Spotlight again on reforming the financial system

By Nick Sherry

The year 2008 was one of the most testing years in living memory for financial markets, investors and super fund members as problems with defaulting US sub-prime loans developed into a full blown global credit crunch.

It’s been a rewarding year for me in my first year as Minister for Superannuation and Corporate Law despite my portfolio being in the ‘eye of the storm’, the global financial crisis.

During 2008, more than 25 banks worldwide have failed or been bailed out while share markets have been buffeted by a new hostility to highly leveraged or opaquely structured companies.

For the Rudd Government, a series of early, decisive responses to the crisis complemented existing policies, such as the move to nationally regulate mortgage brokers and consumer credit and reinforce the strengths of our compulsory superannuation system.

To protect Australians as the global crisis moves from financial markets to our ‘real’ economy — jobs and economic growth — the Government announced a $10.4 billion Economic Security Strategy to stimulate the economy and underpin growth.

The Government also took steps to guarantee the bank deposits of all Australians.

Regulation of credit ratings agencies (CRAs) and product research houses came under the spotlight as a result of CRAs’ perceived role in the financial crisis.

In response to an Australian Securities and Investments Commission (ASIC)/Treasury review, the Government announced that all firms will be required to have an Australian Financial Services Licence and report annually to ASIC on how they have complied with the International Organisation of Securities Commissions (IOSCO) Code of Conduct Fundamentals for CRAs. This will include reporting on the quality and integrity of ratings processes and conflicts of interest management.

Investment product research houses will have to report to ASIC on similar matters.

The Government also moved quickly to improve disclosure of short selling in the Australian market. We saw significant price declines in some shares this year that prompted speculation about the role of short selling and affected confidence in the market.

The Corporations Amendment (Short Selling) Bill 2008, which was introduced into Parliament in November, clarifies the powers of ASIC to regulate short selling, bans naked short selling (which means the seller will need a legally binding securities lending agreement before making a short sale); and will ensure disclosure of all covered short sales.

Further, I have commissioned the Corporations and Markets Advisory Committee to review certain financial market practices such as the use of margin lending by company directors, trading during ‘blackout’ periods, the spreading of false rumours and the potential disclosure of market sensitive information at analysts’ briefings. The negative effects of some of these practices have been seen in recent market volatility.

The global financial crisis has also dented the investment returns of Australian super funds, causing worry for many. Yet, our superannuation system remains strong and well-regulated, and long-term returns remain robust.

The crisis is a timely reminder of the nature of super, which is that it is a diversified long-term investment. Fund members spend 30 years in the system building their super and can expect to spend another 20 years in retirement. I have spent a lot of time this year reminding people of this.

Of course, financial planners have a very important role in educating clients about market events, including the need to avoid ‘quick fixes’, such as moving from equities to cash, that may detract from optimum returns long term.

In leaner times, investors are also more likely to question the fees they pay and whether they are receiving value for money. It is my belief that good financial planning comes to the fore in tough times rather than in boom markets where ‘a rising tide lifts all boats’.

I have also been very vocal this year about my opposition to ‘Latin-like’ product disclosure documents that proliferate in financial services.

The Financial Services Working Group, with which I am heavily involved, and comprised of ASIC, Treasury and Department of Finance representatives, is also close to completing its work on ‘intra-product’ advice.

The aim is to help people receive simple, cost effective advice from their own superannuation fund on investment options, insurance and contributions. The Government believes this area represents a major unmet need for advice.

Last but not least, agreement has been secured with the states for the Commonwealth to take over responsibility for the remaining areas of financial services and consumer credit. Credit providers and finance/mortgage advisers will have to be licensed and adhere to responsible lending conduct rules.

Senator Nick Sherry is the Minister for Superannuation and Corporate Law.