Stephen Jones (Throsby, Australian Labor Party) Share this | Hansard source

This is the third tranche of legislation as a part of the government's Stronger and Fairer Superannuation reforms. It includes seven key elements, the first being a ban on conflicted remuneration fees—effectively commissions for MySuper products. It provides an opt-out provision—that is, insurance in the form of life insurance and total and permanent disability insurance should be provided; however, MySuper Fund members can opt out of the provision of such insurance. It increases the disclosure obligations on trustees in relation to their portfolio holdings. It also provides for default placement via awards and collective agreements—that is, when members are placed by default into a superannuation fund it must be a MySuper superannuation fund. It makes it quite clear that defined benefit funds are excluded from these arrangements. It provides for the streamlining of transfer of pre-approved funds into MySuper accounts and it provides better powers for APRA to scrutinise eligible rollover funds.

My colleague the member for Greenway has gone through the background to these provisions in quite some detail. I do not intend in the time I have available to go back over that ground, but I would like to make some observations about another part of the transparency regime of our financial sector—and by that I mean our ratings agencies. Credit ratings play an important role in the Australian prudential regulatory framework. Ratings agencies are companies that charge fees to provide ratings on financial products and organisations. The work of ratings agencies helps to assess financial products. Ratings agencies, including Moody's, Standard & Poor's and Fitch, wield enormous financial power, yet they are essentially unregulated. Since the global financial crisis, the work of ratings agencies has come under increased scrutiny. I believe that this scrutiny is appropriate and in fact that there could be, and should be, more done in this area. There is no doubt that many investors, not just in Australia but in the United States and elsewhere, are still feeling the consequences of the global financial crisis and the collapse of investment institutions like Lehman Brothers.

Ratings agencies played a significant role in this crisis and contributed to the housing bubble in the United States by giving risky mortgage backed securities top ratings and underestimating the risk of default and disclosure. While the opinion of these ratings agencies is just that—an opinion—in practice the role these agencies play in financial markets is crucial. This is largely a user-pays system in which the ratings agencies receive income from the fees paid by those who issue certain financial products. I believe that there is a lack of transparency and often conflict-of-interest issues in this system that currently are not adequately addressed by regulation.

There can be no denying that there are many investor victims in Australia and globally because of their reliance on the work of ratings agencies. There have been two recent Federal Court cases that touch on this situation. Earlier this month the Federal Court made a landmark decision with regard to the use of Standard & Poor's AAA ratings in the lead-up to the global financial crisis by finding that the ratings agency was in part liable for the advice and distribution of complex financial products to 13 New South Wales councils. This recent decision came in the wake of an earlier ruling in October—again in the Federal Court—which found the Australian arm of a failed US institution, Lehman Brothers, liable for investment advice to councils regarding other complex financial institutions. I know about this very well, because one council in my electorate, the Wingecarribee Council, lost somewhere in the order of $30 million.

It is good news that the Federal Court made a decision in this case; it means that the council affected will recover some of the $30million loss. While this decision will no doubt be appealed, in the meantime it is important to note some of the findings in this decision. The Federal Court judge found that S&P's decision to give a AAA rating to the financial product was 'misleading and deceptive' and involved 'negligent misrepresentation'. As the judge said:

The very purpose of a rating is to provide investors with independent information by persons expert in assessing the creditworthiness of an investment so that, by a simple system of letters, an investor can know and compare the creditworthiness of investments.

This is an issue that goes not just to financial products but to governments at the federal and state level as well. Many local government bodies and their ratepayers were essentially defrauded through false and misleading ratings assurances. I understand that it is likely that, following this decision, we will see more court cases.

I raise these issues in parliament today because I believe the time has come for the Australian parliament to play its part in applying proper scrutiny to these ratings agencies and companies—just as we quite rightly bring legislation before this House to ensure that members who are investing their money in superannuation products do so with the knowledge that those products are well-managed and that they have some control, knowledge and information about not only the superannuation fund but also the trustees of those funds and the whereabouts of those investments. That is because Australia's financial system depends on each player adhering to best practice and the highest standards of prudential rigour. I believe that more action needs to be taken in this parliament not only to improve the operation of our superannuation system but also to ensure that the work of credit rating agencies is done within an environment that is properly looking at the enormous responsibility that they have in pricing and in rating the creditworthiness of financial products and government bodies as well. I commend the legislation to the House.

Debate adjourned.

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