Second Reading SpeechAuthority moving the reading of the bill
That this bill be now read a second time.
Mr Morrison (Treasurer)
Today I introduce a bill to implement two government measures a new regulatory regime for financial benchmarks used in Australia and the appointment of a new Indigenous Policy Commissioner to the Productivity Commission.
Schedule 1 to this bill delivers on the government's commitment to strengthen financial regulation and better protect Australians from the possible abuse and manipulation of financial markets by sophisticated financial institutions at their expense.
It builds on a range of other measures pursued by this government to improve the integrity, resilience and fairness of the financial system, including:
- $127.2 million to enhance the Australian Securities and Investments Commission's powers, data analytics and surveillance capabilities and allow ASIC to take more surveillance and enforcement action;
- a comprehensive review of ASIC's enforcement regime to ensure that it adequately deters misconduct and fosters consumer confidence; and
- the implementation of a new Banking Executive Accountability Regime, which will strengthen the Australian Prudential Regulation Authority's powers to remove, disqualify and penalise senior executives from any prudentially regulated institution.
The government is taking action now. Financial benchmarks are used to value trillions of dollars of financial products. Unfortunately, however, both internationally and domestically, there have been significant shortcomings in the regulation of these benchmarks.
Globally, there have been many cases of market misconduct regarding the determination of financial benchmarks, particularly interest rate benchmarks such as the London Interbank Offer Rate, the LIBOR. As of August 2017, penalties paid by financial institutions globally had reached around A$25 billion.
Australia has not been immune to such conduct. When we came to government we inherited evidence of significant abuse for many years.
In 2013, a number of global institutions entered enforceable undertakings with ASIC in relation to their conduct regarding the bank bill swap rate Australia's most important interest rate benchmark.
More recently, ASIC commenced formal court proceedings against three of our four major banks for alleged market manipulation and unconscionable conduct in relation to the bank bill swap rate. This case is ongoing.
In 2015, in response to these issues and regulatory developments overseas, I directed the Council of Financial Regulators the government's peak advisor on financial regulatory issues of systemic importance to consult on options to reform the regulation of financial benchmarks.
Following a detailed policy development process and extensive engagement with key stakeholders, the CFR recommended that:
- administrators of significant benchmarks be required to hold a new 'benchmark administration' licence and comply with enforceable ASIC rules;
- ASIC be empowered to compel submissions to significant benchmarks in the case that other calculation mechanisms fail; and
- the manipulation of any financial benchmark or financial product used to determine a financial benchmark used in Australia be made a specific criminal and civil offence.
The government accepted this advice, taking action now, and this schedule implements these reforms to our banking and financial system.
Together, these reforms will enhance the robustness of these critical components of our market architecture and help ensure continued confidence in Australia's financial system now.
I will now provide additional detail on the reforms.
Following royal assent, all administrators of 'significant' benchmarks will be required to hold a new benchmark administrator license issued by ASIC, or receive an exemption.
Significant benchmarks will be designated by ASIC in a legislative instrument with the consent of the minister if:
- the benchmark is systemically important to the Australian financial system;
- there is a material risk of financial contagion, or systemic instability, if the availability or integrity of the benchmark was disrupted; or
- there would be a material impact on investors in Australia if the availability or integrity of the benchmark were disrupted.
Other benchmark administrators will also be able to 'opt in' to the licensing regime if they believe that it is advantageous to do so.
By only requiring the administrators of 'significant' benchmarks to obtain a license, the government has appropriately balanced the need to ensure the integrity of Australia's financial system, against the additional regulatory costs associated with a more heavy handed approach to licensing.
Once licensed, a benchmark administrator will be subject to a range of ongoing supervision and regulatory requirements, including an obligation to assist ASIC, APRA and the Reserve Bank of Australia in the fulfilment of any of their statutory functions.
Licensees will also have to comply with enforceable ASIC rules based on the International Organization of Securities Commissions' Principles for financial benchmarks, in line with global best practice.
Consistent with the principles, these rules will impose requirements relating to IT security, business continuity planning, and the separation of business functions (aimed at limiting the potential for manipulation).
To ensure that benchmarks can continue to be generated during times of financial market stress, ASIC will also have the power to compel market participants to make submissions to ensure the continued generation of a financial benchmark.
Even though no significant Australian benchmark currently relies on submissions as a matter of course, given the significant market disruption that would occur if such a benchmark was not generated, this power is crucial to:
- futureproof the regulatory regime; and
- provide investors with confidence with regard to the robustness and availability of significant benchmarks.
It is also a power of last resort. ASIC will only use this tool in the situation where the continued generation of a significant benchmark is under serious threat and the failure to generate that benchmark would have significant consequences for the functioning of Australia's capital markets. It is not a tool for the government to manage the day-to-day operation of our financial system.
Manipulation of financial benchmarks is currently enforced using existing laws relating to market manipulation, false trading and market rigging. However, these provisions are not specifically tailored to the manipulation of financial benchmarks.
To ensure consistency with overseas regimes and provide additional clarity to market participants on what constitutes acceptable conduct, this schedule makes clear that any action intended to influence the level of any financial benchmark significant or not or financial product used to generate a financial benchmark is a specific criminal and civil offence. This will best ensure that such conduct is appropriately captured and penalised.
The creation of new offences can be meaningless, however, unless they are backed with penalties large enough to effectively deter misconduct.
That is why we are instituting sizeable, but appropriate, penalties for manipulation of any financial benchmark.
Demonstrating the government's resolve to stamping out market manipulation, benchmark manipulation will be subject to up to 10 years imprisonment for an individual and, for a body corporate, fines equal to the greater of:
- 45,000 penalty units (almost $10 million);
- three times any benefits derived from the manipulation; or
- 10 per cent of the entity's turnover in the previous year and that is the greater of those three.
This will give ASIC the power it needs to be a 'tough cop on the beat' and crack down on any and all attempts to manipulate a financial benchmark. This is crucial to maintaining investor and consumer confidence in our financial system.
Importantly, legitimate business activity to support the operation of these critical markets is clearly outside the scope of these provisions.
These reforms, once implemented, will also align our regulatory regime with international best practice and a number of our key trading partners, including the United Kingdom, the European Union, Japan, Singapore and Canada.
This will not only reduce the risk of regulatory arbitrage that would arise from gaps in the implementation of global standards but, more importantly, it will ensure that Australian businesses and individuals do not lose the ability to issue and trade financial products that reference Australian benchmarks overseas, and in particular in the EU.
The ability to issue and trade these financial products is dependent upon our regime being deemed equivalent to our key trading partners. Loss of this ability is a serious threat and it is a situation that we cannot let eventuate.
That is why I asked the parliament to ensure that this bill, and the associated ASIC supervisory levy bill, are passed before 1 January 2018, when the EU's regime commences.
Schedule 2 to this bill contains amendments to the Productivity Commission Act 1998.
In his Closing the Gap report to parliament on 14 February of this year, the Prime Minister announced a new role for the Productivity Commission in Indigenous policy evaluation, and the expansion of the commission to include a new commissioner to oversee this work.
A number of high profile reports have highlighted the need for more evaluation of policies and programs that have an impact on Indigenous Australians. The commission's Overcoming Indigenous Disadvantage report of 2016 found that only a relatively small number have been rigorously evaluated. There is a pressing need for further evaluation to better understand which policies and programs are effective in improving outcomes for Indigenous Australians.
Demonstrating the Turnbull government's commitment to improving outcomes for Indigenous Australians, this schedule provides for the appointment of an additional commissioner for a maximum of 12 (excluding the chair) to oversee the Productivity Commission's work to evaluate policies and programs that have an impact on Indigenous Australians, with a focus on what works.
This commissioner will be required to have extensive skills and experience in dealing with policies and programs affecting Indigenous Australians, as well as experience in dealing with Indigenous communities. The commissioner will be expected to have a strong understanding of the diversity of Aboriginal and Torres Strait Islander peoples and good links with communities.
Full details of all the measures I have outlined are contained in the explanatory memorandum.