Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Hansard source

They are on again next week. I just mention this, Senator Brown: APRA are on again next week and usually there is a lot of questioning and a lot of very valuable information not just from APRA but also from ASIC, the ACCC et cetera.

I thought it was regrettable when we had the estimates in May that APRA appeared first thing after dinner, relatively late at night, and they went through the measures they have taken in the last year, particularly given the international environment, to analyse and examine the various exposures of the Australian financial institutions—banks, credit unions, building societies—and they gave a very strong report of health and robustness. There will be another opportunity next week for those senators who are interested—and I am sure there will be, not unsurprisingly, a few more interested than on the previous occasion—to very precisely go through the questions that you and others have raised on a number of perfectly legitimate issues of detail about implementation, concerns and worries you may have about exposures in this country.

In the general sense, and specifically concerning all Australian financial institutions, APRA has carried out rigorous, ongoing oversight. I referred to the HIH royal commission earlier, Senator Brown. In fact, we learnt a valuable lesson from the HIH collapse. I will not go into the detail today, but there was a royal commission and the regulator, APRA, was substantially overhauled as a consequence of that royal commission. We did learn some valuable lessons out of that that have effectively helped to well prepare our regulator for these sorts of circumstances and have led to an increased vigour and surveillance of the broader financial sector, not just insurance companies.

Senator Brown made some comments about executive salaries. I said in my earlier remarks that the Australian position for executives and salaries is somewhat different from that of the United States. I am not just talking about levels of salaries; I am talking about the practices, the excesses, the sheer greed of some of these executives in the United States and the effective insider trading when they knew a company was going to collapse. They bailed out, they sold their shares and sold their shares in their pension funds. Unfortunately, the employees in the United States, through share ownership plans through their pension funds, ended up not just losing their jobs but losing their pension funds as well. The Australian law does not allow that sort of practice. I might say in that sense it is a strong regulatory oversight that we built into our pension superannuation fund system some 20 years ago. But we have not seen the sorts of abuses—the rewards for failure—that have occurred in the United States. We have not seen that in Australia when a financial institution has collapsed.

Senator Brown, I think you paint an overly bleak picture of the outlook of these CEOs. You said that they have self-assigned their pay. Executives do not self assign their pay. They do not sit down at their desk as a new CEO and say: ‘Right, I’m worth $5 million and I’m going to sign off. That’s what I’m worth. And I’m worth another couple of million on share bonuses.’ They do not sit down and self assess and assign what they want. The boards in this country and the shareholders oversee executive salaries. There is an oversight mechanism. It is not a self-assignment mechanism, and rightly so. Particularly in this environment, Senator Brown, I think there will be renewed focus and vigour by boards and shareholders, and we have seen some recent examples of this. Telstra was one. There has been renewed interest and vigour by boards and shareholders in the remuneration of executives. I think that is very appropriate. There has been renewed interest by superannuation funds and fund managers in the level and makeup of executive pay in Australia. I think that is welcome, and I do not think it will come as news that there will be much greater scrutiny of these executive pays in the current environment going forward, and the boards and the shareholders are responsible for this.

But the Prime Minister himself has admitted that that in itself is not sufficient. The Prime Minister has advocated reform of financial executive salaries. He has said it on a number of occasions. It was not just yesterday. He reiterated and gave renewed focus to this issue in his speech at the Press Club yesterday. I was present at a dinner in Sydney on Friday a week ago when there were many of these senior executives present. The Prime Minister—I thought very refreshingly and rightly—outlined his concern about executive greed, moral failure and the need to reconnect moral judgement to the approach by executives to decision making, in particular executive pay. He spoke about this at the UN. Reform has been advocated at the International Monetary Fund and the G20.

The Prime Minister addressed this topic at the UN when he argued financial institutions need to have clear incentives to promote responsible behaviour rather than unrestrained greed. He referred to the Basel rules on capital adequacy that should be linked to the issue of the executive remuneration. Specifically, he referred to regulators setting higher capital requirements for financial firms with executive remuneration packages that reward short-term return or excessive risk taking. That is, that institutions that have more aggressive pay packages would have to hold more capital to reflect the increased risk.

The government is examining the implementation of this approach in Australia. Discussions are taking place with our regulators and one in particular, APRA, which has the prudential responsibility for financial institutions. So both here and internationally this issue has to have far greater focus with a much clearer set of rules in respect of financial stability in the future. The work will also engage the Basel Committee on Banking Supervision to determine the best means of implementing this initiative. So the Prime Minister has been on the record on a number of occasions, certainly at least four of five that I can recall, expressing the need for this work to be carried out and to be implemented in both an international and a domestic framework.

I did say earlier that I think you have painted an overly bleak picture, Senator Brown, of the attitude of senior executives in financial institutions in this country. I would have to say that financial companies in this country, when it comes to areas like socially responsible investment, generally have been leaders in the development of this field, in contrast to many other top 500 companies in Australia. So I do not think it is a totally bleak picture. I do think that on many occasions financial institutions—and this includes the involvement of their CEOs and/or senior executives—have taken a greater involvement and have had a greater focus on areas such as socially responsible investment. I can think of a number of our banks, for example, that have implemented active programs with respect to Aboriginal employment, and with respect to some areas of responsible lending and trying to redress some of the areas of irresponsible lending. So I do not think it is a totally bleak picture. I can think of some examples where our banks and financial institutions, including CEOs, have improved their approach. It is not perfect; I have still got some worries and concerns about areas such as credit card selling and distribution, payday lending—areas which we are bringing into Commonwealth regulation and where we do intend to take a more active approach as a government, once we have got regulatory control of these areas, to encourage responsible lending. I would not argue it is perfect, but I do not think it is quite as bleak as you paint.

On exposure of Australian institutions to CDSs, which you have asked me about, banks must disclose their material exposures, and obviously APRA as the responsible regulator oversights and examines their material exposures. The CDS exposure of Australian banks, I am told, is one to two per cent of their total balance sheet as at June 2008. So the total balance sheets of the businesses in Australia show one to two per cent exposure. APRA requires Australian deposit-taking institutions, ADIs, to report on their CDSs as part of their quarterly reporting. APRA is aware of the level of material exposure by financial institutions and obviously it oversights and checks to ensure that the extent of any exposure to CDS is within prudential requirements in this country. That is a general overview of the exposure. I cannot give you more detail as of this morning on that level of exposure, where that lies and with what particular institutions et cetera, but there will be the capacity for APRA to outline this in much greater detail at Senate estimates next week. I am more than happy to indicate to APRA that in their introductory remarks, for example, they provide some additional information, and then senators will obviously have the ability to question them more intently and to a greater level of detail.

We do not support your amendment, Senator Brown. The Prime Minister has indicated the way in which the government will approach policy development. We do consider it an important issue, not just in the context of this legislation but in the context of what is, rightly, a broader community concern about the level of executive packages for some CEOs, particularly against a background of the well-known and exposed excesses that have occurred in the United States. But I make the point that we have not had a financial institution here collapse. We have not had payment for failure as we have seen in the United States. I do not believe the situation is as bleak as you portray but I accept that you raise some legitimate concerns, Senator Brown. I believe that the process and the way forward that the Prime Minister has set out, and the process that I am sure will take place amongst boards and shareholders and superannuation funds in their scrutiny of executive pay over the coming year and years, will reflect the broader concern that you hold.