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Has Australia's corporate law and superannuation system responded well to the global financial crisis? Address to the National Press Club, Canberra.

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Address to the National Press Club Canberra

Wednesday, November 19, 2008



Thank you Ken (Randall), the National Press Club and the National Australia Bank for the invitation to make today’s address.

It has been 362 days, almost one full year since Labor under Kevin Rudd won the 2007 election on November 24 last year.

It was a win based on levelling with the Australian people and offering a new approach on the major issues, particularly industrial relations, climate change and the environment and Federal-State relations.

One other key feature of our election platform was a rock-solid commitment to govern as fiscal and economic conservatives. Let me repeat today - as has the Prime Minister, the Treasurer and the Minister for Finance on many occasions - that is a commitment we stand by.

But who could have know that in the 362 days between last November 24th and today, the world economy would live through all that it has?

People often ask me if the last year as a Treasury Minister has been what I expected, to which, smiling wryly, I reply that whilst the menu of challenges and priorities we’ve had to face might be somewhat different from our expectations, there is really no place anyone with a long-standing interest in our corporate and retirement savings systems would rather be.

And that’s why, a year into the Rudd Government, it is worth looking at the question of whether Australia’s corporate law and superannuation systems have responded well to the global financial crisis.

I strongly contend that the answer is a very clear “yes”, and I will shortly run through what we’ve achieved this year to arrive at that conclusion. But I would also note that there is more to do, so I will also today lay down some markers of where 2009 is likely to take us in both the corporate law and superannuation areas.

But first I want to make a few comments on the current crisis, what led us to this point and the big picture national and international efforts underway to address the problem.


Turning to the global financial crisis that we face, the well known American neoclassical economist John Bates Clark wrote back in 1898 that:

“the modern world regards business cycles much as the ancient Egyptians regarded the overflowing of the Nile. The phenomenon recurs


at intervals, it is of great importance to everyone, and natural causes of it are not in sight”.1

Perhaps the current crisis is an example of the exception proving the rule, but in my view the key causes of the global turmoil are indeed very much in sight. They are available for us all to see and they lie squarely in the United States home mortgage market.

Over the last several years this market experienced what is quite likely the largest scale episode of product mis-selling in the history of modern market capitalism.

Billions of dollars worth of mortgage debt was pumped into the US housing system, very often to families who never genuinely had the means, in normal interest rate circumstances, to service it.

This was combined with a commission-driven feeding frenzy that saw adjustable rate arrangements used to bring even more people into the net, often with no employment, no income, no assets, no documentation and no credit history.

Of course, when US house prices began to fall, when banks began to pull back credit funding, it ended the way it inevitable would - with systemic defaults and foreclosures and great social dislocation for those US communities directly effected.

However, what may have been a localised US problem was instantly transmitted deep into the US financial markets and then to Europe and beyond through the use of highly complex and incorrectly rated financial instruments that packaged this debt and allowed it to circulate throughout the system in a high-stakes game of “pass the parcel”.

Residential Mortgage Backed Securities, Collateralised Debt Obligations and Credit Rating Agencies suddenly became terms of common parlance.

What has happened since then is now well known. Around 30 banks across the world have either failed or been bailed-out. The US and Europe are on the verge of recession. Japan and Germany are already in recession.

Stock markets have declined significantly and volatility is at all time highs, with confidence at historic lows. Currency movements are also highly volatile.

But the Rudd Government has not stood by observing these incredible movements in our global financial economy. We have taken early and decisive action on a number of fronts.

1 John Bates Clark (1847-1938); Source: K Rodbertus, Overproduction and Crises, 1898, p 1


The Government has announced the $10.4 billion Economic Security Strategy - a major fiscal stimulus to drive economic activity and protect vulnerable groups in our community.

This Strategy builds on our guarantee of the deposits of all Australian regulated deposit-taking institutions - that’s approximately 15 million depositors, totaling more than $800 billion in value. Add to this the guarantee of banks’ term wholesale funding and the $8 billion AOFM program to purchase mortgage backed securities.

Just yesterday the Prime Minister returned from the G-20 Leaders Summit in Washington - a meeting of monumental importance and historical significance.

The Summit outcomes illustrate just how accurate the Rudd Government’s response has been. The Summit Communique outlined the case for a major fiscal stimulus, something we’ve already provided and, as flagged by the Prime Minister, we may add to if the circumstances require.

Further, the Summit also included a focus on transparency, better regulatory oversight and greater legal clarity when it comes to the operation of our financial markets.

It is to this issue, and what we’ve achieved in the last twelve months of corporate law reform, that I will now turn.


The last twelve months

The role of corporate law in any jurisdiction is wide ranging and complex. Anyone that has looked at the length of the Corporations Act lately can attest to that.

For as long as we’ve had corporate laws, people have rightly sought to use them to address whatever current problems may be facing the economy and business at the time.

An example that cuts right to this point is the Bubble Act of 1720. This not-so-subtly named British law was passed in response to a period of excessive market speculation - an economic bubble - in relation to the South Seas Company, and it completely outlawed any new joint-stock companies. This extraordinary law sat on the statute books for a hundred years and was honoured more in its breach than its adherence.

I can confirm today that you can rest assured the Rudd Government is not looking to outlaw the company itself!!


Let me be very clear: Australia has a world-class corporate and regulatory system, coordinated through the Council of Financial Regulators.

What actually concerns us most is not the types of corporate form or the broader regulatory framework we have in Australia, but rather some of the actions and behaviours being employed on the margins of the corporate world, and the impact they might have more broadly across the system, particularly during times of stress and volatility.

Short selling

The Scottish novelist and poet Robert Louis Stevenson once said “everyone lives by selling something”2. After 12 months as Australia’s Corporate Law Minister my reflex response would to be to ask if its short and covered, or short and naked?

The fact that most people in the community would now have some fair idea what I was talking about goes to show just how mainstream the issue of short selling has become.

As part of measures to ensure fair and orderly markets, the independent regulator, the Australian Securities and Investments Commission (ASIC), introduced a temporary ban on short selling subject to limited exceptions. I note that ASIC has today lifted the ban on covered short selling for non-financial stocks, which will now be subject to an interim disclosure and reporting regime.

The short selling ban will, however, remain in place for financial stocks until at least 27 January 2009. In the meantime, the Rudd Government is getting on with the job of putting in place a world’s best practice permanent disclosure regime for covered short selling.

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.

2 Robert Louis Stevenson, Across the Plains, 1892


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.

Naked short selling has a higher risk of settlement failure and can distort the operation of financial markets by causing increased price volatility and potentially facilitating market manipulation.

The Government simply will not tolerate people abusing the fair and transparent operation of the market with manipulation and false rumours, which are often combined with illegitimate short selling.

I take this opportunity to call on the Opposition to stand with us and pass this urgent Bill in the upcoming final fortnight of Parliament.

Credit rating agencies

Last Thursday I also announced significant reforms to the regulation of credit rating agencies and research houses.

The global financial crisis has put the role of rating agencies in stark relief. Rating agencies performed a gatekeeper function in the system by placing themselves, and their allegedly sound methodologies of risk evaluation, between the community of investors - whether that be big or small banks, pension funds or individuals - and the product in which they wished to invest.

The granting of a Triple A rating was actually meant to mean something to investors, however by the time the toxic instruments underwritten by sub-prime loans began collapsing under the weight of their bad debts, the value of such ratings were so low that we should perhaps pen a new term and describe them as “sub-prime ratings”.

A global consensus for improved regulation of rating agencies has quickly formed and Australia has taken a global leadership position.

In Australia, rating agencies will immediately loose the exemption they’ve held from having an Australian Financial Services Licence (AFSL). But even more importantly, as a condition of their new licenses they will be required to issue an Annual Compliance Report outlining in detail to ASIC just how they’ve complied with the recently updated International Organisation of Securities Commissions (IOSCO) Code of Conduct Fundamentals.

This will cover off the quality and integrity of their ratings processes, their conflicts of interest management and their responsibilities to the investing


public and issuers. If they don’t comply with these new requirements ASIC could take a range of steps, all the way to revoking their licenses.

The Prime Minister had previously flagged, in fact here at the National Press Club, there would be tough action on rating agencies and we have delivered. The free-wheeling period of unaccountable rating agencies in this country is now over.

Other areas

In the last twelve months we’ve also taken historic action to bring the remainder of our State and Territory regulated credit and financial services industry into the 21st Century.

We have reached agreement through the Council of Australian Governments and announced $71 million in new funding to support a one 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 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, and will require, again for the first time in Australia, that responsible lending practices be used when people seek credit.

Putting in place arrangements to protect consumers from being given loans they cannot afford to repay is a further important step we’re taking to make our strong system even stronger and to avoid the pitfalls we’ve seen so dramatically in the United States.

Another key feature of the last year has been a complete re-structure of ASIC, the corporate law regulator to bring it closer to the market it regulates, along with a $30 million boost in funding to deal with the financial crisis, added to the almost $70 million already newly allocated for consumer credit.

And finally, looking back, I would also point to the global niche Australia has carved out this year in relation to mutual recognition agreements. In just a year we’ve signed agreements with the United States, New Zealand and Hong Kong, an investment agreement with China and a raft of other jurisdictions are expressing bilateral interest. The US Agreement is the first of its kind for Washington and we look forward to working with the incoming Obama Administration to see it brought fully into effect.


In summary, this suite of reforms and actions have made a strong system even stronger.

The year ahead

So it’s been a busy year for corporate law.

But there are a range of further issues that have arisen as the financial crisis has washed through our domestic markets and corporate legal system.

As the Minister, this cluster of issues - which have given rise to a significant degree of concern in the business, and broader, community - again go to the need for transparency and accountability.

I will address each concern in detail but I can announce today that I have this morning formally referred four issues to the Government’s independent Corporations and Markets Advisory Committee, CAMAC, for its examination, namely:

• the use and disclosure of margin lending by company directors;

• trading in shares during corporate “blackout” periods;

• what is known as “rumourtrage”, or the intentional spreading of false corporate and market rumours; and

• the issue of the disclosure of price sensitive information at closed company briefings.

CAMAC have been asked to report back to me by June 30 next year and the Government has given the Committee an additional funding grant to conduct this important work.

Turning now to each of these issues.

Directors’ interests in listed securities and margin lending

Margin lending plays an important role in the market. It facilitates investors’ access to finance and their ability to pledge assets as security.

Margin lending can provide a means of facilitating the acquisition of meaningful shareholdings by directors, which may contribute to the alignment of directors’ and companies’ interests and act as an inducement to good performance.


However, following financial market events in early 2008, it has been suggested that there may be a significant adverse impact on the market price of a company’s shares if a director is required to sell large parcels of shares as a result of a margin call.

Whilst it’s not appropriate for me to point to particular companies, we saw this issue play out in several high profile examples earlier in the year.

In particular, concerns have been directed at the level of disclosure to the market of margin lending arrangements.

Australian Securities Exchange (ASX) rules provide that, once a company becomes aware of information concerning itself that a reasonable person would expect to have a “material effect” on the value of the company’s stock, the company must immediately inform the market.

Despite this, a degree of uncertainty remains as to the nature of directors’ obligations to disclose margin loan arrangements to their boards, and the obligations of companies to then disclose margin loan arrangements to the market.

Better disclosure to the market would improve the ability of market participants to assess the risk of divestiture of material shareholdings by directors. However, we need to strike the right balance here as the provision of specific details of loan arrangements, such as trigger prices, may encourage market manipulation by short sellers of the company’s stock.

As a result of these issues I have asked CAMAC to examine how overseas jurisdictions regulate the disclosure of directors’ shareholdings subject to margin loans or similar funding arrangements, to compare and contrast overseas regulation with that of Australia, and to advise whether changes are required to Australia’s regulatory framework.

‘Blackout’ trading by company directors

A ‘blackout’ period refers to the time when a company’s officers are prohibited by the policies set down by the company from trading in that company’s own shares. These periods generally, and rightly, occur prior to the release of annual or half-yearly results.

‘Blackout’ trading is when officers nonetheless trade during a set down ‘blackout’ period.

‘Blackout’ trading is not against the law per se, although legitimate questions arise about how ethical it may be.


Both the ASX and Regnan, the governance and research house, have recently reviewed trading by directors and found a significant lack of compliance with regard to not trading during ‘blackout’ periods.

I am concerned that active trading by directors between the close of books and the release of results has the potential to affect confidence in the integrity of Australia’s markets. From a policy perspective, such confidence is central to maintaining Australia’s attractiveness as an investment destination.

CAMAC will look at the law surrounding this practice and advise what form any necessary reforms might take, if they are required.

Spreading false or misleading information and company briefings

Again arising from the recent market turbulence, concerns have been raised that some market participants, both here and abroad, may have been spreading false or misleading information in respect of certain securities in order to take advantage of artificial changes in their price, induced by the rumours.

This practice is sometimes referred to as ‘rumourtrage’ and numerous members of corporate Australia have raised examples of this with me over the last year, some minor but some simply shocking and clearly aimed to cause great stress, anxiety and even distress not just to the shares but also to the staff of the companies being targeted.

This situation is simply not good enough.

ASIC have been focusing on this area through Project Mint and the Corporations Act already prohibits the dissemination of false information that is likely to have a negative effect on the price of a stock in circumstances where the disseminator knew, or ought reasonably to have known, the information was false.

But, in light of the concerns that have been raised regarding rumourtrage, it is appropriate to take a comprehensive look at the regulatory regime governing market manipulation, with specific focus on the spreading of false information.

We must continue to have global best practice in this field.

Finally, whilst analysts, and the research they perform, play an important role in Australia’s financial markets by keeping the market informed, the confidential briefings provided to analysts by companies are potentially of concern.


Under the continuous disclosure obligations in the Corporations Act, price-sensitive information must be provided to the market once the company becomes aware of it.

There are concerns that confidential briefings are being provided to analysts which create the perception, if not also the reality in some cases, that some analysts may have access to critical information that is not available to other analysts, to shareholders and to the general public. These perceptions can lead to a lack of confidence in the integrity of our financial markets and potentially create opportunities for insider trading.

As such I am requesting CAMAC examine the role that analysts’ briefings play in Australia’s financial market, including whether, in their current form, their role is actually a positive one that leads to greater market efficiency, and advise me if any changes may be required to Australia’s regulatory framework. Again this is to ensure we remain at global regulatory best practice.

So, all in all, the year past has been productive and challenging but I unequivocally see the answer to today’s question on whether our corporate legal system has responded well as “yes”. It has proven sufficiently flexible, sufficiently targeted and sufficiently responsive to meet the challenges we’ve faced.

The agenda for the year ahead will continue this with focus.


The last twelve months

I would now like to briefly turn to the other half of my portfolio, that is superannuation.

If short selling has gone more mainstream over the last twelve months, then super has must now be vying against real estate for the title of the great BBQ stopper of the moment - and although the circumstances may not be ideal, in many ways having people discussing their finances and their retirement savings is in itself a healthy thing.

There is no point beating around the bush in this area. Levelling with the community and acknowledging that the impact of the global financial crisis on superannuation has been direct and serious is the right thing to do.

People have been able to see the impact as they’ve been getting their annual statements.


But I would turn to a comment made by Warren Buffet, widely recognised as one of the world’s most astute long-term investors. He said:

“Stocks are the things to hold over time. Productivity will increase and stocks with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low cost index fund and buy it over time. Very few people should be active investors.”3

In his observation Mr Buffet highlights some very useful lessons that can be directly applied to pension or superannuation fund systems - particularly compulsory systems - and it’s these lessons that I will touch on today.

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 the super fund balance, consider switching to cash or other conservative investment options they should seek the advice of their fund or an advisor.

Again turning to Warren: one of the big mistakes in investing is to buy or sell at the wrong time. This is a timely and useful warning in the current climate.

The year ahead

Whilst we are not immune from the impact of the global financial crisis as it washes through our system in the form of short-term reductions in

3 Warren Buffet, The Snowball and the Business of Life by A Schroeder


superannuation account balances, there is one major area where we can do far better, and that is fees.

Currently fees in our system average 1.25%, that is 1.25% of the total assets in the system, with a range of between 0.6% through to over 2% in some cases.

These may sound like small numbers and indeed a small range, but an additional 1% fee over 30 years in your super account can reduce your end-savings by 20% - that is a real impact both on individuals and the system as a whole.

Furthermore, average percentage fees have changed little over the past decade, and that is despite the significant growth in total funds in the system from $360.3 billion at 30 June 1998 to $1.17 trillion today.

As the financial crisis hits home for superannuation fund members, there is understandably a new focus on the level of fees people are paying.

Fees are charged for four basic operational activities, that is, there are four core parts to super fund fees. They are investment; administration, distribution and advice.

The system is complex compared to many internationally and whilst we should always acknowledge our own industry’s origin, evolution and practice there are useful lessons to be learnt and solutions to be found.

Operational efficiency needs to be improved at two levels - system-wide and at the fund or sector level.

There are 31.7 million accounts for 11.6 million Australians in our super system, with now over 6.4 million “lost” accounts containing almost $13 billion in assets - an extraordinary amount.

Last week I released a consultation paper seeking suggestions for the implementation of a central clearing house and automatic rolling together mechanism for lost accounts, an election commitment for which we have already budgeted $16 million.

This reform, which will be a key development in the coming year, presents an opportunity for industry to think on a whole-of-system basis about the current delivery of administration and IT.

Presently each of the 600 or so APRA-regulated superannuation funds and the 380,000 ATO-regulated self managed superannuation funds continue to maintain and update individual IT systems.


The net effect is rather like a growing, sprawling city with each house and suburb struggling to develop their own water and power distribution networks and then trying to interconnect them with those of their neighbours.

Administration in our super system is struggling under the stresses and strains of both frequent new directions in policy over the past 20 years and the sheer massive size of the system itself.

But what we can clearly see is that there is efficiency in economies of scale. On this front, I was particularly pleased that at the Association of Superannuation Funds of Australia (ASFA) conference last week, preliminary research and analysis was released on this issue.

There are practical workable examples in other areas of financial services, such as banking, of the industry coming together to streamline administration. This is without a doubt one area where different sectors and funds should be able to act cooperatively - it is in the best interests of the member that they do so.

Leading by example, the Government itself has fundamentally rethought its own super administration by taking another look at the development of its Comsuper administration platform and initiating a scoping study to examine options for reform.

At the fund or sectoral level - that is corporate, industry, public sector, retail, eligible rollover and self-managed super funds - a range of operational issues based on improving governance, or what I have previously called “renovating the house” in the best interests of the member also need to be addressed.

All sectors have struggled to deliver advice in a cost effective form within the requirements of financial disclosure. Currently fund members are presented with lengthy, complex and Latin-like documentation often running to 50-100 pages supposedly in order to provide consumer protection and for individuals to make informed decisions.

It does neither and it has added to compliance and overall costs.

Again the Government is tackling this issue head-on.

The Financial Services Working Group we established upon coming to office has completed its proposals for the delivery of a far simpler, readable, standard regime for consumers to maximise informed decision-making, which the Government is currently assessing.

In assessing the superannuation system it is important that we understand that individuals in a compulsory system fall into two distinct categories, namely those who do not wish to make active decisions - those who so-called


“default” - and those who do make decisions in some way, usually after taking some kind of advice.

Looking at those who default, the majority are in good long-term performing funds, but a minority are not and fee levels are a major contributing factor to this.

Clear performance criteria need to be developed on default fund selection in the coming year. Again this is to maximise long-term returns in the best interest of the member.

And again I would point out that the Government has also acted by announcing the examination of a merger for its own default funds, AGEST, PSSap and the military funds.

For members in the active category, who are usually, although not always, in the retail and self-managed sectors, there are a complex set of interrelated governance issues that we need to examine.

The role of advice and distribution in both sectors, and investment practices in the latter, require detailed causational analysis and reform.

In the retail space this entire issue is exemplified by the commissions versus fee debate. What I would say is this: remuneration practices certainly need to reflect our contemporary, modern and compulsory system rather than be based on the legacy of pre-compulsion selling in what was then a voluntary system.

All parts of the industry have expressed a positive desire to work with the Government on such a project and I thank them for their position.

The discussion on fees is a broad one and not something targeted at any one sector. As Warren Buffet said, paying high fees can be a major issue for long-term investments - and he meant all types of long-term investments.


To conclude I would turn to comment of former United States President John F. Kennedy who once said:

“My experience in Government is that when things are non-controversial, beautifully coordinated and all the rest, it must be that there is not much going on”4

It’s safe to say, that a year in, I think we’ve got the coordination aspect pretty much worked out as we continue to work closely on the issues arising daily

4 John F Kennedy (1917-63); Source: The Kennedy Wit, ed. Adler


from the global financial crisis with the relevant agencies, regulators, the States and Territories, with Local Government, with industry, with stakeholders and with the community at large.

We certainly cannot be accused of there not being much going on.

In the specific areas of corporate law and superannuation, in the 362 days since the election we have faced a range of challenges probably not seen in a generation. Yet I strongly believe that not only has our system withstood these pressures - I think better than anywhere else in the world - and not only has it responded well overall, but through early and decisive action by the Rudd Government we have a system has is sufficiently robust to respond to the current circumstances.

These actions have allowed the Rudd Government to move quickly on a wide range of new measures that now stand to further protect the Australian market and the Australian retiree, well into the future.

All of our actions have been about making a strong system stronger and as we move into the second year of the Rudd Labor Government, we will only intensify our commitment to that approach.

Thank you.