30 October 2017
Speech - #2017027, 2017

Address to the Financial Services Council, Sydney

Check against delivery

Good morning and thanks very much for that introduction.

It's great to be here today with the Financial Services Council — the voice of Australia's biggest sector and one of our largest employers.

It's business as usual for the government despite some issues in recent days.

Our economy continues to show its mettle, as it shakes off the final days of the prolonged and painful exit from the mining investment boom, and forges a path towards broad-based growth.

Real GDP growth grew by 2 per cent in 2016-17 after being revised up by the ABS on Friday and is expected to rise to 2 ¾ per cent annual growth this financial year.

Businesses are experiencing the best conditions since 2008 and are beginning to ramp up their investments as they spy the blue skies through the clouds that may have obscured their outlook in the past three years.

But the real cause for joy within the Australian economy has been the record jobs growth that shows no sign of abating.

Australia just experienced the strongest annual full time jobs growth on record - with 315,900 full time positions created in the last year and 371,500 in total.

Nearly 20,000 new jobs were created in September alone, the 12th consecutive month of jobs growth. You have to go back 23 years to find a longer run of growth.

The rate of annual jobs growth is now above 3 per cent, more than 15 times faster than in 2013 when we were elected. And since that moment in time, 825,000 jobs have been created, almost two thirds of which have been secured in the past two years.

As well as growing the economy by encouraging investment, building infrastructure and giving businesses the incentive to expand and create jobs, a lot of our attention this year has focused on the financial sector.

Australians are heavily reliant upon our financial services sector. It forms a crucial and unavoidable part of their daily lives.

These services enable some of our most important decisions in life - borrowing for that first home, saving for retirement, building a portfolio of wealth.

More than $2.7 trillion is entrusted to the sector by 13 million Australians, underlining its importance to not only customers, but the stability of the national economy.

Improving the quality of the financial system, ensuring it is providing stability to the sector and the wider economy as well as serving its customers well, is our constant remit.

The Turnbull Government's agenda is governed by three key perspectives.

Ensuring our financial system is unquestionably strong to protect against the storms that may arise;

Ensuring our financial system is unquestionably accountable; to protect against rogue operators and rash decisions that undermine the sector and hurt the customer, and finally;

Ensuring our financial system is unquestionably competitive. You exist because of the customer. When they are not front and centre, you've lost your compass.

Together this creates a system that is fair.

Today I'm pleased to outline how the Turnbull Government is taking action now, and ensure these three key perspectives are driving our agenda.

A key reason Australia was able to withstand the body blows thrown from the GFC was the resilience and prudency of our banking system.

This was the message I told global bank executives and business leaders in New York earlier this month.

We didn't get bashed around by the GFC like they did, and their counterparts across the Atlantic did. Our economy continued to grow while others ground to a halt, and our banks weathered the storm better than most.

Since the GFC, Australian banks have increased their capital ratios and now have a significant buffer above APRA's current minimum regulatory requirements. The total capital ratio of the Australian banking system has risen by 3.6 percentage points since the start of 2008 to be 14.2 per cent as at June 2017. In July, APRA announced it would raise the minimum capital requirements for our banks to make them more resilient and less susceptible to shocks. These higher requirements will be met by 1 January 2020.

This increased minimum capital requirement will place Australian banks capital ratios in the top tier of internationally active banks, allowing them to enjoy continued access to international finance at competitive prices.

Importantly, the four major banks and Macquarie Bank have indicated they are well placed to meet the higher capital standards.

These new requirements place us at the head of the pack in providing financial stability in a post-GFC world.

As nations continue to negotiate the finalisation of Basel III and are close to reaching a consensus, our corporate regulator beat them to the punch with the necessary calibration to reach the "unquestionably" strong standards.

APRA is confident that even when Basel III is finalised, it will be able to comfortably accommodate the reforms within its framework without requiring extra capital requirements from our banks.

Of course, the Turnbull Government wholeheartedly supports APRA's efforts to ensure the Australian financial system is resilient. That's why we are building on our legacy of resilience by enhancing APRA's crisis management powers.

As recommended by the Financial System Inquiry, we are giving APRA additional ability to prepare for, and manage, a financial crisis.

In any sort of crisis you want the response to be clear and orderly.

Already APRA works comprehensively with banks and insurers to ensure they are prepared for a financial crisis.

But the legislative framework does not give APRA clear powers to make prudential standards for resolution.

Well, we are plugging this gap.

APRA will also have expanded powers when it steps in and takes control of a failing bank or insurer, through a new crisis management toolkit.

It has proven invaluable in bringing an orderly resolution to distressed financial companies. But has previously hit roadblocks when the company in trouble is part of a complex financial group.

Group entities will often house critical services, like staff or infrastructure.

To ensure effective resolution, APRA needs to be able to either direct or take control of all of these necessary group entities; which our legislation now provides.

We're also doing the heavy lifting to bridge the regulatory gaps around the lending activities of non-banks.

APRA has powers to address the financial stability risks and reinforce sound residential mortgage lending practices by Authorised Deposit-taking Institutions, or ADIs.

But it has no ability to manage material financial stability risks that might arise from non-ADI lenders.

International experience shows this presents a risk, so we have provided APRA with a new reserve power over the lending activities of non-banks.

It will be able to adjust the rules when it sees activities from non-bank lenders that contribute to instability within the Australian financial system. We envisage this is a last resort power, but a critical tool for APRA were it become necessary to step in.

APRA will also have "eyes on the ground" with its ability to collect data from the non-bank lender sector. Such access will allow it to react quickly when unfortunate trends arise.

This is largely a future-proofing measure.

We want the non-banking lending sector to be strong, vibrant and resilient, because it is vital source of competition in a market concentrated around five dominant players.

The customer needs them to thrive, which is why I have introduced legislation to lift the prohibition on the use of the word 'bank'. Currently only ADIs with more than $50 million in capital can call themselves a bank.

There are approximately 58 ADIs in Australia that will then be entitled to call themselves a bank, boosting their market appeal and their ability to secure cheaper funds.

The benefits to the customer are simple - cheaper loans.

But it is not just about the current players in the market. This change knocks down a significant barrier for new entrants - nimble and innovative lenders that care less about bricks and mortar branches and more about giving customers a better deal.

When UK authorities similarly removed the prohibition on the term 'bank', it led to a flood of new online lenders into the market, forcing the major banks to slash their interest rates and product pricing.

Almost 60 new banks have piled into the UK market since regulatory changes in 2013, including digital banks like Monzo, Tandem and Starling - banks that sell themselves as "mobile first''.

The future of our banking sector, under this similarly reduced licensing burden, is rather exciting.

As well as having a strong, stable and resilient banking system, it must be unquestionably accountable.

Australians are fair-minded and practical. They know that businesses need to make a dollar. They know that profit drives competition and innovation and supports jobs.

But profit should not come at the expense of the Australian people or the integrity of the financial system.

In introducing our Banking Executive Accountability Regime, we have sought to address any concerns and take action now.

And in doing so, ensuring the leadership of our banks are held to account for the decisions that can negatively impact their customers, or hurt the reputation of their bank.

This practical regime can be summed up in three words:

Transparency. Responsibility. Consequences.

To deliver transparency, the regime will require banks to provide accountability statements and governance maps.

This will show exactly who is accountable for what within the senior ranks of the bank, meaning that when something goes wrong, banks will not be able to shift the blame or claim that no one executive was responsible.

Bank executives and senior leaders will also have to uphold new standards of honesty, integrity, due skill, care and diligence — standards the community expects.

And they and their banks will have to wear the consequences of behaviour that contradicts those standards.

For banks that breach their obligations, we're introducing civil penalties of up to $210 million - a strong deterrence for poor behaviour.

But this goes beyond banks being forced to write big cheques to absolve their sins.

Executives and directors in breach of their obligations face disqualification from the banking industry and they may be stripped of their bonuses.

This is legislation with teeth. And such is necessary to restore the public's faith in the leadership of our banks and the way they go about their business.

It is not about bashing the banks. In fact, the formation of this legislation has been done in a very consultative manner with the banks and their CEOs. They have been extensively involved in the process. We have also listened to their concerns around procedural fairness and have addressed them.

Executives and directors wishing to challenge their disqualification will have access to both judicial review by the courts and merits review by the Administrative Appeals Tribunal.

Importantly, these are the same appeal rights afforded to banned financial planners.

Above all, we've designed the regime to improve behaviour within the banking sector.

We will not measure success in enforcement actions alone — the ultimate goal is to end inappropriate behaviour.

The onus is on the banks to ensure the regime drives improvements in culture and behaviour rather than becoming a compliance exercise or an enforcement regime.

Within the realm of financial advice, we are putting in the necessary guard rails to improve the professional, ethical and education standards of advisers.

The current requirements allowed some advisers to become 'qualified' to provide financial advice to retail customers after only four days of training.

This doesn't instill any confidence in the system — especially when you consider someone's life savings are on the line.

Furthermore, it doesn't instill confidence if you are a highly qualified financial adviser and you see shonks trashing your collective reputation.

So we are lifting the standard.

From 1 January 2019, new financial advisers will require a degree while existing advisers will have until 1 January 2024 to meet a standard equivalent.

Advisers will be required to sit an exam to test their practical and ethical knowledge; there will be uniform code of ethics to follow; and, from 2019, all new advisers will have to complete a professional year under the supervision of an experienced adviser.

We are fortunate to have Catherine Walter AM chairing the new Financial Adviser Standards and Ethics Authority and Dr Deen Sanders OAM as the inaugural CEO.

The authority will set the education, training and ethical standards that financial advisers will need to follow, and will be responsible for developing the industry exam.

Of course, all of this targeted action has a distinct face behind it. The customer.

An unquestionably fair financial sector must be unquestionably competitive.

This is why we are currently setting up the Australian Financial Complaints Authority — a one-stop shop for external dispute resolution for financial services.

This significant move was made with consumers and small businesses front of mind, providing them access to a free, fast, fair and binding dispute resolution service.

We appreciate that the number of disputes remain small compared to the overall size of the system, however, the impact of financial disputes on consumers and small businesses can be very stressful.

Many Australians have been left unsatisfied after going into battle with their bank to rectify a wrong. The time and cost has just not been worth it.

Therefore, it's imperative that Australians are able to resolve their financial complaints in a timely and proper way.

There will no longer be uncertainty over where to turn or confusion about which body has the ambit to hear a particular dispute.

The authority will replace the current three-prong system involving the Financial Ombudsman Service, the Credit and Investments Ombudsman, and the Superannuation Complaints Tribunal.

This means more consumers and small businesses can have their case heard, and receive fair compensation if they have wrongfully suffered a loss.

We are fortunate to have former Reserve Bank of Australia Assistant Governor, Dr Malcolm Edey, leading the transition and ushering in the new authority.

Dr Edey brings extensive knowledge, experience and leadership in making sure the authority is up and running by 1 July 2018.

Our extensive work on safeguarding consumers from predatory credit card lending has also been warmly received by the public.

We are tightening up how credit card providers are required to determine a consumer's ability to repay a credit limit.

Keeping a tight rein on your credit card is a routine struggle for many Australians. Particularly when you consider the average balance is sitting around $4700.

People can easily get themselves in trouble, especially when financial hardship knocks on their door or when an unexpected setback in life impacts the earning capacity of a household.

Here I have made four changes to make the system fair.

Firstly, I will require credit card affordability assessments be done on a customer's ability to repay the full credit limit within a reasonable period.

Currently, those assessments are only conducted on the customer's ability to pay the minimum repayment amount.

Secondly, I will be prohibiting unsolicited offers of credit card limit increases. No more.

Thirdly, I will also be simplifying how your interest is calculated. Those Australians that understand how credit card interest is calculated are probably all in this room.

Fourth, I will make it easier for customers to cancel their card or reduce their credit limit online.

And we are also forging ahead of our open banking regime in Australia that will give customers ownership of their financial data and reduce the costs of banking products.

This will empower customers to seek out products better suited to their needs - saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models, helping challenger banks driver greater competition and contributing to overall productivity.

I appointed Scott Farrell to lead the Open Banking Independent Review. Mr Farrell is a partner at King & Mallesons and has over 20 years' experience in financial systems law. He knows the FinTech sector and is a member of my FinTech Advisory Group.

I look forward to receiving his draft recommendations.

We're determined to make things easier and fairer for the consumer. And that, at the end of the day, will be of benefit for the financial sector.

One of the areas that I'm particularly passionate about is FinTech.

And it's not because I like hanging out with people who wear T-shirts, have beards and look a lot like baristas.

It's because they are on the cusp of what is hopefully one of the biggest changes to our banking and financial system in generations.

The technology is exciting. It can be distracting, it can sometimes over promise and under deliver. But at the same time it's hard not to appreciate the potential.

And like any new sector where innovation arrives, there are misfires, there are misstarts. But it's important that we don't lose sight of the benefits of FinTech in revolutionising how it will allow the customer to engage like never before.

First, it was seen as a disrupter of the big banks, and I think we're past that. What we're now seeing is a collaboration between the FinTech innovators and the financial and banking system.

There is an exchange. I think we're also past the part of the cycle where the purpose of starting a FinTech company is to be bought up by a bank, and walk away with a cheque.

When you've got the ASX looking to establish the first blockchain settlement exchange in the world, that's a pretty exciting thing for Australia.

We'll have a new online real time payment platform active and operational by next January.

When you consider that we will have in place the world's most forward leaning regulatory sandbox for FinTech development, the pieces of the puzzle are coming together for the financial services revolution in this country.

And the big winner will be the customer.

We'll see greater security and resilience in the system. Technology affords that as well. Whichever way you look, you're removing what have been institutional, bureaucratic, impediments between the customer and the service provider. Anywhere we've seen that in history, we've seen massive changes.

So that our goal, a financial system that is unquestionably strong, accountable and competitive, will also be a more fair system for the customers it is intended to serve.

We are putting customers at the apex of the financial system where they belong. We are making sure they benefit from competition, stability and accountability.

And importantly, we are not wasting any time; we are getting on with it and taking action now.

It is already happening.

And the customer, and the financial sector, are both better for it.

Thank you.