I’m particularly pleased to be here today to make my first speech since being sworn in as the Minister for Revenue and Financial Services in the Turnbull Government.
Before I get into the specifics of my new role, and the Turnbull Government’s program on financial services reforms, I want to talk about some of the challenges that confront the Australian Government and the 45th Parliament.
It is generally acknowledged that the Australian economy has done well for over a quarter of a century. We are entering our 26th consecutive year of growth. While there is no guarantee this growth will continue, the economy has proven resilient in the face of a range of shocks such as the Asian Financial Crisis, the Global Financial Crisis and a historic rise and fall in our commodity prices.
But we cannot be complacent.
Our terms of trade which hit historic highs under the previous Labor Government have now been falling since 2011, and as commodity prices fall, Australia is effectively taking a pay cut.
This has implications for the living standards that we enjoy today, and that our children will enjoy in the future. It also has implications for the ongoing health of the Budget.
In the past month, international credit rating agencies have noted the importance of continuing to improve the country’s budgetary position.
Standard & Poor’s noted that “our current stable rating outlook on Australia is based on our assumption that Australia’s conservative budgetary policies will continue and result in consistently narrowing deficits over the forecast horizon, maintaining the general government debt near or below current levels.”
Moody’s noted that it “expects fiscal consolidation to remain a key policy objective of the new government when it is formed.”
Future generations will be affected by decisions we make now. For example, they stand to benefit from policies that improve productivity and deliver higher wages, but they will also bear the costs of decisions that increase debt, to finance unsustainable levels of consumption.
The Turnbull Government is committed to providing the fiscal policies and structural reform that will improve the productive capacity of the economy.
The responsibility of keeping Australia in a strong fiscal position is one that is shared by all of the elected members of the 45th Parliament. The Opposition, the Greens and the crossbench all have an obligation to work together to achieve Budget savings to reduce the Budget deficit and maintain our AAA credit rating. This is especially important in times of significant global uncertainty.
Financial Services Sector
One of the great drivers of our economy is, and will continue to be, our financial services sector.
The financial sector is the largest sector in Australia, accounting for around 10 percent of the economy. It employs around 434,000 people and impacts every single Australian, from the time that they come into the world, to the time that they leave it.
The success of the sector is critical to ensuring that Australians are able to create opportunities, for themselves and their families, and to pursue their dreams.
Australians rely on these services to help manage their household budgets, to hold their savings and to provide the credit they need to get ahead.
Our financial system also supports growth in our economy and makes a direct contribution to the nation’s finances.
For instance, Australians have in excess of $2 trillion invested in superannuation, which equates to around 124 per cent of Gross Domestic Product.
While the financial services sector makes a major contribution to the economy and employment, the Government is committed to seeing the sector making an even stronger contribution. We are focussed not only on domestic growth, but also improving our exports of financial services, including taking advantage of our new trade agreements.
We are committed to Australia as a significant global financial services hub, as envisaged by Mark Johnson in his 2009 report.
While some steady progress has been made with the Asia Region Funds Passport, the investment manager regime, the simple corporate bonds legislation and the changes to the tax arrangements for managed investment trusts, there is still much more to be done.
At the moment Sydney ranks 17th in the world as a financial centre.
We will continue to identify further opportunities to open up new markets in global financial services trade and to turbocharge Australia as a financial services hub in the Asia region.
Which makes it an exciting time to be the Minister responsible for Financial Services.
But there are some important challenges that must be addressed to improve the performance of the financial sector and to ensure that it is meeting the needs and expectations of Australian consumers.
Today I’d like to take the opportunity to let you know what my broad responsibilities are on the financial services side of my portfolio. This description is not exhaustive and does not include my responsibilities as Minister for Revenue.
I am responsible for financial sector policy, including the financial advice sector; funds management; corporate trustees; and life insurance. I will also maintain my responsibility for corporate law and regulations and general insurance.
The Treasurer and I will be working on banking policy and the development of our superannuation legislation, including undertaking consultation with stakeholders on our measures before they are presented to the Parliament.
I will continue to be the Minister with oversight of ASIC.
A number of issues that are on my desk at the moment for action include ASIC funding and putting in place recommendations from the ASIC Capability Review; professional standards for financial advisers; implementing recommendations from the Financial System Inquiry; Client Money reforms; and the Asian Region Funds Passport and the Collective Investment Vehicle regime.
Consumer outcome measures
I’ll now deal with some of the specific challenges confronting the financial services sector and the Government.
The Government is conscious that trust and confidence in the sector has been diminished by the actions of some industry participants.
You would all be aware of recent examples of product and advice failures — instances where short-term commercial incentives have overridden consumer interests. And you would also understand that it’s imperative that Australians have access to financial advice they can rely on.
While the financial system is more sound and resilient than before the GFC , I agree with the Financial System Inquiry’s conclusions that while ultimately consumers are responsible for the consequences of their financial decisions, they must be treated fairly and ethically. The financial services and products they are advised to invest in should be suitable for them and should generally perform in the way they are led to expect.
The Government has announced and progressed a number of reforms to meet these fair and reasonable expectations.
Let me take you through some of the key reforms:
- We will lift the education, training and ethical standards of financial advisers.
- We will work to ensure remuneration structures do not adversely affect the quality of advice that consumers receive.
- We have committed a $127 million reform package, which will enhance ASIC’s surveillance capabilities, so it can better proactively combat misconduct in Australia’s financial services industry. This, in turn, will bolster consumer confidence in the sector.
- We have announced the establishment of a panel of eminent persons, led by Professor Ian Ramsay (chair), to review the role, powers and governance of all of the financial system’s external dispute resolution and complaints schemes, including the Financial Ombudsman Service, and will assess the merits of better integrating these schemes.
- And, we will consult on strengthening ASIC’s enforcement tools in relation to the financial services and credit licensing regime, and improve the accountability of issuers and distributors of financial products.
The agenda for the Turnbull Government is a large one.
But the ultimate success and effectiveness of the Government’s reforms will depend on the industry’s active and positive participation in the process.
As all of us understand, ignoring underlying problems in the financial services sector reduces trust.
We believe that by taking these steps, we can begin to improve the perception of the industry and help create a vibrant and trusted sector into the future.
This is demanded both by consumers and the industry and pursuing these reforms, will ultimately result in greater customer engagement and economic growth.
So with that said, I will now discuss in more detail two of the consumer outcome reforms the Government is pursuing.
The first is raising the professional standards of financial advisers.
Now, I want to emphasise that financial advisers have a very important role. They help Australians plan for their future and that of their family.
It is in everyone’s interest that Australians are receiving high-quality advice from high-quality advisers.
Right now, we know that only one in every five Australians seeks financial advice.
As Australia’s population ages, we want people to seek advice from those with expertise and experience.
And the best way to do this is by raising the professional standards of advisers, as was recommended in numerous recent inquiries, including the Financial System Inquiry and the inquiry of the Parliamentary Joint Committee on Corporations and Financial Services.
The Government has taken the first steps towards creating an enduring framework that raises the professional, ethical and educational standards of advisers.
There are, of course, many aspects to these proposed reforms. So let me quickly outline them for you.
The Government will establish a standard setting body, as a Commonwealth company limited guarantee, to develop professional and educational requirements for new and existing advisers, including an exam and a code of ethics.
All new advisers will be required to complete a relevant degree, pass an exam and complete a professional year from 1 January 2019.
Existing advisers will have a five-year transitional period to reach degree equivalent status — a status that can be achieved through a number of flexible pathways.
This transition period reflects our awareness that existing advisers will need to balance the further education requirements with the full-time demands of continuing to provide high-quality financial advice to their clients.
Existing advisers will have from 1 January 2019 to 1 January 2021 to pass the exam, unless exempt. At this stage, it is envisaged that the standards body will have the power to exempt some advisers on a case-by-case basis. However, this exemption from the exam will be reserved for advisers who are exceptionally qualified, and who have many years of experience in addition.
Further, all advisers will be required to undertake continuing professional development from 1 January 2019, and will need to comply with a Code of Ethics. The Code of Ethics will be developed by the standards body. Individual advisers will also need to nominate and subscribe to their preferred compliance scheme, which will monitor the adviser’s compliance with the Code of Ethics.
Finally, the Government will enhance the Financial Adviser Register, to provide a mechanism for accountability and transparency, which will assist consumers to make informed decisions about choosing a financial adviser.
I am confident that this new framework will improve the quality and integrity of financial advice.
We want a robust framework for improving standards, whilst also minimising the compliance burden for the industry and for individual advisers. Stakeholder feedback from the consultations broadly agrees that these objectives will be satisfied.
These reforms will boost consumer confidence and trust. They will professionalise the industry. And, ultimately, they will benefit advisers, their clients and the industry as a whole.
We know that building consensus across this diverse sector is critical.
There are still some technical details that we need to settle. We will keep working with industry and consumers to make sure we get these reforms right.
Now I want to turn to another important reform: life insurance advice commissions.
Life insurance products provide financial security for Australians during times of need — and, given its importance, it is crucial that the advice sector is performing at the highest level.
We all know that the life insurance advice sector has faced scrutiny in recent times.
For example, ASIC’s 2014 review of life insurance advice found that too often consumers received poor or inappropriate advice where an upfront adviser commission was paid.
Of course, as with financial advice more broadly, the Government knows that the majority of the sector does the right thing. But if the sector is to grow, and consumers are to receive appropriate advice, we need to address these issues and concerns.
A number of recent inquiries and reports have made recommendations to improve the quality of life insurance advice — including a report by ASIC, the industry-commissioned Trowbridge Review and the Financial System Inquiry.
And in response to these reviews the Government has worked with key industry stakeholders to introduce a package of reforms that better align the interests of advisers and consumers.
Now, as you’re no doubt aware, the legislation was before the Senate when the election was called. Consultation had also started on regulations to support the legislation.
With that in mind, the Government will now work through the recommendations made in submissions.
I want to reiterate that the life insurance advice reform package remains a priority for the Government and I intend to work closely with stakeholders to ensure its passage through the Parliament.
Before I move on to the important issue of exporting financial services, I want to acknowledge the other issues that have been exposed in relation to life insurance more broadly. ASIC is currently investigating the issues that were raised in the 4 Corners report in relation to CommInsure. ASIC will also consider whether the matters raised in that report are indicative of systemic problems across the life insurance sector that need to be addressed. The Government will carefully consider the findings of ASIC’s investigation.
Exporting financial services
Now to the important issue of exporting financial services.
We have already taken significant steps to strengthen the competitiveness of the financial services industry. Our Government legislated the investment manager regime, making taxation changes to attract investment into or through Australia by foreign investors that use local funds managers. In addition, in the last term of Parliament, we legislated a dedicated new tax system for managed investment trusts. The new model recognises the commercial needs of the funds management sector by more closely aligning the commercial and tax consequences of a managed investment trust’s activities.
And we are continuing to take further steps to facilitate the export of financial services.
As you know, while Australia has one of the largest and most sophisticated managed funds industries, exports of funds management services are relatively low by international standards.
At the moment, less than 4 per cent of the $2.6 trillion in funds under management in Australia are managed on behalf of foreign investors.
We announced in the Budget that we will introduce a tax and regulatory framework for two new types of collective investment vehicles (CIVs): a corporate CIV and a limited-partnership CIV. This will allow Australian fund managers to promote investment vehicles to foreign investors that are more widely understood by those investors.
Importantly, these new investment vehicles complement other related Government initiatives, including the Asia Region Funds Passport, by making it easier for our funds managers to export more of their services to foreign investors.
We recognise industry concerns that withholding tax can contribute to competitiveness of the products that a CIV can offer and the Government will be looking at these rates during the next twelve months.
The passport means that Australia’s managed funds industry will be able to access a single market, with high standards of investor protection right across the Asia region. And, I’m pleased to report that Thailand is now formally committed— joining Australia, Japan, Korea and New Zealand. This brings the combined population of member countries to more than 250 million people.
The Government will now give priority to legislating the Passport arrangements.
Finally, I will move now to superannuation.
The Financial System Inquiry recommended there should be a clear objective for superannuation. As you are aware, the Government agreed, and we set about consulting on how exactly that objective should be framed.
In the Budget we announced that we will enshrine in legislation, for the very first time, the objective of the superannuation system.
It is: ‘to provide income in retirement to substitute or supplement the Age Pension.’
In other words, it should be used to increase self-sufficiency in retirement, not to accumulate unlimited wealth to be passed on to the next generation.
Having a clear, agreed objective will provide greater long-term confidence and policy stability, as well as a yardstick for assessing proposals for policy change.
Superannuation is a key part of the system that supports Australians in their retirement years. As the population ages and fiscal pressures increase, we need to be sure that the tax concessions that apply to super are fiscally sustainable and appropriately targeted, and that the system has integrity. It also needs to be flexible, to accommodate the wide range of working arrangements that people experience across their lifetimes.
As you are aware, the Budget contained a package of superannuation measures that are designed to improve the sustainability, flexibility and integrity of the superannuation system. We expect to begin consultation on exposure draft legislation shortly and, consistent with usual practice, will listen carefully to advice on the design of the legislation.
While some of the changes were the subject of much attention during the election campaign, others have received less attention, and I would like to highlight now some of the changes that will improve the flexibility of the system.
We recognise that people have different work patterns. People will often have multiple jobs and several careers across their lifetimes. They might also take breaks from work — to look after children, or care for an elderly parent, for example. The superannuation system needs to accommodate changes in how people interact with it over their lives.
Under the changes more employees and a wider range of self-employed people will be able to claim a tax deduction for personal superannuation contributions.
For the first time, people with balances under $500,000, will be able to rollover unused concessional caps for the previous five years to allow those with interrupted work arrangements, such as parents, to make ‘catch-up’ concessional superannuation contributions.
We are also encouraging partners to make contributions to their low-income spouse’s superannuation by extending the eligibility for individuals to claim a tax offset for these contributions.
We will also remove the rules that stop people aged 65 to 74 from making voluntary contributions to their superannuation. This will help those who are no longer working to top up their retirement savings from sources not necessarily available to them before retirement.
And we will remove tax barriers that might hinder new retirement income stream products to encourage innovative products being designed and developed. This will ultimately give consumers more choice and improve confidence around longevity risk.
Finally on superannuation, the Government remains committed to strengthening the governance, transparency, competition and efficiency of the superannuation system. It doesn’t make sense that some superannuation funds have lower governance standards than life insurance companies and banks, given that superannuation is a compulsory savings system.
So let me once again thank the FSC for inviting me today.
This is an industry of tremendous importance — and tremendous potential. And I look forward to working with you to see it fulfil that potential.
The Government’s reform agenda is one part of this; summits such as these are another.
I believe that with your ideas and your support, we can grow financial services in a way that will benefit every individual, every family and every business across Australia.
I wish you all the best for the remainder of the summit.