Chris Bowen (McMahon, Australian Labor Party, Shadow Treasurer) Share this | Link to this | Hansard source

The Labor Party will support this legislation through the House and through the other house. It is very sensible legislation and, indeed, much that goes into this legislation is the result of processes begun by the previous Labor government. We recognise the fact that this government has continued that work. This bill strengthens APRA's management powers in both preventing and responding to a financial crisis. Of course, everybody knows a financial crisis is unlikely, or is very much the exception. But it is also the case that we should make sure that our regulatory practices are best practice, up to date and maximise the chances of avoiding a crisis in the first place and responding rapidly and appropriately, should such a crisis emerge.

The bill will provide APRA with clear powers to ensure that regulated entities are better prepared for a financial stress event. It will also strengthen APRA's powers relevant to the resolution of a regulated entity in distress. APRA's existing crisis resolution powers enable it to take control of a failing bank or insurer when needed. Often, however, banks and insurers are part of a complex financial group and deal with many contractual arrangements The bill will enable APRA to take control of groups of entities so that it has the power to resolve a distressed regulated entity or group quickly and effectively.

Of course, it is just over 10 years since the onset of the global financial crisis in which our regulatory framework was tested. Indeed, it was around this time 10 years ago that the UK government nationalised Northern Rock and it was in March 2008 that the world's fifth largest investment bank, Bear Stearns, collapsed and was taken over by JPMorgan.

By 2008, of course, the Rudd Labor government had announced the introduction of a financial claims scheme, and the bank guaranteed to provide certainty and protection to Australian banking customers—a time I remember well and I know the member for Rankin remembers exceptionally well; it was a very important time for economic decision-making in our history. Only a few months later, in September 2008, the US government bailed out Fannie Mae and Freddie Mac, and Lehman Brothers filed for bankruptcy. These were indeed extraordinary times. Labor announced the guarantee scheme for large deposits and wholesale funding in October 2008 to support confidence and to assist banks, building societies and credit unions. This followed developments in international wholesale funding markets which were restricting the ability of financial institutions to access funding, with potentially serious implications for liquidity and lending activity.

So the results of the decisions taken by the Rudd Labor government at that time—by the then Prime Minister and then Treasurer, the member for Lilley—speak for themselves. These measures were significant in Australia's being one of only three advanced economies to avoid recession over that period. Perhaps most tellingly, between 2007 and 2012 Australia's increase in GDP per capita exceeded that of any other G20 nation by more than 80 per cent. Let's just think about that fact for a minute: our increase in GDP per capita exceeded that of any other G20 nation by a full 80 per cent, all as a result of these measures and other stimulus measures that the government took. Between December 2007 and March 2013 employment rose by 8.8 per cent, despite the global financial crisis. This contrasted with significantly weaker employment outcomes in other advanced economies, including net job losses in the United States, Japan, France and Italy.

Thanks to the response of the Labor government, Australia again avoided recession. The capital and skills destruction that was avoided in Australia was key to ensuring higher levels of growth in the years following the crisis. And, as we know, a recession has intergenerational impacts; it's not just the cost paid at that time. A recession has intergenerational impacts. Young people in particular are thrown onto the scrap heap of unemployment and find it very difficult to get back into the labour market. And of course it is the case that the institutional frameworks that were put in place prior to the crisis served Australia well, most particularly the prudential regulation regime overseen by APRA. This regulatory framework, which existed and still exists, of the RBA, APRA and ASIC, and their clear responsibilities, has been very important. But of course it is important to appropriately refresh our regulatory structures from time to time.

In government, Labor recognised the need to continuously engage with the financial regulators, particularly APRA and ASIC, to identify ways to strengthen further the regulatory framework that protects depositors, policyholders and other consumers of financial services. We knew that in order to keep our financial sector strong and resilient in the face of any further external shocks it was necessary to maintain vigilance. Therefore we kicked off some of the work that has led to the bill we have before us today: the 2011 consultation paper on the financial claims scheme and the 2012 consultation paper on strengthening APRA's crisis management powers, which canvassed a range of proposals that sought to address gaps in the framework, such as powers to address a distressed foreign bank in Australia, the ability to require restructuring of regulated entities to facilitate resolution and efficiencies in powers to resolve group distress. Later of course, in 2014, the Murray financial system inquiry recommended that the government complete the process for strengthening APRA's crisis management powers.

The experience of other countries during the global financial crisis demonstrated that, when complex financial groups enter distress, failure to resolve these entities in an orderly fashion can lead to severe, adverse economic consequences. The disorderly failure of a significant financial institution in Australia could of course have severe impacts on our financial system and our economy more broadly. So this bill is ensuring that APRA has effective powers to resolve a failing entity expeditiously in ways to protect the interests of depositors and policyholders and to maintain financial system stability. Accordingly, it has our support. We support the regulators.

I've made public comments recently that I'm concerned about some of the blurring of responsibilities between our regulators and that our framework has worked very well but, more latterly, some of the responsibilities between ASIC, the RBA and APRA have become more blurred. I've pointed out, for example, that it was arguable that the BEAR powers should have been given to ASIC and that macroprudential regulation has many hallmarks of monetary policy rather than prudential regulation—it's more about the macroeconomy than it is about the health of any one institution. These are matters that of course we will continue to monitor and ensure that we have appropriate responses for should we form the next government. But in the meantime we're more than happy to support this bill's passage through both houses of parliament and to see its expeditious enactment. I commend the bill to the House.

Jim Chalmers (Rankin, Australian Labor Party, Shadow Special Minister of State (House)) Share this | Link to this | Hansard source

It's a pleasure to follow the member for McMahon, the shadow Treasurer, as we talk about the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017. This bill, like so many other things we do in this House, is a response to what was the defining moment in the economy, really, for all of our lifetimes in this building, the global financial crisis. There has not been in this country, or indeed around the world in the global economy, a more consequential event than the global financial crisis. You have to go all the way back to the Great Depression to find an economic event, which was as devastating for economies right around the world, as we saw during the global financial crisis.

As the member for McMahon said, we're now at the 10-year anniversary of the acceleration of the global financial crisis. That means that the GFC is far enough away that we've got the capacity to reflect from some distance and to learn the lessons of that period, but it's close enough for so many people here and in businesses and communities around Australia to remember well just how extraordinary, how serious, how devastating and how enormous the global economic tsunami was that countries were forced to deal with.

As I said, it was the sharpest synchronised downturn in the global economy since the Great Depression. World markets went into turmoil, unemployment queues grew massively across the developed world—though thankfully not here—and people were lining up outside of banks to get their cash out to hide it under their beds. There were all kinds of drastic actions taken not just on Wall Street but on Main Streets in all of the developed economies and beyond. So many of them, frankly, tanked during that period. Some of the biggest economies in the world tanked; they went off a cliff.

It gives me a lot of pride to say that Labor's response to the GFC shielded Australians from the very worst of those impacts. I want to pay tribute to a number of our predecessors in this place, and indeed a number of our colleagues in this place, whose actions, decisions, hard work, determination and intellect applied to this most serious policy challenge did so much to help Australia through the crisis. With the announcement on Saturday that the member for Lilley doesn't intend to recontest the next federal election, I think that now is the time for a proper appraisal of the role that he played in that remarkable period of economic policymaking in conjunction with Prime Minister Rudd, Julia Gillard, Lindsay Tanner, the member for Jagajaga, Senator Wong in the other place, the member for McMahon as the Assistant Treasurer and a whole range of colleagues—so many people working with the member for Lilley that did such good for this country. I think we really owe them a debt of gratitude. We had thousands of people saved from the economic and employment scrap heap. We were one of only two OECD countries to avoid recession, a pretty remarkable feat of 30-plus OECD countries. Almost all of them hit the fence economically, but Australia still grew—a really remarkable achievement of this parliament and the former government.

As the member for McMahon said, we avoided the capital and skills destruction which other nations have gone through and are still recovering from which happened in the recession of the early nineties. We had this hollowing out of our workforce; people lost their jobs and couldn't properly get back in. We avoided that by working together in this place—the Australian Labor Party, the government of Kevin Rudd working with those other colleagues. It's really quite a remarkable thing.

From time to time, our critics, whether they be in this place or in the editorial pages of some of the newspapers, have tried to rewrite the history of that period. I think it's important, 10 years later, that the history is written correctly. Sometimes, when one or another of the government's cheerleaders get into the member for Lilley or me or others about our performance during that period, I think I'd rather take the word of Nobel laureate Joseph Stiglitz, who said of Labor's policies that they were:

… probably, the best designed stimulus package of any of the countries, advanced industrial countries, both in size and in design, timing and how it was spent …

Joseph Stiglitz, arguably one of the three or four most respected and well-regarded economists on the planet, looked at Labor's response to the global financial crisis and said it was the best in the world. I think that's a pretty stunning endorsement. The member for Lilley, the former Treasurer, has also been awarded and lauded around the world for his role in that period. When we think about the history of that period 10 years ago, let's properly set the historical record straight. It was a remarkable achievement, and we are proud of it.

Even if you don't want to take Joseph Stiglitz's word for it, you can look at some of the facts. These aren't opinions; these are facts. There were 200,000 people saved from unemployment queues. Despite the GFC, employment rose by 8.8 per cent between 2007 and March 2013. Other advanced economies were shedding jobs while we were adding jobs. Our post-crisis employment participation exceeded levels in other advanced economies like Britain and the US. The other stat that I like to recall is that, at the start of the crisis, both the US and Australia had effectively the same unemployment rate—about five per cent. The American unemployment rate rose to something like 10 per cent. The Australian unemployment rate was half that. That is really a demonstration of the remarkable policy success that we had here.

It was not just the government, of course. Businesses did the right thing. They hung onto their workers. They appreciated that they didn't want to shed the skills they would need to prosper once the economy recovered. It was a team effort, but something quite remarkable. As the member for McMahon reminded us just a moment ago, between 2007 and 2012 Australia's increase in GDP per capita, which is probably the best measure, exceeded that of any other G20 nation by more than 80 per cent—which is a remarkable thing to think about—and we avoided that skills and capital destruction.

I think it's fair to say that other countries did not fare so well. They didn't apply the same well-designed stimulus and they paid the consequences. Some of them are still paying the consequences, even though the global economy has recovered substantially. The global economy is probably in the best nick now that it has been in for 10 years, but a lot of countries still have to deal with that skills and capital destruction that the GFC brought.

That's a long way of getting to the bill before us today, but this bill is really of a piece with those efforts. It's about enhancing prudential arrangements and consumer protections. We started the process of this legislation when in government and, as the member for McMahon said, we will be supporting it. We're pleased to see it proposed in the parliament. We're very happy to support it. We're very enthusiastic in our support for this bill because it strengthens APRA's management powers to both prevent and respond to another financial crisis, should we come across one. It will provide APRA with clear powers to ensure that regulated entities are better prepared for financial stress and allow APRA to intervene and help with distressed entities or groups quickly and effectively, which is very important. More specifically, it will enhance APRA's statutory and judicial management regimes to ensure their effective operation in a crisis, enhance the scope and efficacy of APRA's existing directions powers, improve its ability to implement a transfer under the transfer act, ensure the effective conversion and write-off of capital instruments to which the conversion and write-off provisions in APRA's prudential standards apply, and enhance stay provisions and ensure that the exercise of APRA's powers doesn't trigger certain rights in the contracts of relevant entities within the same group. There are a range of other measures as well, including enhancing and simplifying some of APRA's other powers.

These measures have been developed over a long period. In 2012, the Labor government released a consultation paper that canvassed a range of proposals to strengthen APRA's crisis management powers, and that was part of the effort that has led to this bill today. The Liberal government then put the consultation process on hold, pending the outcome of the 2014 financial systems inquiry. That inquiry recommended that government complete the process to strengthen APRA's crisis management powers. This bill implements those changes, and we're pleased to see it do so.

Our institutional frameworks, our regulators and our prudential regulatory regime, overseen by APRA, served us really well during the global financial crisis—that's another important part of the story—but some gaps did become evident. As I said at the beginning, with the distance of 10 years now, it's far enough away that we can learn the lessons but close enough that we can remember well the impacts. The experience in other countries highlighted the need for robust crisis resolution powers. I will give some examples. We remember February 2008 when the UK government nationalised Northern Rock bank. We remember March 2008, when the world's fifth largest investment bank, Bear Stearns, collapsed and was taken over by JPMorgan. We remember September 2008, when the US government bailed out Fannie Mae and Freddie Mac. The one that really sticks in my mind from that period was the night that Lehman Brothers filed for bankruptcy. I think the world economy really crossed a psychological threshold when Lehman Brothers hit the fence on, I think, 15 September 2008. I think that really turbocharged the crisis from something that was a serious problem into something that was a catastrophic problem for people to deal with.

I have gone through some of the effects of the stimulus on the real economy, on the financial side. By June 2008, Labor introduced the financial claims scheme and bank guarantee that the member for McMahon mentioned. That was to provide certainty and protection to customers. It seemed a big deal at the time. In hindsight, it was a very wise thing to have done. In October 2008, the government announced the guarantee scheme for large deposits and wholesale funding to support confidence and assist the banks, building societies and credit unions. A few days later we followed that up with the first stimulus package of $10.4 billion and then, in February the following year, there was the big one—the $42 billion Nation Building and Jobs Plan. Together, those financial changes, combined with the stimulus to the real economy, had the extraordinary impact that I mentioned just a few moments ago.

This bill extends what I think any objective observer would consider to be a very effective Australian response to the global financial crisis and those initial prudential reforms and consumer protections that were put in place. Labor will be supporting the bill, as I said, because it's all about Australian regulators having the appropriate powers to minimise the likelihood of a financial crisis and so that, in the event we do have a crisis, we have the power to address it. It is absolutely critical that our institutions, our regulators and our arrangements can protect Australian depositors, policyholders and superannuation beneficiaries and protect the stability of the financial system. We hope that in our lifetimes we never see the kind of economic and social devastation that we saw around the world during the global financial crisis, but hoping that that won't happen is not a policy. We need to make sure that we get the arrangements exactly right. I commend the government for this bill. We support it enthusiastically.

Andrew Gee (Calare, National Party) Share this | Link to this | Hansard source

I rise to support the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017. It was interesting listening to speakers on the opposite side of the chamber looking back at the history of the global financial crisis with rose-coloured glasses and giving themselves a pat on the back about how they averted a recession, whereas many hardworking Australians will remember it as the time of those opposite talking about 'Rudd money' and billions of dollars being handed out to not very much economic effect and not the glorious time in Australia's economic history that those opposite are now painting it to be.

This is an important bill which will strengthen our financial system and, therefore, our economy. The experience of other countries during the global financial crisis demonstrated that, when financial groups enter distress, failure to resolve these entities can lead to severe economic consequences and that it has to be done in an orderly and controlled way. The US experience, in particular, was very instructive. During critical moments in their attempts to resolve complex entities such as Bear Stearns and Lehman Brothers, the US government was impeded by resolution powers being inadequate or uncertain, and that just fed into the whole crisis. There was a similar story in the UK, which experienced a crisis of its own and had to deal with inadequate powers of resolution with respect to certain entities.

So, to achieve the best chance of effective resolution in these situations, it's essential for regulators to have access to flexible, timely and robust resolution powers. Whilst we disagree on the history of the aftermath of the global financial crisis in Australia, I think that at least we do agree that this bill is both timely and needed. Strong resolution powers need to be balanced with adequate compensation measures for stakeholders who are disadvantaged by the exercise of these powers. If the exercise of any of APRA's resolutions powers leads to acquiring of rights other than on legal terms, the legal framework requires compensation. This strikes the appropriate balance.

A review conducted by the Council of Financial Regulators examined the adequacy of Australia's resolution powers. This review took into account domestic and international developments such as the work of the Financial Stability Board, or FSB. This review found that, while APRA has a reasonable set of existing tools, significant gaps existed—in particular, the ability to resolve distressed groups; secondly, the ability to require restructuring of a regulated entity to facilitate a resolution; and thirdly, the ability to address a foreign bank branch in Australia. Proposals to address these gaps were outlined in detail when the government's December 2012 consultation paper was released entitled Strengthening APRA's crisis management powers. Crisis resolution is the process by which APRA manages or responds to situations in which the ongoing viability of a bank or insurer is in jeopardy. The global financial crisis clearly demonstrated that it's particularly difficult to ensure the effective resolution of a failing entity that is part of a wider group of companies. The structures of financial groups can be complex, involving numerous business lines and support services linked through different ownership and contractual arrangements. It may not be clear how different members of the group are linked and what critical interdependencies operate within that group. The ongoing provision of critical intragroup services is therefore vital to achieving effective resolution and outcomes in these situations. Understanding the position of a failing regulated entity, disentangling its affairs from those of the rest of the group and ensuring it can be resolved quickly, effectively and expeditiously present considerable challenges. In the absence of effective group resolution powers it may be particularly difficult to resolve a distressed regulated entity or group quickly at all.

This bill will ensure that Australian financial regulation is suitably keeping stead with development in international standards in resolution. The Australian government is committed to ensuring that, should a crisis strike a bank or insurer, the impact on the Australian economy and taxpayer is minimised and will be minimised, and that APRA is required to protect the interests of depositors and insurance policy holders and the stability of the financial system. I commend this resolution. I commend the bill to the House because I think it will greatly add to the confidence that the Australian public and the international community has in the Australian financial system. That can only be a good thing. Nobody wants to see another global financial crisis. But, if the experience of years gone by has told us anything, it tells us that trouble can strike again, and it can strike at unexpected times. So the time to prepare for crisis and trouble in the financial sector and the global economy is now. I think the government is right to be taking this action. It is a responsible action. It's the right thing to do. It has very strong support across various sectors. I commend this bill to the House.

Michael Sukkar (Deakin, Liberal Party, Assistant Minister to the Treasurer) Share this | Link to this | Hansard source

I thank the member for Calare. Indeed, I thank all of those members who've contributed to this debate today. The landmark reforms contained within the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 will protect Australians and Australia's financial system for generations to come. While Australia avoided the worst effects of the great recession that followed the global financial crisis, we can't just rest on our laurels. We're beneficiaries of the robust economic management and effective regulatory reform undertaken by the Howard government, but we can never be complacent. Successive reviews, including the coalition government's Murray Financial System Inquiry, have made the case that our crisis management powers need to be strengthened. We must strengthen crisis management powers when the financial system is healthy. Now is the time to do this.

The international experience from the global financial crisis demonstrated that regulators need powerful, flexible and timely tools to resolve financial institutions in distress. Even though APRA has a reasonable toolkit to deal with these crises, there are deficiencies that need to be addressed to ensure the right tools are available to deal with these crises. The bill has two core themes: resolution planning and resolution powers. APRA needs to be prepared for and manage a crisis that could occur in many different ways. Firstly, resolution planning refers to the process of banks and insurers working with APRA to ensure they are ready for stress events. APRA already puts considerable effort into resolution planning, but the legislative framework does not give APRA clear powers to make prudential standards for resolution. We are addressing this gap. These amendments will substantially reduce the wider financial system impact and cost to the taxpayer of a stress event. They put APRA in a position to address barriers to the orderly resolution of an entity.

Secondly, resolution powers are the tools that APRA can use to deal with a distressed institution, including its corporate group entities. The bill strengthens APRA's toolkit by making amendments to: enhance APRA's statutory and judicial management regimes to ensure their effective operation in a crisis involving a bank or insurer and their group companies; enhance the scope and efficacy of APRA's existing directions powers, which require banks and insurers to address prudential issues; improve APRA's ability to implement a compulsory transfer of business of a regulated entity; ensure the effective conversion and write-off of capital instruments to which the conversion and write-off provisions in APRA's prudential standards apply; enhance stay provisions and ensure that the exercise of APRA's powers don't trigger certain rights in the contracts of relevant entities within the same group; enhance APRA's ability to respond when an Australian branch of a foreign bank may be in distress; enhance the efficiency and operation of the FCS and ensure that it supports the crisis resolution framework; and enhance and simplify APRA's powers in relation to the wind-up or external administration of regulated entities under the industry acts, and other related matters.

These amendments will significantly strengthen APRA's capabilities as a resolution authority, accompanying its traditional role as a prudential supervisor. They will ensure that Australia keeps up with international best practice for crisis management. While the government does not wish to see the day that these powers ever need to be used, we're taking the responsible course of action to safeguard the financial system for the wellbeing of the Australian people. I therefore commend this bill to the House.

Question agreed to.

Bill read a second time.

Message from the Administrator recommending appropriation announced.