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Address to the Financial Planning Association 2008 National Conference.

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20 NOVEMBER 2008

Thank you for having me here today.

As I am sure you all know, the weather conditions outside in this part of the world have been extraordinary and tumultuous in recent days, not unlike the world financial situation over the last twelve months.

Before I do turn to the financial situation I would take this opportunity to acknowledge the people of south-east Queensland, and in particular Brisbane, who have been suffering through a truly shocking week of natural destruction.

As we quickly approach Christmas I am sure our collective thoughts in this room, and indeed across Australian, are with all those affected.

I must say that it is a pleasure to address the Financial Planning Association Conference today and I trust you have been enjoying the conference so far.

Today, I wanted to take the opportunity to speak to you about the Government’s recent actions in both of my portfolio areas - both of which directly impact on the work of Australia’s financial planners.

I will of course also make some general comments about the role the financial planning industry has been making in these tough times, and indeed will continue to need to make.

However, I would like to note right now just how important I see the role of the Financial Planning Association (FPA) as a stakeholder in the financial services arena. I will say some more on this later but I do wish to establish early on that I see the FPA, and indeed all planners, as a key part of the solution to many of the challenges we face today in the financial services sector.

But first, I want to turn to a few of the bigger picture issues - the global financial crisis and the steps the Rudd Government has taken to put Australia in the best possible position to meet these global conditions.

Financial market volatility and Government’s response

We are all well aware that the world is facing the most significant upheaval in global financial markets since the Great Depression.

Australia is already feeling the wash through effect of the global financial crisis that began in the US sub-prime mortgage market over 15 months ago.

Speech of 19/11/2008

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The Mid-Year Economic and Fiscal Outlook, released on 5 November, forecast that the sharp deterioration in the global economic outlook, and the resulting fallout for our economy, will result in more moderate GDP and employment growth for Australia.

While we cannot be immune from the effects of the international turmoil, the foundations laid by the Rudd Government have enabled Australia to withstand the worst of the crisis.

In fact, we have been planning ahead, and making preparations since we came into office. When we were working on the Budget, we were acutely aware of the risk posed by global turmoil. We were also well aware that the situation could worsen. That’s why we built a strong Budget surplus as a buffer against future shocks.

Ladies and gentlemen, we have the capacity to deal with this challenge.

The fundamentals of the Australian economy are sound.

We have a strong regulatory framework.

We have four of the world’s strongest banks.

We are in a stronger fiscal position than almost all other developed countries.

We have higher growth than most other countries.

And we have lower unemployment than most other countries.

These assets have allowed Australia to stand strong, even as other nations are falling into recession.

This was highlighted in the latest figures from Treasury. Only two advanced economies — Australia and Canada — are currently forecasting growth and surpluses. Every other advanced economy in the world is facing recession and budget deficits.

It is in this context that the Rudd Government, on 12 October, took unprecedented and decisive action.

And we took action for two very clear reasons.

To maintain stability in Australian financial markets.

And to underpin ongoing growth in the economy.

We provided a guarantee on the deposits of all Australian regulated deposit taking institutions — banks, building societies and credit unions — to maintain confidence in the system.

This action guarantees an estimated 15 million deposit accounts, totaling more than $800 billion.

Simultaneously, we announced a guarantee of banks’ term wholesale funding to ensure they could access global credit in the future and continue lending to business.

This guarantee covers $1.2 trillion in bank funding.

In addition the Government has authorised the AOFM to inject up to $8 billion into the

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residential mortgage backed securities market, an important step in the interests of competition in the Australian credit marketplace.

By taking decisive and early action, we have guaranteed the stability of this country’s financial system, in the face of destabilising developments abroad.

While other major economies around the world are going into recession, Australia has stayed ahead of the curve, by taking early and decisive action.

And that’s also why the Government has acted swiftly to inject $10.4 billion in direct fiscal stimulus into our economy through the Economic Security Strategy.

The strategy is forecast to boost the level of real GDP between half and one percentage point. And help to create up to 75,000 additional jobs over the coming year.

International cooperation

In troubled times, the governments of the world must also work cooperatively. A global challenge demands a coordinated global response.

That’s why we have complimented our domestic actions with a major international role.

Australia is continuing to engage at the highest levels internationally to ensure that the governments of the world develop coordinated responses to minimise the impact of the global financial crisis on world economic growth.

We have been at the forefront of efforts to ensure that the G-20 — the forum which brings together the world’s systemically important advanced and emerging market economies — has a key role in addressing these issues.

Both the Prime Minister and the Treasurer attended the G-20 Leaders’ meeting in Washington on 15 November. At that meeting, Australia put forward proposals that built on the five-point plan announced by the Prime Minister in his speech to United Nations General Assembly on 25 September.

I would now like to briefly turn to few specific actions in my area.

Short selling

Australia’s response to the international financial market turmoil includes measures in relation to short selling to ensure the continued integrity and transparency of our markets.

Last Thursday we introduced into Parliament the Corporations Amendment (Short Selling) Bill. This Bill fills a gap in the law that has been present now for at least seven years. It has taken the Rudd Government to move decisively to fix the problem.

In addition to significantly boosting disclosure and transparency, the Bill also puts in place a ban on all naked short selling.

In naked short selling, the seller doesn’t own, hasn’t borrowed and may not even have a pathway to obtain the shares they are selling.

Naked short selling is currently banned under actions taken by ASIC and ASX, both of which support this legislative ban.

The Government feels strongly that it is in the interest of Australian retail investors and the companies in which they own shares, that this practice is prohibited.

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I again state for the public record my desire for the Opposition to not play politics with what is a systemically important piece of financial markets legislation and join with us to pass the Bill in the coming final fortnight of Parliament.

Action on credit rating agencies and research houses

Last week I also announced significant reforms to the regulation of credit rating agencies (CRAs) and research houses.

The global financial crisis has prompted a global consensus for improved regulation of credit rating agencies, whose role has come under scrutiny due to their involvement in providing inaccurate ratings of structured financial products in the lead up to the US sub-prime loans crisis.

As I announced and repeated yesterday at the National Press Club, rating agencies in Australia will immediately lose the exemption they’ve held from having an Australian Financial Services Licence (AFSL) and they will be required to issue an annual compliance report.

What has been less focused on - and what is arguably much more important for the membership of the FPA - is the decisions on the regulation and expectations of research houses.

Financial planners are key consumers of the advisories issued by product research houses.

As part of your work you frequently place a considerable degree of reliance, and indeed trust, on such research house advice. This is not to say that planners don’t also independently inform themselves of the health of different investments, you do, but as with the large banks and their use of credit ratings, you should be in a position to reasonably expect research house advice to be of good quality and to be free of conflicts of interest.

In some very high profile and large cases this has not proven to the be the case.

For these reasons, ASIC will now confirm that research houses must hold an Australian Financial Services License. There will be no room for a view that research houses are not giving financial advice, because that is exactly what they do.

In addition, ASIC will develop, for the first time, a tailored annual compliance reporting regime for research houses as a condition of their license. This statement will directly address concerns over the quality and integrity of research methodologies, conflicts of interest management and their responsibilities to the investing public and issuers,

These are all important new steps that will boost the integrity of our financial system and I look forward to the FPA playing an active role in this important work.

These actions again show Australia's leadership in combating the underlying causes of recent financial turbulence.

One more area of action the financial planning community will be interested in is the uniform regulation of consumer credit and financial services.

We have reached agreement through the Council of Australian Governments and announced $71 million in new funding to support a single, standard, national system of consumer credit and financial services regulation, making us one of the only Western economies in the world to boast such a unified regulatory system in this critical area.

This action will address the deficiencies that have long existed in credit regulation - and

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which had also long been recognised by report after report to the previous Government - by establishing a consistent and robust national consumer credit regulation framework.

For the first time, a comprehensive national licensing regime will be established and will cover all credit providers, brokers and advisers.

Financial planners understand the benefits of uniform national licensing, and we strongly feel the time has come for others in the financial services sector to similarly step up to a comparative level of oversight and transparency.


I would now like to turn to superannuation.

As I mentioned earlier, yesterday I gave an address to the National Press Club. In that address I made some comments about the Government’s views on the direction of superannuation in Australia.

I think it worthwhile to repeat one or two of those messages.

As I’ve said, the turmoil on Australian and global equity markets has had a significant and direct effect on superannuation fund balances. Despite this, I can unequivocally confirm that our superannuation system remains robust and well regulated.

As many have pointed out, superannuation is a long term investment.

Australians typically spend about 35 to 40 years in the workforce before they retire and over 20 years in retirement. During that period they will experience a number of investment cycles and there will be time for the markets to recover. History clearly tells us this.

Over the long haul, the last 35 years it has delivered excellent real returns of close to five percent over and above inflation, and this will continue despite the average -6.4 return in 2007/08 or for that matter the plus 10-15% each year of the previous five.

What people must consider is this simple fact: a dollar invested in super ten years ago was worth $2.07 at 30 June this year; that’s a doubling in just a decade.

Before individuals, in their response to current movements in their super fund balance, consider switching to cash or other conservative investment options, they should seek the advice of their fund or an advisor.

Financial Services Working Group

An important project that will assist in getting this advice out to the community is the Financial Services Working Group.

As well as ensuring our super system is operating as smoothly and efficiently as possible, we need to do two things.

We need to encourage a culture of saving. And we need to provide the right signals for people to contribute to their superannuation.

An important element of this is ensuring that people have access to easy-to-understand information to help them make informed decisions, and compare the relative merits of alternative products.

This is why the Government established the Working Group.

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The Working Group is facilitating the creation of disclosure documents which are short, simple and readable.

Documents which will better enable consumers to understand and compare the full range of financial products.

Earlier this year, the Government released the first of these documents — a four page product disclosure statement for the First Home Saver Accounts.

The next item on the Working Group's agenda is to look at product disclosure documents sector by sector, beginning with superannuation.

During this process, the Working Group will consult closely with stakeholders through its advisory panel and conduct public consultation.

And I would like to place on the record the very positive and constructive role that the FPA has played in the work of the Group, something the Government - and I am sure the public - is grateful for.

Intra-Fund Advice

As part of this project, I am keen to improve Australians’ access to low-cost advice about their superannuation.

There is currently a large unmet need for this kind of simple superannuation advice.

On 30 May this year, the Working Group released its public consultation paper, entitled Simple Choices Within an Existing Superannuation Account. The paper sets out several proposals that may help us to provide intra-product advice relating to superannuation.

The Working Group is analysing these proposals, and examining what regulatory and other steps the Government could take to help more investors get the kind of advice they need, and I expect to announce a policy decision in this regard very soon.

ASIC - Temporary Relief

Recently ASIC provided temporary relief to superannuation fund trustees to provide limited guidance to their members.

This is a practical solution to the need for guidance and information at the present time of economic uncertainty.

It does not pre-empt the Working Group but it does demonstrate the importance of ASIC providing clarification to enable superannuation funds to provide simple, low-cost advice to their members.

ASIC temporary relief will enable superannuation fund trustees to provide valuable information on the relative return and volatility characteristics of different types of investments, such as guaranteed bank deposits and market-linked long-term investments.

The measure will enable fund members to better understand the implications of switching or transferring their superannuation investments at the current time. Those implications include the possible crystallisation of investment losses, loss of insurance benefits, and taxation consequences.

The response from industry, including financial planners, has been extremely positive.

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Planners and voluntary contributions

I would like to say a few things about the issue of voluntary contributions to super and the role of financial planners.

The former Treasurer Peter Costello has been very vocal on this issue. Unfortunately and I think unfairly, financial planners were directly is his firing line.

His comments basically sought to place blame on planners for advising clients to direct voluntary payments into super at a time when the then Government was directly encouraging exactly that outcome through legislative change and a very expensive advertising campaign.

As I said at the time, the financial planning community is not to blame. You responded to a regulatory change, pushed along by incentives and advertising. You acted within the law.

I don’t think it fair or accurate to look back and to now try and apportion blame.

Government's priorities for the superannuation industry

What does the year ahead hold?

It’s hard to tell day-to-day at the moment, but looking forward, whilst its clear our superannuation system is strong, stable and continues to deliver, there is still scope for improvement.

The superannuation system is maturing and it is time to take a close look at the operation, structure and cost of our superannuation industry.

We need to consider these issues across all sectors of the industry — corporate, public sector, industry and retail, as well as the self-managed superannuation fund sector.

We need a broad principles-based approach to improve the superannuation sector, rather than a piece-meal approach.

I like to call this "renovating the house".

Fees and charges

For example, superannuation account fees have a direct and significant impact on final retirement income.

Fees at 2 per cent of a member’s account — rather than 1 per cent — could, over 30 years, reduce their final return by up to 20 per cent, a very significant difference by any measure.

I would like to see Australia move towards a superannuation system with a more sustainable remuneration model, in which fees are more competitive by world standards.

Publication of APRA data

The Australian Prudential Regulation Authority plays an important role in meeting the need for information to assist consumers make informed decisions about their superannuation.

As the prudential regulator, APRA is well-placed to collect and publish the superannuation fund performance data it gathers from the fund income statements and balance sheets made public to members each year.

APRA publications aggregate this data at a sector level, across the industry, public sector,

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retail and corporate fund sectors.

Clearly, returns for industry sectors do not reflect individual fund performance. For this reason, APRA data does not provide any indication of the actual performance of a particular fund.

With the encouragement of the Government, APRA is moving to consult on how it could report disaggregated long-term performance and volatility data for individual funds. I expect that APRA will be able to release a consultation paper shortly.

This will not duplicate the work of industry research houses, which currently report at the individual fund member investment level.

By publishing this information, APRA will serve not only the public interest, but also the interests of all industry participants. Making this data public will help to ensure a fully-informed debate on medium-to-long-term fund performance and related issues.

A key issue here is the extent to which commissions are — or are not — included in the relevant data. While APRA publishes some data on fund expenses, this data generally understates expenses. This is because funds are required to report information on indirect expenses only where this information is readily available.

APRA is currently working with super funds to refine its data on direct and indirect expenses and plans to include expense data in future publications.

Australia’s future tax system

Retirement incomes are also being considered as part of the comprehensive review of Australia’s tax system, announced by the Government earlier this year.

Long-term reform of the tax and transfer system is a vital part of how we create prosperity, reward hard work and meet the future challenges facing Australia.

Our future tax system will also affect the decisions people make about working, saving and investing.

It has a significant role to play in Australia’s future.

The Government understands the need for a tax and transfer payments system that is simpler, rewards hard work and provides security for pensioners, carers and people with disability.

Long-term reform is vital to achieving this ambitious goal and positioning Australia to deal with the challenges it faces into the future.

Both superannuation and the retirement income system are under the microscope of the review.

On the back of the first round of community input, the review panel is currently preparing its first consultation paper for public release at the end of this year. In the first half of next year the review moves into intensive consultation mode and will seek the views and ideas of Australians.

The paper will pave the way for more consultation. You will have opportunities to raise views at public meetings, express ideas and suggestions in submissions and work with the review team.

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I encourage the Financial Planning Association to get involved and help us build a fairer, simpler, more efficient system.


In conclusion, I would highlight that the Government is committed to ensuring that our superannuation system is safe, stable and efficient, and that our corporate regulatory system is strong, flexible and structured to deliver transparency and accountability.

The objectives are all the more important in light of recent events in the global financial system.

Consultation with industry is central to the Government’s approach, and the FPA has an important role to play.

I note that just this morning the FPA launched a new Code of Ethics that aims to place clients first in every aspect of the financial planning business. This is exactly the kind of thinking I am pleased to see coming from industry.

I would also particularly note the role Jo-Anne Bloch, your chief executive, has played in advocating your agenda across the last twelve months, as a further example of how together we can continue the work of improving both our financial services sector and the wealth and security of all Australians, even in these challenging times.

Thank you again and I hope you enjoy the remainder of the conference.

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