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Thursday, 16 October 2008
Page: 6167


Senator COONAN (10:10 AM) —These bills, the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008, the Financial Claims Scheme (ADIs) Levy Bill 2008 and the Financial Claims Scheme (General Insurers) Levy Bill 2008, have been brought before us in order to establish a financial claims scheme to provide an unlimited, explicit guarantee for bank deposits. It is probably fair to say that most people in Australia had a reasonably based assumption that there was already in place at least an implicit guarantee that their bank deposits, particularly with the major banks, were guaranteed. But these bills contain significant mechanisms to both maintain and build confidence in Australia’s financial system. Australia does have a depositor protection scheme in place whereby authorised deposit-taking institutions must have in place assets held in Australia equal to or more than the deposit liabilities that they have. Depositors in this country also have first claim to the assets of an authorised deposit-taking institution. But in these uncertain times greater assurance is required, particularly to assure depositors with institutions other than the big four banks that their deposits are safe, because authorised deposit-taking institutions also include building societies, credit unions and so on.

I think it is fair to say that Australia is in a far better position than many other countries to withstand the shocks from the financial crisis. We have heard that assurance given repeatedly over the past days and weeks. Our financial system is safer than many and we are therefore better prepared than most other countries to withstand the financial crisis. I have to say, however, that that does not result just from luck. In fact, the soundness of Australia’s financial system reflects some 10 to 12 years of responsible economic management and the application of targeted and carefully calibrated financial principles by the previous Howard government.

Australia’s financial institutions have served the economy well and continue to do so. The Reserve Bank is keeping an eye on inflation and providing systemic stability to underpin our entire financial system. Senators will recall that the Australian Prudential Regulation Authority, which was set up in 1998 by the Howard government as a result of the Wallis inquiry recommendations, provides careful prudential supervision that perhaps is not present in some overseas systems. The supervision is of a systemically important kind. It supervises institutions such as authorised deposit-taking institutions and life and general insurance companies. The Australian Securities and Investments Commission is providing oversight of corporate law. It has been called on recently to make some judgement calls in relation to the issue of short selling during the month of September. And the Australian Treasury oversees policy development and forecasting at both macro and micro level. So these institutions interact and coordinate to ensure that our economy does have strong prudential regulation and supervision, and their roles are complemented by the competition regulator, the Australian Competition and Consumer Commission.

These institutions were, as in the case of APRA, created or, as in the case of others, had their mandate strengthened by the coalition when in government, and I think we can be confident that the measures contained in these bills will be competently administered by the appropriate one of these institutions, the Australian Prudential Regulation Authority. In the highly unlikely event that an Australian institution collapses, these bills will provide depositors with the security that their funds will be available to them in a short period of time. The guarantee will apply for three years to all deposits in authorised deposit-taking institutions. The scheme will also provide compensation to eligible policyholders of general insurance in the event of a failure by a general insurer. Finally, the bills strengthen APRA’s ability to manage a distressed authorised deposit-taking institution, general insurer or life insurer should that be required. In addition, the two related bills provide for the imposition of a levy on authorised deposit-taking institutions and on general insurers in the event of the activation of the Financial Claims Scheme in relation to the failure of an ADI or general insurer.

However, there are some risks with these bills that need to be addressed by the government, in our view. While we do support the bills—and I stress that—we also recognise that there are risks in providing such a guarantee to depositors. As with all areas of government, the bills require careful analysis and will require prudent management once they are passed. While the bills before us have been under consideration, it would seem, for some months, the idea of a financial claims scheme has now considerably changed in scope from the original capped scheme which proposed a limited explicit guarantee of $20,000. That was about timely access to at least some funds in the event of a failure to meet deposit liabilities rather than ensuring that the entire deposit was covered and available in a short period of time.

I believe that the government should be upfront and should acknowledge in the debate here today that the speed with which these greatly changed bills have been brought forward does mean that analysis available to the government for decision making has been hurried—to put it at its mildest. The opposition has had even less information, I am sorry to say, and less time to consider that information than the government, so there are a number of unanswered questions. Lest it be said that the opposition is quibbling about this package, I want to make it perfectly clear that it is our job, and I think the taxpayers of Australia would expect nothing less than us at least flagging some of the concerns that we have had in looking very quickly at these bills.

There has, as I understand it, been a limited briefing from representatives of Treasury and the government, but there are a number of issues which need to be watched very closely, and critical information is still required. The public and those financial institutions that are affected by these bills, both those that are included and, more particularly, those that are excluded from its coverage, are largely in a position of simply having to trust the government on this one. That is never a comfortable position to be in, and there are some unanswered questions about those institutions not guaranteed. The answer to it, no doubt, is that, not being regulated by APRA, it is very difficult to supervise and some of the institutions not covered are in fact very small, but there are some legitimate concerns that will need to be addressed by the government in relation to those not guaranteed, including cash management trusts, property and share trusts and mortgage trusts, just to mention a few.

In the House of Representatives there has been a debate about the significance and importance of having the government level with or come clean with the Australian people and provide publicly and through the parliament a full statement of the information and analysis that the government has received on the important decisions that it has been taking over the past couple of days. The $10.4 billion package announced on Tuesday, which I want to bring up, has been designed to act as a fiscal stimulus for the Australian economy, but there has not been very much information surrounding the announcement of that package. There was a press release and a statement by the Prime Minister and no doubt other public statements, but none of the serious accompanying material that you would expect—no Treasury papers or advice and no revised forecasts. In the circumstances, we think that all the usual advice, data and information that you would expect to see supporting the announcement of a $10.4 billion spend should be forthcoming and made available forthwith.

I also want to raise the major issues relating to protection of the taxpayer. We want some information about what is going to happen with guarantees offered to banks in respect of wholesale term funding, which are enormous sums of money borrowed from international markets and may result in losses by banks being transferred to the account of the taxpayer. Our main motivation here in raising these issues is the protection of the taxpayer. In the House of Representatives and the Senate information has been sought about that. We have asked questions about whether there will be additional prudential supervision requirements and what the conditions will be of providing a guarantee of this kind. The Prime Minister could have provided the parliament with a substantive answer or simply said that they are still working on the detail, which we would have appreciated. But we got a very indignant response, and that has been reflected here in the Senate with responses to questions about the package and the bills that we are looking at today.

The wholesale term guarantee must be structured in such a way that there is an exit plan, because, as John Stewart, the Group Chief Executive of the National Australia Bank, apparently said only a few days ago, the real challenge would not be getting banks to apply for these guarantees and to pay the fee—and of course termination of the fee is a critical issue—but getting them off it. Mr Stewart described it, perhaps a little bit inelegantly, as getting them off the government teat, but his point is valid and well taken. It is a major issue because we do not want to get into a situation in which unsustainable practices by banks are in effect supported and continued by virtue of a Commonwealth government guarantee.

It is of course an answer—and this answer has been given—that APRA will keep an eye on it, but the flaw with that is that APRA, as the Prime Minister and the Minister for Finance and Deregulation and the Treasurer know very well, is not constituted to act as an investment adviser for the Commonwealth of Australia. When the Commonwealth gives a guarantee of this kind, it is actually on the hook. It is taking on board very substantial contingent liabilities. It can charge a fee and it should charge a fee and the fee should be a recognisably commercial fee. But nonetheless it is in this instance proposing to take on a considerable risk. This is something, in the opposition’s view, that will need additional, heightened and very careful supervision.

Just going back to the package that was announced a couple of days ago: when you look at the magnitude of this, it is going to halve the budget surplus. Unfortunately, we feel concerned that the information that underpins this package is simply absent. When questions have been asked that must, on any view, be legitimate—such as questions about the revised economic forecasts and the information that the government must have had in order to announce a package of the magnitude of $10.4 billion—we have received, I think, a disproportionate reaction of confected outrage that we should be so impudent as actually to want to know what is fundamentally critical and important information.

I would say to the government and to Senator Sherry, who is going to respond in short order, that one of the reasons why we think it is legitimate to ask these questions is that we have wanted to take a very responsible position in relation to these bills in terms of taking the government on trust, but there are concerns in the minds of the public. Senator Sherry was on this side of the chamber not long ago, and he would no doubt remember and be well aware of the fact that members of the public contact senators to voice their concerns. We wish to be in a position where we can allay concerns in the minds of the public. I would have thought that that would be an aim that is consistently held by the government as well as us. These are responsible inquiries and ones that we intend to pursue in the interests of our constituents, the taxpayers of Australia.

These three financial bills of course are no exception in terms of our wanting to know the underlying information. They have not been subject to the normal scrutiny. There is no regulatory impact statement. We have called on the government to prepare a clear statement of the costs, benefits and risks of this policy to government, to the financial sector, to businesses and to the public. In such a statement, we are of the view that it is essential that the government recognises that this scheme will change the way in which institutions behave. It will create new incentives and disincentives to authorised deposit-taking institutions and insurers and their customers, and they will act in ways different to the way in which they have acted in the past. So analysis and effective supervision by government will certainly require it to be alive to the increased risks from the moral hazard involved in these arrangements, and it must ensure that they are minimised.

The government has set an expiry date of three years for this scheme to operate without a cap—that is, with an unlimited, explicit guarantee for deposits. To have an expiry date of three years for the scheme to operate without a cap, there really must be—and we urge this once again in respect of both of these large packages—a credible and workable exit strategy. If Senator Sherry is able to tell us what that is, we will of course be listening intently. It should be devised now, and then reviewed at appropriate intervals between now and the expiry date. We cannot see that there is currently an exit strategy and we think that is a glaring deficiency.

I had a look at the Treasurer’s second reading speech, and I think another important aspect about it—as I said when I addressed some earlier remarks to the wholesale term funding guarantee—is that, although he talked about an interaction, at this stage there is virtually no information about that, about whether it needs legislation. I also call on the government to make such information available.

We understand the need for a concerted effort to ensure Australia withstands the impact of the financial crisis, but the coalition, like the Australian public, should not be left in the dark wondering what the information is, what advice the government has had and what has been the real catalyst—given the forecasts and the International Monetary Fund’s recent report—to take this action. We have said we will support these bills, but we insist that in the interests of transparency the public receive better information.

We have cautioned the government in respect of some of the concerns that we have been able to identify in the short time that we have had to consider these bills. We think that there are still many matters that need consideration and more information. As I said a little earlier, it is important to take the Australian public with the government on this, so I call on the government to level with us and level with the taxpayer, to give us the detail and information we need so that we can be assured that this level of regulation, this extraordinary intervention, the content and scope of these bills, will achieve the desired effect. The government should give us whatever information it has at its disposal that it has not yet shared with the rest of us.

Finally, I want to say that we will not be supporting the second reading amendment that Senator Bob Brown will move. In the time remaining, I will briefly state a couple of reasons. There is no doubt that a lot of executive salaries have been way over the top, especially in the United States, but no-one is suggesting that our banks have been mismanaged or that excessive salaries have contributed to financial problems in Australia. I think it is important, ultimately, to remember that salaries are set by boards of directors and shareholders of companies. Institutional shareholders such as superannuation funds could no doubt be a bit more vigilant in their scrutiny of executive remuneration, but the responsibility lies with shareholders. There has to be some end to what interventions are going to be run in respect of financial institutions. I think talking about wars against greed, and other vague comments might make for great headlines, but it is not going to really do anything to ensure that our financial institutions operate in a better way.