Bluenotes: Australian financial services – room to grow

August 20, 2020

Article Three Director Kristen Bondietti has been featured in ANZ’s Bluenotes, looking at the potential of Australia’s financial services exports.

Australia’s exports of cross border financial services are small as a proportion of services exports – accounting for just 5.7 per cent in 2018-19 – and also compared with other leading financial centres.

In Singapore, financial services account for over 17 per cent of services exports, more than 22 per cent in Hong Kong and almost 25 per cent in the UK.

“Australia can leverage the post-COVID environment to expand its financial services exports to the region.”

Australia’s exports of wealth management services are also low, particularly given the size of the Australian funds management industry. Funds managed by Australian investment managers on behalf of overseas investors account for just 3.6 per cent of the total $A3.7 trillion funds under management in Australia.

Why is this so?

Australia’s exports of services (on a cross border basis) are dominated by travel and transport (accounting for over 72 per cent in 2018-19, with almost 39 per cent education-related). The impact of the superannuation guarantee creates a large pool of domestic assets for Australian fund managers to invest. However, this alone does not explain Australia’s relatively low level of exports given the deep expertise of the domestic industry and the large volume of funds under management.

Australia’s domestic policy settings are not as competitive as other economies in the region, for example Singapore. Taxes are higher and arrangements more complex, deterring both foreign productive investment that improves the competitiveness of the domestic sector and foreign capital that can be managed by Australian financial services firms. The recommendations of the 2009 Johnson Review to address these issues are yet to be fully implemented.

Regulatory barriers to trade in North and South-East Asia still persist. While Australia’s Free Trade Agreements (FTAs) have helped create some opportunities to improve access, not all of the potential trade across Asian markets is accessible to Australian businesses.

New opportunities

Australia can leverage the post-COVID environment to expand its financial services exports to the region.

As pointed out by financial services leaders and politicians alike, there is scope to capitalise on the recent political upheaval in Hong Kong to attract greater financial talent, technology and investment to Australia and strengthen its position as a regional finance centre.

With borders indefinitely closed due to COVID-19, education and tourism exports will continue to be severely impacted. Increasing reliance on digital forms of cross border exchange, intensified by the pandemic, creates opportunities for financial services trade to grow, thus further diversifying Australia’s export base.

Continued economic growth in the region is expected in the longer term. PWC forecasts assets under management in the Asia Pacific region to almost double from $US15.1 trillion in 2017 to $US29.6 trillion in 2025.

Australia’s financial services sector can expand by accessing potentially large pools of capital in key Asian markets and increasing cross border offerings. With the exception of China, Australia’s exports of financial services to Asia are tiny –  less than 1 per cent are to Japan and to Korea and less than 6 per cent to ASEAN.

The current policy environment is also more conducive to reform than in previous years. Open and competitive policy settings will be important for economic recovery. The benefit of a strong financial services sector has become apparent to policy makers amid the pandemic.

Open and competitive markets

So how can Australia act to realise export opportunities? A targeted agenda is needed to support more open and competitive policy settings for financial services at home and abroad. This should be done now to capitalise on opportunities such as the uncertain future of Hong Kong as a regional financial centre.

The agenda can build on the government’s 2018 Services Export Action Plan. It should:

1.       Better assess the benefits. The benefits of expanded trade are broad – more exports help to grow the Australian financial services industry, generate jobs and support the economy. Financial services also support trade in other goods and services as ‘embodied’ inputs (for example, banking, insurance, accountancy and advice are essential for the creation and trade of mining, agricultural and manufacturing goods and other professional services). However, the magnitude of these benefits is still not yet fully appreciated. The value of exports, both in dollar terms and to the broader economy, is generally understated. Greater clarity of the potential opportunities is needed.

2.       Reduce domestic regulatory and tax complexity. As recommended by industry in the2018 Services Export Action Plan, reforms to institute more open and competitive domestic policy settings need to continue. This includes addressing taxation policy, licensing requirements for exporters and rules on collective investment vehicles to enable Australia to better compete with Singapore as a regional finance centre and allow fund managers to better attract offshore investors. Finance industry leaders have recently affirmed the need for Australia to implement the recommendations of the 2009 Johnson Review to make our market more attractive to overseas investors and improve our global standing.

3.       Address regulatory barriers in key Asian markets. Australia can continue to reduce barriers to trade by building on existing Free Trade Agreements, pursuing bilateral and regional regulatory cooperation arrangements and advancing tax treaties. Efforts should be focused on advancing greater regulatory alignment of financial services, recognition of licencing requirements and improved cross-border data mobility and security. Regional initiatives like the APEC Asia Region Funds Passport should be expanded to more markets and its potential interoperability with EU and ASEAN schemes further explored.

Public perceptions of exports to Asia are still often wedded to the idea of Australia’s primary sectors exporting commodities or niche high-value manufacturing. Australia’s services exports – when they are thought of at all – are generally considered to be tourism and education.

This needs to change if Australia is to take full advantage of the opportunities on its doorstep.