amendment to omit schedule 3 from the bill, the most important of which is that we want to ensure the marketplace has certainty and stability, something that this skeleton or, if you like, the bare bones schedule in the bill does not provide. One of the most ridiculous claims asserted by the government on this schedule is that it is a matter of urgency that this bill be quickly passed. ASIC and the ASX are able to continue regulating short selling indefinitely; moreover, schedule 3 of this bill does not come into operation until regulations are tabled in the parliament. The government itself has said that the regulations are yet to be drafted and yet to be consulted upon and will only appear some time in the future, most probably months away. Considering that the Treasury has indicated that it needs more time to consider the nature and the structure of regulation, there is absolutely no justification for running the media line and the media spin that this schedule in the bill should be rushed. Undue haste without proper attention to detail and substance, as the member for Maribyrnong would know, is not good law making and, frankly, is quite dangerous in this context—and he would know that as well.

The government has invented a deadline to appear to be doing something. Just because you say you are doing something does not mean that you are actually doing what is right or indeed what is good. Being decisive demands taking a decision to present a properly detailed bill for the parliament’s consideration. This should not be an unattainable goal, considering that the government have just conducted what they say has been an extensive consultation process. The most important aspect of this schedule is the procedure for the disclosure of covered short sales. Schedule 3 has a complete lack of detail in relation to how the disclosure requirements would actually work in practice. This means that the key issues and concerns for the industry stakeholders remain undetermined and unresolved. There are no legislative provisions on how disclosure should operate in terms of time, regularity and stock measure to be used. Most troubling is that there is neither framework nor principle espoused; therefore, there is no indication of how any regulation is to be approached. The lack of certainty is most concerning. The very point of having a parliament is that matters of national importance can be considered and debated in this place. The parliamentary legislative process provides the opportunity for interested stakeholders to scrutinise the proposed measures.

In relation to schedule 3, there is a complete lack of transparency which arises from the circumvention of the parliament. As the bill currently stands, there is no capacity for scrutiny and consultation in relation to schedule 3. If it were passed in the government’s proposed form, the government would be able to continue ignoring consultation with industry stakeholders and could simply table binding regulations in parliament, regardless of the consequences. Once again, parliamentary democracy suffers under the Rudd government. The government’s contempt for this place is unprecedented—

Government members interjecting—


Mr PEARCE —and I am pleased to hear that the members opposite agree.

There is also the government’s exposure draft, which was released in September during the now forgotten consultation period. Key industry groups, including the Investment and Financial Services Association, the Australian Financial Markets Association and the Securities and Derivatives Industry Association, do not agree with the government’s preferred option 2 in the exposure draft. There is significant opposition to the disclosure of covered short sales to other brokers as proposed in option 2. Industry advocates that positions should be disclosed to the ASX, as market operator, and not to other brokers, so as to protect commercial advantages and prevent price distortion. Key industry participants support the implementation of a permanent disclosure regime where the market participants—investors and fund managers—report their short sale positions directly to the market operator, the ASX, on a company-by-company basis. The information would then be published by the ASX on that basis. Once again, this position is contrary to the government’s selected option 2 in the exposure draft.

Industry largely has a preference for disclosure of positions to occur one to two weeks after the short sale, not on the following day as proposed by the government’s favoured option 2 in the exposure draft. Industry concerns include the proliferation of ‘copy-cat’ style behaviour, where speculators would derive great benefit from the publication of daily short-selling data. In addition, a next-day disclosure regime may expose commercially sensitive and active investment research to other participants, which could further distort the market. It has also been strongly argued to us that an exemption threshold for small traders should exist within the legislation. This would reduce unnecessary costs for small market participants. I also note that there are no legislative provisions for stock lending, despite stock lending being heavily featured in the now forgotten exposure draft.

Not only does industry have issue with schedule 3 but Treasury officials stated during the Senate Standing Committee on Economics hearing the other day that it was not ideal that the particulars on how the disclosure regime would actually operate are not invested in the main legislation. The Australian Financial Markets Association were one of the few industry groups—indeed, one of only two—that were allowed, that were actually given permission, to present to the Senate Standing Committee on Economics. This is despite many requests to appear before the committee. AFMA strongly asserted that the type of information that would be required for disclosure should be in the legislation, not left to regulation.


Mr Kerr —This is giving me a headache.


Mr PEARCE —The committee also heard from the Investment and Financial Services Association, who stated that regulation should exist only to fill in the detail and that the law itself should have the basic requirements within. IFSA held that such basic requirements must exist in order to provide direction and guidance to the detail. And I am sorry that the member for Denison is getting a headache, but he will have some empathy with the industry and the financial markets, because this bill will give them a headache.

Most damning, IFSA went on to state on the public record that the disclosure regime is the very structure which must be in the legislation for certainty’s sake. This issue of no detail being in the schedule is particularly highlighted when one refers to the government’s own explanatory memorandum. In the explanatory memorandum it says:

The amount of the compliance cost impact will be determined by the details to be prescribed through Regulations.  As such, it is not possible to quantify the costs until the Regulations are made.

So there you have it for all to see: this government, because it has not done the work required, is admitting openly that it has no idea of the cost implications because it has no idea what it wants to do in terms of the important—indeed, the incredibly important—implementation and practical details of this requirement.

One does have to ask the question: why has the government decided to present only a skeleton schedule, devoid of detail and substance, after it has had so much time to do the work and to get it right upfront in the legislation? Why would the government not want to detail the implementation requirements and details in the main legislation, thereby providing absolute certainty and clarity to the market? Clearly, the answers to these questions are because the government does not know what it wants to do, it has not done the work required and it simply just wants to say that it has done something for the sake of having said it has done something.

The participants in the market in this country want certainty. They do not want requirements to change at the whim of a government long on rhetoric but short on substance. If schedule 3 as it currently stands is not omitted, it will only cause instability in the marketplace, and I am sure the member for Maribyrnong does not want to create instability in the marketplace. The market needs certainty, not ambiguity. It would be negligent of any opposition to not highlight and draw attention to such an inept schedule. Again, the opposition wants the government to do the work that needs to be done to provide certainty and substance to the market and then present it to the parliament for consideration. Our amendment will allow the government to achieve the aims of schedules 1 and 2 as our amendment, if passed, will allow schedules 1 and 2 to become the bill. Our amendment also provides the government with yet another opportunity to get schedule 3 right, an opportunity to actually work out what it wants to do and to articulate this upfront in the main legislation and to represent it to the parliament for consideration.