Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014

16 July 2014

Dr CHALMERS (Rankin) (11:38):  I rise today to speak on the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014—and particularly to follow the wise words of my colleague the member for Oxley. This bill does make it easier for companies to offer relatively simple corporate bonds to retail investors. These measures seek tor educe the regulatory burden on companies issuing bonds in Australia—helping to kick start a deeper and more liquid domestic corporate bonds market. This legislation is almost identical to the legislation that Labor introduced to the last parliament, where it unfortunately lapsed before the election. For this reason, the opposition will be supporting this bill.

This is fundamentally Labor legislation and is built on a very worthy aspiration. Indeed, some people think that developing a deep and liquid corporate bond market in Australia is one of the most important objectives of financial markets policy. I know, from having worked in this area of policy in former roles, that it is a very complex problem and there are not a whole lot of easy solutions.

The lack of liquidity and diversity in Australia's corporate bond market was one of the key focuses of the last Labor government's Johnson report, the report that members would be familiar with, called Australia as a Financial Centre: Building on our Strengths. Developing a deep and liquid corporate bond market in Australia is important also for a couple of other key reasons. The first one is that the experience of the global financial crisis tells us that a diversity of funding sources is key to a stable financial sector. As it stands, local companies are largely reliant on banks and offshore markets for their debt issuance. The corporates are missing out on a key source of diversity in debt funding—namely, the direct issuance of bonds to the domestic market. The direct issuance of bonds by corporates in Australia could act as a partial shock absorber to international economic fluctuations.

The second thing is that a more developed corporate bond market in Australia could see us play a greater role in facilitating non-bank corporate debt issuance in the Asia-Pacific region. We have all been witness to the huge and dynamic changes underway in the Asia-Pacific over the last couple of decades. In this respect I would highly recommend Andrew Charlton's recent quarterly essay called 'Dragon's Tail', which is a particularly good account of the hurtling growth in the region and Australia's role in it. I would also encourage members to check out the contribution by John Edwards which tackles some of the same issues, even though it comes up with some very different conclusions.

The unprecedented investment in the Asia-Pacific region over the last decade or more has been accompanied by a much greater need for access to financial services. As we develop our trade relationships with our neighbours through processes like the Japan-Australia Economic Partnership Agreement, the Korea-Australia Free Trade Agreement and the Trans-Pacific Partnership, there is room for Australia to play a bigger role in the financial services sector. I might just thank some of the representatives of the industry that have spent time with me in the last few weeks as we go through some of the detail of the financial services components of some of the deals that the government is in the process of securing.

A deeper and more liquid corporate bond market is one key aspect of becoming a stronger competitor in the Asia-Pacific region in the financial services sector. The question is how we develop a stronger corporate bond market in Australia. In essence, when you think about it, it is really a classic chicken and egg kind of problem. As it stands, corporates do not issue enough bonds in the domestic Australian market because they can buy more cheaply by issuing bonds overseas. The greater liquidity and sophistication of the overseas bond markets make them more attractive because it means companies can issue larger volumes more easily and for longer tenures.

At the same time I am told investors would be happy to buy more Australian corporate bonds to diversify and balance their portfolios but currently there is not enough issuance here to make the market liquid and to offer a good range of investments at compelling valuations. In essence, corporates do not issue bonds here because there are not enough investors to buy them and provide liquidity, and investors do not generally buy the bonds issued here because there are not enough bonds issued to provide that liquidity and that competition. So the corporate bond market does need a catalyst to encourage corporates to issue bonds here and to encourage investors to buy their bonds here. It is the best way, probably, to develop a bigger and more liquid market in Australia because, like a positive feedback loop, this will lead to more competitive valuations and more interest from overseas markets leading to that greater volume and that greater liquidity that I keep coming back to.

The low interest rate environment over the last few years has been a partial catalyst for greater interest and focus on the Australian corporate domestic bond market. Over the last couple of years a few large multinationals have managed to issue debt locally in Australia after many years of absence from that market. For example, BHP Billiton raised about $1 billion with a tenure of five years in 2012 and Qantas raised $175 million over seven years in May 2013, and neither company had issued debt in Australia for more than a decade.

In a recent speech to the Economic Society of Australia—a fantastic group for advancing the economic debate in Australia—Guy Debelle, the assistant governor of the RBA and a highly respected player in that conversation, described the more significant pick-up in the domestic corporate bond market—namely, in lower-rated issuance at longer maturities than they would normally get from the bank. He is optimistic about the prospect that these developments in the corporate bond market will be long lasting, but he acknowledged that questions remained about the dependence of our bond market on the global interest rate environment.

This legislation is good policy. It is policy that will, hopefully, grow on and consolidate these recent developments in the market. It is, as I said at the outset, Labor legislation, effectively—almost identical to the bill we proposed in government which built on legislation we had passed to allow retail trading of Australian government bonds. Our reforms of Commonwealth government securities made it easier as well for mum and dad investors to buy government bonds. This was part of a general strategy to develop preferences among Australian investors for fixed income products rather than just shares. Australians have long held a bias towards investment in shares because of the long period of high growth in equities—the high returns prior to the global financial crisis, when it was not unusual to see returns greater than 20 per cent on shares.

Fostering demand for fixed income products is important not only to develop a higher volume and more competitive bond market in Australia but also because it leads to that greater diversity among the portfolios of Australian investors. It is still important, of course, for Australians to invest in equity, to grow local businesses and to have high growth products in their portfolios. Investment in growth products is important to Australians so as to grow our superannuation and provide for a more comfortable retirement. But investment in bonds—both of the corporate and the Commonwealth government type—does lower risk in their portfolios and provides a bit more certainty for investors in otherwise uncertain times. The changes that Labor made in 2012 to allow trading of Commonwealth government securities was a good start to develop that domestic market for fixed income products.

The bill that we are discussing today builds on that CGS legislation by making it easier for corporates to issue those bonds. It does a couple of important things in that respect. First of all, it makes it more attractive for corporates to issue bonds to mum and dad investors by cutting out some of the really onerous, expensive and unnecessary disclosure documents they had to prepare each time. Instead, now they will be able to issue a really short and simple statement which tells the investor everything they need to know in very easy terms and references information that is already available to the public. In this way, a shorter and simpler document can actually enhance transparency and make it easier for investors to understand the products that they are investing in. Mum and dad investors are about as likely to read a 200-page bond prospectus as they are to sit down and read the full text of the federal budget papers.

The second important thing this bill does is reduce some of the overly severe liabilities that directors face in the case of inadvertently making incorrect disclosures or omitting certain types of information. In doing so, the drafters of the legislation were very careful to ensure that retail investors were properly protected. There is no reason a director should face a criminal offence for getting something wrong when they have made a genuine good faith attempt to understand and communicate all the risks, including relying on an expert. This type of overkill liability discourages directors from agreeing to their companies undertaking retail corporate bond issuances.

I would like to finish up on a few points. Getting a retail bond market going in Australia is only a very small part of the equation. There is a lot more work needed to kick off the wholesale market as well where the big super funds are the buyers rather than typical punters. But these measures are a step in the right direction. They will provide a clear signal to Australian companies that now is their time to contribute to the development of Australia's corporate bond market. It is for this reason that Labor will be supporting the legislation, and we will continue to support the development of a deeper and more liquid corporate bond market in Australia.