Wednesday, 9 December 2020
Economics Committee; Report
On behalf of the Standing Committee on Economics, I present the following reports: Review of the Australian Prudential Regulation Authority annual report 2019 (second report) and Review of the Australian Securities and Investments Commission annual report 2019, together with the minutes of proceedings.
Report made a parliamentary paper in accordance with standing order 39(e)
by leave—On 5 August and 23 October 2020, the Economics Committee scrutinised the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority on their performance and regulatory responsibilities.
The COVID-19 pandemic has caused unprecedented disruption to our lives. While the pandemic is primarily a public health issue, it has significantly impacted economies and financial systems around the world. It has led to the closure of our borders, the biggest economic downturn in close to a century, a large budget deficit and historically low interest rates.
The Australian financial sector and its regulators responded quickly to the pandemic. Financial institutions provided support to Australian families and businesses as they worked to manage their mortgages and debts during a time when income was disrupted and the future was uncertain. Superannuation funds paid out billions of dollars as affected individuals accessed their superannuation under the early release scheme and were reunited with their money. On the health side, being girt by sea enabled Australia to be one of the few nations that was able to close its international borders and effectively stop COVID-19 from entering. Closing our international borders has been the single biggest public health measure taken to protect Australians. The only examples of community transmission have come as a result of a breach of those borders.
On the economic side, when the Australian economy went into this crisis it was better positioned than most to weather the storm. Having a federal budget in balance ensured that lockdown measures could be offset by fiscal support through temporary increases in JobSeeker and the creation of the temporary JobKeeper program, amongst others. It is a reminder of the need to be prudent on the sunny days in the hope that the rainy days never come, but they inevitably do.
The Australian economy has weathered this storm better than many others. However, economic recovery brings its own challenges. It's essential that governments, regulators and financial institutions continue to be proactive and work together as the immediacy of the crisis fades and the hard work of economic recovery continues. The opportunity of Australia's economic comeback is not simply to resuscitate Australia's 20th-century economy but to build a forward-looking, modern, liberal 21st-century economy that provides the foundation for sustainable growth and provides the next generation of Australians with opportunity, employment and home ownership. However, the economic comeback brings its own challenges. It's essential that governments, regulators and financial institutions continue to be proactive in their diligent work.
The committee notes ASIC's and APRA's timely responses to the pandemic. Both ASIC and APRA adapted quickly to the challenges of the pandemic, adjusting regulatory priorities to focus on protecting vulnerable consumers, maintaining the integrity of markets and supporting businesses. In particular, the committee notes ASIC's prompt and ongoing release of guidance regarding retail lenders' obligations and ASIC's expectations when assessing consumers who are experiencing financial difficulties due to COVID-19. The committee credits APRA's prudential guidance regarding pandemic risk and its requirement around stress testing for pandemics as key factors contributing to the stability and the resilience of the Australian financial sector during this challenging period, in which they continued to lend.
The committee notes ASIC's and APRA's proactive and ongoing engagement with peak bodies, superannuation funds and financial institutions throughout the various stages and changing circumstances of the pandemic. In particular, the committee notes the strong relationship and high level of cooperation and coordination that ASIC and APRA have displayed during this challenging period. The committee notes ASIC's and APRA's progress regarding the implementation of the royal commission's recommendations, acknowledging the disruption caused by the pandemic and the deferral of implementation of commitments associated with the royal commission. The committee also notes ASIC's continuation of its enforcement work during this challenging period, as well as the progress APRA's made with the capability review throughout this time. ASIC's work on enforcement is important—in fact, it should be its focus.
However, ASIC's progress and its rapid response to the COVID-19 pandemic are overshadowed by problems of its own making. It is difficult to say that there is as much confidence in ASIC today as there was at this time last year, and ASIC should seek to address these issues as a matter of urgency, because they go to the heart of its capacity and its internal processes. As an important example, the committee has been concerned about ASIC's continued refusal to accept responsibility for its misleading and deceptive SMSF fact sheet that has made spectacular and unsupportable claims of the costs of establishing a self-managed superannuation fund. While this matter may appear trivial, it raises serious questions about the internal processes for approval within ASIC for information that is promoted to inform consumers and their choices and whether ASIC understands the products it is ultimately regulating. It is simply absurd that ASIC would put information in the public square claiming that the cost of running an SMSF annually exceeded half the cost of the maximum contribution that could be made to a self-managed super fund without scrutiny of the underlying data.
It has only been because of the diligence and persistence of the committee that the inaccuracies of this fact sheet have been highlighted. To date there has been no acknowledgement of this error and no apology for it from ASIC. Instead, ASIC has stood by and claimed that new data has simply superseded it. This attitude undermines ASIC's credibility. Had a regulated business made similarly misleading statements about a competitor product, they would face sanction—and rightly so. Yet those who impose sanctions are holding themselves to a different standard. Since the committee finalised its report it has subsequently been reported, by Michael Roddan in The Australian Financial Review yesterday morning, that ASIC has quietly updated its Moneysmart website after swallowing industry data on what is claimed to be needed for Australians to comfortably retire. This follows the recent Callaghan retirement income review, which criticised the standards proposed by the Association of Superannuation Funds of Australia. Once again, ASIC have been caught misleading and deceiving Australians and seem to swallow junk data without scrutiny. It again raises the question: does ASIC understand the products that it is responsible for regulating?
Unfortunately, these concerns about ASIC's internal processes have now been validated following independent investigations into payments made by ASIC on behalf of two of ASIC's most senior officers—the chair, and deputy chair Crennan. The committee will not comment on the substance of these matters, as the independent review is still underway. However, the committee is very disappointed that such a review is necessary in the first place. ASIC should be leading by example. It must be beyond reproach in its governance and accountability structures and processes, particularly when it oversees those corporate entities. ASIC has a lot of work to do to rebuild its credibility and confidence with the committee and likely the wider business and Australian community. The decline in confidence did not originate with the investigations into the chair and the deputy chair, although it has substantially compounded it.
The committee takes its role of the oversight of ASIC very seriously. It would be fruitful if, in 2021, ASIC demonstrated to the committee how it is reviewing its internal processes to address these critical issues so that such errors do not occur again, that ASIC actually accepts that responsibility and accountability exist within the organisation and that it is clearly focused on their core duties of enforcement. While this remains a matter for the Treasurer, these issues justify consideration for reform of ASIC to help rebuild confidence in its capacity and so that it fulfils the important statutory functions that the parliament entrusts it with. In 2021 the committee will closely follow the outcome of the independent review. It will continue to scrutinise ASIC's performance, particularly ASIC's ongoing response to the COVID-19 pandemic, its implementation of the royal commission's recommendations, and the degree to which people are held accountable for misleading the public.
On behalf of the committee I would like to thank ASIC and APRA representatives for appearing before the public hearings on 5 August 2020 and 23 October 2020. I would also like to thank the committee members for their participation. In a bipartisan spirit, I thank the deputy chair for his cooperation—I know that I'm not always a straightforward chair to work with. I also thank the secretariat, including the outgoing secretary, Stephen Boyd. I welcome on board the new committee secretary, Lachlan Wilson, and I thank the acting committee secretary, Casey Mazzarella. I commend these reports to the House.
by leave—The committee this year has engaged in a productive series of conversations with a range of entities—ASIC, APRA and the ACCC. We have held a series of hearings with major banks and major superannuation funds and, most recently, we have had productive discussions with the Reserve Bank. As has become clear from these conversations, the Reserve Bank has concerns about the state of the Australian economy. The Reserve Bank governor noted recently: 'What has become clearer, though, as time has passed is that the Australian economy is likely to experience a run of years of relatively high unemployment, unemployment being too high, and wage increases and inflation being too low, leaving us short of the Reserve Bank's goals.' The Reserve Bank's own figures have unemployment at six per cent by the end of 2022 and extremely weak wage growth. That must surely be in part a function of the fact that the government will reduce real government expenditure by 17.5 per cent in 2021-22, the fiscal year starting in just seven months time. That is a record cut in government expenditure and will have an impact on the macro economy. The governor noted: 'Businesses are failing or they are going to fail. I think the insolvency rate at the moment is low but it is going to rise.'
The role of the House Economics Committee is to scrutinise the performance of the Reserve Bank in fulfilling its mandate. It is of concern to the committee that the Reserve Bank doesn't forecast hitting its inflation target in the foreseeable future. At the top of a chart from Westpac called 'G10 central bank balance sheet assets as a share of GDP' is the Bank of Japan, with around 35 per cent assets. At the bottom of the chart is the Reserve Bank of Australia, with a little less than five per cent assets. On that metric, quantitative easing in Australia has been more modest than it has been in the nine comparator jurisdictions with which we'd naturally compare ourselves. This is reflected in the change in the FX markets since the start of March, with the Australian dollar relatively overperforming and, therefore, losing the ability to stimulate the economy through the exchange rate channel.
That's the high-level picture. In terms of what more the Reserve Bank could do, we had productive conversations around their purchase of state bonds. State bonds are 30 per cent of bonds on issue, but as a share of the Reserve Bank's quantitative easing program they are only 20 per cent. Dr Debelle of the Reserve Bank responded to this by saying: 'When we buy Australian government bonds we're pulling down yields for everyone in the country.' But the contra-argument is that the state bond market is only a $400 billion market and one on which a big fish like the Reserve Bank could potentially have a larger impact than it could have on the Commonwealth bond market, which is more an international market. Driving down the prices of state bonds would have a material impact on the ability of state governments to fund much-needed fiscal stimulus.
I also offered the Reserve Bank a chance to respond to a comment from former researcher Peter Tulip, who said:
Our disagreements over the zero bound … reflect … that one side respects the research while the other side believes what it wants to believe.
Gertjan Vlieghe, from the Bank of England's Monetary Policy Committee said:
My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low.
The Reserve Bank remains cautious on this matter, despite the fact that other countries have moved.
The Reserve Bank's structure is also a matter which came up for some conversation during our recent hearings. Since 1989, every Reserve Bank governor, deputy governor and assistant governor appointment has been an internal one. Various critics have in recent times suggested that the Reserve Bank may have become a little too much of a closed shop. The ability of the Reserve Bank to draw in external ideas is important. The Reserve Bank did respond that they have a lot of robust internal conversations and that their current head of economic analysis was an outside appointment from the private sector and the IMF. But I still remain concerned that the Reserve Bank has only made internal appointments at its three most senior levels since the 1980s.
According to the Warsh review of the Bank of England, the Reserve Bank is also the only major central bank not to have regular press conferences after meetings. I hope that the Reserve Bank will move away from that position. I was pleased when Governor Lowe held a press conference following the most recent monetary policy announcement. I think it would behove the governor to make that a regular factor.
Finally, more precision over forward guidance would also help ease the constraint implied by the lower bound. The Reserve Bank has said it won't raise rates until inflation gets within the band. To name a number rather than a band would potentially be productive.
The Reserve Bank and the Treasury are the places where many of Australia's best macroeconomists go. One of the impacts of that has been that Australian macroeconomic commentary has been less rigorous than in other areas, where many of the experts have jobs that allow them to participate fully in the public debate. That is, however, beginning to change, and I'm pleased that there is an active academic community engaged with questions of monetary policy. Thoughtful scholars, such as Isaac Gross from Monash; Stephen Kirchner from the University of Sydney; Bruce Preston from The University of Melbourne; Peter Tulip from the Centre for Independent Studies; Emma Dawson and Stephen Koukoulas from Per Capita; and Brendan Coates, Matt Cowgill and Danielle Wood from the Grattan Institute are among the many who have made important contributions to the academic debate over monetary policy and whose expertise is being drawn on by the Reserve Bank. It remains head-scratching to me that there is only one monetary policy expert on the Reserve Bank board. I think we would be far better served to have two or three monetary policy experts on that board.
In closing, I thank the chair for the way in which we have worked constructively together on the House Economics Committee this year. I acknowledge Stephen Boyd and Lachlan Wilson for their work as secretary of the committee, and Casey Mazzarella for her splendid work as the interim committee secretary.