Laurie Ferguson (Reid, Australian Labor Party, Shadow Minister for Multicultural Affairs, Urban Development and Consumer Affairs) Share this | Hansard source

Today I wish to deal with the simpler regulatory components, especially the disclosure aspect of the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007. The bill will amend the Corporations Act 2001 and related acts and regulations in order to simplify Australia’s corporate and financial services law. The proposals for the bill were outlined in the ‘Corporate and Financial Services Regulation Review—Proposals Paper’, released in 2006. Today’s legislation is part of the government’s response to some of the recommendations made by the Taskforce on Reducing the Regulatory Burden on Business in its report Rethinking Regulation, the Banks report. Most of the proposals are in line with Labor’s approach to reducing the red-tape burden on business.

In respect of disclosure documentation issued under the Financial Services Reform Act, providers have generally been issuing advice documents of up to 100 pages. They are complex, costly and essentially unreadable to most consumers. The proposed bill represents a partial reduction in the expansion of lengthy documentation under the Howard government. To this end, Labor supports the bill.

Since being appointed to the shadow consumer affairs portfolio, it has become clear to me that dealing with the information asymmetry between consumers and product suppliers is a key aspect of empowering Australian consumers. Time and again I am confronted with stories from consumers who feel they have been duped into taking out an insurance policy, getting into a get-quick-rich scheme, entering into a financial plan that does not suit their circumstances, or even subscribing to floats that they do not understand.

I am not surprised, nor are the numerous consumer advocates I have met with. Open any product disclosure statement for a simple product such as motor vehicle insurance and you will be confronted with an extremely complex and confusing set of terms describing what should in reality be quite simple. Indeed, the average disclosure document for motor vehicle insurance now runs to at least 50 pages—almost a book. It is not at all surprising that consumers are constantly reporting that they are confused and unable to comprehend what is before them. Bridging the information asymmetry between consumers and sellers requires significant simplification. A starting point is making communication documents more efficient and easy to read and, hence, better understood by the consumer. This surely was a key objective of the Financial Services Reform Act.

Since its deregulation in the early 1980s, the Australian financial services sector has been characterised by a cascading and often interweaving set of guidelines, laws and principles designed to uphold the integrity of a marketplace which is often chaotic, unpredictable and open to abuse. Given the enormous impact that a decline in the integrity of this market may cause the economy, Australian governments have given special attention to constantly reviewing and reassessing the various laws which govern the sector. At the disposal of government is the principal instrument for governing the financial sector—that is, the Corporations Act 2001. Whilst the Corporations Act stands as the key regulatory instrument, it does so as a result of a very wide and diverse set of regulations which make up the pluralist tapestry that is financial services regulation. The financial sector is governed by Commonwealth laws and state laws, by federal regulation and state regulation, and by agencies such as the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority, the federal Treasury and numerous industry sponsored self-regulatory guidelines and regulator issued practice guide notes.

In trawling the vast sea of financial services regulation, there appears to be no shortage of highly confusing prescriptions such as ‘clear, concise and effective’, ‘fair and reasonable’, ‘practicable’, ‘adequate’. To an extent this is what the great English legal philosopher Herbert Hart referred to as the laws’ ‘core of uncertainty’. As well as setting in place rules of practice and operation, much of the body of financial services regulation is concerned with resolving uncertainties by making definitions tighter.

The Wallis financial systems inquiry sought to create ‘a flexible regulatory structure which is to be more responsive to the forces for change operating in the financial system’. This enterprise was promulgated through the Corporate Law Economic Reform Program process, CLERP, which more or less overhauled most aspects of the financial system in Australia. CLERP 6, which went on to become the Financial Services Reform Act, was the most important reform as it initiated a system of co-regulation the success of which remains questionable.

The nature of the FSRA licensing system is such that it relies very heavily on the provision of privately sponsored codes of conduct and dispute resolution structures. In affect, ASIC have little inclination to act as enforcers. This is demonstrated by the looming catastrophe in property investments which seem to have occurred right under the nose of ASIC. As a result of evidence coming from the recently conducted Senate estimates, my colleague Senator Sherry has gone as far as saying in a recent media statement:

The Howard Government’s central protection for consumers of financial services—the disclosure regime—is next to useless.

Complex and lengthy documents, often between 50 and 100 pages are unreadable to most people.

They failed to protect investors in Westpoint, Fincorp and Australian Capital Reserve.

…            …            …

After two so-called ‘refinements’ of the disclosure regime, the Howard Government still does not get it.

A total overhaul of disclosure documentation is urgently required.

Simple, readable, standardised, no longer than 3-4 pages on a product by product basis, focusing on fees, return and risk level must be key elements of reform.

Kevin Rudd, the Labor Leader, highlighted Labor policy to overhaul the regime in his recent budget reply speech.

ASIC relies very heavily on industry systemic reporting in order to investigate malpractice. ASIC also relies very heavily on external disputes resolution reporting to assess where key problems lie. Given the hundreds of billions invested by Australian consumers, it surely follows that government should not merely rely on industry systemic reporting and an equally weak surveillance system. Instead it must act more vigorously by taking enforcement action whenever necessary. The debacle around Fincorp may have been avoided had ASIC acted earlier or been more decisive. In his second reading speech, the Parliamentary Secretary to the Treasurer, who is in charge of this legislation, stated:

Today I introduce a package of measures that will further deliver on the government’s commitment to reducing red tape. This bill will make the corporate and financial services regulatory system simpler.

The most troubling aspect of this statement is the fact that the parliamentary secretary views disclosure standards to consumers as an extension of red tape. This is not so. When properly conceived, disclosure has the potential to redress the information asymmetry I mention above. Nevertheless, I certainly concur that statements of advice running into the hundreds of pages are clearly inefficient and have the potential to confuse and mislead. I note that poorly written SOAs and poor advice have been the basis for hundreds of complaints that have been before the Financial Industry Complaints Service. In their submission to the Productivity Commission inquiry into business red tape, the Australian Consumers Association, Choice, stated:

We want as little regulation as possible—but as much as is needed. The idea that the size of the problem can be measured by the amount of regulation in the statute books—the ‘quantity theory of regulation’—is dangerously simplistic. Much of the regulation introduced in the past 20 years has been required by new developments in technology, markets, demography, societal expectations or government policy.

The public interest should be the fundamental motivation of regulatory decision-making in the market sphere. In particular, will consumers benefit from regulation? A test for successful regulation should therefore hinge on a broad test of consumer interest. Ultimately consumers endure the burden of both failed regulation either as victims of market failure or increased prices resulting from compliance costs.

Whilst it is important for government to consider the cost of regulation on all business, nevertheless, the guiding motivation underpinning any regulation or government reform should always be the public benefit. Again, in their submission to the task force, Choice argued:

The public interest should be the fundamental motivation of regulatory decision-making in the market sphere. In particular, will consumers benefit from regulation? A test for successful regulation should therefore hinge on a broad test of consumer interest. Ultimately consumers endure the burden of both failed regulation either as victims of market failure or increased prices resulting from compliance costs.

This bill seeks to simplify the provision of SOAs. This is welcome. However, it is not enough. The current system is not working well. Consumers are bombarded with enormously complex disclosure documents that seem to cause confusion as opposed to clarity. Again I defer to Choice. They argue:

Much regulation in financial services is founded on the basis of an assumption that consumers and businesses will use information optimally. As a result, there is a strong tendency towards ‘disclosure’ as the regulatory answer to market problems in financial services. If a market problem emerges, it can simply be addressed by providing more information to consumers, who will use that information optimally in decision making. If the problem persists, then it must be because the quantity or type of disclosure was inadequate, so the regulatory response is to require more disclosure or to engage in endless tinkering with the disclosure requirements. New market failures can also be addressed by more disclosure. In effect a huge burden has been placed on disclosure to solve a wide range of complex market problems.

Ironically, having vigorously supported disclosure as the main tool in addressing information asymmetry, industry and government now recognise that there is such a thing as over-disclosure. A Rudd Labor government will be committed to an efficient and responsive disclosure regime. We also recognise that mere tinkering with disclosure standards is not enough to empower consumers. Consumer empowerment requires strong disclosure standards. It also requires strong laws that deal with unfair contracts, unconscionable conduct, misleading and deceptive behaviour, quick and easy access to compensation and refunds where industry is found to be in breach of the law, as well as access to dispute resolution. Labor supports this bill’s intention for the provision of simplified statements of advice.

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