Thanks to Michael Willis from Effective Governance for today’s guest post.

The Prime Minister’s “Innovation Statement” may or may not prove to be gold, frankincense and myrrh, a Christmas gift for our nation. But like the shepherds arriving with a humbler offering, a research team has this week produced a gift our nation cannot overlook – a new research paper on how to build a world-class Australian financial centre.

This report has some important lessons for Australia’s policy makers and regulators, and reminds us that strong financial markets will be critical to the success of our nation’s innovation and the wider economy.

Running parallel to the Prime Minister’s innovation strategy, and underpinning it, is the need for Australia to build a globally competitive financial sector to support business innovation and scientific endeavours. And innovation must also be able to flourish in our financial sector, and among the sector’s regulators, so that we remain competitive in this key sector.

The paper from the Centre for International Finance and Regulation on “International Competitiveness of Australia’s Financial Services Sector” was written by Eric Knight of Sydney University and Dariusz Wójcik from Oxford… http://www.cifr.edu.au/project/International_Competitiveness_of_Aus_Financial_Services.aspx

What does the report tell us that will help us build a world-class Australian financial centre?

Firstly, while London and New York are the world’s top financial hubs, Sydney is still in the game, punching above its weight at number 10 position on the league table (see chart below).

Secondly, the report shows that corporate and financial tax regimes have less impact than might have been expected. Perhaps our policy makers are exerting too much energy on this issue.

In fact, the report identifies several indicators that are more critical to success for any global financial centre:

• The strength of the rule of law and contractual enforcement, which appears to have a remarkably large impact on the performance of a financial hub
• The centre’s population and its population growth capacity
• The size and flexibility of its workforce (which may be concerning for Sydney)
• The presence of a securities exchange and the concentration of financial services firms and investment banks
• Proximity to quality universities

These are key factors, and our governments must ensure that Australia has the right policy settings for success in these areas.

Geography has a part to play as well. Membership of EU had been a major success driver for four cities in the top ten – Zurich (3), Frankfurt (4), Paris (5) and Amsterdam (8).

On our side of the globe, Asia’s economic growth will foster the growth of strong financial centres, but our region is still behind the game. The authors make clear that neither Shanghai nor Beijing will topple Hong Kong until they address issues of legal and regulatory reform. Those issues may well be barriers for other Asian cities, and an opportunity for Australia.

The purpose of the research paper was to identify areas for improved performance of Australia’s financial centres, Sydney and Melbourne. For Australia to maintain growth and create new jobs, we must maintain our global competitiveness in the financial sector, which has delivered much of our success in recent decades.

From a governance perspective, the importance of the rule of law and the enforceability of contracts are major positive for the Australian markets. But the research underscores the importance of constant review and reform, to reduce the costs of enforcement and to build global confidence in our financial markets and institutions.

Australia’s finance markets and regulators have some real strengths – such as our regulatory approach to the emergence of dark pools and the stability of our banking system through the GFC – but other centres are constantly watching, learning and improving.

The measure of success used in this research paper – the value of investment banking fees billed from cross-border deals from 2000-2014 – may generate some debate.

But as a guide for banks, innovators and regulators, this paper will contribute some excellent evidence to advance the policy debate and innovation in Australia’s financial services sector.

Prime Minister Turnbull’s mantra that “there has never been a more exciting time to be an Australian” may be true. But that also means we face constant competition on the global financial stage. Taking notice of this important paper might help ensure we are still in the top ten in another ten years.

Michael Willis is a Senior Advisor at Effective Governance Pty Ltd. He is also the Independent Chair of Boyce Chartered Accountants. The opinions expressed here are his own.