Industry Capability Report
A sophisticated hub for the Asia-Pacific
Australia has a sophisticated financial services sector and is ideally positioned as a centre for the Asia-Pacific region. This is demonstrated by deep and liquid financial markets and regional leadership in investment management as well as in areas including infrastructure financing and structured products. The strength of the financial services sector is underpinned by a mandated retirement savings scheme, highly skilled and multilingual workforce and advanced business infrastructure.
Highly developed financial markets make Australia one of the major centres of capital markets activity in Asia. Underpinning much of Australia’s financial services strength is the growth of its investment funds sector. Australia has one of the largest pools of contestable funds under management globally, valued at about A$1.3 trillion (US$850 billion).
The Australian industry is looking to build on our capabilities to take advantage of emerging opportunities in the region and globally, with the active support of the Australian and State Governments.
Australian-based firms are seeking to position Australia as a centre for excellence for funds management. Fund managers are rapidly expanding their operations around the globe, particularly in the Asia-Pacific region Australia is recognised for its innovation and sophistication in the provision and administration of managed funds products.
Investors in Australia can also look to Australia’s financial services industry for investment financing. Financial sector regulation is recognised as world best practice, and provides a transparent and secure base for expansion within the region.
Australia offers global financial services institutions opportunities in a rapidly expanding domestic market and an ideal location for servicing markets in the Asian time zone.
The Australian Government is committed to building upon Australia’s strong regulatory environment and financial sector expertise, and firmly establishing Australia as a financial centre in the region. The government is taking a number of initiatives to support this objective.
The government has passed legislation which has progressively reduced the withholding tax rate on specified distributions from managed funds making it one of the most competitive in the world today. The government has commenced a major review of Australia’s tax system, recognising the importance of taxation for our international competitiveness generally, and for the competitiveness of the financial services sector in particular.
The government is also looking at opportunities for simplification of Australia’s financial services regulation and negotiating mutual recognition agreements with key international markets. Agreements have already been signed with the United States, Hong Kong and New Zealand. In addition, the government has secured Australia’s status as an approved destination for investment funds under China’s Qualified Domestic Institutional Investor program.
The government has assembled a panel of experts comprising financial sector representatives, leading academics and senior government officials which – along side a dedicated team in the Commonwealth Treasury – will work to identify barriers to inward and outward investment and develop policies that will help Australia to grow its potential as a financial centre.
The following is further information on the financial industry sectors:
- Asset-based finance and leasing
- Funds management/Superannuation
- Hedge funds
- Investment banking
- Payment systems, clearing and settlement
- Private banking
- Private equity/Venture capital
- Retail banking
Asset-based finance and leasing
Australia's asset-based finance and leasing industry is a dynamic part of the country's financing market with equipment leasing facilitating approximately 40 per cent of the nation's equipment capital expenditure.
The market has attracted a range of global and domestic competitors offering the full range of products including asset-backed debt financing, operating and finance leases, vendor finance and structured finance for large assets such as aircraft and industrial equipment.
Global competitors in this market include non-bank finance companies such as GE Commercial Finance and CIT Financial, as well as the large corporate banks and manufacturers' captive finance companies.
Leading the Asia-Pacific region, Australia has one of the largest and fastest growing funds management sectors in the world. The sector is driven largely by the country's government-mandated retirement scheme and continues to create new opportunities for fund managers, service providers and related entities.
Further strengthening this burgeoning sector is the sophistication of Australia's investor base. Retail investors engage the market with a confidence and know-how that highlights the maturity of the sector and ensures an ongoing demand for cutting-edge products.
The sector has attracted many foreign asset managers, including companies such as Aberdeen, Allianz, AXA, BNP Paribas, CAAM, Credit Suisse, Fidelity, Invesco, Schroders, State Street and Vanguard.
Australian legislation enables single entities to have overall responsibility for managed investment schemes and provides a clear framework for funds managers and investors by simplifying the investment process and streamlining legal obligations.
Australia’s hedge fund industry, underpinned by Australia’s globally significant investment management industry, has grown rapidly in recent years to become the largest in Asia.
Hedge fund managers in Australia offer a wide range of strategies including: long/short; relative-value; arbitrage; event-driven and macro strategies in global and regional equities; fixed income/credit; derivatives and futures.
Australia’s hedge funds industry has attracted, and is supported by, strong service providers. Their provision of risk assessment, unit pricing and operational procedures within the sound regulatory and governance framework that underpins Australia’s financial services industry is an important aspect of the Australian hedge funds industry.
Australia has a developed, sophisticated, well regulated and highly competitive insurance sector.
Australia's insurance market is generally segmented into three sectors:
- Life insurers – offering risk related insurance and pension products (referred to as superannuation products)
- Health Insurers – offering private health insurance to compliment Medicare, the Australian government health care scheme
- General insurers – offering all insurance other than life and health insurance.
The life and general insurance markets have a mix of strong domestic and international competitors, while the private health insurance is predominantly domestic with a significant number operating as not-for-profit entities.
The sophistication of the Australian insurance market has attracted a number of leading international competitors including brokers (AON, Marsh, Willis, JLT), underwriters (Allianz, BUPA, Zurich, AMP, AXA, Tower, MetLife) and reinsurers (General Re, Munich Re and Swiss Re).
Australia has a well developed, world class investment banking sector.
Most of the world's leading institutions offering investment banking services have a presence in Australia, with several using Australia as a base for activities within the Asia-Pacific region. And many more niche players continue to enter the market.
These institutions offer the full range of investment banking services and products, including corporate finance, capital markets, private infrastructure financing, structured finance, offshore funding, derivative markets, underwriting, securitisation, and corporate advisory services. The Australian Prudential Regulation Authority (APRA) provides information on licensing and the regulation of banking businesses in Australia.
Australia's financial markets are among the largest, fastest growing and most sophisticated in Asia. The country is a regional leader in a range of products including asset backed securities, Real Estate Investment Trusts (REITs), exchange traded and over-the-counter (OTC) derivatives, corporate bonds and hedge funds.
Payments, clearing and settlement systems
The Australian payment, clearing and settlement systems contribute to the smooth functioning of the economy by providing a service that is safe, efficient, and reliable.
The environment consists of five main categories of payments and related systems for clearing and settlement:
- Cash transactions, including notes and coins, are cleared via the Australian Cash Distribution Exchange System (ACDES)
- Paper transactions, encompassing cheques and other paper based instruments, are cleared via the Australian Paper Clearing System (APCS)
- Direct entry transactions, including direct entry (DE) credit and debit, and electronic data interchange (EDI), are cleared via the Build Electronic Clearing System (BECS)
- Consumer electronic transactions, which covers automated teller machines (ATMs), credit and debit cards, electronic funds at point of sale (EFTPOS), and stored value cards (SMART cards etc.), are cleared via the Consumer Electronic Clearing System (CECS)
- High-value electronic transactions, which encompasses Clearing House Electronic Subregister System (CHESS), Financial Transactions Recording and Clearance System (FINTRACS), Reserve Bank Information and Transfer System (RITS), and other high-value electronic payment streams, and are cleared via the High Value Clearing System (HVCS).
These systems have evolved and adapted for new products and technologies over time.
Despite its relatively small population, Australia has one of the world's largest private wealth markets. And this market is growing at a rate that outpaces many of the world's most affluent nations.
The sustained rise in value of Australian equities and other asset classes has augmented the total pool of financial assets held by Australians.
The composition of private wealth has also changed with the cash component of wealth decreasing, while holdings of superannuation (pension funds) and equities have increased.
On an individual level, Australia has more high net worth individuals than Hong Kong and Singapore combined and demand for private banking services is on the rise.
The majority of the 10 leading global firms now have private banking facilities in Australia and the increasing sophistication of Australian investors is expected to encourage more firms to establish private banking operations in Australia.
Private equity/Venture capital
Australia’s venture capital industry has grown significantly in recent years driven by increased demand from emerging and expanding businesses for equity funding. Private equity bids are becoming more innovatively structured and the average bid size is continually rising.
An increase in institutional investors seeking alternate investment options is also seeing an increased flow of funds into private equity.
With strong fundamentals, Australia's private equity market is well-positioned for future growth.
The country's innovative culture and R&D infrastructure is supported by government and provides a continuous pipeline of ideas and projects.
Australian venture capital taxation law is structured in accordance with international best practice.
Posting a string of strong profit announcements in recent years, Australian retail banks have enjoyed a period of ongoing prosperity.
The four largest domestic banks in the sector are the domestic banks ANZ, the Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. Under the Government's Four Pillars Policy mergers between these four organisations are prohibited.
A number of mid-tier banks operate in the space. These include St George, Bendigo Bank, the Bank of Queensland, Adelaide Bank, and Suncorp.
There are a number of foreign retail banks operating in Australia that have been gaining market share. These include ING Bank, HSBC, Citigroup and Rabobank.
The market is also comprised of a number of non-bank financial institutions including building societies, credit unions, mortgage originators and money market corporations.