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Wednesday, 14 February 2018
Page: 1055

Senator WHISH-WILSON (Tasmania) (12:05): I rise today to speak on behalf of the Greens in relation to the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017. The purpose of this bill is to amend a number of statutes and so provide the Australian Prudential Regulation Authority, APRA, with an enhanced suite of crisis resolution powers. Those powers will apply to prudentially regulated authorised deposit-taking institutions, otherwise known as ADIs; general insurers; life insurance companies; and group entities.

This piece of legislation before us has been to the Economics Legislation Committee. I'm a part of that committee along with Senator Ketter in here today, and we have been through a process now of dealing with a number of concerns in relation to this legislation today. I want to outline those concerns here today because I think they are reasonable. I also believe, and shall state on record now, that the committee has answered those concerns as directly as possible. It's very important that, when we are dealing with matters of financial regulation or matters relating directly to the financial system that is so important for our economy, we here in parliament keep a very close eye on proceedings. The committee has gone to great lengths to address concerns that have been raised by a number of stakeholders. Those queries and concerns in the submissions have been answered on the website of the economics committee.

There were also additional criticisms of the committee and concerns from the committee other members and me that we didn't have a public hearing in relation to this piece of legislation. May I say here today that that's not an indication that the committee didn't take this seriously. We most certainly did. I will go through some of those queries, questions and concerns in a minute. They are reasonable, and we should be as transparent as possible, but there's nothing that a public hearing on this matter would have delivered that the combined regulators and Treasury weren't able to answer in significant detail. I stress again that we went to great lengths to make sure that these issues were addressed. If there are still concerns relating to this legislation then those concerns can be raised directly with the head of APRA, the head of ASIC and, of course, Treasury in just a few weeks time at Senate estimates. So I will say that, if there are still concerns out there, these are issues where senators can do their jobs. They can ask direct questions to Treasury officials who put this legislation together and to the minister who is responsible for this. But I and the Greens are comfortable that those issues have been addressed. That information is in the public realm. We have been transparent. We have worked hard to address those issues, and I think overall this legislation should be supported.

There are a couple of things I wanted to talk about. I won't necessarily go into the detail or the structure of the bill. There are nearly seven schedules there that need to be amended. But I will say that the purpose of this policy is to follow on from the final report of the 2014 financial system inquiry, which made a number of recommendations to improve the resilience of Australia's financial system and enhance the ability of regulators to deal with a financial crisis. This essentially is following on from that recommendation. Why are we doing this? Not just Australia but the entire global economy has been through a very significant financial crisis in the last decade. In fact, I would argue it was the most significant financial crisis that we have seen and, I hope, are ever likely to see. This was financial contagion. As was mentioned by the previous speaker, Senator O'Neill, Australia reacted to that because we had strong institutions and because we had a government and a parliament that were willing to act and take good advice. We can sit here and debate until the cows come home how much money was spent on things like fiscal stimuli, but, at the end of the day, we took action. Not doing so could have led to even worse consequences. Why? Because financial systems are held together by one thing.

We talk about currencies, we talk about money, but actually the currency in a financial system isn't money itself; it's trust. When trust breaks down, the whole system breaks down. We get risk, we get instability, we get mass panic and hysteria, and we get financial contagion. It's that simple. I recommend anybody who wants to have a really good basic understanding of this to look at Niall Ferguson's The Ascent of Money, an absolutely brilliant series pitched in a very interesting way about how the financial system was set up and how it still works today. But, without trust, there is no financial system and everything falls apart. And by everything, I mean everything. You see the worst excesses when people panic because they can't access their money, when businesses shut down, when people are rioting on the streets: we get all sorts of problems.

Raising issues around financial regulation and how we regulate in times of crisis is a really important thing to do. Some of those people who have come to see us senators and the committee have said: 'Look, we have concerns about this. We have concerns around transparency. We're giving APRA new powers, which is essentially what this bill does. We have concerns about whether the regulators are going to act in the interests of depositors, savers who've got their money in banks.' These are important points, but I do feel like they've been thoroughly dealt with.

So what were some of the key concerns and criticisms that were raised with the committee about this legislation? The first one—which has been addressed by Treasury and which is on the website of the economics committee—really related to the protection of depositors. Suggestions in submissions that deposits were not protected under the Banking Act 1959, that this bill provides APRA with bailing powers and that these powers are to be extended to deposits are incorrect. They're absolutely valid concerns to raise, no doubt about it, but the best evidence we've had before us is that those concerns are not justified. Depositors are protected by the government's Financial Claims Scheme, the FCS, which guarantees deposits up to a cap of $250,000 per person per authorised deposit-taking institution.

Now why was this guarantee put in place? Let's just go back really quickly. This guarantee was put in place to help stability in the financial system, to help prevent that contagion and that disaster that I've just referred to. This was designed to try to bring back some trust in the system and assure people that their deposits were safe with the government guarantee. In other words: it was a key measure to head off panic. I've been arguing in this place that we need to recoup the guarantees given to banks in the form of a bank levy, and I'm very pleased that in this parliament the government has done that. So in a way the government has given the banks a leg-up by providing a depositor guarantee and I think the banks have profited from that. I would like to see some of that go back to the taxpayer, but the purpose of that guarantee in the first place was to protect depositors and keep trust in the system, and I think that worked.

Of course that guarantee was also for wholesale and institutional deposits. Although that has now been changed, the deposit guarantee is still in place. And I will refer to the Reserve Bank's comments on the committee's website in relation to the submissions, and the concerns. They don't see any benefit at all in not guaranteeing deposits for the stability of the system—quite the opposite. The reason it's actually in place is to give people that sense of trust in the system.

There are a wide range of deposits that are covered under the FCS, including term deposits, savings accounts, call accounts, pension accounts, trustee accounts and retirement savings accounts. And while this legislation before us today does include reforms to ensure that capital instruments of authorised ADIs and insurers can be written down or converted in accordance with their contractual terms, it does not include the statutory power, APRA, being able to write down or convert the interests of other creditors in resolution, including depositors of a failing ADI—a so-called bailing power.

I would hope that we have learnt from history and won't let our ADIs fail. It didn't happen in the GFC. Australia had an enviable global track record in the actions we took during the GFC. We have seen failures of ADIs. I remember the Pyramid collapse, for example, in Victoria. I've seen them happen. Of course, I worked on Wall Street. I was teaching finance to first-year students when the GFC happened. So this is a very real thing to me. Although there was a lot of evidence that the risks in that system were leading to it, it's amazing that so many of us didn't detect what was going on till it was too late.

While I'm giving plugs for things that are worth watching, I still think—for anyone who hasn't seen it—The Big Shortis a funny movie but a very, very important movie. It's a good way to educate people on the risks in this system and make it approachable. It's a fascinating and chilling account of how the masses, including decision-makers and politicians, can get it wrong. And that's why, when we get people coming to the committee, and we get thousands of emails—like I've received and, no doubt, Senator Ketter has received—I do take seriously the concerns of people that we got it wrong in the past in a really big way and it can happen again. But I'm convinced that it didn't happen in this country because we do have good regulators and we had a government and a parliament that was on top of the system.

The other thing that's worth pointing out is that depositors will not be subject to the provisions in the bill that deal with the conversion of capital write-off of capital instruments. In fact, the existing law, as further strengthened by this bill, provides a high level of other protections for the interests of depositors in a crisis; in particular, APRA's statutory objectives include protecting the interests of depositors and promoting financial system stability in Australia. Both Treasury and APRA have provided feedback and consider, in the case of a failure of an ADI—and once again I hope that will never happen—that the objectives of protecting depositors and promoting financial system stability would be very closely aligned. The Reserve Bank said exactly the same thing. This is further reflected by the depositor preference provisions in the Banking Act, which give depositors priority over most other creditors in the winding up of an ADI, to the extent that depositors have not already been paid out under the FCS, which I just mentioned.

Finally, I note that the bill includes an amendment that, for the avoidance of doubt, explicitly adds the words 'to protect the interests of depositors of any ADI'—authorised deposit-taking institution—into the definition of prudential matters on which APRA makes prudential standards under the Banking Act. I think that issue has been well dealt with and we will continue to do our job to make sure this legislation is implemented. We will continue to ask questions of the regulators in relation to this issue.

The next issue was the implementation of the Glass-Steagall legislation in Australia. While I think that would be an interesting debate, and if someone wants to put up a private member's bill or the government wants to bring it on, we can have the debate about a structural separation in our economy. That's been previously implemented in the US. I understand why people may think that the removal of the Glass-Steagall Act was a contributor to the GFC, but I do think that in Australia most of our big retail banks—and they are some of the biggest and most profitable banks in the world—are not as active in the investment banking market, as, for example, our foreign banks, like the ones I used to work for—Deutsche Bank and Merrill Lynch. I think there is already a type of structural separation. By all accounts, let's have the debate. It would be a very interesting one if someone were to introduce such a bill into parliament.

There are concerns with the secrecy provisions in the bill. If you don't trust the banking sector, if you don't trust the financial system in this country, I, once again, understand where that comes from. That's why the Greens have pushed so hard for a royal commission into the financial services industry. We've now got that. Justice Hayne made it clear the other day that he wants to work hard in his very short time frame to try to bring some trust back into the system and look at how things can be improved, as well as, hopefully, some restitution for those who have been victims of financial misconduct. So I understand where the lack of trust comes from and, therefore, I think people tend to lump trust in the financial system together with trust around the regulators. The regulators are part of the banking system. Interestingly enough, we did hear some very strong criticism from whistleblowers about how close our regulators were to the banking sector back in 2013-14, and that's something we watch very closely. But my experience of working with the regulators, as a senator, is that they do a good job. They are not perfect. They make mistakes. There have been some cultural issues there. They have been underfunded. We've done a lot to try to improve that situation. But, while we're always watching it, my personal experience is that I do trust the regulators—people like APRA, the Reserve Bank and ASIC—to do their job to the best of their ability with the resources that they have. We still have significant oversight here in parliament on just about all matters relating to their work, and that won't change.

The issue around secrecy provisions in the bill is that the proposed legislation allows APRA to determine that the giving of a direction by it should be confidential in certain circumstances where APRA considers that such a determination is necessary to protect depositors or policyholders or to promote financial system stability in Australia. There were suggestions in the submissions that these provisions will allow APRA to subordinate the interests of depositors in favour of financial system stability in a crisis. I don't believe that is a correct reading of the legislation. The confidentiality provisions in the proposed legislation relate only to APRA's ability to determine that an APRA direction should be confidential. This would not detract from APRA's wider statutory objectives to protect depositors under the Banking Act. If they did do something like taking money away from depositors—the savings of ordinary Australians—as I mentioned earlier, it would be counterproductive to financial stability. It would have quite the opposite effect, and I don't believe any of us are that stupid.

Consumer protection for investment in hybrids is the last thing I'd like to deal with here, because I think this is an issue. I have raised it directly with Greg Medcraft, the previous head of ASIC, in a number of estimates, and I know that Mr Medcraft has also raised concerns—not necessarily around the regulation of hybrids, because ASIC have put in place a number of procedures to try to better manage the risk of hybrid securities. For those people who don't know what hybrid securities are, they're essentially a mixture of different basic debt and equity instruments. They are extremely complex. Even my mates who've done CFAs still find them complex. I still find them complex. So I imagine retail investors who may not necessarily have financial backgrounds or be interested in this kind of thing, if they're sold these kinds of instruments and they're getting a 400-basis-point premium over current interest rates, which is a big return, have to ask themselves why they're getting such a big return. Of course, anyone who understands finance knows that that's commensurate with high risk.

So these things can be weapons of mass destruction. We've seen the impacts that hybrids have had, and selling them to retail investors is something I think we should seriously consider banning in this country. At the moment, we're about to pass legislation that make it compulsory for financial advisers to disclose the risks of these hybrid securities to retail investors—to non-sophisticated investors. But I just say this: if even sophisticated investors can get badly burnt playing around with hybrid securities, it's doubly so for mum and dad investors, self-managed super funds and individuals who might be tempted by the lure of making high returns. I don't mind the use of hybrid securities when it comes to hedging risks in your own portfolios. I actually recommended that to people when I was a financial adviser. But to use the instruments yourself in high-risk strategies to make money is very much caveat emptor—buyer beware. Are we really aware of those risks? I don't think so, and I think the previous head of ASIC would agree with that.

The issue of hybrids is slightly different in this bill. It relates to how they might be wound up in the case of a financial crisis. We have some great information here from ASIC as to the size of the hybrid market in this country, and there is the data there on tier 1 and tier 2 instruments and how they would be wound up. Basically, we're assured that just because hybrid securities are complex and they may, when they're wound up, take the deposits or the savings away from investors—nearly always high-net-worth investors; not many low-income Australians would invest in hybrid securities, but I digress—it won't be an issue with the wind-up of hybrid securities either undermining or attacking people's deposits.

Financial system stability should be taken very seriously and should have our utmost attention and scrutiny. I just say to those people out there that are still disappointed that the Senate didn't have a public hearing that they're going to be disappointed when a number of us support this bill today. My belief is that nothing, probably, would have satisfied them, except having the Glass-Steagall Act enacted here in the Senate today. We do take this issue very seriously. Thank you for your submissions and for raising your concerns. It's always important that these things are brought to our attention and that we're held to account. I believe we've done our job today, and we'll continue to do our job.