Jan 19, 2010

Financial services exports can double, says architect Johnson

MARK Johnson, the architect of the plan to develop Australia into a regional financial hub, believes the export of financial services can double in the next five to seven years.  Exports account for only 3 per cent of the sector's contribution to the economy at present, compared with 50 per cent in Britain, 25 per cent in Singapore and 8 per cent in Canada and the US.  However, it was a reasonable ambition for financial service exports to increase their "value-add" to the economy from 3 per cent to 6 per cent, Mr Johnson told The Australian yesterday.

"We are not trying to build a financial system on steroids, with artificial inducements," he said. "Really what we are talking about is making sure our financial services sector is in accord with open competitiveness and efficiency."  Mr Johnson, the former deputy chairman of Macquarie Group, is keen for the Australia As A Financial Centre report handed to the government last week to be used as a blueprint for boosting the financial services sector's international output.

Among numerous recommendations, the Australian Financial Centre Forum study said the local market would be more internationally competitive if the withholding tax on the interest income that foreign banks earn from their Australian branches was removed. Mr Johnson believes the report's recommendations would increase competition in the local banking market by encouraging major Asian banks to open branches in Australia.  He said while the Australian banking market was in better shape than the rest of the world, there were still opportunities to increase competition in the sector.

"It's very important that we have as much competition as possible in this market," he said.  "Our recommendation on withholding tax on foreign banks goes directly to that point. "We think some of the regional shifts will see some changes in Australia. I think some of the big Japanese banks have limited growth opportunities in Japan, and as their customers increase outside of Japan, they will come back to Australia.

"We are seeing at the moment more activity from the big Chinese banks. They will come to Australia on the traditional routine of financing their customers, but they will move to financing trade and financial investments and then local operations."  The report, commissioned by Financial Services Minister Chris Bowen in 2008 before the full extent of the global financial crisis had hit, was designed to identify policies to encourage growth in the financial services industry.  A number of foreign banks at the time were threatening to leave Australia.

However, only two have changed their local operations. Canadian bank Toronto-Dominion last year shifted its Australian operations to Singapore, at a cost of 65 jobs. And Societe Generale (SG), the French bank, is in the process of scaling back its domestic business.   SG's outgoing Australian chief executive, John Harvey, yesterday said the move was the result of the bank making Hong Kong the regional hub for its Asia-Pacific operations.  "The bank has been very consistent in its commitment to the region, and has made a big push into Hong Kong, developing it as a regional centre," Mr Harvey said.

"It has been the view that the growth future of the bank is in the region. SG is going to be a European bank with a focus in Asia."  Mr Harvey said SG had held discussions with regulators and would retain its Australian banking licence for at least a year. It is understood its leasing finance business in Australia will remain for some time yet.  "There has been a significant transfer of staff and resources from Australia to Hong Kong as the bank continues to build its presence there," Mr Harvey said. 

"We have transferred approximately 30 staff from Australia overseas to ensure adequate coverage of Australian business and clients.

"We are in regular dialogue with APRA and their position is that we retain our branch banking licence while SG continues to conduct banking operations in Australia."

Mr Johnson said the proposed measures, along with the establishment of an independent financial services taskforce, would help the sector raise its contribution to the broader Australian economy.

Mr Johnson said even though significant reforms had been put in place, the financial services sector was still not "highly internationalised".

"I think the technical pieces that need to be put in place are relatively straightforward -- we can identify them," he said.

"What you need is to implement changes at the policy-making level to accept and deal with the recommendations for changes.

"We have been arguing for years and years on tax . . . where is the money earned, what is revenue and what is capital?  "Thousands of people have made the pilgrimage to Canberra to talk with the tax office about this, and they have responded by saying this is the law as we see it applied in these circumstances.  "The Board of Taxation has done a lot of work, but this the first time there has been the opportunity to look at tax policy as it applies to the financial sector."  Mr Johnson said the fact the government had indicated it would take a "holistic approach" to improving the competitiveness of the Australian financial services sector was a positive sign.

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