One of the great drivers of the Australian economy is — and will continue to be — the financial services sector.
It is the largest sector in Australia — accounting for around 10 per cent of our economy. It employs 417,000 people and impacts the lives of every Australian, from the moment they come into the world, to the moment they leave it.
Financial institutions also make up around 35 per cent, by market capitalisation, of the ASX, which is the eighth-largest market by market capitalisation in the Asia-Pacific.
What's more, Australia benefits from having the world's fourth largest pool of superannuation savings,1 with assets totalling around AUD$2.1 trillion — or over 100 per cent of our GDP, and that number is growing rapidly.
But in addition to its sheer size, Australia's financial sector is also remarkable for its stability. This of course is the result of a number of factors:
- A stable macroeconomic environment …
- Prudent risk management by institutions …
- A comparatively low-risk commercial banking model ...
- Australia is known as the lucky country, but the truth is - you have to make your own luck.
The most striking recent example of this is the way in which Australia was able to weather the global financial crisis.
Before the GFC, Australia's prudential framework was significantly more stringent than minimum international standards, and our regulators had a proactive approach to regulation and supervision.
It is difficult to quantify, but impossible to refute, that Australia's ability to steer through the shoals of the GFC was in part a result of the financial regulatory framework it had built ahead of the event, as well as prudential fiscal management by the former Howard-Costello Government.
In recent decades, successive Australian governments have commissioned three landmark financial system inquiries, entirely independent of any financial crises or economic shock.
The first inquiry paved the way for the successful deregulation of the financial system.
The second recommended reforms that shaped our current regulatory architecture, including the world-leading "twin peaks" regulatory model.
The "twin peaks" model has one regulator charged with financial system stability and another dedicated to market conduct and consumer protection. This model has proven to be a success in managing financial system risks and helped us navigate through the Global Financial Crisis. It was implemented in 1998 and has since been emulated in the United Kingdom, New Zealand, the Netherlands and Belgium.
The Murray Inquiry is the third example of the Australian Government commissioning a root and branch review of the financial system outside of a crisis. This Inquiry's recommendations are now being implemented — and they reach across five priority areas: enhancing resilience; increasing the efficiency of the superannuation system; enabling innovation; improving consumer outcomes; and empowering the financial regulators.
One of the key Murry recommendations is directed to ensuring that our banks' capital levels are 'unquestionably strong' so they can adequately absorb unexpected losses, and continue to lend and provide critical functions to the economy during times of stress.
In my role as Minister for Financial Services and Revenue I am determined to ensure that our regulators continue to build their capacity to steer our financial system in the right direction, and that the strength and stability of our banks and other financial institutions remain the envy of the rest of the world.
Now, that is a very brief run through of what I see as the strengths of the sector. And these are strengths underpinned by a highly skilled population — a result of world-class universities and a large skilled migration program.
Responding to risks and opportunities
So we have great strengths. But none have come about by accident. They are the result of careful and considered planning, over a long period of time.
And that brings me to my next point, which is how the Government is tackling the current risks to the financial sector — and capitalising on the opportunities for investment in Australia.
One risk includes consumers' confidence in banks and financial institutions – that is, the confidence that banks and other institutions will treat their customers fairly and ethically.
In response to this risk, the Government is paving the way for improved resolution of disputes between consumers and small businesses customers, and their financial institutions. We have accepted recommendations to Government from the interim Ramsay Review supporting the establishment of a one-stop-shop, binding dispute resolution scheme that can provide access to compensation where appropriate.
A one-stop-shop scheme will significantly improve consumer outcomes in the financial system.
And, we are committed to ensuring that Australia has a financial services regulatory regime that enhances trust and confidence. Indeed, the Turnbull Government has recently delivered on its promise to enact legislation to raise the education, professional and ethical standards of financial advisers and to reform remuneration practices that have led to poor outcomes for consumers.
These reforms will work together to deliver steady, continuous improvements to our financial system and we remain poised to take any further action that is necessary to strengthen our consumer protection framework.
So those are all important steps to mitigate risks, to protect consumers and to build confidence, but what else is on the horizon?
Certainly, the recent rise of anti-capitalist sentiment is a risk to global growth and development.
That said, however, Australia continues to embrace the enormous benefits that come from pursuing economic openness — and financial services is no exception.
The Government is currently delivering on the recommendations of Mark Johnson's 2009 Report - 'Australia as a Financial Centre.'
The policy recommendations in the Johnson Report seek to bolster Australia's standing as a major financial sector or hub in the Asia Pacific region.
In response to the Johnson Report, in 2015, the Government finalised the Investment Manager Regime. This regime provides certainty about the Australian tax treatment of widely-held foreign funds and foreign investors, including where they engage Australian fund managers and invest in Australian or overseas assets.
It encourages greater foreign investment in Australia and allows Australian fund managers to actively market their services globally, thereby promoting Australia as a regional financial services centre, and will create more jobs in Australia.
Another Johnson recommendation that the Government is implementing is the Asia Region Funds Passport.
The passport is a free-trade agreement for managed funds that allows Australian fund managers to sell their funds to investors in participating economies in the region, and vice-versa.
Over the past few years there has been substantial growth in foreign funds flowing into Australia to be managed by Australian fund managers. In fact, the number has doubled since early 2010 to reach AUD$46 billion at the end of 2015, a recent survey conducted by the Financial Services Council and Perpetual showed this. And, we also know that 62% of these funds are sourced from within our Asia Pacific region.
Demand for Australia's financial services expertise will undoubtedly continue as a result of the huge growth in the middle-class, and High Net Worth and Ultra High Net Worth individuals in Asia. ANZ projects that Asia's financial system could be as large as AUD$260 trillion by 2030 – or around three times the size of the European financial system in 2030.
So as Australia transitions from a resources-led economy to a services-led economy, we are uniquely positioned to take full advantage of the positive demographic changes that are happening in our region.
However, at just 3.4%, foreign sourced funds only represent a tiny proportion of Australia's AUD$2.66 trillion dollar funds management industry.
This can be compared with other major financial centres in the region such as Singapore and Hong Kong, which have around 70-80% of funds under management sourced from offshore investors.
An increase in Australia's foreign sourced funds under management to even 10%, would translate to significantly more investment, more Australian jobs and growth in GDP. In fact, modelling prepared by Deloitte Access Economics for the Financial Services Council shows that merely doubling the current percentage of funds management exports could lead to an increase in GDP of AUD$326 million and more than 700 jobs by 2029-2030.
To ensure that Australia will be competitive within the passport framework, we will introduce legislation this year to create a new corporate collective investment vehicle, or CCIV. The CCIV regime will facilitate the export of Australian funds via investment vehicles that are commonly used overseas, and which are widely understood by foreign investors.
In addition, our recently completed free trade agreements with Japan, China and Singapore open the door to many more opportunities for Australia to export its world-class financial services expertise. We are also pursuing agreements with other partners in the region to open up further opportunities, with partners such as Indonesia.
For example, the China-Australia FTA secures a range of unprecedented commitments from China to open their financial services sector to Australian providers, such as significant relaxation of restrictions on the ability of Australian banks to engage in local currency business in China, and for Australian securities firms to access the Chinese domestic equity underwriting and funds management sectors.
Looking ahead, we obviously think of the superannuation sector.
Australia's superannuation system is internationally renowned. That said, however, to remain world class we must ensure the system continues to evolve and reflect the time in which we're in. And, most importantly, it must deliver for everyday Australians.
As is stands, the vast majority of Australia's pension assets — at least 94 per cent — are in account-based pensions.
There are benefits to account-based pensions, obviously. But they do offer limited protection against longevity risk, and may not deliver high levels of income from a given superannuation balance.
That is why the Government is consulting on the development of a better regulatory framework to facilitate the provision of more efficient and innovative retirement income products.
These products are intended to help manage longevity risk, increase diversity and choice of products, provide individuals with guidance to make complex financial decisions, and, to ensure the retirement income system can withstand the change in Australia's demographics.
Importantly, the Government is mindful of the need for social security means testing arrangements to be complementary to the facilitation of these products.
All of you would be familiar with the potential (and disruption) associated with technological change. Australia is determined to be on the front foot on this.
Our highly educated and growing population is well known for its appetite for adopting new technology, and we can already see the beginnings of this in the way they consume financial services.
We are determined to provide supportive policies for entrepreneurship and innovation, recognising it as an engine of future growth and future jobs.
As part of the Government's National Innovation and Science Agenda (NISA), additional tax concessions for qualifying early stage investment in start-ups have been available since 1 July 2016, including a 20 per cent tax offset for investing in qualifying early stage innovation companies, and a 10 year capital gains tax exemption for such investments.
The NISA, as it is known, also included generous tax concessions for investors in Early Stage Venture Capital Limited Partnerships which invest in start-ups, including in the Fintech sector.
Of course, in developing these policies the Government has worked closely with industry. And it is this consultation — the working together for a common goal — that bodes particularly well as we continue to forge ahead.
So let me finish by, once again, thanking you for welcoming me to this forum today, and for the chance to talk about Australia's remarkable financial services sector.
As I said at the beginning, it is a sector that is strong, that is stable. And it has enormous potential to become even better.
And the Government is committed to making happen. We are working every day to make sure the sector is ready to embrace the opportunities — and tackle the challenges — not only of today but also the future.
I wish you all the best for the remainder of this forum, and I look forward to seeing many of you again next year.
1- In US$ billion