Address to Financial Services Council Annual Conference

31 July 2012


Gold Coast

1 AUGUST 2012



 Good afternoon everyone. It’s a pleasure to be here. I’d like to acknowledge the leadership of the Financial Services Council, both the Chairman and the CEO, John Brogden, who is always formidable in his advocacy for the interest of his members.  And, I congratulate the FSC on the merge with the Trustees Corporation of Australia.

 I’m a big believer that scale does matter and I can see why the FSC are pursuing an argument of scale in the best interest of its members. What I’d like to do is put to you a proposition today in this introduction that things I believe are better than we read.

 I had the opportunity yesterday and this morning to visit BMA’s coalfields, the BHP Billiton and Mitsubishi alliance, which producers 30 per cent of Australia’s coal, so I’ve been up in central north Queensland for most of the morning. And there I see that despite the floods, some industrial disputation and change in world prices there are success stories happening, which belie some of the coverage of the coal industry.

 But as I speak to the leader of BHP Billiton today, I said I think mining is a very important part of the Australian economy, but I also said to him did you know that there are 243,000 people that work in mining in Australia directly, but there are 437,000 who work in Financial Services. I said did you know that whilst mining is generating a reasonable proportion of Australia’s GDP, our economic growth, was he aware that financial services in Australia is generating a larger share of our GDP. Now I understand the mood in Financial Services at the moment. Perhaps people are a bit flat.

 Certainly, there’s been a significant amount of regulatory change and reform, which I’ll talk about a little later and that can have its own dynamic and constant change. But indeed, as Martin Cadena, the formidable policy director at FSC said perhaps the people think the mood has changed from a cyclical phase in the financial services sector in Australia to indeed structural change. And of course, change is never easy.

 But what I’d like to submit to you, as that you here today should be rightly proud of what you contribute to the on-going story of Australia. And, you should be rightly pleased to some extent, to some significant extent, about the contribution you make to Australia’s current relative success.

 Now I do not for one minute propose to say to you today that we can afford to be complacent, we can’t. I’m not going to suggest to you that some of double digit returns that some people were able to enjoy, in particular between 2000 and 2008 will be easily reclaimed. But, fundamentally ladies and gentlemen, I’d like to submit to you today an examination of the current strings to the financial services sector, secondarily an examination of the changes we’ve undertaken in financial services in Australia, and thirdly and finally the future challenges. This trifecta of topics demonstrates why we should be more positive and optimistic about our future than pessimistic and negative.

 Now you should rightly be proud of what’s going on and I’ve mentioned the jobs and I’ve mentioned the contribution to GDP. Now I do also believe that part of the reason why Australian financial services is such a significant proportion of the Australian economy, of the Australian wealth, the creation of our prosperity. Part of that has certainly been far-sighted decisions of previous Labor administrations and the current one to lift compulsory savings from zero in 1985 when there was a social contract between unions and the then Labor Government to put in 3 per cent. Then mandating 3 to 9 per cent lift in compulsory superannuation in 1992.

 Most recently in March, despite I have to say fierce opposition, we lifted superannuation over the next number of years from 9 to 12 per cent. We have a superannuation system which I submit to you is the envy of the world. And I do believe your strength as a Financial Services sector has helped us through the global economic crisis. We have strong economic fundamentals.

 The people at the coalmines today were moaning at the fact that our currency was still so high. They’ve had to revaluate there thinking that normally being a commodity based economy, as world commodity prices soften so would our currency decrease. But our currency hasn’t decreased.

 The reality is that banks across the world and governments across the world, they want to trade Australian currency because we are a stable currency. It is not be accident that the wall street journal now lists ours, as one of the five currencies as a bench mark against the green back in their publication because of the strength, as the editor Robert Johnston in Australia told me, it’s the strength of the Australian economy, which is the reason why they regard us as one of the most prestigious currencies in the world.

 So I do believe we are delivering. But in financial services the delivery isn’t just based on smoke and mirrors. If you have a look at productivity growth, a topic which is of course is great interest within Australia financial services and the insurance sector has averaged 2.1 per cent over the last 5 year, per annum productivity growth.

 This is in stark contrast to the average across all industries. And indeed you might find this statistic, depending on how you’re feeling, good or bad news; Average financial service workers, have broadly are neither significantly overpaid or significantly underpaid. I’m not talking about the top end there. But, I am talking about the vast bulk of the industry.

 The data suggests that compared to productivity increases, wages in financial services haven’t kept paced even with the productivity increases. When you have a look, and we look at how Australia is going in the Olympics at the moment, and again, I’m a glass half person, whilst we are one gold, two silver and two bronze as I understand it, the poor old Brits haven’t even got a gold medal yet.

 But when you have a look at where we go perhaps in the pool of investment assets after the United States, France and Luxemburg, we are fourth in the world. Fourth. If you have a look at our pension assets after the United States, Japan, the United Kingdom, comes Australia. There are not many things, ladies and gentlemen, where Australia comes fourth in the world. And, certainly not things as important as the size of our investment assets or the size of our pension funds.

 And, indeed, and I’m grateful to Ibis for the researchers, if you have a look at the financial services industry sector, you are more than pulling your weight. When you have a look at an assessment of the 100 most profitable return to shareholders organizations in Australia. In the top 100, they’ve produced a weighted average return on shareholder funds, after tax that is, a 53 per cent over 5 years to 2011. And financial services had 6 in the top 100 companies and the average of those organisations was 72 per cent return to shareholders.

 If you have a look at the Australian stock exchange, we are the largest and most liquid, other than Japan, in the Australia-pacific region. 2241 listed companies. I think that you are members of a deep and sophisticated financial market sector. We are regional leaders in products such as infrastructure financing and structural products. I think that you’ll find we have a highly skilled, multi-lingual workforce. And we have a strong and efficient regulatory environment.

 But when I talk about the skills of a sector, I said there are 437,000 people as of May of last year working last year. In Sydney, in 2009, 6 in every 100 Sydneysiders worked in financial services. It’s the growing source of our exports. But, I made comment about the qualifications of the industry within which you work. Over 40 in every 100 people in financial services have a tertiary qualification. This compares very favourably to the Australian average across all industries of 27 in every 100 Australians. So you are a well-educated bunch.

 But, what I find particularly encouraging, being a Melbournian of our proud history and contemporary society of being ethnically diverse; the number of foreign born people working in the Australian financial services sector is 27 in every 100 people.

 This compares very favourably, in fact, you could go anywhere in the world in financial services and other than that nation Luxemburg, which we have to beat for the security council, only other than Luxemburg, does any nation have as many foreign born people working in their domestic financial services sector. This to me is a cause of celebration. And I also want to look at the growing diversity of the financial services sector to include my first point, that you are more than lifting your weight in terms of Australia’s current economic prosperity.

 When I had a look at revenue from last year in terms of financial services, the number which is interesting is that whilst banks contribute to 26.8 per cent of revenue last year. If you include the central bank and the co-opt that gets it to 29 per cent. 29 per cent of all the revenue generated in our financial services sectors through the banks. Insurance is contributing 19.5 per cent of the total revenue.

 But what is remarkable is that when you look at our superannuation funds and funds management industry, they are contributing 41 per cent of our financial services sector revenue. You know we just didn’t have this sector and the way it was 20 to 25 years ago. And I submit to you that the decisions that we’ve made to increase the size of compulsory savings, will only accelerate the size of our funds management industry and therefore the revenue across our financial services market in Australia.

 I think, ladies and gentlemen, that despite some of the flatness about the underperformance of markets in Australia, we’ve got a lot to build upon in terms of financial services. But I said there was a second reason why I believe people could afford to be more confident and less pessimistic about our future. This of course goes to economic change and reform.

 I make no comment about the political affiliation of people in the financial services industry. But, I think, as one elder statesperson counselled me recently, he said; “you’ve got to understand Bill, there are a significant number of conservative people in financial services and change, and change in business models is never easy.”

 But I have to congratulate the financial services industry. One, for being dogged when they don’t agree with something that’s said, but even more importantly for being able to negotiate with the government. To help, quite bluntly, educate me, inform me, to persuade me in a process of pragmatic consultation, to come up with what I think is a remarkable list of change.

 You know I was in America recently, in Washington, speaking to both Democrats and Republicans and they said “we would like to have your economic problems in Australia.” You know, they said, “we are a little bemused at the political debate in Australia and the apparent instability in the politics when you look at the fundamental numbers.” Or in other words they were saying to me the polls are out of whack with some of your other numbers. Our polls for the Government are not good.

 But, when you look at our unemployment rate, whilst there are pockets of significant disadvantage in groups in Australia are missing out significantly. We have the sixth highest participation rate in the world. Our unemployment is 5.2 per cent compared to the United States at 8.2 per cent or indeed the Euro region at a dramatic 11.1 per cent unemployment. Inflation: 1.2 per cent, underlying inflation just over 2 per cent. Our cash rate is at 3.5 per cent. Our net public debt, commonwealth debt as a proportion of GDP is the lowest of the modern industrialised nations. We are doing very well.

 So there are some good economic numbers and I think that also belies the political stability. The Government has not been defeated on a single piece of financial services reform which we’ve sought to put into the House. We have by all means comprised and I don’t see compromise as a badge of failure I see it as a sign of success, maturity and recognition. No one point of view in politics has a monopoly on the truth. No one sector in the financial services sector has a monopoly or a patent on the truth. And that what we’ve seen is a remarkable amount of change.

 I went through a little bit of a list in preparation for today. Let me pick just some of the headings, consumer credit - we’ve implemented, since September 2010, so in the course of less than two years, lenders are now required to provide a summary of costs of home loan products, a dollar for dollar comparison for the consumer. We’ve reformed the way lenders offer or provide credit cards, already effective from 2011, including repayment priority for the most expensive debts first.

 We’ve introduced, and got through the House of Reps the nation’s first ever cap on the maximum amount that micro lenders can charge, the payday lender brigade. We’ve introduced protections for older Australians entering reverse mortgages. And superannuation, you are very familiar with list of what we’ve done in a short time. We’ve implemented the increase from 9 to 12, that’s the law.

 We’ve introduced the low income superannuation contribution, effective 1 July 2012, that’s the law. No more tax if you earn less than $37,000. We’ve started the process of improving the problems around excess concessional contributions with a one off refund, effective from the first of July last year. We have reduced the contribution tax concessions for very high income earners. We’ve announced that at least.

 We will, we had to delay, but we will introduce on 1 July 2014 higher concessional caps for people over the age of 50. And we’ve abolished from 1 July next year the superannuation guarantee being limited to people under the age of 70. We are making superannuation more efficient.

 The new data and e-commerce standards for superannuation transactions, the use of tax file numbers as the primary locater of member accounts; we are facilitating account consolidation electronic affordability. With MySuper, we believe the new and simple cost-effective MySuper products in the parliament, it’s moving through.

 We’ve given APRA the ability to make credential standards in relation to superannuation. We are improving the governance of superannuation funds through new duties for trustees. We want to make sure that superannuation fund directors are appropriately accountable for meeting certain duties to members. And, we are certainly improving the integrity the self-managed superannuation funds through penalties for a legal release of benefits and new rules on related party transactions.

 Of course, we’ve commenced the Future of Financial Advice reforms, the ban on conflicted remuneration. A best interest duty for financial advisers and improved fee disclosure for clients paying on-going fees. We finally replaced the accountants licensing exemption so that accountants can provide financial advice, which will transition into an Australian financial services licence from 1 July 2013 through to 1 July 2016.

 We’ve clarified that litigation funding schemes are not managed investment schemes. We’ve recognised carbon credit units as financial products. We’ve established the centre for international finance and regulation. We’ve maintained the effectiveness of the national regulation of trustee companies. We’ve got a new operator in the stock exchange market being Chi-X. We finally put in legislation for IMR 1 and 2, the investment manager regime. We are drafting IMR 3, following passage of the bill.

 Even on insurance, we’ve got a better –we’ve got a standard definition of flood. We are going to properly map flood risk in Australia through the creation of a national library of flood information, a mandatory one page key fact sheet statement. And, we are doing a lot of other things under the radar from continuing the account base draw down relief, the account base pension draw down relief. We’ve even maintained appropriately the CGT scheme for superannuation fund merges.

 Friends, the reason why I make that list is because it is a remarkable list. I believe that despite the political hurly burly there is very little there which would be repealed in the event that there was a change in government. I believe in all of this that we are actually improving people’s confidence in the efficiency of transactions within our financial services market. Now I don’t pretend these changes are easy.

 But we are a government that understands that don’t be judged just on the next 24 hours. But if we were to talk in 5 years time, would we be able to look back and say what has passed the test of time and what hasn’t. I also believe our approach to this legislation has been consultative, some of you would actually say overly-consultative. Pragmatic - I don’t think anyone thinks that you can be too bad being pragmatic. I think it’s efficient. I think it’s equitable.  

 And just as we’ve worked through on the accountant’s exemption, we need to sought out the FATCA. We’ve worked out exemptions for stockbrokers and for timeshare. We are currently working on the issue of dark pool regulation through ASIC and high frequency trading.

 Not because we think we have all the answers, but we’d rather have regulation working with the investment banks, working with the people on the supply, on the buy side and the sell side, working with the stockbrokers. Because our approach and my personal approach is all too often regulation is about closing the gate after the horse has bolted and all too often as we see in other jurisdictions financial services regulation is about solving the last problem, creating new unintended consequences and not thinking about the future.

 You watch our approach to dark pools and high frequency trading; it’s about working collaboratively, cooperatively with industry to make sure that markets work most efficiently for the benefit of consumers. So I believe that the second proposition I’ve advanced to you today is well established. There’s been a lot of reform, but these reforms will stand the test of time and strengthen the confidence and the depth and equity and operations of our financial services sector.

 Finally, I’d like to submit to you that there’s a lot to be done in the future and we should be optimistic and positive about what the rest of this year we look like and what I think the next five years will look like. I have a think about what a financial services conference might look like in 5 years time. John will be best dressed here, as he always is.

 But, I think the transition also to MySuper will be complete. It means commission free superannuation for millions of Australians. In five years time the superannuation guarantee will be 11 per cent. We will have a two trillion dollar funds under management industry. I believe, controversially there will be greater convergence between the Hatfields and McCoys. Of course I mean the retail funds and the industry funds.

We’ll see financial planners recommending industry funds on their preferred lists. We’ll see retail funds having the ability to get into markets and work places they haven’t previously been able to do. The supply of financial advice will significantly increase. One - because accountants will take up the streamline licence. And two - we would’ve codified financial planning and improved its status as a trusted profession.

 I think the place of high frequency trading and dark pools in the Australian financial landscape will be more settled and of course we will probably be grappling with the next development brought upon by the Internet and technology. I think we will have a lot more transparency in fund selection. I think our FOFA reforms will have removed some of the conflicts which currently exist.

 We will have all our stages of the Investment Manager Regime in place. Possibly even an Asian funds management passport and we’ll be in line with other financial centres throughout North America, the United Kingdom, Hong Kong and Singapore. I even think that we will have greater transparency in our home and contents and home building policies.

 I believe that the consumer credit legislation bill, which was passed through the House of Reps in June will put that first – that national cap on payday lenders will occur. We will have specific protections for older Australians with reverse mortgages. We will have more savings options for people in the drawn down phase of their lives and I believe that we will have the contributions cap lifted across a range of age groups and areas. Now that’s what I think 5 years will look like.

 But I believe in the meantime there are challenges out there which we should embrace with open arms. I do believe our fund managers will become a little less timid about looking at emerging markets, although in five years time some of what we call emerging markets will be emerged markets.

 I had the opportunity to take some financial services leaders to Israel and in Israel we saw together that in this start up nation which is Israel, they have less of a fear of failure than we do here in Australia. Perhaps in five years time we will have less of a fear of failure and there will be more reward for effort and innovation.

 In Israel every government department has a chief scientist. We might even have some of our larger funds in Australia a chief scientist to each of our investment funds because that makes sense. We might even, dare I say it, have a chief historian so we can traverse the past and don’t repeat the mistakes. I believe that in five years time our funds our superannuation investment funds will be a lot more plugged into our universities and centres of research and science.

 Perhaps even in five years time some of our academics will be rewarded for the number of start-ups, commercial start-ups rather than the number of academic papers they publish. I think that as an industry, as a financial services industry we will unlock the deal flow for infrastructure using our superannuation resources. We will also have more women in charge and on the boards of superannuation funds.

 I also believe that when I talk about emerging markets that future ministers, be it myself or others from whatever political party will take more of our financial service leaders to opening economies, like Indonesia, Vietnam. Never forget that whilst we talk about the growth of Asia which is an on-going fact, half of the GDP of Asia occurs in economies outside of China.

 And of course in all of this I think we will have better governance which will encourage more diversity, a greater role for independent directors, and a greater challenge against group think. I also believe that we should have a greater voice for consumers. One thing, which is certainly on the very short-term list to implement, is improving the organisation of the consumer voice in superannuation, which takes nothing away from the role of retail funds or industry funds or of the AIST, or any other groups speaking up for important parts of the financial services sector.

 But I do believe we can organise the consumer voice better to ensure that the consumers of financial products and services can be heard even more clearly than they are at the moment. But fundamentally friends in talking about where we are at the moment, what we have accomplished at the moment, outlining future challenges both in the short and medium term in financial services, including of course the better provisioning and regulation, and creation of an enabling environment for financial products post retirement.

 I believe that fundamentally the challenge for the financial services industry and public policy, and politicians of all political stripes, is that we need to be ambitious for our future. We need to recognise that it is people who make the difference in organisations, not regulation. We need to understand the on-going ageing of our population and the consequences that means for the requirements of consumers. We need to, of course engage more culturally and more deeply with Asia, not just view it as a source of a fast buck.

We need to understand that business models, which are changing will keep changing. We just need to make sure people don’t get forgotten in that equation. We need to be a nation of financial product innovators as well as people who credentially manage funds on behalf of millions of people.

 We can make our future or we can let our future happen around us. We can say that we’d rather stay as we are and keep competing in our own small pool, which is the Australian market or we can decide that we want to be the leading nation in the world in financial services. When I say that we can become world leaders, I don’t mean in every product and I don’t mean in all the wealth and I don’t mean in every aspect which we associate with other markets in the world. But we should be at least as ambitious four our future as the most capable nations in the world of which we compete.

 I believe that the financial services industry reflects the sophistication, the diversity, the ability and the imagination of the Australian peoples, but it’s each generation of leader in financial services who builds the next set of trophies and accomplishment and we can’t just rely on what’s happened before to guarantee our future.

 Thank you very much.