Chris Pearce (Aston, Liberal Party, Shadow Minister for Financial Services, Superannuation and Corporate Law) Share this | Hansard source

It is a great pleasure to rise in the parliament this morning to speak on the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009. This bill provides a mechanism for the regulation of margin lending, regulation in and around trustee companies and the regulation of so-called promissory notes. In addition, the bill also provides consistent federal regulation and oversight of these financial services and products by the Australian Securities and Investments Commission. The bill does present a good example of evidence that targeted reforms, reforms that go to particular parts of the Australian law and in particular to our financial system, can provide a positive result for all participants. This is a good example of where a bill has particularly identified areas in the law for improvement. It has targeted those areas, and it will solve some issues. All three of these financial areas, and the products and services in and around them, are very different. I guess it is appropriate to consider them independently of each other, and that is what I will do this morning.

First, let me go to the area of margin lending. The problems surrounding margin lending were highlighted during the difficulties experienced by some financial services organisations as the market turned in late 2007-early 2008. It has been widely canvassed in the press and elsewhere that there are regulatory failings in relation to margin lending. These have included many different areas, but a few of the areas identified include a potential lack of consistent and robust supervision and confusion over the adviser’s and the lender’s responsibilities, particularly in relation to the end user—the end user being the consumer, the customer, who has actually taken out the margin loan. Uniform national regulation of margin lending was agreed upon at COAG in March of 2008, and it was agreed that the responsibility for margin lending would pass to the Commonwealth so as to ensure that it was clearly and consistently regulated throughout our great country.

Federal regulation of margin lending was raised in June 2008 through the green paper on consumer credit and financial services reform. Subsequently, in June of this year an exposure draft of the bill we are currently debating was released for public comment. There have been some changes to the draft, which is good to see, as result of the consultation process. The primary change from the exposure draft to this bill has been the extending of the transitional period in relation to licensing.

There are three primary objectives of the margin-lending aspect in this bill. Firstly, the licensing of lenders and advisers who engage in margin loans will be mandatory. This will occur by instituting margin lending as a chapter 7 product in the Corporations Act. Madam Deputy Speaker Vale, you will know that chapter 7 in the Corporations Act is on financial services and markets. It is the chapter that particularly regulates all issues relating to financial products and financial services and was instituted as a result of the Howard government reforms under the Corporate Law Economic Reform Program, or CLERP, that the Howard government put in place during its time in office. Margin lending and the licensing of the lenders and advisers will now move into chapter 7 of the Corporations Act. Licensing will be compulsory 12 months after assent to the bill, and that will allow a phase-in approach. People will have up to 12 months to get themselves licensed, but once the 12 months following royal assent have passed it will be law that all people must be licensed.

Secondly, margin call responsibility and ambiguities between advisers and providers will be clarified in this bill. I think this clarification is a very important step as any grey areas over margin calls and margin loans has the potential to ultimately negatively affect the investor. Toward the end of the bull market run there were a series of allegations that investors with margin loans were not informed by their financial adviser or loan provider that they faced a margin call. I am sure all members of the House—and, indeed, the whole parliament—consider this to be an inappropriate and unsatisfactory situation for investors, particularly those investors who have taken out margin loans. Consequently, such investors essentially had the rug pulled from underneath them without warning as their equities were liquidated in order to meet the margin loan debt. That is the way the margin loan system works. Washing away any ambiguities in margin loan regulation is, I think, a positive step.

Thirdly and finally, this bill provides additional investor protection mechanisms for margin lending in terms of responsible lending. The responsible lending aspect is to be provided through subsequent regulations, and those regulations are currently on public exposure for comment. I comment here that I think that the omission from the bill of responsible lending arrangements in relation to margin lending is not a good or desirable outcome. Given that these provisions will dictate the way in which a business is to structure its margin loan business, I think it would have been much more preferable to have those sorts of substantive elements vested in the bill itself rather than in regulations.

I take the opportunity to highlight again that I think the government has a penchant for vesting the substantive measures of bills in subsequent regulations. This is something of a slippery method, because it provides the government the ability to escape some of the scrutiny that the parliament provides. It also fails to provide the business community with any sense of certainty. The reason for that is that regulations are much easier to change on the run than legislation. I think that from a practical, business certainty viewpoint, having these types of areas vested in the actual bill is a much more favourable situation than what we find today. A good example of that is a bill that went before the parliament late last year about short selling. We were told then that this bill was urgent and that the regulations would follow very soon after. I am sorry to say that bill passed this parliament in December of last year and, believe it or not, we still have not seen the regulations for that bill. That is an example of the point I am making about how important it is to vest these types of things in the actual bill. Some 9½ months after that bill was passed in this parliament, the business community still has not seen the short-selling regulations.

The next area of the bill is in relation to trustee companies. This bill provides national uniformity which will allow trustee companies to operate across multiple state jurisdictions without different laws and without prohibitive compliance costs. This is another good example, as I said in my opening remarks, of a good, targeted reform. Trustee companies are currently regulated at the state and territory level. There are currently 10 private licensed trustee companies operating in Australia. Trustee company services will, like margin loans, become part of chapter 7 and their products regulated in the Corporations Act. Again, it is a good initiative in my view.

Members of the Trustee Corporations Association, the sector’s peak body, have approximately $510 billion of assets under management, according to a Treasury estimate. It is therefore a significant sector of the financial services industry. The bill will provide authority under Commonwealth law for trustee companies to perform their traditional functions, deem such services to be ‘financial services’ and require them, as a result, to hold an Australian financial services licence when selling such services. Another result of moving it in under chapter 7 of the Corporations Act is that these people will now be required to hold an AFLS—an Australian financial services licence.

The third area of the bill is in relation to promissory notes. Under this bill, promissory notes will be regulated in the same manner as debentures. All promissory notes will now be subject to additional disclosure and regulatory requirements, which already apply to debentures. All promissory notes issued to retail clients will now be accompanied with a prospectus, appointment of a trustee and the issuance of a trust deed. There have been some notable failures of the use of promissory notes in recent years. Promissory notes are in fact very similar in function to debentures. However, they are regulated according to their value. Under the current distinction, promissory notes issued with a value less than $50,000 are regulated as debentures, while promissory notes issued with a value greater than $50,000 are not subject to debenture regulation and are treated as financial products. This bill will now regulate all promissory notes. It will require prospectuses and trustee documents to be provided. Again, this is a good and positive reform.

This bill has the three areas of margin lending, trustee companies and promissory notes. I notice here in the chamber that we have the distinguished chairman of the Parliamentary Joint Committee on Corporations and Financial Services and a fellow distinguished member of that committee, the member for Parramatta. The three of us have been spending quite a lot of time travelling Australia. The chairman has attended, I think, six public inquiries over the last couple of weeks. I have had the opportunity to attend three of those six in Melbourne, Brisbane and Sydney, where we have been hearing firsthand about some of the issues in and around margin lending. It is very clear to me that the proposals that are captured in this bill will be very important proposals. They will be positive initiatives that I think will help to overcome some of the stories that we have heard throughout the public hearings in relation to the inquiry that the committee is undertaking into financial services.

Overall, by instituting margin lending and trustee company services as chapter 7 products in the Corporations Act and treating promissory notes as we already do debentures, I believe that Australian investors will be the ultimate beneficiaries. This bill does represent worthy, targeted reforms—reforms that go to the act and improve it. This bill proves that this is a good way to ensure that the baby is not thrown out with the bathwater. You do not rewrite of the whole area; you go to the area where there is a particular problem and you put in place some reforms to improve it. This is a good example of how that can be done.

Our financial system in Australia has proven itself to be strong and robust. We hear each and every day in the parliament and in the media about the fact that Australia is travelling comparatively very well compared to other like nations throughout the world. There are several reasons for that, but one of the core reasons for that is our regulatory system—a regulatory system that was put in place years ago during the term of the Howard government, where we regulated the financial services industry in Australia. We put in place the so-called twin peaks regulatory model. We created APRA, the prudential regulator, to regulate our financial services from a prudential viewpoint and we established ASIC, the regulator of business conduct. It is through that twin peaks model that we have sustained a very robust and strong regulatory framework for financial services—and it is, as I say, one of the reasons that Australia has been performing well during these very turbulent economic terms. I think these are good initiatives, and I commend the bill to the House.

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