Julie Owens (Parramatta, Australian Labor Party) Share this | Hansard source

I am pleased to speak on the Parliamentary Joint Committee on Corporations and Financial Services report on its inquiry into financial products and services in Australia. In many ways this was a difficult inquiry not just because of its content but because of the nature of some of the witnesses. Many of the witnesses had lost significant amounts of money, sometimes all of their savings and more, particularly through Storm Financial and Opes Prime and a small number of other companies in recent years. It was a difficult inquiry for us. From listening to them it was perhaps an even more difficult inquiry for them, telling their stories in such a public way.

There is no doubt that the recent controversies, such as the collapse of Storm Financial and Opes Prime and the subsequent dire circumstances of many small investors, have dented confidence in the financial advice industry. The consequences for many people have been dire. The committee heard evidence from people who lost everything and much more in investment schemes that were, by any stretch of imagination, out of line with their life circumstances. We heard from pensioners with no possibility of earned income who had invested everything they owned and geared further in investment schemes which carried considerable risk. Many of those people lost everything.

Our job was not to assign blame, although it was very tempting to do so. Our job was to consider the issues associated with those collapses. We heard from time to time that the problems were caused by the global financial crisis. I want to comment on that. Of course, it is true that there was a financial collapse in 2008 and that there were going to be losers. But the collapses exposed problems within the sector, which led to people making investment decisions that were profoundly inappropriate for their circumstances. It is also clear that many of those people were unaware of the risks associated with their decisions. While the submissions exposed some questionable behaviour on the part of the companies that collapsed, our role was not to forensically identify illegal behaviour. That role is for others to take—and they are doing so. But we did identify industry-wide practices that have grown over time and that seemed not to lead to advice and decisions in the best interests of the client.

While I do not want to provide any excuses for the sector, I do want to reflect on the way that the world in which advisers operate has changed over the last 10 to 15 years. Australia is in many ways in a unique position. We have one of the largest per capita investment rates in the world largely due to superannuation funds and recent demutualisations, which quite often see people who are in the later years of their lives and who have no investment experience at all receive significant amounts of money. An incredibly large number of people are coming to investment late in life having received large superannuation payouts or literally receiving cheques or shares in the mail because of demutualisations. That makes us unique. You can see in the pattern of margin lending, for example, the change in the way Australians have engaged in investment. Ten years ago, in 1999, less than $5 billion had been borrowed through margin loans. By December 2007, some 8½ years later, that figure had skyrocketed to over $37 billion—a 700 per cent increase in 10 years. It grew not just in numbers but also, significantly, in the range of investors that took out margin loans. The growth also happened through the years of boom. It is not strictly true that it was impossible to lose money but it is probably true to say that people made money and also, arguably, that the people who were exposed to inappropriate risk or who did not fully comprehend the nature of their investments were insulated from the consequences by upward trends for a number of years. That of course all came to a halt in the middle of 2008. At the same time as the number and range of investors grew, there was a massive growth in financial industries and the number of advisers. Collapse or not, it would have been timely now to review the way that financial advice industries operate.

The government has already moved to regulate margin lending, and that is a very good thing. That will already make a difference to the way that financial advice is offered to retail investors in particular. The minister has also flagged further intentions in his initial acknowledgement of the report last night. He outlined at a recent FPA national conference that any regulatory changes by the government will be guided by the following two key principles: firstly, that the financial advice that people get must be in their best interests—distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised; and, secondly, in minimising these distortions, we need to ensure that we do not put financial advice out of the reach of those who would benefit from it. They are both very strong statements. They coincide significantly with the views of the committee as expressed in the report, even though this statement was made prior to its release.

The committee has made a number of recommendations and, in broad terms, they are in the areas of raising standards of advice; making disclosure more effective; removing conflicted remuneration practices; ensuring better transparency, competency and accountability through the licensing system; reforming lending practices; limiting access to complex and/or risky investment products; and introducing a last-resort statutory compensation scheme for investors.

Standards of advice vary considerably, and so do the conditions under which clients receive it. A number of witnesses outlined concerns about the effect of conflict of interest on the quality of advice provided by financial advisers. There were proposals put in three main areas: imposing a higher legislative standard through a fiduciary duty for financial advisers to place clients’ interests first; providing consumers a distinction between sales-based advice and independent advice; and improving enforcement of current advice standards through annual reports to ASIC and/or risk-based auditing.

There can be no doubt, in listening to the evidence provided by a number of investors and organisations representing the industry, that there is a view that compensation packages through commissions are largely not understood by the client base, and similarly that quite often a financial adviser is acting more as a salesperson for one product or another than as an independent adviser. So there is considerable confusion in the industry from the client perspective about what they are actually getting when they go and see a financial adviser.

The committee made a very strong recommendation concerning fiduciary duty, and it is probably the most powerful recommendation in the report. It states that:

The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.

I would assume that many people who have sought financial advice prior to this report being delivered would have assumed that the adviser actually already was providing advice in the client’s best interests, but that is not required under current regulations and there was clear evidence given by a number of people that it is not always the case.

There is also evidence—and ASIC is probably one of the strongest exponents of the view—that the imposition of a legislative fiduciary duty would likely change remunerative practices without even placing a ban on commissions. They state:

… once you are in a fiduciary relationship, if you are going to take commissions or some other benefit, that benefit belongs to your client. … So the change we would see to industry practice would be that a lot of the front-end, trail and ongoing commissions would probably not sit well with a clarification of that duty.

Ultimately, the definition of ‘fiduciary duty’ will be determined by the courts, but there were very strong indications of industry views that remuneration practices through commissions will be problematic under that regulation change.

The second recommendation—also an important one—is that:

… the government ensure ASIC is appropriately resourced to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. ASIC should also conduct financial advice shadow shopping exercises annually.

This is an incredibly important recommendation that ensures that ASIC is keeping an eye on the behaviour of the industry, particularly over the time that these changes would take place—assuming that they are adopted by the government, of course.

The third recommendation—also an incredibly important one given the lack of understanding by many clients of advisers of the way in which their relationship actually plays out—is that the Corporations Act be amended to require advisers to disclose prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest. Again, this recommendation came about because of the clear evidence that many advisers are taking commissions or other fees and many are in fact only representing a small number of products, which means again a person can go to a financial adviser believing that they are receiving open and independent advice and are really talking to a person who is only able to provide advice concerning a small range of products. It is an incredibly important recommendation that will make a substantial difference to investors.

The inquiry attracted considerable debate about whether banning commission-based remuneration is required to overcome the conflict of interest that it creates. Some argued that disclosure and conduct requirements have failed to adequately manage those conflicts and that a ban is now warranted, while others claimed that removing these payment methods would increase the cost and decrease the accessibility of advice for consumers. There was also discussion about whether enabling payments to be made as a percentage of funds under management represented an effective compromise between removing conflicts and maintaining affordability. This is an incredibly difficult issue. In the end, the committee resolved to recommend that the industry and the government work together to find the most appropriate mechanism by which to cease payments from financial product manufacturers to financial advisers. This is a very difficult issue. The industry is currently essentially supported by the flow of commissions, trail commissions and you name it, from product providers. This would be a substantial change within the industry and would require considerable consultation to ensure that it did happen in a way that did not put the price of advice out of the range of consumers. The asset-based fees were also criticised, most effectively by Choice magazine, who were very strong in their criticism of that particular kind of fee structure.

The committee also recommended that the government consider the implications of making the cost of financial advice tax deductible for consumers as part of its response to the Treasury review into the tax system, also an important consideration if we are to keep advice affordable.

There are a number of other recommendations that I will not cover because I am going to run out of time but I would like to cover recommendation 11, which concerns financial literacy. It is an issue everywhere but it is particularly important in Australia, where we have so many inexperienced investors, that we work hard to improve the level of financial literacy. I suspect that most members of parliament through the financial crisis have met with constituents who have lost everything who had all of their assets in investments which were so inappropriate it is almost unimaginable that any reputable adviser could have advised them to do so. There were people who took all of their workers compensation payouts, for example, and put them in one company—Rio Tinto in the case of one constituent. People find themselves in appalling circumstances because of a complete lack of understanding of risk. One man who lost all his money in the share market did not actually understand that his money was not in the bank. He wanted to know where his money was and I was not able to get through to him that there is a difference between a bank deposit and buying shares. This is a man who had invested his entire superannuation payout and lost it all, with no understanding at all of what he was actually doing in making that decision. There is no doubt that we have to make strong efforts here to improve the financial literacy of our population, particularly targeted to groups in the community who are likely to be seeking financial advice for the first time.

This is a very good report. It makes a number of recommendations that will make real differences should they be accepted by the government, and I commend the report to the House.

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