Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
"Challenging financial markets": keynote address to the International Centre for Financial Services symposium, Adelaide.



Download PDFDownload PDF

NO.021

CHALLENGING FINANCIAL MARKETS

KEYNOTE ADDRESS TO THE INTERNATIONAL CENTRE FOR FINANCIAL SERVICES SYMPOSIUM

ADELAIDE

21 JULY 2008

Good morning.

Firstly, I would like to thank the International Centre for Financial Services for inviting me to talk with you today.

I notice that the theme for this symposium is "Challenging Financial Markets".

Let me assure you that the Rudd Government is fully equipped to deal with these challenges. The strategies we set out in our first Budget will help us to weather the fallout from the current financial market turbulence.

The foremost priority of the Rudd Government is to build a strong economy through responsible economic management, in order to protect the interests of working families.

To do this, we recognise that we need to prepare Australia for future challenges. By modernising the Australian economy. And by investing for the future in areas which the previous government neglected for far too long. Areas like education, health, infrastructure, and of course, the greatest issue facing us today - climate change.

For my part, I am working to deliver the commitments the Rudd Government made to reduce the regulatory burden on business... to better protect the interests of consumers... and to ensure that the Australian economy is modern and strong.

Turning now to the work we are doing to achieve these critical objectives...

Green Paper - Financial Services and Credit Regulation

On 3 June 2008, I released the Green Paper: Financial Services and Credit Reform: Improving, Simplifying and Standardising Financial Services and Credit Regulation.

This is the Rudd Government's first step in reforming our financial services sector and modernising Australia's credit regulation regime.

Regulation of many financial services is currently duplicated, patchy, confusing, difficult to change - and in some areas, completely non-existent. Not only that, but it also imposes

Page 1 of 6

..

unnecessary red tape on business.

Clearly, this just isn't good enough.

Australia needs a forward-looking financial services regulatory structure. One which provides the highest standards of disclosure and advice supervision - and which does this at the national level.

We moved closer to that goal on 3 July. On that date, COAG formally agreed that the Australian Government will assume responsibility for regulating all consumer credit.

The scope of this regulation will be comprehensive. It includes all consumer credit and related activities, regardless of purpose. This will ensure that the provision of advice and broking services is regulated, as well as investment credit such as margin loans. Mortgages, mortgage brokers, non-bank lenders, credit cards, personal loans, payday loans, and micro

loans also come under the consumer credit umbrella.

This landmark decision is a win/win situation for consumers and businesses.

We will introduce a national regulatory framework for the 21st century. One which includes simple, uniform national regulation that adequately protects consumers and imposes a cost-contained burden on business.

We are currently working out the implementation details, taking into account the submissions we received on the Green Paper. The plan will be submitted to COAG in October this year.

Financial Services Working Group

The Financial Services Working Group is another way we are simplifying the system and increasing consumer protection.

For some time now, the Government has been concerned about the quality and length of disclosure documentation. Investors must have access to, and understand, the information being provided to assist them make informed decisions.

As the Minister responsible for financial services, I am determined to fix this problem. I am committed to seeing that industry providers produce disclosure documents which are simple... standard... and - perhaps most importantly - readable.

In February, the Minister for Finance and Deregulation, Lindsay Tanner, and I announced the establishment of the Financial Services Working Group. The Working Group is comprised of officials from Treasury, the Department of Finance and Deregulation and the Australian Securities and Investments Commission.

The broad aim of the Working Group is to facilitate short, simple and readable documents, to enable consumers to better understand and compare products.

Simplified disclosure documents are now a step closer to reality with last week's announcement of Government regulations that will enable short, readable four-page Product Disclosure Statements (PDSs) in anticipation of the commencement of First Home Saver Accounts.

The new disclosure statement passes my 'Burnie Pub test' as it's clear, simple and will improve Australians' access to cost effective financial advice

The Working Group is currently examining the issue of "within product" or "intra-product"

Page 2 of 6

advice relating to superannuation products.

There is currently a large unmet need for low-cost, simple superannuation advice, and the Government is determined to remedy that.

The Working Group released its consultation paper, Simple Superannuation Advice, on 30 May this year.

The consultation paper sets out a number of proposals that may facilitate the provision of intra-product advice on superannuation. The Working Group is currently considering feedback on these proposals, as well as what regulatory and other steps the Government could take to help more investors receive advice that is genuinely appropriate and helpful.

Mutual recognition

We are also making headway on the mutual recognition of securities with the US. On 29 March, the Prime Minister and the Chair of the US Securities and Exchange Commission, Christopher Cox, made an historic announcement that Australia and the United States would explore an arrangement for the mutual recognition of securities regulation.

This announcement was a significant move towards making it easier for US investors to invest in Australia and vice-versa. Mutual recognition will reduce red tape... enhance cross-border law enforcement activities... and enable greater capital flows between our two countries.

A mutual recognition arrangement will also enhance the global reputation of Australia's financial services industry. This can only strengthen our role as a financial services hub for the Asia-Pacific.

ASX competition

I'd now like to talk to you about competition for market trading and related services in Australia.

ASIC has received a number of market licence applications from agencies which propose to operate alternative trading systems, facilitating transactions in ASX-listed securities in competition with the ASX.

Competition between trading systems over the same securities is well-established in some other major jurisdictions. But it would be a new development for Australia.

I have received advice from ASIC on these issues and, together with my Parliamentary colleagues, am considering it carefully.

Review of credit rating agencies

The recent financial market turbulence has highlighted the need for some fine-tuning to ensure the integrity of our markets.

In particular, we need to re-examine the impact of credit ratings on several areas, including market integrity... prudential regulation... and financial system stability.

In fact, one of the triggers of the recent market turbulence following the sub-prime fall out in the United States was the decline in confidence in the ratings of structured credit products. That's why I have asked Treasury and ASIC to jointly undertake a review of credit rating agencies in Australia.

The review has three broad objectives.

Page 3 of 6.

Firstly, to examine the issues surrounding the role of credit rating agencies in the recent market volatility, particularly in relation to structured and securitised products...

Secondly, to analyse whether the circumstances under which credit rating agencies operating in this country have been granted an exemption from holding an Australian financial service licence are still current or justified...

And lastly, to examine, consider and report on the range of issues raised in recent international reports on credit rating agencies, such as those released by the Financial Stability Forum, and the International Organisation of Securities Commissions.

In addition to credit rating agencies, the review will examine financial product research houses. In particular, it will consider the role they played in providing advice to investors in several recent major corporate collapses, such as Westpoint.

I have asked Treasury and ASIC officials, after the public consultation process is finished, to deliver their final report to me in November this year.

Equity derivatives

You may be aware that recently, the Prime Minister announced that Treasury would review appropriate disclosure requirements for equity derivatives.

This review is part of the Government's commitment to further improve the transparency, competitiveness and efficient operation of our financial markets for the continued benefit of investors.

As you would be aware, equity derivatives give their owners an economic interest in the underlying securities, but not traditional ownership rights such as the right to vote or dispose of the securities.

However, it appears that, under certain circumstances, these instruments enable market participants to exercise some control over the underlying securities, while avoiding the statutory disclosure obligations that accompany ownership of securities.

In particular, they avoid the statutory obligation to disclose the control of substantial shareholdings in large Australian companies and the obligation to comply with the corporate law provisions designed to prevent any person from obtaining control of a large company without making a formal offer to all the shareholders.

The disclosure requirements I'm talking about are integral to a transparent marketplace.

To that end, Treasury officials will carry out a review to help ensure our markets remain fair, efficient and transparent.

I'd now like to turn to the superannuation side of my portfolio...

Labor priorities for superannuation

The Australian Party has a long history of championing the cause of superannuation for all working Australians. In fact it was Labor which introduced the first fundamental superannuation reforms.

The introduction of compulsory superannuation has had a significant and continuing impact - both on Australia's economic health and the retirement savings of hard working Australians.

Page 4 of 6

The recent market volatility has highlighted some future challenges for the superannuation sector.

The latest available data from the Australian Prudential Regulation Authority indicates that, as at March 2008, fund assets totalled $1.1 trillion. That represented an increase of 3.5 per cent over the year to March, despite a fall of 6.4 per cent during the March quarter.

Putting those figures into context, it's important to remember that superannuation is a long-term investment. Over the 35 years to June 2007, Australian superannuation has delivered excellent real returns of about five per cent over and above inflation.

The Government remains committed to encouraging a culture of saving. Giving the right signals for people to contribute to superannuation is part of our agenda for ensuring that Australians can meet their expectations for their retirement income.

Superannuation Clearinghouse

We recognise the Government has a duty of care under a compulsory superannuation system.

We have undertaken several initiatives designed to improve the superannuation system. For example, in this year's Budget, we announced funding of $16 million over three years to set up an optional superannuation clearing house facility. This initiative will cut the red tape burden on businesses across Australia.

The introduction of Superannuation Choice means that employees can choose their own superannuation fund from the many hundreds available.

This is great for employees. But it may not be as popular with the employers who need to make compulsory superannuation contributions into many different funds - a process that can be very time-consuming.

The previous Government was happy to introduce new measures but never thought about their impact on the front line - businesses across Australia.

A superannuation clearing house will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the superannuation funds selected by their employees.

Businesses which use the clearing house facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house.

It is intended that the clearing house will be available from 1 July 2009. We will consult with industry before we implement this measure.

Superannuation for temporary residents

Another area where we are improving the superannuation system is the superannuation arrangements for temporary residents.

On 5 May this year, I released a public consultation paper on the payment of temporary residents' superannuation to the Australian Government.

Under the proposal, the superannuation balances of temporary residents would be paid to the Australian Government. The proposal was announced by the previous government with a start date of 1 July 2008. However, we deferred the start date to allow time for public

Page 5 of 6

consultations.

The consultation period has now closed, and we received nearly 50 submissions from industry bodies and individuals. We are carefully considering this feedback before settling on the design of the measure.

Benefit projections and calculators

The Australian superannuation system is now overwhelmingly "defined contribution" in nature. One of the significant shortcomings of this approach is that very few fund members have any idea about the ultimate size of their nest egg.

This is why I would like to see universal access to projections developed as an integral part of the superannuation system. This would give fund members an indicative estimate, in current dollar values, of their superannuation and age pension benefits at different ages in a simple, standard format.

It would also help them to better understand how the superannuation system works over the long-term - that is, through the 'magic' of compound interest.

I was interested to learn that, after projections were issued in the UK, there was a significant increase in awareness among fund members of the need to increase their contributions.

Superannuation fees and charges

Of course, the size of a fund member's nest egg will be affected by the level of fees and charges levied on their superannuation account.

For example, superannuation fund product disclosure statements warn consumers that if total annual fees and charges represent two per cent of a fund member's assets - rather than one per cent - this could reduce their superannuation savings by up to 20 per cent over 30 years.

These fees reflect the range of business and remuneration models operating across the superannuation industry. And importantly, the fees charged to some fund members reflect commissions paid to the distributors of superannuation products.

It's high time we took a long, hard look at the operation, structure and cost of our superannuation industry.

Instead, I would like to see Australia move towards a superannuation system in which fees and charges are more competitive by world standards.

Conclusion

Ladies and gentlemen, I trust that my talk this morning has given you an insight into the Rudd Government's response to current financial market issues... as well as our work to bring the regulation of financial services into the 21st century.

Thank you.

Page 6 of 6