Helen Coonan (NSW, Liberal Party, Manager of Opposition Business in the Senate) Share this | Link to this | Hansard source

These bills, the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008, the Financial Claims Scheme (ADIs) Levy Bill 2008 and the Financial Claims Scheme (General Insurers) Levy Bill 2008, have been brought before us in order to establish a financial claims scheme to provide an unlimited, explicit guarantee for bank deposits. It is probably fair to say that most people in Australia had a reasonably based assumption that there was already in place at least an implicit guarantee that their bank deposits, particularly with the major banks, were guaranteed. But these bills contain significant mechanisms to both maintain and build confidence in Australia’s financial system. Australia does have a depositor protection scheme in place whereby authorised deposit-taking institutions must have in place assets held in Australia equal to or more than the deposit liabilities that they have. Depositors in this country also have first claim to the assets of an authorised deposit-taking institution. But in these uncertain times greater assurance is required, particularly to assure depositors with institutions other than the big four banks that their deposits are safe, because authorised deposit-taking institutions also include building societies, credit unions and so on.

I think it is fair to say that Australia is in a far better position than many other countries to withstand the shocks from the financial crisis. We have heard that assurance given repeatedly over the past days and weeks. Our financial system is safer than many and we are therefore better prepared than most other countries to withstand the financial crisis. I have to say, however, that that does not result just from luck. In fact, the soundness of Australia’s financial system reflects some 10 to 12 years of responsible economic management and the application of targeted and carefully calibrated financial principles by the previous Howard government.

Australia’s financial institutions have served the economy well and continue to do so. The Reserve Bank is keeping an eye on inflation and providing systemic stability to underpin our entire financial system. Senators will recall that the Australian Prudential Regulation Authority, which was set up in 1998 by the Howard government as a result of the Wallis inquiry recommendations, provides careful prudential supervision that perhaps is not present in some overseas systems. The supervision is of a systemically important kind. It supervises institutions such as authorised deposit-taking institutions and life and general insurance companies. The Australian Securities and Investments Commission is providing oversight of corporate law. It has been called on recently to make some judgement calls in relation to the issue of short selling during the month of September. And the Australian Treasury oversees policy development and forecasting at both macro and micro level. So these institutions interact and coordinate to ensure that our economy does have strong prudential regulation and supervision, and their roles are complemented by the competition regulator, the Australian Competition and Consumer Commission.

These institutions were, as in the case of APRA, created or, as in the case of others, had their mandate strengthened by the coalition when in government, and I think we can be confident that the measures contained in these bills will be competently administered by the appropriate one of these institutions, the Australian Prudential Regulation Authority. In the highly unlikely event that an Australian institution collapses, these bills will provide depositors with the security that their funds will be available to them in a short period of time. The guarantee will apply for three years to all deposits in authorised deposit-taking institutions. The scheme will also provide compensation to eligible policyholders of general insurance in the event of a failure by a general insurer. Finally, the bills strengthen APRA’s ability to manage a distressed authorised deposit-taking institution, general insurer or life insurer should that be required. In addition, the two related bills provide for the imposition of a levy on authorised deposit-taking institutions and on general insurers in the event of the activation of the Financial Claims Scheme in relation to the failure of an ADI or general insurer.

However, there are some risks with these bills that need to be addressed by the government, in our view. While we do support the bills—and I stress that—we also recognise that there are risks in providing such a guarantee to depositors. As with all areas of government, the bills require careful analysis and will require prudent management once they are passed. While the bills before us have been under consideration, it would seem, for some months, the idea of a financial claims scheme has now considerably changed in scope from the original capped scheme which proposed a limited explicit guarantee of $20,000. That was about timely access to at least some funds in the event of a failure to meet deposit liabilities rather than ensuring that the entire deposit was covered and available in a short period of time.

I believe that the government should be upfront and should acknowledge in the debate here today that the speed with which these greatly changed bills have been brought forward does mean that analysis available to the government for decision making has been hurried—to put it at its mildest. The opposition has had even less information, I am sorry to say, and less time to consider that information than the government, so there are a number of unanswered questions. Lest it be said that the opposition is quibbling about this package, I want to make it perfectly clear that it is our job, and I think the taxpayers of Australia would expect nothing less than us at least flagging some of the concerns that we have had in looking very quickly at these bills.

There has, as I understand it, been a limited briefing from representatives of Treasury and the government, but there are a number of issues which need to be watched very closely, and critical information is still required. The public and those financial institutions that are affected by these bills, both those that are included and, more particularly, those that are excluded from its coverage, are largely in a position of simply having to trust the government on this one. That is never a comfortable position to be in, and there are some unanswered questions about those institutions not guaranteed. The answer to it, no doubt, is that, not being regulated by APRA, it is very difficult to supervise and some of the institutions not covered are in fact very small, but there are some legitimate concerns that will need to be addressed by the government in relation to those not guaranteed, including cash management trusts, property and share trusts and mortgage trusts, just to mention a few.

In the House of Representatives there has been a debate about the significance and importance of having the government level with or come clean with the Australian people and provide publicly and through the parliament a full statement of the information and analysis that the government has received on the important decisions that it has been taking over the past couple of days. The $10.4 billion package announced on Tuesday, which I want to bring up, has been designed to act as a fiscal stimulus for the Australian economy, but there has not been very much information surrounding the announcement of that package. There was a press release and a statement by the Prime Minister and no doubt other public statements, but none of the serious accompanying material that you would expect—no Treasury papers or advice and no revised forecasts. In the circumstances, we think that all the usual advice, data and information that you would expect to see supporting the announcement of a $10.4 billion spend should be forthcoming and made available forthwith.

I also want to raise the major issues relating to protection of the taxpayer. We want some information about what is going to happen with guarantees offered to banks in respect of wholesale term funding, which are enormous sums of money borrowed from international markets and may result in losses by banks being transferred to the account of the taxpayer. Our main motivation here in raising these issues is the protection of the taxpayer. In the House of Representatives and the Senate information has been sought about that. We have asked questions about whether there will be additional prudential supervision requirements and what the conditions will be of providing a guarantee of this kind. The Prime Minister could have provided the parliament with a substantive answer or simply said that they are still working on the detail, which we would have appreciated. But we got a very indignant response, and that has been reflected here in the Senate with responses to questions about the package and the bills that we are looking at today.

The wholesale term guarantee must be structured in such a way that there is an exit plan, because, as John Stewart, the Group Chief Executive of the National Australia Bank, apparently said only a few days ago, the real challenge would not be getting banks to apply for these guarantees and to pay the fee—and of course termination of the fee is a critical issue—but getting them off it. Mr Stewart described it, perhaps a little bit inelegantly, as getting them off the government teat, but his point is valid and well taken. It is a major issue because we do not want to get into a situation in which unsustainable practices by banks are in effect supported and continued by virtue of a Commonwealth government guarantee.

It is of course an answer—and this answer has been given—that APRA will keep an eye on it, but the flaw with that is that APRA, as the Prime Minister and the Minister for Finance and Deregulation and the Treasurer know very well, is not constituted to act as an investment adviser for the Commonwealth of Australia. When the Commonwealth gives a guarantee of this kind, it is actually on the hook. It is taking on board very substantial contingent liabilities. It can charge a fee and it should charge a fee and the fee should be a recognisably commercial fee. But nonetheless it is in this instance proposing to take on a considerable risk. This is something, in the opposition’s view, that will need additional, heightened and very careful supervision.

Just going back to the package that was announced a couple of days ago: when you look at the magnitude of this, it is going to halve the budget surplus. Unfortunately, we feel concerned that the information that underpins this package is simply absent. When questions have been asked that must, on any view, be legitimate—such as questions about the revised economic forecasts and the information that the government must have had in order to announce a package of the magnitude of $10.4 billion—we have received, I think, a disproportionate reaction of confected outrage that we should be so impudent as actually to want to know what is fundamentally critical and important information.

I would say to the government and to Senator Sherry, who is going to respond in short order, that one of the reasons why we think it is legitimate to ask these questions is that we have wanted to take a very responsible position in relation to these bills in terms of taking the government on trust, but there are concerns in the minds of the public. Senator Sherry was on this side of the chamber not long ago, and he would no doubt remember and be well aware of the fact that members of the public contact senators to voice their concerns. We wish to be in a position where we can allay concerns in the minds of the public. I would have thought that that would be an aim that is consistently held by the government as well as us. These are responsible inquiries and ones that we intend to pursue in the interests of our constituents, the taxpayers of Australia.

These three financial bills of course are no exception in terms of our wanting to know the underlying information. They have not been subject to the normal scrutiny. There is no regulatory impact statement. We have called on the government to prepare a clear statement of the costs, benefits and risks of this policy to government, to the financial sector, to businesses and to the public. In such a statement, we are of the view that it is essential that the government recognises that this scheme will change the way in which institutions behave. It will create new incentives and disincentives to authorised deposit-taking institutions and insurers and their customers, and they will act in ways different to the way in which they have acted in the past. So analysis and effective supervision by government will certainly require it to be alive to the increased risks from the moral hazard involved in these arrangements, and it must ensure that they are minimised.

The government has set an expiry date of three years for this scheme to operate without a cap—that is, with an unlimited, explicit guarantee for deposits. To have an expiry date of three years for the scheme to operate without a cap, there really must be—and we urge this once again in respect of both of these large packages—a credible and workable exit strategy. If Senator Sherry is able to tell us what that is, we will of course be listening intently. It should be devised now, and then reviewed at appropriate intervals between now and the expiry date. We cannot see that there is currently an exit strategy and we think that is a glaring deficiency.

I had a look at the Treasurer’s second reading speech, and I think another important aspect about it—as I said when I addressed some earlier remarks to the wholesale term funding guarantee—is that, although he talked about an interaction, at this stage there is virtually no information about that, about whether it needs legislation. I also call on the government to make such information available.

We understand the need for a concerted effort to ensure Australia withstands the impact of the financial crisis, but the coalition, like the Australian public, should not be left in the dark wondering what the information is, what advice the government has had and what has been the real catalyst—given the forecasts and the International Monetary Fund’s recent report—to take this action. We have said we will support these bills, but we insist that in the interests of transparency the public receive better information.

We have cautioned the government in respect of some of the concerns that we have been able to identify in the short time that we have had to consider these bills. We think that there are still many matters that need consideration and more information. As I said a little earlier, it is important to take the Australian public with the government on this, so I call on the government to level with us and level with the taxpayer, to give us the detail and information we need so that we can be assured that this level of regulation, this extraordinary intervention, the content and scope of these bills, will achieve the desired effect. The government should give us whatever information it has at its disposal that it has not yet shared with the rest of us.

Finally, I want to say that we will not be supporting the second reading amendment that Senator Bob Brown will move. In the time remaining, I will briefly state a couple of reasons. There is no doubt that a lot of executive salaries have been way over the top, especially in the United States, but no-one is suggesting that our banks have been mismanaged or that excessive salaries have contributed to financial problems in Australia. I think it is important, ultimately, to remember that salaries are set by boards of directors and shareholders of companies. Institutional shareholders such as superannuation funds could no doubt be a bit more vigilant in their scrutiny of executive remuneration, but the responsibility lies with shareholders. There has to be some end to what interventions are going to be run in respect of financial institutions. I think talking about wars against greed, and other vague comments might make for great headlines, but it is not going to really do anything to ensure that our financial institutions operate in a better way.

Bob Brown (Tasmania, Australian Greens) Share this | Link to this | Hansard source

Let me express at the outset the greatest disquiet about the process that is taking place here. These bills, the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008, the Financial Claims Scheme (ADIs) Levy Bill 2008 and the Financial Claims Scheme (General Insurers) Levy Bill 2008, are to guarantee deposits in banks, other financial institutions and insurance companies and to transfer that responsibility across to the taxpayers of Australia. Whatever other arguments we might put forward about the better management of such institutions in Australia compared to the United States, the legislation comes out of a real concern by the government that one or other of these institutions might fail, leaving depositors out of pocket and leading to a run on other institutions, with the inevitable consequences that flow from a situation not unlike that which we are seeing in the United States, where overnight yet another bank was mooted to be on the verge of failure. This whole process comes from the neo-liberal and conservative view which has prevailed not just in recent decades but right through the last century that small government is good government, that government should get out of the way and that financial institutions and big business in general should be able to run the market because the market knows best. I have heard that expressed in second reading speeches in this place just in the last month or so. This is the view that in a democratic system the interests of the majority of the people are best served by allowing those who are wealthiest to effectively run the financial system. It has been demonstrated yet again how wrong that is.

I accept Senator Coonan’s observation that regulation is better in this country than it is in other countries, and that includes some of the regulation brought in during the Howard government years. But the fact is that with this legislation before the parliament today we are seeing that it is not enough to guarantee that there will not be a bank, insurance company, or credit union failure in this country in a situation where the American system has gone belly up. All the assurances going right back through history that the market knows best are again being found to be patently wrong. We are now seeing the fix up, the ambulance, arrive in the form of this legislation before us and similar legislation in other countries around the world, simply because the culture of greed has threatened the wellbeing of millions of people and their deposits, not only in this country but right around the world.

It is quite extraordinary how successive parliaments, under great pressure I might add from sections of the media and vested interests, will not respond to the greater need of the public over those vested interests, which lobby so patently in this place and in parliaments elsewhere around the world. For those who missed it, I would point to John Kenneth Galbraith’s great book The Culture of Contentment, which is one of the many books of this great economist’s output over the last century—he recently died, bless him. I read this book in 1992, and it nails the failures of the democratic system to deal with greed, which has the inevitable outcome he was predicting and which we are now seeing unfold around the world. I would just take one quote from page 5 of this book, where John Kenneth Galbraith is referring to testimony before congress in the 1930s. He says:

Testifying before a Senate committee, the American Banker J.P. Morgan—

note the name—

warned, ‘If you destroy the leisure class, you destroy civilisation.’ Asked later by reporters to identify the leisure class, he said, ‘All those who can afford to hire a maid.’ For Morgan the threat from Washington was no casual concern: ‘The family of J. P. Morgan used to warn visitors against mentioning Roosevelt’s name in [his] august presence—

that is, Morgan’s august presence—

lest fury raise his blood pressure to the danger point.’

And we all know about Roosevelt’s New Deal to deal with the depression that was caused by people like Morgan back in the 1929-30 crash. Galbraith goes on to say:

It is now generally accepted that the Roosevelt revolution saved the traditional capitalist economic system in the United States and the well-being of those whom capitalism most favoured. By adaptation the anger and alienation were diminished, and economic life became more stable and secure. This would not have happened had those who, on the full maturity of time, were saved and most rewarded had their way. If in the election of 1932 they had been fully aware of what was to come, there might well have been no salvation. The energy, money, public concern and propaganda that would have been released in that year by a full knowledge of the impending changes could well have assured a Roosevelt defeat.

Galbraith is saying that whether you have the Democrats or the Republicans in power—read the Labor Party or the coalition in Australia—the democratic system is so nobbled by the big end of town and the culture of contentment that if it is accepted that rich people have a special wisdom to run the economic system then that will lead repeatedly to a failure of the financial system in the way that we are witnessing yet again in what many analysts are describing as the worst economic crisis since the Great Depression itself.

I was born in 1944 and I was very alert to the world in the 1950s. I remember very clearly the swaggies on the road around Australia in the early 1950s as a result of the Great Depression and then the war coming afterwards. We never want to see the country back in those circumstances. But here we are looking at the real possibility of massively increasing unemployment in this country, failure of small businesses and, as this legislation so obviously puts it, the potential failure of major financial institutions, unless government guarantees are given to them in 2008.

I want to comment about a couple of matters in the limited time we have here. I note at the outset that there are three speakers on this bill. Here are three of the most important pieces of financial regulatory legislation that we will ever see before this place in our tenure in this parliament. Here is one of the great financial crises that needs to be analysed and for which we need to understand the causes, to go to them and have them explained to the parliament and to remedy the failures of those who have caused it, and we have got only three speakers on this legislation. This legislation went through the lower house yesterday in one day, and there will be no Senate inquiry. There will be no going out to seek the opinions of economists, let alone people whose deposits are inherently—because the legislation makes it clear—potentially at risk, and that is all Australians in one way or another. And there will be no going out and getting the opinions of people who have already lost money—ask the superannuants—because of the financial crisis caused by the greed, self-invested contentment and the nobbling of democracy by those self-empowered in Wall Street who, by extension, have tens of thousands of lobbyists in Washington with prodigious lobbying power.

We have had the inanities from the Reaganites, from President Reagan, then Prime Minister Thatcher—much admired by former Prime Minister Howard—who wanted to put a brake on democracy, in the interests of people generally, in regulating the excesses of the rich. Instead of that, we have got a truncated debate here today and we are going to be giving a guarantee to the banks, but we are not going to have the government’s analysis of why there needs to be a $10.4 billion package added to this guarantee and an analysis of the root cause of the problem, because the big end of town will not want too much of an expose on that.

I have been looking though today’s Financial Review and to give it its credit, it has done quite a lot on exposing the obscene rake-off by executives who should know better and should have a greater social conscience in this country. Let me state this from the outset: whether or not you say they are important jobs that need good pay—and I am not going to quibble with that—I ask anybody in this chamber to explain how, in an age where the Prime Minister is on 300 and something thousand dollars a year and works very hard as the chief executive of this country, these bankers and other CEOs who are on multiples—and I am talking about 10 or 20 or 30 times the Prime Minister’s pay—justify the rake-off that they are getting. These screen jockeys have been so willing to up their own take-home pay to levels that simply cannot be justified.

We have Babcock & Brown’s chief, Phil Green, with remuneration of $22.1 million and a share price fall of 94.5 per cent. NAB’s John Stewart’s remuneration is $8.8 million and the share price has fallen 37.2 per cent. And when I say ‘share price fall’, we are looking at people losing 20 per cent—some say six, some say 10 and some say 20 per cent—of their superannuation or their investments from which they are making ends meet. These people are being hurt. Every time you look at a fall, there are people suffering economic hardship in our community in much greater numbers than the executives I am talking about. ANZ’s Mike Smith receives remuneration of $12 million and the share price has fallen 33.7 per cent as of yesterday. Macquarie’s Nicholas Moore’s remuneration is $19.2 million. How could you justify anybody in Australia talking $19.2 million out of the public pool, because that is what it is—this is everybody’s money and that is $19.2 million going to somebody whose institution has had a share price fall of 54.3 per cent? And so it goes on: CBA’s head gets $8.7 million; St George’s Paul Fegan gets $3.5 million; Westpac’s Gail Kelly gets $8.7 million.

I therefore put it to the Senate—and I am sorry to hear it being dismissed already by the coalition—that this is a very belated time, but the proper time, for some sort of curb to be put on these excesses. The Greens have spoken about it and I have spoken about it in this place repeatedly over the years, but it seems like you are actually attacking the institution of Australia by talking about curbing these obscene payouts. And now it is shown as being nothing of the sort. In a ‘fair go’ Australia, it is something that goes right against the fabric of this country and its sense of a fair go. These people cannot justify this executive rake-off no matter which way you look at it. You cannot justify it against any decent parameter that might be brought forward.

Prime Minister Rudd has now said that he is going to get APRA to do something. He has cut funding to APRA in his general slash of the Public Service because that is what the big end of town thought would be a good thing in the run to the last election. He is going to ask APRA now to come up with some sort of formula to regulate these CEO obscene payments, but not more than that. What he intends to do is then ask the international community to adopt whatever APRA comes up with and, if they do, then Australia will. This is a rerun of the Howard idea that, yes, we will respond to climate change but we will not do it until Baluchistan or, rather, Kazakhstan does. We will wait till everybody else does it.

So I can see here the Prime Minister has got a very neat mechanism for saying, ‘I am going to deal with these CEO payouts, but not now.’ Sure, we will shore up the banks, and you know what that does. It gives a guarantee to these banks which will enable the chief executives to ensure that they get a payout greater than if that guarantee did not exist. So it is actually going to feed into them being able to claim a bigger salary than they would otherwise get and they do not have to, any longer, provide the guarantee. Ipso facto, it means that they are not quite so constrained in the decisions they will make in the coming three years. So we provide the guarantee and they will be able to use that to argue to get a bigger salary than they otherwise would have gotten. No doubt the salaries are going down but they are going to remain totally out of whack with the value of a CEO as against another citizen. I am not ashamed to say that that means other citizens who are making bricks, who are policing our security, who are teaching in our schools and who are nursing in our hospitals. Why should these people be on less than 100th the take-home pay of the CEO? Justify that if you can; I cannot.

It is time that this obscenity was hauled in by a Prime Minister acting now. He can act to guarantee the banks; let him act on these CEO wages. That is why, on behalf of the Greens, I have an amendment here to cap these wages at $5 million or at 10 times the base wage of the Prime Minister, whichever is the lesser—I can tell you it is the second that is the lesser—as at least a defined measure here and now. If the bank, the insurance company or the financial institution is going to get this public guarantee—that means taxpayer backed-up guarantee—then let them quid pro quo take at least some rein in on the extraordinary wealth that they are unfairly draining out of the Australian financial system, and that means out of the pockets of fellow Australians in 2008.

We also read Geoff Winestock’s piece in today’s Financial Review that the Australian Prudential Regulation Authority has had to delay the updating of some of its rules for banks because of the extra workload in the financial crisis. Now listen to this:

The delay comes amid questions over why APRA’s expenditure fell and its staff ceiling was lowered in the federal budget in May.

David Rush, APRA’s general manager policy development, said in a speech in Sydney last month that APRA had identified the need for new “liquidity management requirements” for banks this year.

Months ago they identified the problem coming down the line but they could not do anything about it because their funds had been cut. By who? By Prime Minister Rudd, who sacked 3,000 public servants when he came in. They were not the top ones, mind you—the Howard public servants are still advising him—but out went other public servants. You cannot have a prudential authority dealing with the problems of this country if you have cut its funding by one, two, three or four per cent. The Minister for Finance and Deregulation, Lindsay Tanner, says if APRA required further resources they would of course receive them. The message to Mr Tanner is: they do require it. The Prime Minister wants them to look at executive salaries, for example. That will go on the backburner, I can tell you, unless they are given the wherewithal, and that applies to other authorities which are there in the interests of the average Australian in containing some of the excesses of the corporate sector. (Time expired)

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

I rise briefly to support the comments made by Senator Coonan and to state that the National Party also has a concern about the non-quantifiable depth of this contingent liability on the Australian public purse. We do not know nor has Treasury provided any figures on exactly where this liability ends. I think it is extremely important that Australia does know where this liability ends because of the ramifications that it could have on everything from our surplus to exactly what our future planning and future budgetary requirements are. We feel that Treasury has either been completely and utterly remiss in what they presented to the Australian public by way of the parliament for its perusal or they have not presented anything, and many of the decisions that are coming out now have been made on the back of an envelope.

What we do also have a concern with and what we think should be strongly considered is not so much that there should be a cap on where executive salaries go but that the executives should be fully aware that if they are buying a product that is underwritten by the Australian taxpayer then they should be very considerate about exactly what their own personal drawings on those institutions amount to. There are so many issues that one should consider and, without prescribing any measure, they should have a look at where our nation’s CPI is going and where their salaries are going and, if there is a great divergence between the two amounts, how they justify that to the Australian people, considering it is the Australian people now that are underwriting their institution.

It is not obligatory that they buy these products that underwrite the banks; it is their option to buy them. It is a free choice they make to buy these products and to underwrite them. But when they do, because we have no firm idea of exactly where the liability ends, they should be very considerate about how they act. We in the National Party hope that this process is expedited as quickly as possible. We are fully in support of making sure that we keep a structure in the Australian economy that fulfils a purpose of providing security to the Australian people.

We have huge questions every day not about whether there should be a package but about the competency that has gone into the construction of this package and the extent, form and substance of this package, because we cannot get the details of the extent, the form or the substance beyond what seem to be arbitrary ideas presented with arbitrary numbers. It is a package that uses up over half of our nation’s surplus, yet we cannot get fully informed disclosure from Treasury about exactly where this comes from.

There will be requirements on our nation in the very near future such as unemployment and other infrastructure. At that point in time we are going to need the money again and we cannot spend the money twice. There is no asset being put in place which will allow for further selling to redeem money used for other purposes if the extenuating circumstances of a recession are brought upon us. We will have to just live with the memory of exactly where the current package went. In supporting our banking structure, we realise it is absolutely essential that we have a liquid financial situation, a competent credit situation and that the Australian people are not put at a disadvantage by factors around the world that have forced this onto us.

I will close with two issues. First, sooner or later we are going to need a competent and detailed analysis of exactly where the underwriting of this contingent liability leaves the Australian books. Second, we call on the executives of the major banks to bear in mind that, on the purchase of this guarantee product, they are benefactors of the public underwriting of that process and they should have a close examination of exactly where their salaries go as compared to where the CPI goes.

Steve Fielding (Victoria, Family First Party) Share this | Link to this | Hansard source

Family First supports the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008, the Financial Claims Scheme (ADIs) Levy Bill 2008 and the Financial Claims Scheme (General Insurers) Levy Bill 2008 that guarantee bank deposits and insurance coverage for ordinary Australians. These are important measures to give the Australian public confidence in the banking and insurance industries in these difficult financial times. Family First is concerned that there is no time to properly scrutinise these bills but, given the urgency of the issue, Family First is to make a special exception to the expectation that such important bills should go to a Senate committee before being considered.

Family First is disappointed that these bills do not address the important issue of executive salaries. In the United States, for example, the rescue package passed by the congress included restrictions on executive salaries. I understand there is some difference between this package and the US but it is important that we should also be including restrictions on executive salaries. Executive salaries need to be competitive but they also need to be reasonable. This is an opportunity for the government to tell fat cat executives with outrageous salary packages that it is time to get off the gravy train, that the train will terminate here and to mind the gap.

At a bare minimum, we should be looking at the salaries of chief executives and considering things like ensuring bonus payments cannot exceed the company profit result for the year. If profits are up by one per cent bonus payments should not exceed that one per cent. Also salary packages should not exceed the company’s capital increase for the year. So, if the capital increase was one per cent for the year, bonus payments should not be above that one per cent. In addition, early termination payments must not exceed company profit results for the year or should not exceed the capital increase for the year. These are termination payments when a company has failed and when it is quite clearly trying to get rid of an executive. Another measure when corporations fail is that maybe we should be thinking about whether bonus payments in excess of, say, five per cent of the base salary for the preceding two years are repaid. A lot of times, when a company fails, it knows two years beforehand.

Executive salary packages for CEOs should be transparent and be reported in a standard way on company websites with changes updated within seven days. They should not just be reported at the end of the year and buried in some sort of report but be reported within seven days of the change. Also, looking at CEOs, they should not have stock option plans unless the employees receive a share of the firm’s profit as well. Family First will be pursuing and pressuring the government to stop extravagant executive salaries. Fat cats, you are on notice—the gravy train has stopped.

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

I would like to thank the senators who have contributed to this debate on the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 and related bills and for their acknowledgement that, due to the extraordinary times, the debate on this legislation—which is an extraordinary package of measures—has been constrained. Due to the urgency of this matter, the time frame for passage of this legislation and the extraordinary nature of the measures, there has been an understood approach that the debate and the normal Senate processes that would have been considered appropriate—for example, referral to a Senate committee—have been constrained to less time than would normally be given to much of the other legislation that we have to consider.

I think it is important to briefly summarise why we are at this point—and it is not just the Australian parliament but also a number of other legislatures around the world that are at this point. Much has been made, rightly, of what is known as the US subprime crisis. I think it is important to look briefly at why this occurred. Whilst I think that most Australians are familiar with the term ‘US subprime crisis’ and the fact that the financial crisis in the US system is spreading to other countries, with the potential for significant if not catastrophic consequences for some other countries, I do not think that the fundamental cause is particularly well understood. The fundamental cause of the crisis in the United States was the unfettered, unregulated, unsupervised distribution of mortgages to people who, on any reasonable assessment, could not afford to continue those mortgage payments. That was the fundamental cause. Between five and six million Americans were not so much mis-sold—that is a pretty conservative description—but conned into purchasing mortgages that they could not afford or, under any reasonable circumstances, could not continue to pay once they moved off the introductory or what is known as the ‘honeymoon’ rate. In the United States, you had sales forces doorknocking and telephone canvassing millions of American households, saying and doing anything to effect the sale of a mortgage product. There was no supervision and no regulation of these practices at all in the United States. That was the root cause of the problem that has now infected the US financial system and the financial systems of many other countries.

These mortgages were bundled together and securitised as ‘assets’ into various financial instruments with varying values—hundreds of millions or billions of dollars in value—to underwrite these mortgages that could not be repaid. Financial institutions participated to varying degrees in this process and then onsold these assets and passed them on to other financial institutions. They appear as assets on the balance sheets of financial institutions, and some were passed through to banks in Europe.

One of the other great failings of this process was that of the credit ratings. Agencies classified these assets with a triple A rating. That means that the chances of an asset that was worth, say, a hundred billion dollars decreasing in value were next to zero. It would be very unlikely to be reduced in value and, if it did drop, it would be slight. What happened? These assets have collapsed in value. Whilst it is very difficult at any point in time to assess the real value, they have collapsed. Some of them are worth zero. Some of them have gone from being worth $100 billion down to $1 billion. They have collapsed in value because the rating agencies fundamentally failed to assess the totality of the risk in these products. What is the consequence? The financial institutions that held these assets have been lending out against the value of the assets which have collapsed. They have been lending out to small businesses and to retail customers in a variety of other forms—not just as mortgages but as business loans, for underwriting credit cards et cetera. So you had these fundamental flaws in the US financial system, and this has been the cause of the problem. In turn, I think it is now 25 banks that have either collapsed, have been nationalised or have been forced into merger in the US, in the UK and in some other European countries.

The process of the collapse of these financial institutions has created worry, fear and uncertainty, because the financial markets take a view—along with consumers—that if one bank collapses and then another one collapses and then another one collapses—and there have been 25 in the last six months—when will it stop? Other financial institutions that are safe and prudent get worried that, if they lend money or enter into financial transactions with another financial institution, what if it collapses? Effectively, the oil that ensures the smooth running of the economy is being removed from the system. If you remove the oil from a car, you know what happens to the car—the whole thing seizes up.

These are very, very unusual times. We have global financial market turmoil of historic proportions. I cannot recall turmoil in our financial system of anywhere near the level we have now over the last 20 years, and I think some of the commentators who have referred back to the Great Depression are correct in their observation. We have not seen the extent of this turmoil other than what occurred in the Great Depression. The Great Depression was not caused by the collapse of stock markets; it was caused by the collapse in confidence in financial institutions and their inability to lend because of the collapse in confidence. That is what caused the Great Depression. I have to say that, having been born in the 1950s, I never witnessed or went through the Great Depression, but my father did. He would tell me some of the consequences of the Great Depression. I suppose that people of my generation or younger would never have believed it possible that those events could possibly occur again.

One of the fundamental reasons we are dealing with legislation like this is that we have learnt some lessons from the Great Depression. We have learnt that, in extraordinary times, it is necessary for governments to intervene quite directly in the markets and financial sector in a variety of ways to prevent the circumstances of the Great Depression ever occurring again. It was the failure of governments, particularly in the US, when the Great Depression arrived, to intervene quickly and effectively, to minimise the collapse that occurred. Senator Brown referred to Roosevelt. The great difficulty that Roosevelt presented was that he was elected President after the crash, after the depression started. He was not in a position, because he was not the President, to actively intervene to minimise the causes of the Great Depression. Roosevelt, as effective a President as he was—he was a great President—was acting after the event, catching up with a whole series of measures over the decade of the New Deal, to reinvigorate the American economy and the world economy with a whole raft of measures after the collapse occurred. So governments have learnt that, at least to the extent that you can, you intervene in a timely fashion, effectively, quickly and with extraordinary measures in extraordinary times. This measure represents such an approach.

The turmoil we have seen in global financial markets has the potential to undermine confidence in Australia’s robust financial system. Our financial system is strong. If you compare our banks, our credit unions, our building societies and our insurance companies with those oversees, particularly in the US and the UK and in some European countries, our system is strong. We have had no failures of financial institutions during this period of turmoil in Australia. We have not had any failures because our regulator, APRA, have maintained strong, vigilant oversight, regular reporting, prudential oversight, regulation and control of those financial institutions that they oversight.

The current difficulties in assessing funding in global credit markets are not a reflection of investor concerns relating to Australian institutions, but they are more a general lack of investor confidence in the global financial system. Confidence is fragile. A decline in confidence or mass panic is pretty frightening to behold when it occurs, and we have seen some of these elements in other countries in the last year. When confidence is fragile and we have the failure of a number of large international institutions, that in turn is not just reflected in those institutions in the ways I have described, but it leads to a significant effect on global equity share markets and it is also reflected in elevated spreads in international and domestic funding markets. These are the factors that have led to the unprecedented actions being taken by central banks and governments in a variety of ways around the world.

As I have said, Australia’s financial institutions remain profitable and well capitalised. They do not have the significant exposures to troubled US and European financial institutions or to troubled mortgage related assets. There have been some comments about executives and their pay, but at least executives and senior management in Australia exercised the good judgement and sound sense to largely avoid—with a little at the edges in a couple of cases, but really at the edges—the sorts of exposures that we have seen in US and European financial institutions. This was recently confirmed by the IMF in its Article IV report and by the RBA in its Financial stability review. Nonetheless, Australia is not immune from these very disturbing and worrying developments in international financial markets. Given the broad reliance on financial institutions in undertaking day-to-day economic activity, the ramifications of financial institutions’ distress and current international events are significant. Although confidence in the Australian banking system remains sound, it is prudent to put in arrangements to maintain this confidence and to align Australia’s response with international developments.

One of the great difficulties in this set of circumstances is that we know that our financial institutions are sound and well regulated here. But in other countries, when they adopt responses as a consequence of their local environment and, for example, offer guarantees to financial institutions, it does have an impact here in Australia, despite the soundness of our financial institutions, if we do not offer a guarantee in some particular form. The government, in conjunction with Australian regulators, have been taking steps to strengthen the resilience of Australia’s financial sector in the face of current challenges. So we have a strong system which we are making stronger, and this is one of the measures to do that.

The government has adopted other measures. For example, in my area we are transferring the regulation and supervision of all financial products—we are talking here about bank cards, credit cards, business loans, investments, payday lending—which are currently regulated by the states and territories into one national financial regulatory system. The complex web of financial regulations in the US was another key reason behind the current circumstances they face.

The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 introduces unprecedented action to deal with developments in global markets and to ensure stability for Australia’s financial system. The bill will improve and strengthen Australia’s crisis management arrangements and gives effect to the Prime Minister’s announcement last Sunday that the government will guarantee the deposits in Australian banks, building societies, credit unions and locally incorporated foreign subsidiaries for a period of three years. The bill also introduces the Financial Claims Scheme. In addition to the FCS, the bill introduces a number of other measures that will enhance and strengthen Australia’s regulatory framework.

There are some issues of detail. I accept that Senator Coonan and others have raised some matters. But we have an independent regulator, APRA, which together with Treasury is well capable of handling the issues of detailed implementation that have been raised.

I do want to say something about APRA funding. APRA funding has not been cut. Some people should check the facts. The government excluded APRA from the efficiency dividend and did not cut their funding. A decision taken on 18 April, which was disclosed at the Senate May estimates—and I do not criticise senators for not all fronting up to APRA at estimates—was such that their funding was not cut. The efficiency dividend was not even applied.

With respect to the consumer regulator, ASIC, I have just announced a package of additional funding of approximately $70 million over four years. And, no doubt, if APRA believe that they need additional funds as a consequence of additional responsibilities, both directly given to them or alternatively because of additional workload, they will make a request for funding and we will consider that in supplementary budget estimates.

I will go to the other two points quickly. Even though we are dealing with this legislation quickly and expeditiously—and, as I said, I thank the Senate for that—the overall consideration of these policy issues does actually go back a long time. In fact, it goes back as far as the HIH royal commission in April 2003. The APRA submission to the HIH royal commission said with respect to insurance companies:

We believe it is appropriate that the existing arrangements for the protection of policy holders be reviewed and consideration be given to the establishment of a formal compensation mechanism. This is ultimately a matter of government policy.

A study of financial systems guarantees led by Professor Davies in March 2004 provided a recommendation to government. So the concept of guarantee in aspects of a financial system goes back five years.

We could spend a great deal of time on this, but my other comment is with regard to the amendment to be moved by the Greens. I point out that what we saw in the United States was excessive salaries and bonuses that were often—not always, but often—paid as a result of failure. We have not had failure of Australian financial institutions. With some of the so-called bonus share arrangements in the United States we saw appalling behaviour by executives who knew the institution was going to go under, sold off their shares and the poor old employees who held shares—often in their pension fund, which Australian law does not allow, fortunately—were left holding their shares that had crashed in price, either directly or through their pension funds. The executives got out before the company collapsed, because they had insider knowledge. Australian law does not allow that sort of behaviour, fortunately. But the Prime Minister has advocated fundamental reform in this area. (Time expired)

Question agreed to.

Bills read a second time.