The Minister for Financial Services and Regulation
21 October 1998 - 26 November 2001
Speech to CEDA
Australia as a Centre for Global Financial Services
Thursday, 28 January 1999Ladies and gentlemen,
CEDA has long been an important forum for the promotion of Australias economic well being. I can think of no more appropriate forum to discuss Australias growing determination to be a Centre for Global Financial Services.
In this case I am quite deliberately changing the vernacular from the more familiar term of Regional Financial Centre. Convergence and globalisation are replacing the term "regional" with "global".
This is closely linked to the rash of recently announced mergers of financial services organisations like Deutsche Bank and Bankers Trust, Citicorp and Travelers, and UBS and SBC who are looking for global presence as well as larger balance sheets.
While many financial centres may be intimidated by this dance of the elephants in Europe and North America , Australia should seize the moment and recognise the impact of the movement from regional financial services to global financial services.
Today, clients expect seamless financial services 24 hours a day from financial organisations located in two, three or four different time zones. Investors expect real time access to market information and expect to be able to trade and hedge their risk in diversified, liquid markets around the clock.
Therefore our goal of establishing Australia as a Centre for Global Financial Services should be no different to our goal to be a Regional Financial Centre. Our distinct advantages, which I will touch on in a moment, are the same.
However, our focus on Global Financial Services means that we can emphasise our capacity to serve international and not just regional customers. The trite comment that money never sleeps has never been more pertinent.
But like so many other major goals, building a Centre for Global Financial Services is not an overnight project. It is a brick-by-brick construction job that requires patience and persistence and an unwavering commitment to the task ahead.
And like any good construction project - and looking across the skylines of Australia there seems to be plenty of experience - the foundations must be right.
My early view is that we have the foundations right. And if they are not perfect, then at least we have recognised the problems and are setting about getting them fixed.
Broadly, the foundations creating a Centre for Global Financial Services fall into five different categories. They are:
- Quality of financial markets
- Environment for business
- Preparedness for the Future
Quality of Financial Markets
It is self evident that international financial institutions prefer markets that are liquid and transparent. They invest more in a financial centre that is going to offer a reasonable level of certainty about investment returns.
Australias financial markets have reasonable depth and liquidity across a wide range of products. Whether it be in equities, bonds, synthetics or managed funds we continue to punch above our weight.
We also have the capacity to offer products that are innovative and comparatively sophisticated. For example, our leadership in the debate on the trading of Greenhouse Gas Emissions should lead to new and innovative markets in tradeable products.
However, despite lacking the size and breadth of major Global Financial Centres like New York, London and Frankfurt we should aim to play on the same pitch and in the same game.
And because of our commitment to technological change, globalisation and competition over the last 20 years - factors that have blurred the traditional boundaries between institutions and products - we have developed a local capacity to compete internationally.
This means we are very competitive in areas like financial futures and options. For instance, the Sydney Futures Exchange has maintained its position as the largest exchange in the Asia-Pacific, beating its closest competitors in the region, the Singapore International Monetary Exchange and the Tokyo International Financial Futures Exchange.
Globalisation also presents golden opportunities for Australian stock and future exchanges to become regional leaders by taking advantage of electronic links between markets in our common time zones.
Pleasingly, our exchanges are already grasping these opportunities. The recently announced agreement between the Sydney Futures Exchange and Dow Jones to launch a new index known as APELS, Asia-Pacific Extra Liquid Series, in the second quarter of this year is an appropriate example of this trend. What is more, flow-on benefits like the opportunity to run a single clearing account to access markets around the Asia-Pacific from Sydney will arise as the product line develops depth and liquidity.
In light of the financial markets dynamism, it is imperative that the regulatory regime is sufficiently flexible to permit Australian markets and investors to fully participate in the benefits of innovation and competition.
The co-operative regulatory partnership between the Australian Investments and Securities Commission and the two major exchanges shows how well self-regulation can work.
That relationship is based on reasonable regulatory flexibility, transparency and most importantly, an agreed commitment to maintain market integrity. This is a significant advantage over our closest regional competitors.
The second area of advantage relates to our working environment.
Australias political stability is the envy of the region. Our democracy is robust and stable. And despite our apparent differences all the major political parties share a commitment to business development. Some quicker than others, of course!
That stability is the foundation upon which we have built a resilient economy. In fact, our economy grew by 4.6 per cent in 1997-98 while many of the countries in the region have been in recession. This growth will underpin further employment growth, and help reduce unemployment, which now stands at 7.5 per cent - the lowest since September 1990, and of course we want this to fall further.
In December, Fortune Magazine described Australia as"the miracle economy of the world financial crisis".
However unlike Biblical miracles our economic health came about through hard work. We should not be in any doubt that the Howard/Costello Budget of 1996/97 shielded Australia from the sharp end of the economic downturn in the Asian region. We have become a safe haven for the region despite our significant trade exposure to Japan and Korea in particular.
And this shield has been assisted, in no small part, by the security provided through our world-class regulatory arrangements.
Following the Wallis Inquiry, an improved regime for financial system regulation at the Commonwealth level came into effect on 1 July 1998. The Government removed unnecessary regulatory barriers to contestability, competition and efficient market operation, while maintaining the stability of the Australian financial system, enhancing safety and strengthening consumer protection.
We can say with confidence that Australia has a strong and robust domestic financial services sector that has a very limited exposure to the regions volatility.
Streamlining the regulatory framework for financial services builds on the lessons of the 1980s and the Government remains committed to completing the Wallis reforms by bringing the remaining financial institutions under the supervision of the Australian Prudential Regulation Authority. This is a key part of my immediate responsibilities.
The second part of our regulatory framework relates to our corporate law reform and simplification process. Both the IMF and the OECD have recognised the significance of good corporate governance.
The Corporate Law Economic Reform Program (CLERP) further improves transparency and accountability in our legal system which is in comparison with our regional competitors, cost effective, timely and predictable.
We cannot discuss our domestic advantages without discussing the Australian taxation system.
As many commentators and market players will tell you financial institutions look at their balance sheet when deciding where to do business. However, I believe many domestic businesses overplay the impact of tax on our financial centre aspirations. After all, Boston, New York, London and Frankfurt could not be described as low tax financial centres.
However, the Government recognises that our regional competitors are extremely aggressive and the Australian taxation system does need reform.
To that end, the Howard Government has introduced legislation that will make a number of changes to increase the attractiveness of the tax regime for Offshore Banking Units (OBUs).
The mobility of funds makes providing financial services for transactions between offshore parties super competitive, and as such, many countries provide low tax rates for the profits derived through such activities.
For several years, Australia has supported a special OBU taxation regime intended to facilitate such activity. The regime exempts certain offshore parties from Australian tax and provides a 10 percent tax rate on the taxable income of OBUs.
Right now, only banks and authorised foreign exchange dealers can establish an OBU and get the tax concessions. But in order to facilitate greater non-bank competition for offshore business, eligibility is being extended to funds managers, life insurance companies and providers of custodial services.
And these sorts of reforms are having some impact.
Already we have seen Deutsche Bank relocate its regional centre for Euro Money Market/Repo risk management and price making responsibilities to Sydney.
We also offer incentives through Invest Australia which is the national agency promoting Australia as an investment location. It facilitates major investment projects and provides a range of services to companies seeking to establish operations in Australia.
Specific incentives under the Regional Headquarters (RHQ) program also help companies make Australia their servicing base for the Asia-Pacific region. These include tax incentives and help with other matters, such as immigration for executives.
This Government is adamant that it will pursue those investors with a long-term commitment to Australia. While we are prepared to offer some tax sweeteners under existin programs, we are not in the business of setting up a caravan park, where international banks come and go, in line with the latest baubles and trinkets on offer.
Apart from the economic incentives Australia is also a damn fine place to live.
Australia is well renowned for its climate and quality of life. We enjoy a country that is contemporary, cosmopolitan and progressive. And it doesnt cost the earth.
For instance, residential accommodation in Australia is highly competitive, where average monthly rental for prime CBD apartments range from US$656 to US$2,194 in Sydney. This compares with US$2,425 in Singapore, US$5,294 in Tokyo, and an incredible US$7,525 in Hong Kong.
These factors do influence where foreign nationals want to do business. We do not suffer the same high turnover of executives that some of our regional neighbours must suffer. This churn factor does cost financial institutions significant sums for relocation and retraining.
And while we are looking at the geography, lets not forget the time zone we share with much of Asia which, with our advanced transport and communications networks, give companies in Australia the edge in servicing Asian markets quickly and cost-effectively.
And Australia's time zone is also ideal for international communications with Australia's business day spanning the close of business in the USA and the opening of Europe's business day.
This was beautifully highlighted recently with the launch of the Euro, where our time zone advantage over Singapore and Hong Kong enabled Australian forex dealers to be among the first to actively trade the new world currency in a liquid market.
This leads me to Australias next big advantage as a global financial centre, that is, our people.
It is no secret that we are a harmonious multicultural community that has benefited from more than two centuries of immigration. In fact, one in every 20 inhabitants is Asian-born with more than 2.4 million Australians speaking a language other than English at home.
Now, Asian language speakers number over 800,000, a fact that ensures companies can draw on skilled managerial and technical staff who also happen to be fluent in regional tongues.
For example, the Sydney Futures Exchanges 200 employees speak 37 languages.
This resource means Australian cities are fast becoming the location for companies requiring a range of language skills.
What is more, international surveys consistently highlight Australia's advantage in salary costs for management and skilled staff. In fact, salaries for middle, senior and top management are much lower in Australia, particularly when compared with Hong Kong, USA, Japan, Germany, the UK and Singapore.
Moreover, our workforce is highly educated. The statistics bear out what I am saying. Forty-five per cent of Australia's workforce has university, trade or diploma qualifications, which compares with 23 per cent in Singapore. Furthermore, 30 per cent of Australians with degrees from tertiary institutions have post graduate-qualifications.
These advantages are supplemented by Australias relationship with the region.Australia enjoys the respect of the region because we have supported our neighbours during their very difficult times. Many Australians and Australian companies are now forging closer links with the region than ever before.
This includes Government agencies like the Australian Bureau of Statistics, the Australian Securities and Investments Commission and the Australian Competitition and Consumer Commission who are actively supporting the rebuilding of Government regulatory institutions across Asia.
Through our work as a good neighbour Australians are better able to service the region. This provides clients with excellent regional resources without regional risks.
Along with this glaring human resource advantage, Australia has much to offer through its communications infrastructure. Australia is the second-largest information technology and telecommunications market in Asia after Japan and we are among the most technologically
literate people in the world with market penetration rates of the Internet and mobile telephones among the highest in the world.
Australia is also second only to the USA in per capita ownership of personal computers and we have the largest number of internet service providers per capita in Asia, with levels similar to the USA and more than twice that of Singapore and Hong Kong.
While our IT and communications infrastructure is attractive financial institution are also availing themselves of Australias legal and accounting infrastructure and our efficient settlement systems.
We have highly competitive business service industry. In other countries, these costs, such as legal, accounting,actuarial and insurance services are either very expensive or require imported expertise.
Similarly superannuation and other mandatory employee benefits can dramatically increase the total cost of employment. By international standards, Australia's on-costs, including insurance and superannuation, are relatively low.
Finally our prime CBD office space costs, for example, are a fraction of the cost of similar property in Tokyo, Hong Kong, Singapore and Beijing. For example, Australian capital cities range in annual price from an average of US$76 to US$290 per square metre, compared with US$487 in Singapore and US$1,084 in Hong Kong.
And as we head to the new Millennium, Australia can boast it is better prepared than most for the challenges of 1 January 2000.
In terms of Y2k compliance Australia is ranked second in the world only to the USA, according to the respected Gartner Group. This is a credible achievement.
Our future readiness is also obvious in our determination to build a 21st century taxation system. This reform represents the single most significant change to our international competitiveness since Federation.
This tax reform will provide a boost to financial sector activity, as:
- We abolish $3 billion a year on a range of inefficient financial services taxes including, Financial Institutions Duty, Debits Tax and stamp duty on marketable securities;
- We remove $4.5 billion a year in taxes on exports including exports of financial services which will be GST-free, in line with the treatment of other exports.
Finally, John Ralphs Review of Business Taxation will form the basis of a new business tax regime as part of A New Tax System. The Review, which will report by 30 June 1999, will make recommendations on the fundamental design of the business income tax system, ongoing policy making, drafting of legislation and the administration of business taxation.
This once in a generation review of business taxation means that by the end of 2000, Australia will have the most modern and progressive taxation system in the OECD. It will be relevant to the challenges of the 21st century and will be comparable with the best in the world.
Ladies and Gentlemen,
All of these foundations can be described as our comparative advantage.
To refresh your memory they include:
- Liquid and innovative financial markets
- Our working environment
- People skills to serve the region
- World class Infrastructure
- Australia s readiness for the future
Add to these factors our steely determination to succeed.
We will work with local industry to build a centre for Global Financial Services.
The Government has already established the Regional Financial Centre Task Force, which will advise us on policies to nurture Australias existing advantages.
This includes advice on developments in international financial markets and appropriate policies to boost Australias attractiveness as a financial centre.
My own appointment as Minister for Financial Services and Regulation will also ensure there are close links with industry and the views of the industry are given a voice in Government.
In effect we believe the fundamental groundwork has been done, or is significantly under way.
We are determined not to let the opportunity to become a centre for Global Financial Services pass us by.
And with your ongoing support we can achieve our national ambition.