Australia's performance during the GFC and recent enhancements in tax and regulatory reforms have, on the whole, positively impacted its international reputation and credentials in financial services.
This is a highly competitive and mobile sector internationally – both for capital and talent – and Australia needs to compete with key regional players, like Hong Kong and Singapore, who are well positioned and already have significant momentum in financial services.
How far has Australia come, and how far have we yet to travel to create the right market and policy settings to attract our fair share of international capital?
The reform journey arguably started in 2008 with the release of a joint consultation paper by the Australian Securities and Investments Commission and Treasury about facilitating access to overseas markets and financial services. The Government then established the Australian Financial Centre Forum (chaired by Mr Mark Johnson), which in 2009 delivered its report Australia as a Financial Centre - Building on our Strengths. The Johnson report found that, in spite of our sophisticated financial services sector, enviable talent and regulatory strength, our exporting and importing of financial services was low by international standards.
The Government has since embraced some of the recommendations of the Johnson report and initiated several reforms designed to improve tax certainty and regulatory efficiency so that Australia can build its international financial services capability.
These reforms and reviews have been enhanced by the recommendations of the Board of Taxation - including the recommendations for Managed Investment Trusts and limited tax exemptions for foreign funds (the recently enacted Fin 48 and IMR exemption regimes). Other initiatives include establishing The Centre for International Finance and Regulation (in conjunction with the University of New South Wales) and the White Paper 'Australia in the Asian Century' task force chaired by Dr Ken Henry.
Last Friday (31 August) Minister Shorten announced that in 2013 Sydney will host an international symposium on regional financial market integration to explore the creation of an Asia Pacific Financial Forum to strengthen and promote regional financial architecture. It will bring together private sector leaders and regulators from across the Asia Pacific region.
Two of the critical aspects of financial architecture will be the Asia Region Funds Passport and a consensus on tax and regulatory recognition of collective investment vehicles (CIVs). These are necessarily related.
The Passport proposal would establish an agreed framework through which participating governments and regulatory agencies would mutually recognise the taxation and regulatory status of fund vehicles. This would allow funds to be more readily marketed across borders within the Asia Pacific region. At their meeting in Moscow last week, APEC Financial Ministers acknowledged that technical work was under way and anticipated the future development of the proposed model, governing arrangements and policies for a pilot Passport. This is to be encouraged.
Trusts are the preferred tax transparent investment vehicle in Australia, however in other jurisdictions in our region tax transparent corporate and limited partnership vehicles are more common. A regional consensus in recognising CIVs is clearly desirable – especially given the success Europe has achieved from a level of harmonised regulatory and tax laws.
The Government's pending response to the Board of Taxation report on CIVs will clearly be of importance for the Symposium. Separately, the Corporations and Markets Advisory Committee has published a report on managed investment schemes recommending, amongst other things, law reform that would treat registered schemes as separate legal entities. If implemented, this reform proposal could deliver a tax and regulatory outcome that is more consistent with other jurisdictions and more familiar for prospective foreign investors.
Co-operation between the Federal and State governments, as well as international co-operation, will be required to remove impediments to international market participation in a cohesive manner. We must have regard to ongoing local and regional policy developments and consider their impact on Australia's aspirations as of one the centres of financial services in the region.
Finally, the manner in which the reform process is managed is crucial. Investors and managers alike require certainty of regulatory and tax outcomes. If the process for change is not well managed and effectively communicated, there is a risk that investors will be deterred by uncertainty and that Australia will not reap the full benefit of these significant policy reforms in a timely manner.
The symposium in 2013 is a great opportunity to showcase to overseas investors the strengths of our financial services sector and the advantages of recent and prospective policy changes. Australia needs to more actively and effectively promote these advantages. The symposium is also an opportunity to focus on the positive features of our markets and encourage prosperity for the benefit of Australia and the region as a whole.
This is the full text of an opinion piece published in The Australian on 12 September 2012.