Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
ASIC Summer School
Grand Hyatt, Melbourne
2 March 2010
Good afternoon and thank you for the invitation to speak to you today.
The ASIC Summer School has become a key annual event for those involved and interested in regulatory matters. So I'm delighted to be here to lend my support to ASIC's efforts, even if this is the first summer school that I've ever been to which has been held in autumn.
The theme for the 2010 ASIC Summer School is 'Regulation beyond the crisis'.
Just one year ago, the Summer School theme was 'Big issues for our financial markets in the global crisis'.
Today, while we have not yet fully emerged from the shadow of the crisis, the light at the end of the tunnel is certainly growing brighter. Australia has not only weathered the global economic turmoil with remarkable resilience but we have emerged in better shape than any other advanced economy.
We were one of only three advanced economies to avoid technical recession.
And, while full year growth data for 2009 is not yet available for every advanced economy, latest figures suggest that we were the best performing advanced economy in 2009.
The IMF estimates that the Australian economy grew by just under 1 per cent in 2009, which compares to an average contraction of 3.2 per cent for the advanced economies collectively.
There are several reasons for Australia's comparatively good performance. Our strong trade links with China is one. The admirable flexibility of our employers and employees in reducing working hours has meant a lower unemployment rate than otherwise would have been the case.
The fact that a relatively high percentage of our mortgages are variable as opposed to fixed has meant that the Reserve Bank's monetary stimulus has been arguably more effective than elsewhere. Our superannuation savings played a major role in Australia's enviable record of capital raisings over the last two years.
And vital of course has been the fiscal stimulus.
The stimulus peaked in the middle of last year and has been gradually winding back since then.
There are some who argue that the stimulus may have avoided recession – but at too high a price.
It is argued by some that future generations are being saddled with unsustainable debt, that there will be a day of reckoning or some other apocalyptic type of event.
This analysis does not reflect that Australia's net Government debt will peak at 9.6% of GDP in 2013/14 , the same time that the average net government debt of major advanced economies will hit 93% of GDP.
It doesn't reflect the fact that Australia was voted by the World Economic Forum as the country with the lowest risk of sovereign debt default.
It doesn't reflect the fact that the Economist magazine, in its analysis of four different measures of debt sustainability, found that 19 major advanced economies (including the US, Canada, Germany and France) had more unsustainable debt than Australia.
It also doesn't reflect an understanding of the long term, and sometimes intergenerational, impacts of recessions and unemployment.
Recessions don't just come and go. They leave wreckage. People affected by unemployment, particularly young people, find it very difficult to recover.
The psychological, health and family relationship impacts of unemployment can be very long lasting.
Avoiding recession in Australia has had its costs. But these costs pale in comparison to the costs of higher unemployment.
Another key reason for our comparative resilience is our first-class regulatory framework. Our twin peaks model – of having APRA look after prudential regulation and ASIC deal with corporate regulation – has worked well and both agencies rose to the challenges thrown up during the particularly hairy moments of the crisis.
The role of regulation
Against this background, I want to reflect on reflect on the lessons we have learnt, and consider what it means for how we do business into the future.
One of the main fallouts from the GFC has been a renewed focus on the adequacy and quality of regulation around the world.
While Australia's regulatory framework held up exceptionally well under pressure, there is certainly a movement globally – through the G20 and elsewhere – to increase regulation of financial systems, corporate governance and financial reporting.
The Australian Government's response to this is that the key to proper regulation is to have better regulation, not more regulation.
In a moment, I would like to run through some of the regulatory reforms that we are undertaking in my portfolio and point out how these reforms are being shaped by this guiding principle.
Government approach to regulation
At a whole-of-government level, we have introduced the Better Regulation Ministerial Partnerships to ensure consistency of regulation across Government portfolio areas.
We are committed to using better regulation to drive productivity and reduce costs to business and the not-for-profit sector.
The upshot of our moves to improve the efficiency of regulation is a reform agenda designed to provide business with confidence and certainty. We want to protect and promote those who are doing the right thing while coming down hard on those who do the wrong thing.
Let me give you one or two examples of easing the burden on companies doing the right thing.
Last year, I released draft amendments to the Corporations Act designed to cut back on paperwork for many corporations and further refine our corporate regulatory framework.
The proposed measures will reduce unnecessary reporting obligations for business.
This is one example of where the Government is moving to ease the burden on companies doing the right thing.
The key elements of the reform package include streamlining the reporting requirements for companies limited by guarantee, which typically have a not-for-profit focus.
The reforms will also streamline parent-entity reporting, and provide greater flexibility for companies to pay dividends and change their year-end dates.
These important reforms will allow companies to focus on their core business, rather than spending time on excessive paperwork. The reforms will also ensure that Australia's financial reporting framework remains strong and ahead of world's best practice.
Access to share registers
We are also easing the burden on business through our plan to restrict access to share registers of listed companies to people who have a good reason – or 'proper purpose' – for wanting a copy of all the shareholders' details.
At present, virtually anyone – including unscrupulous operators looking to profit by making undervalued share offers to unsuspecting punters – is able to get their hands on a copy of a company's register.
At the same time, the amount companies are able to charge applicants for a copy of their share registers has been effectively capped by a recent Federal Court decision at $250, far less than it actually costs companies in time, effort and materials to produce.
So, in many cases, under the current law, it is costing companies money to hand over copies of their share registers against their will to scam artists who are using that information to rip off poorly informed shareholders.
That's why, earlier this month, I announced our plan to restrict access to share registers to applicants with a 'proper purpose'.
By doing so, we are making life easier for businesses – by empowering them to reject inappropriate attempts to access their registers and charge a more appropriate amount for the information when they do provide access. And, at the same time, we will protect ordinary investors from predatory offers.
A policy which reduces compliance costs for businesses doing the right thing, as well as making it harder for people who think it's appropriate to work under a business model which has at its core ripping off unsophisticated investors, is a win-win in my view.
Another area where we are moving to protect people doing the right thing is through our corporate insolvency package, which I announced last month.
The package included three core elements designed to reduce the costs and complexity of insolvency administration, two of which I want to speak about in a bit more detail.
Insolvent Trading Consultation Paper
Firstly, I released a consultation paper, setting out options for a 'safe harbour' for directors who are trying – in good faith – to navigate their companies through rocky waters.
The paper considers a 'business judgement' defence to insolvent trading. While submissions on this do not close until later today, we do acknowledge that there are fears within the business community that directors risk prosecution for insolvent trading in cases where they are genuinely trying to save their company – for the benefit of shareholders, employees and creditors.
In this respect, the Government is looking at ways to protect directors who are genuinely trying to do the right thing.
Informal work-outs could play an important role in business rescue by avoiding the destruction of value associated with formal insolvency arrangements – for the benefit of shareholders, creditors and employees of distressed businesses.
That said, I would stress that the release of our consultation paper is not a sign that the Government is going soft on directors engaged in insolvent trading. Both options for change flagged in the consultation paper – a 'business judgement' defence and a moratorium – set very strict guidelines to protect creditors, and directors doing the wrong thing will still find themselves prosecuted for inappropriately risking creditors' money.
Sons of Gwalia
The second element of our insolvency package that is designed to make life easier for businesses is our decision to reverse the Sons of Gwalia judgment.
The High Court in that case held that claims by shareholders against a company rank equally with those of unsecured creditors. This overturned a longstanding and widespread view that all shareholder claims in a corporate winding-up ranked behind those of other, traditional creditors.
The court's decision changed the well accepted balance of risk between shareholders – who, as investors looking to share in the profits of a company, acknowledge and accept an element of risk – and creditors, many of whom are simply owed money for work done or goods delivered.
This created uncertainty for creditors, who could unexpectedly find themselves splitting distributions equally with shareholders in the case of insolvency.
We also saw evidence that the Sons of Gwalia decision had made creditors more wary of lending money, tightening business credit generally and increasing the cost of borrowing.
This was bad news for shareholders, not just creditors. And it was bad news for shareholders of all companies, not just those who have invested in companies facing insolvency.
Another problem with the Sons of Gwalia decision – which relates to what I was saying earlier about coming down hard on wrongdoers – was that it did not transfer losses arising from misconduct to those responsible for that misconduct. Or, to put it another way, it did not create an incentive for those responsible for corporate misconduct to change their behaviour.
Instead, it burdened a company's creditors with the costs of misbehaviour by the company itself.
Market offences – increased penalties and powers
We have also moved to send a clear message about misconduct in relation to market offences, such as insider trading.
Earlier this year, I announced our plan to bolster ASIC's investigative powers and increase penalties for these offences.
The current penalties in the Corporations Act for the offences of insider trading, market manipulation, false trading, market rigging and making false and misleading statements aren't tough enough to deter those who would profit from market misconduct.
These activities damage the efficient functioning, and undermine the integrity, of our markets.
Individuals will now face criminal penalties of $500,000 or three times the profit made (or loss avoided) — whichever is greater — and up to 10 years' imprisonment.
Corporations will face criminal penalties of $5 million; three times the profit made or loss avoided; or 10 per cent of the corporation's annual turnover during the relevant period.
And not only are we acting to deter those who wish to profit from market misconduct but we are providing ASIC with the tools to catch them if they do.
In the same way that the ACCC can already ask a court to allow the Australian Federal Police to collect telephone interception material, ASIC will soon also be able to seek access to such information.
At present, ASIC is operating with one hand tied behind its back, prosecuting cases almost exclusively on the basis of circumstantial evidence. All ASIC can do is point to questionable share trades, link those with suspicious phone records and ask a court to infer all the requisite elements of knowledge and intention.
Armed with new powers, however, ASIC will be able to use the content of those self-incriminating conversations – the likes of which have been relied upon in prosecution of hedge fund billionaire Raj Rajaratnam in the United States – instead of just the fact that the conversations took place.
As mentioned, all of this comes with proper safeguards – including close judicial scrutiny.
ASIC will also be able to apply for search warrants without first issuing a notice. This will reduce the likelihood that those engaging in market misconduct will destroy the relevant documents. These increased powers and penalties show how serious the Government is about reducing these offences, and the potential impact on the Australian economy.
Another area where we are moving to strengthen confidence in our markets is in the transfer of market supervision responsibilities from financial market operators, such as the ASX, to ASIC.
It's vital that the supervision of Australia's financial markets is transparent and independent. For this reason, it's important that we avoid any actual or perceived conflicts of interest.
That's why the Government will substantially change the way financial markets in Australia are supervised – a reform that brings us into line with other leading jurisdictions.
ASIC supervision will consolidate the current individual supervisory responsibilities into one entity, streamlining supervision and enforcement, and providing unified supervision of trading on the market.
This means that, rather than having the ASX supervise itself – and potentially even supervise its competitors – ASIC will take on responsibility for supervising financial markets as a whole.
ASIC is well placed to take on the role of whole-of-market supervisor, and has been fully resourced to carry out this work. Legislation to give effect to the transfer has passed the House of Representatives and we are hoping it will pass the Senate in coming weeks.
As part of the reforms, the Bill establishes a new rule-making regime, in which ASIC will set 'market integrity rules', the first iteration of which was released for consultation last week.
These rules largely replicate the rules already in place under the ASX and will be the primary determinants of behaviour on Australia's financial markets.
Financial Services Working Group
Earlier, I mentioned the Government's Better Regulation Ministerial Partnerships, which are designed to reduce complexity and increase productivity.
Another example of the partnerships in action is the Financial Services Working Group. We established the Working Group in February 2008 to develop short, straightforward Product Disclosure Statements for key financial products.
New disclosure documents have been developed for the First Home Saver Accounts, and are close to being finalised for margin loans, superannuation and managed investment products. The disclosure information for these key products is now presented in only six pages, compared with earlier disclosure documents that often ran to hundreds of pages.
The new disclosure documents will improve consumer protection by presenting the key information the consumer needs to know in a way that is easy to read and understand.
Consumer testing shows that the new disclosure documents are achieving these aims. They are far easier to navigate, use and understand.
Shorter PDSs will benefit industry as well as consumers. An Industry Costs Study conducted by the Financial Services Working Group found that developing, maintaining and distributing PDS documents for the superannuation industry alone cost over $35 million a year.
The total cost of developing and distributing PDS documents for managed investment products was even higher at over $48 million. The bulk of these costs are incurred in the printing of paper documents, legal costs and administrative costs that can be markedly reduced with shorter PDSs.
I have tried to give you a flavour today of our approach to regulatory matters in corporate law.
On any analysis, there are some instances where events of the last two years have highlighted the need for a more interventionist regulatory approach to deal with market failures, externalities and simply bad corporate behaviour.
Equally, any fair analysis will show that there are regulations that have outlived their usefulness, had unintended consequences or that simply can no longer be justified. Where we've found those, we've torn them up.
There is more work to do in both these areas.
I look forward to our assessment of how we have done at next year's ASIC Summer School – and I will be especially interested to see what theme is chosen.