29 May 2015
Speech - #2015006, 2015

‘The Government’s financial system reform priorities’, Address to the 2015 Annual Stockbrokers Conference, Hilton Sydney

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Introductory remarks and acknowledgements

Ladies and gentlemen, I’m delighted to be here with you today at the 2015 Annual Stockbrokers Conference.

It is great to see so many industry participants getting together to discuss the state of your sector and to raise and address the issues that you face in a constructive environment.

I would particularly like to thank the Stockbrokers Association for your warm invitation and would like to acknowledge Andrew Green and congratulate him on his recent appointment as Chief Executive.

The importance of financial markets

I’d like to begin with a snapshot of the financial sector.   

Australia’s financial markets are at the very heart of our economy.

They are essential to supporting growth, employment and to creating better lives for all Australians.

They also punch well above their weight.

In Australia, we have more than 2,000 listed entities.

Our equity markets have a total market capitalisation of $1.6 trillion. On a free-float capitalisation basis, Australia ranks eighth in the world.

Around 183 million cash equity trades take place each year, with a value of $1.1 trillion.  That’s a daily average of 723,000 trades, or around 1.6 billion shares worth about $4.4 billion.

We have the largest interest rate derivatives market in Asia and we are one of the top five globally – with exchange traded interest rate derivatives having a yearly nominal value of more than $40 trillion.

Our markets have proven to be remarkably resilient. For example, they enabled almost $390 billion of equity capital to be raised for Australian companies during the Global Financial Crisis.

While the financial industry supports the operation of the wider economy; it is also a major source of wealth creation and employment in its own right.

Between 2013 and 2014, the financial and insurance services industries contributed $130 billion to our economy — or nine per cent of total GDP.

With more than 410,000 workers, it makes up more than three and a half per cent of the Australian workforce.

This makes financial services our biggest sector; bigger than the mining sector, and bigger than our manufacturing sector. 

In order for markets to serve the Australian people, they must be directed at meeting the needs of end users.

They must assist businesses to access capital and manage risk; and allow savers to grow and keep their wealth safe.

An appropriate balance must be reached between safety, efficiency and fairness in our markets — and, I’m pleased to say, there is normally little conflict between these objectives.

Regulation does have an important role to play. However, the Government firmly believes that it is market forces and industry that are the primary driver of the best outcomes.

Bodies such as the Stockbrokers Association, and its members, can play a vital role in achieving this; informing and raising standards in the industry, and influencing the policies and actions of government and regulators.

Market evolution

Undoubtedly, financial markets are going through a period of unprecedented change. 

Australia is not an exception to this.

This change is driven by a range of factors, including globalisation, international regulatory initiatives, technological innovation, new business models; demographic shifts; and an evolving competitive landscape.

This is not a bad thing - with change comes new opportunities, and for Australia to take advantage of these opportunities, government and industry must work together and adapt to the new landscape.

Globalisation, international standards, and regulatory initiatives

We’ve recently seen a range of international regulatory initiatives that have impacted our markets.

The adoption of the BASEL banking standards and G20 over-the-counter derivatives reforms are just two examples of this.

There have also been indirect impacts, such as major regulatory initiatives being adopted by key international financial centres.

For example, global markets have been affected by US Dodd-Frank, commonly referred to as too big to fail, and European Market Infrastructure Regulation reforms to increase stability of over the counter derivative markets.

While the Government is committed to promoting globally coordinated approaches to regulation, we must also ensure regulatory settings are appropriate to our domestic circumstances.

We need to make sure our regulatory regime facilitates cost-effective access to foreign markets, and where necessary, minimise the impact of duplicative or conflicting foreign regulation.

We must ensure that Australia’s regulatory regime provides a framework where Australian businesses can compete against their global counterparts.

A case in point is the Government’s over-the-counter derivatives reforms. 

Australia, through the G20, has committed to improving transparency and risk management in derivatives markets. This includes requiring derivatives transactions to be reported to data repositories; mandatory central clearing of some derivatives; and, where appropriate, shifting derivative trading onto trading platforms. 

Through the G20 and the Financial Stability Board, the Government has sought to promote consistent and coordinated approaches with other jurisdictions. 

But that said, we are also carefully tailoring our domestic implementation.

I’ll give you two examples.

Firstly, in relation to trade reporting, our adoption of two-sided reporting maximises our prospects of mutual recognition with the European trade reporting regime.

This will reduce the costs of transacting with institutions caught by the European regime. However, for smaller entities which are unlikely to enter into such transactions, the Government only requires one-sided reporting.

Secondly, in relation to central clearing, the Government announced in December that clearing would be mandated for interest rate swaps denominated in Australian dollars and four other major currencies. 

Importantly, this central clearing mandate will only apply to large internationally active dealers. This reflects our desire to reduce the impact of foreign regulation through mutual recognition, while minimising regulatory impacts on purely domestic transactions.

Innovation in technology and business models

Innovation, much of it driven by technological change, has the potential to disrupt the status quo and significantly affect market structure.

We have seen the growth of dark pools; and algorithmic and high frequency trading.

We’re also seeing the emergence of crowdfunding and peer-to-peer lending.

New technologies and business models have the potential to be both transformative and highly disruptive.

Will old regulatory frameworks work effectively in emerging environments? Will they stifle rather than facilitate innovation? Will they appropriately manage associated risks?

The answers to these questions have changed rapidly over recent years as contemporary business models are challenged.

One example of the need to re-examine regulatory frameworks is equity crowdfunding. While equity crowdfunding has potential benefits for entrepreneurs and investors, previous reviews have found that existing laws create a barrier to its use in Australia.

The Government is committed to introducing a legislative framework to enable the equity crowdfunding market to develop further. This follows a consultation process that we commenced in December 2014 with the release of a discussion paper and industry roundtables hosted by the Minister for Small Business, Bruce Billson, in February this year.

The Government is aware that many stakeholders are keen for equity crowdfunding legislation to be introduced as soon as possible. It is important that we develop a model that facilitates a sustainable equity crowdfunding sector by appropriately balancing supporting investment, reducing compliance costs and maintaining investor protection.

The Government is developing draft legislation which we will release for public comment later in the year to further ensure that we get this balance right.

Evolving competitive landscape

The competitive landscape is also evolving.

The rapid rise of Asia is occurring on our doorstep. The OECD notes that by 2030, Asia will represent a staggering 66 per cent of the global middle-class population and 59 per cent of middle-class consumption. In 2009, these figures stood at 28 per cent and 23 per cent respectively. This presents a great opportunity for Australian business and a great opportunity for Australian consumers as they are exposed to greater competition.

Couple this with new technologies, new business models and other increased cross-border service provision, this creates new sources of competition, and erodes old barriers to entry.

In recent years we have seen the introduction of competition in trading. 

This has resulted in a series of consequential changes, including:

  • the transfer of market supervision to ASIC;
  • enhancements to market supervision;
  • the introduction of market integrity rulemaking; and
  • market supervision cost recovery.

The Council of Financial Regulators will shortly provide the Government with its recommendations on competition in equities clearing. 

At that point we will consider whether to maintain the status quo — with the ASX being the monopoly provider — or whether we should be open to a competitor entering the market.

There has been a robust discussion on this subject, with strong arguments on both sides.

The Government is committed to looking at these matters methodically so we make the right decision for the national interest.

We are conscious that, as with the introduction of trading, there would likely be a range of significant flow-on effects. For this reason, once again, we will be considering the Council’s advice very carefully.

Demographic shifts

Our ageing population — and the frameworks in place to support them — are also driving change.

The capacity for our markets to safely grow wealth is crucial to ensuring Australians can enjoy a better retirement.

The superannuation system now holds $2 trillion in assets — a figure that represents more than 120 per cent of Australia’s GDP.

And current projections show the sector could grow to $9 trillion by 2040.  

Indeed, Australia has the fourth largest private pension assets pool in the world, behind only the United States, Japan and the United Kingdom.  

This is made even more impressive when you consider we only have a population of 23 million!

In contrast, the three countries with greater pension pools than us - the US, Japan and the UK - have populations of 316 million, 127 million and 64 million respectively.

Superannuation balances are now the second largest household asset, after owner-occupied housing.

And the relative significance of superannuation will only increase as our system matures.

Superannuation funds are, importantly, key participants in financial markets.

At the present time, about a quarter of superannuation assets held by APRA-regulated funds are invested in Australian listed shares.

These funds also have substantial interest in international shares and fixed interest markets.

Similarly, ordinary Australians have a direct interest in the safety and efficiency of the superannuation sector, as well as the safety and efficiency of the financial markets that their savings are invested in.  

Participation by everyday Australians

This brings me to my next point. Compared to our peers, our financial markets have a very high level of participation by everyday Australians.

Even when you exclude indirect participation through superannuation, almost two in five adult Australians participate in the Australian share market in some way.

And, as at December last year, Australian households directly held1 around $210 billion of listed equities.

However, technology is changing the extent and manner in which retail investors access markets.

Today, this is increasingly happening through online trading. This presents opportunities for new services and greater efficiencies as technology places markets at the fingertips of all Australians.

But there are also new risks.

In recent years, we’ve also seen the growth of self-managed superannuation funds, which are a proud achievement of the Howard Government designed to help empower individuals to take ownership of their retirement.  

These funds now account for nearly one-third of superannuation assets ($595 billion). And self-managed superannuation funds owners are investing directly in financial assets, particularly Australian equities.

Notably, they must make their own investment decisions, and don’t have access to the statutory compensation arrangements available to APRA-regulated funds.  

In this environment, the integrity of markets and the quality of advice can have major implications for investors.

Improving financial advice

One of the key issues addressed in the recent Financial Systems Inquiry was improving consumer outcomes. 

The Government has already established an industry-wide register of financial advisers. This was recommended in the inquiry as a significant development. 

Two weeks ago, we had more than 22,000 advisers on the register. 

And since its launch six weeks ago, more than 49,000 people have visited the website with over 106,000 searches having been conducted.

This is a step forward in the right direction, and the Government is now acting on the next challenge.

We currently have a bipartisan report from the parliamentary joint committee on corporations and financial services that looked at financial adviser standards. 

This report recognises that the status quo is no longer acceptable, and provides a model for improving adviser competency.

It also makes three important recommendations.

Firstly, it suggests new educational standards, including degree requirements and registration exams.

Secondly, it would like to see a new independent body to set educational standards, to be funded by the industry.

And thirdly, the report calls for all financial advisers to become members of a professional association.

The Government has already responded to this report and its recommendations by launching a public consultation process. 

All of this said, the report sets out an ambitious reform agenda. 

As such, you would expect there to be some in the industry who would resist such change. 

However, I think there is now a clear consensus for reform. 

In April, I chaired a roundtable that included the Stockbrokers Association and other peak industry bodies, consumer groups, respected academics, and the chairman of the Australian Securities and Investment Commission, Greg Medcraft.

All participants agreed that we need to lift industry standards, and I believe they did so because we all understand the important role that this industry plays in Australia.

I was especially pleased to see that there is consensus around many elements of the model, and to receive feedback on how the model could be adapted to work best in practice. 

Participants were keen to emphasise the need for a sensible transition, strong governance, sustainable funding and enduring reform.

The Government will continue to consult on this matter until the end of June. 

We believe this is an important piece of reform, and as such we want to take the necessary time to consult and consider it very carefully. 

However, pleasingly, I think everyone recognises that now is the time to act. For this reason, we are moving swiftly to settle our policy position and provide the industry with a clear roadmap as soon as possible.

We have also seen consumer protections strengthened in the past few years with the passage of the FOFA legislation.

We do not intend to re-litigate past debates on these laws.  However, we are working on a bipartisan basis to progress a handful of technical refinements, which will ensure FOFA operates as intended.

While I am not yet in a position to announce our proposed refinements, in respect of the application of the retail/wholesale client test, I am aware of the difficulties posed by the lack of alignment across the Corporations Act.  It was never intended that there be different tests across different parts of the Corporations Act. 

The Government is looking to make time-critical refinements by 1 July 2015.   Once this bipartisan effort is settled, FOFA will be given time to work. 

Flexible and responsive regulation

The changing environment demands a regulatory framework that can readily and quickly adapt.

Any framework must be able to respond to new risks, to change its focus, and to reprioritise resources where they are most needed.

The Government is focused on removing the burden of red tape for Australian business. As the Parliamentary Secretary to the Prime Minister in charge of administering the Government’s deregulation agenda, I saw first-hand the burden that excessive regulation places on business, preventing them from getting on with running and growing their businesses.

This is why I am particularly proud that the Government has already made significant progress in the space, announcing more than $2.4 billion worth of annual red tape savings since the election.

The Government is also taking steps to improve resource management and the performance reporting framework for government agencies too. This involves:

  • improving the quality of planning, performance information and evaluation within government to improve accountability to ministers, the Parliament and the public; and
  • encouraging Commonwealth entities to adopt risk based business processes and systems.

During 2015-16, enhanced performance reporting requirements under the Public Governance, Performance and Accountability Act 2013 and the Regulator Performance Framework will take effect.

The Public Governance, Performance and Accountability reforms require agencies, including the financial regulators, to prepare a corporate plan setting out their strategic objectives and establish performance measures against which they will report an annual public performance assessment.

Under the Regulator Performance Framework, regulators will have additional requirements to conduct an externally-validated annual self-assessment of a set of key performance indicators related to compliance costs for industry.

These existing reforms will provide greater emphasis on the strategic objective of agencies, and will strengthen public accountability and performance assessment of the financial regulators.

Financial System Inquiry

The way our markets work; the role of intermediaries; the needs of end users – these are all evolving.

To help the Government take stock of the current environment — and the threats and opportunities we may face in the future — we commissioned a major financial system inquiry. You may have heard of it by now!

The Financial System Inquiry is directed at helping the Government lay out a roadmap for where we want the financial system to be over the next decade and the steps we should take to get there.

The Government believes it is vital that our financial system is positioned in a way that meets Australia’s evolving needs and supports economic growth.

The final report of the Financial System Inquiry was released on 7 December 2014.  

Importantly, the inquiry found that Australia’s financial system has performed well since the Wallis Inquiry in 1997, and has many strong characteristics.

It pointed out how well Australia weathered the global financial crisis, due in no small part to a prudent and well-regulated financial system.

However, it also found room for improvement, and made 44 recommendations that seek to best position the Australian financial system to meet future challenges.

A number of recommendations, including those on bank capital, are the responsibility of the independent regulators. 

The Inquiry also made a number of observations on tax issues, which will be referred to the Taxation White Paper process.

There were also a number of recommendations that focussed on ASIC, its operations and powers and funding, which ultimately led to a recommendation that an industry-funding model be introduced.

I’m aware that this recommendation is of particular interest to your sector, and the Government is considering this proposal as part of its entire response.

Consultation on these recommendations has included many stakeholders before making any decisions.

We received 180 submissions, and Treasury has also met with a number of financial firms and industry bodies.

The Government will respond to the Inquiry’s recommendations over the course of 2015.


Australia’s financial services industry, like our international peers, is going through a period of significant change.

There is no reason to conclude that the pace of change will abate.

Change may bring some challenges and adjustments – but it also offers tremendous opportunities.

This Government is committed to ensuring that Australia is ready to meet the challenges and take advantage of the opportunities that will arise.

And through processes such as our Financial System Inquiry, we are acting on that commitment.

We will also be better prepared for what lies ahead through the efforts of industry bodies, such as the Stockbrokers Association, and the constructive discussions that you conduct. I thank you all for providing me with the opportunity to also be part of that discussion.

1 Including through self-managed super funds but not including institutional funds.