Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Hansard source

Some people say that it is very hard to get agreement in this place, but here I am, in the company of my colleagues, with two people in the public gallery to witness this moment: we are rising in support of the government's legislation to amend Commonwealth government securities legislation. The Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 seeks to establish a market for retail investors in Commonwealth government securities. The government has chosen to facilitate the trading of Commonwealth government securities to retail investors through an indirect beneficial ownership structure. The bill does this by making amendments to the Commonwealth Inscribed Stock Act 1911—which I am sure the people in the gallery have read!—in order to facilitate the trading of retail Commonwealth government securities on financial markets and to allow the Australian Office of Financial Management to carry out the administrative duties arising from the retail market.

The bill also amends the Corporations Act 2001—that was my bill. I introduced that bill into this place with the most significant referral of power from the states to the Commonwealth since income taxing powers. This amends the Corporations Act 2001 in order to ensure that investor protection measures and market integrity provisions apply to the retail CGS market.

The coalition welcomes the idea of opening up investment in Commonwealth securities to the retail market. It has many benefits. Investing in Commonwealth securities allows people to invest in the future of their country—you would hope—and to contribute in a direct sense to the building of the nation—that is, of course, if the debt is being used to build the nation.

Unfortunately it has been used, in the main, to paper over the cracks of deficit budgets under Labor over the last four years.

Having Australian households investing in Commonwealth securities helps to finance the government's debt from domestic sources of capital and reduces reliance on overseas financing. This is particularly important at present, when around three-quarters of Commonwealth government securities on issue are held by offshore investors—in fact, it is probably more than that at the moment. Improving access to Commonwealth securities also facilitates a broadening of investment choices for the retail sector.

It is widely noted that Australian superannuation investments are overly weighted, arguably, towards equities when compared with retirement fund investments in other countries, such as the United Kingdom and the United States. An OECD analysis of retirement income systems shows that equities are by far the largest asset allocation for Australia—nearly 55 per cent, compared to the United States at 45 per cent and the United Kingdom at just 40 per cent. Treasury analysis has shown that domestic equities measured as a percentage of GDP for Australian super funds have risen from just over one per cent of GDP from 2003 to 2007 to just over three per cent of GDP from 2008 to 2011. Of course, there was a period in late 2008 and early 2009 when the equity capital markets raised $103 billion, essentially from superannuation funds, in lieu of rolling over debt or to add to the capital of existing businesses, and that in itself represented a substantial increase.

This year's Budget Paper No. 1 noted:

Since 2008 there has been a substantial shift in superannuation funds' asset acquisition away from foreign equities and debt securities towards domestic equities …

This overweighting to equity seems in part to reflect a lack of alternative investments, particularly in domestically issued, fixed-interest securities. The opening up of the Commonwealth securities market to retail investors, along with the development of an active and liquid secondary market, should help facilitate the development of investor interest in private-sector corporate securities. The long-term objective should be the development of active secondary markets and retail investments in a full range of private and public debt instruments.

Of course, Australian retail investors were once readily able to invest in Commonwealth securities through the mechanism of Australian savings bonds. These were available from 1976 until 1987. They were hugely popular because, particularly during that period, they were high yield and a safe investment which carried no price risk. What I mean by 'no price risk' is that they could be sold before maturity at face value on a month's notice and without penalty after a minimum holding period, no matter what happened to yields in the interim since the date of purchase. Despite their popularity, these ASBs were discontinued—in part because there was a very high administrative cost associated with running them and introducing them.

Under the legislation before us, the mechanism for retail investment will be different from that of the old ASBs. As stated previously, the government has chosen to facilitate the trading of Commonwealth government securities to retail investors through an indirect beneficial ownership structure. Under the model being put forward by the government, retail investors will not acquire the legal ownership of the government bond. Instead, they will purchase a financial product known as a depository interest, which is linked to the underlying Commonwealth government security. This is not quite the same as American depository receipts, but it is not totally different either. Forms of beneficial ownership are already available in Australia for other types of securities. There are two main types of depository interest currently traded on the Australian securities exchange. The first type is CHESS units of foreign securities—known as CUFS—which are issued by foreign entities in order to facilitate the training of their equity on the ASX. The second type is depository interest issued in respect of private sector debt instruments.

Under the government's proposal, the depository interest provides retail investors with beneficial ownership of the underlying Commonwealth government security. Retail investors will receive their periodic interest and principal payments from the proceeds paid by the government in the same way as they would have if they were the legal owner of the security. The deposit interest will be available in minimum units of $100. The depository interest will be tradeable through market makers appointed by the ASX. These market makers will charge a fee for their services. The coalition expects that competition between market makers will keep the fee to reasonable levels, provided that there is sufficient demand.

The coalition welcomes the opening—or rather the reopening—of the Commonwealth securities market to retail investors. It also welcomes the security of the product, because a bond issued by a corporation is of greater security than an equity. In the event of a company falling over, a bondholder usually ranks ahead of equity or shareholders, so corporate bonds generally are a more secure investment. But, in the retail space, one of the reasons that there is a drift towards shares over equities is that you can receive a fully franked dividend. This is so in a number of cases with a number of companies with a share, but you do not get the same beneficial tax treatment with a corporate bond. Having said that, obviously this does not apply to the Commonwealth government, because we do not have shareholders but constituents.

The benefit of this is that in a retail market it effectively becomes a benchmark yield and, therefore, hopefully—this is one of the reasons we support this—it will start stimulating greater retail interest in the corporate bond market, which at the moment is very small.

The bill has given issuers of CGS depository interests exemption from the product disclosure statement requirements under the Corporations Act. This is a very good thing. Many product disclosure statements are unreadable. It is interesting: the government excludes itself from the product disclosure statements but expects everyone else to put them out. That really says it all about the red tape which this government has become rather famous for. It does not want to apply the red tape to itself, but all the issuers of bonds and everyone else out there—anyone who buys a financial product—has to have one of the convoluted product disclosure statements.

Mr Bowen interjecting—

I introduced them, but they were never meant to butcher commercial activity in the way they have, with their extremely onerous requirements. In their place, the bill requires the Australian Office of Financial Management to issue disclosure documentation for all retail investors on the basis that this would be more efficient than having the nominee companies prepare and release the information. So let's give the government a rare tick. This is good; we are heading in the right direction.

The government have, on average, introduced 11 new regulations a day since they were elected—18,000 new regulations. Mr Deputy Speaker Murphy, you would be appalled at that. The government has introduced 18,000 new regulations since they were elected back in 2007. I think they have only abolished 86. They have introduced 18,000 regulations and they have abolished 86. That is outrageous, as I am sure you would know, Deputy Speaker.

Unlike the old Australian savings bonds, the new depository interests will not be redeemable for the price that we talked about that was paid. Their market value will vary in line with movements and yields. That will mean that the redemption value prior to maturity will be uncertain. They may be worth more than what was paid for them or they may be worthless. Retail investors need to understand that there is virtually no credit risk, although if these guys keep running the budget the way they are, you never know; but I am not going to suggest there is credit risk with the government. Although we did just see South Australia under Labor downgraded from AAA by the ratings agencies, which is hugely disappointing. Compare and contrast that with New South Wales and Queensland, which are working desperately to hold their current credit ratings—and this government criticises them for it, but that is by the by.

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