Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
Keynote Address to the FINSIA Asia Financial Services Summit
Park Hyatt, Melbourne
17 June 2010
Thank you Martin [Fahy, FINSIA CEO] for that kind introduction.
I'm delighted to be here because I'm delighted to support the efforts of any organisation that is promoting the development of Australia's financial services industry in Asia, as FINSIA is doing.
The subject of this summit is one very much on the mind of the Government – positioning Australia for the "Asian century" and promoting Australia's financial services industry.
Preparing for, and capitalising on, the opportunities that are being created by the growth of Asian economies is an essential task for any sensible Australian Government at this stage of the region's economic development.
To talk about the Asian Century is not to suggest some sort of Asian hegemony. It is simply to acknowledge the fact that the defining factor of economic growth throughout coming decades will be extraordinary development of Asian economies.
This is not, of course, limited to China. India, Indonesia and Malaysia, among others, are countries with rapid growth and enormous scope for greater engagement – in financial services in particular.
Economic links with Asia
Australia is situated on the edge of the fastest growing region in the world.
The population of Asia at the start of the century was 4 billion. By 2050, it will be 5 billion – which sort of puts our population debate in perspective.
But even more important for our purposes than the increase in population is the liberalisation of financial markets – opening up opportunities for mutually beneficially engagement.
Australia, which arguably has the most efficient and competitive "full service" financial sector in the Asia-Pacific region is well-placed to play a significant role in this development.
Our greatest asset in financial services is the quality and professionalism of the workforce.
Human capital issues almost universally rank very highly in analyses of effective and successful financial sectors.
The skills that we have built in managing and developing our increasingly sophisticated financial services and superannuation sector in the last 20 years stand us in very good stead.
The importance of human capital is why I so warmly welcome the establishment of FINSIA's professional development program, which is being launched this morning.
I welcome the fact that 1,200 experienced financial sector professionals have signed up to be mentors and I'm confident that the development of the FINSIA Financial Services Professional credential will play a role in further boosting our reputation for excellence.
Despite the strengths of our financial sector, our export performance has been ordinary,
Our funds management sector, one of the largest and most sophisticated in the world, manages only a small volume of funds sourced from offshore.
Knocking down the barriers to improved export performance has been a key priority for this Government, and was the driving imperative of the Prime Minister's decision to create a Minister for Financial Services at the Cabinet level.
Financial services centre
On Budget night, we released our response to the report of the Australian Financial Centre Forum – the Johnson Report – which we commissioned in September 2008 to recommend further steps to promote Australia as a financial services centre.
Our response provides in-principle or direct support for 18 of the 19 recommendations in the report.
One of the recommendations we have accepted is the introduction of an Investment Manager Regime. This will provide greater certainty around the tax treatment of foreign funds managed by Australian investment managers.
Another recommendation we are pursuing is the development of an Asia Region Funds Passport, which would enable a complying retail investment fund in a member country to offer its products in other signatory countries. This will assist local fund managers to manage a wider pool of asset from their home base.
On Budget night we announced that this recommendation has a lot of potential and Australia will be raising the concept through the APEC Finance Ministers' process to progress discussion with our Asian counterparts on this proposal.
A third recommendation we have accepted is to phase down the Interest Withholding Tax (IWT) incurred by local subsidiaries and branches when they pay interest on borrowings from their overseas parents. This reform also extends to Australian-owned financial institutions borrowing from overseas related parties, and any financial institution borrowing offshore retail deposits which they on-lend in Australia.
For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10 per cent to 7.5 per cent in 2013-14 and to 5 per cent in 2014-15.
Subject to budgetary constraints, we would ultimately like to reduce this rate to zero.
Meanwhile, the IWT rate applying to borrowings by any bank branch from its overseas head office will be reduced from 5 per cent to 2.5 percent in 2013-14 and to zero in 2014-15.
This is an important measure, which will both boost Australia's attractiveness as a financial centre and potentially enhance banking competition.
Perplexingly, this measure does not enjoy bipartisan political support.
We have already made concrete progress on some of the report's recommendations designed to enhance our international competitiveness.
On 31 March, for example, I announced support for competition between markets for trading in listed shares in Australia and in principle approval of the market licence application of Chi-X Australia.
This announcement is in line with the Johnson Report's recommendation, which advocates competitive, efficient and innovative equity markets as a vital step in the development of Australia as a financial services centre.
The Government also announced the decision by ASIC to provide class order relief to listed entities to issue bonds to retail investors using a simplified process.
This initiative will help to further develop our retail bond market, and is in line with a key recommendation of the Johnson Report.
Australia's equity market is well developed, being the seventh largest in the world and the second largest in the region (behind Japan).
However, our debt market is relatively small. A deeper and more liquid Australian corporate bond market will make it easier for Australian businesses to diversify their funding sources as an alternative to borrowing from banks.
This is another example of a measure which both enhances Australia as a financial centre and potentially boosts competition for our existing banks. It underlines the point that promoting Australia as a financial services centre has benefits for our export performance and international engagement, but also for the choice and range of options and products available for Australian domestic markets.
Centre for International Finance and Regulation
I talked earlier about the importance of our skills, the necessity to build our human capital.
This is what we had very much in mind with our Budget decision to invest in a Centre for International Finance and Regulation.
The Centre will provide tertiary education and training for financial regulators from Australia and across the Asia Pacific. It will also undertake research into innovation in the financial sector and best practice financial regulation.
The Government is providing $25 million for the Centre over the next four years.
The establishment of the Centre will complement the Government's response to the Johnson Report and will be a significant step in advancing our regional engagement. I'll be making further announcements about the process for establishing the Centre in the not too distant future.
Any discussion of Australia's engagement with Asia would be incomplete without talking about the importance of Islamic finance.
When thinking of Islamic finance, many people's minds turn to Dubai, Qatar and London. In fact, when we consider we have the world's largest Muslim population living in one of our nearest neighbours, the opportunities for Australia come into starker relief.
In fact, 62 per cent of the world's Muslim population lives in the Asia-Pacific region.
The global Islamic finance, banking and insurance market is already worth almost $US1 trillion. The growing worldwide interest in this market means that Australia cannot afford to be left behind.
Australia's Muslim population is about 365,000, or 1.7 per cent of our total population. This exceeds the combined Muslim population of Hong Kong and Japan, and is over half the Muslim population of Singapore.
Our political stability and geographic location mean we are well-positioned to service this rapidly-growing sector of the global financial services market.
Islamic finance is a concept that is not universally understood. Some prefer to refer to it as alternative finance or ethical finance because of its aversion to speculation and its rules on what constitutes ethical investment.
Experience offshore shows that a significant proportion of investors in Islamic-compliant products are not in fact Muslim but investors attracted to the heightened stability and steady returns of these products.
There is an opportunity for Australian-based banks to provide a range of Islamic-compliant investment and financing products and services to Islamic banks, corporations and high net worth individuals, particularly for the wholesale market.
Recognising the potential of Islamic finance, the Government is undertaking further work to remove unnecessary legal and taxation barriers to this sector.
This has been an area we've spent some time progressing.
Islamic finance was the centrepiece of the recent visit of my colleague, the Assistant Treasurer, Senator Nick Sherry, to the Middle East.
Shortly afterwards, in Malaysia, I signed a Memorandum of Understanding with the Governor of Bank Negara, Malaysia's Central Bank, on closer engagement between the Australian Treasury and the Bank on the promotion of Islamic finance.
The Board of Taxation has already commenced a review of Australia's tax laws to see whether we need to amend the tax law to ensure that Islamic finance products have parity of treatment with conventional products. The Board has been asked to provide the Government with a final report by June 2011.
On Budget night, we also announced the establishment of interdepartmental committee to examine barriers to Islamic finance. The IDC will be guided by the principle that there should be no obstacles — but no special treatment — for Islamic finance products. The IDC will provide me with advice on any regulatory barriers they identify.
For Australia to ignore the potential for Islamic finance would be like Australian farmers ignoring the Middle East as a market – it would simply make no sense.
These measures will go a long way towards ensuring that Islamic finance products can be integrated into Australia's suite of financial services, giving us a competitive advantage in attracting those funds.
Government's record of achievement
Previous Australian Governments have paid lip service to the ambition of Australia being a financial centre. But it takes more than a slogan – it takes reforms and concrete actions.
Each of the Rudd Government's three Budgets has included measures to promote Australia as a financial services centre.
Our first Budget included cuts in the withholding tax for distributions from Australian managed funds to offshore investors. It was a reform that had long been called for by the financial services industry. As a result of gradual reductions in our withholding tax rate from 1 July this year, Australia will have one of the lowest rates in the world.
Last year's Budget included the abolition of the Foreign Investment Fund provisions, again a very significant reform that will make a contribution to Australian being a financial services centre.
And this year's Budget contained the measures I've already outlined.
Superannuation and financial advice reforms
We are also making big improvements domestically to superannuation and financial advice.
The primary motivator of our superannuation policy is – and must always be – a comfortable retirement income for Australians.
This has not, of course, meant that improved retirement incomes for Australians have been the only benefit of our superannuation system.
The skills that Australia has built in terms of wealth management as a result of our superannuation system are, in my view, the single most important factor in our competitiveness as a financial services centre.
Australia's funds management industry has capability across liquid asset classes, such as equities and fixed interest, as well as illiquid assets, such as infrastructure and property. We also have strong experience in investment consulting and financial planning, as well as the governance and administration of pension products.
For example, the two largest infrastructure fund managers in the world (by assets under management) are Australian – Macquarie Group and Industry Funds Management.
Growing our pool of funds under management can only have positive implications for our ambition to be a significant financial centre.
Australia's superannuation pool was on track to grow to $5.3 trillion by 2035. The superannuation reforms we announced on 2 May will add another half a trillion to that amount.
These reforms together, with the "Future of Financial Advice" reforms, all add to our development as a financial services centre.
In relation to the reforms to financial planning, I would argue very simply that it would be impossible to ask those in other countries to place their trust and confidence in our financial planning industry if Australians do not.
This point was made very clearly in the Johnson Report, which observed that attracting overseas capital to Australia depends partly on the reputation and integrity of Australia's financial advisory sector.
Sadly, and almost inexplicably, this Government's reforms to financial planning are being opposed by the Coalition, as are our improvements to superannuation and the reduction in interest withholding tax for financial institutions.
The Government is committed to promoting Australia as a financial services centre because of the many benefits it would bring to our nation.
This is an area where the Government sees real possibilities. The opportunities for leveraging our financial services skills and expertise, in the region and beyond, are potentially enormous.
Once again, I would like to thank you for inviting me to be here today. And I would also like to thank FINSIA for your ongoing commitment to raise professional standards across the financial services industry.
I wish you well for the remainder of your Summit.
I am happy to take any questions.