Jim Chalmers (Rankin, Australian Labor Party, Shadow Parliamentary Secretary to the Leader of the Opposition) Share this | Hansard source

I also rise today to speak on Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014. It is a particular privilege to follow on this side of the House the member for Kingsford Smith, who has worked on some of these issues for some time and knows his stuff in this area. I found his contribution to be very compelling.

Recently in this House we have seen examples of where both sides of the House can find common ground. We have seen it in respect of some of the foreign policy questions that we are currently dealing with and in response to the recent tragedy in Europe.

It is true to say that, when it comes to issues like this, these are fundamental issues where we will never find common ground. This future of financial advice bill is nothing but another attack on average people, working people: mum and dad investors, people with superannuation, people who have just tried to do the right thing their whole working life, to save and give themselves some financial security.

The main problem we have with this bill is that it tips the scales in the wrong direction and it gives a green light to some of the most powerful actors in our economy to take advantage of people who are more vulnerable, people who might not have access to the information and people who want to trust their financial adviser. There are many good financial advisers in the community, but we need to ensure that we are protecting consumers so that that small group of people who might want to do the wrong thing are prevented from doing so.

Whether it is the budget or the wind back of consumer protections in financial advice that we are talking about today, I think these types of initiatives do shine a light on what I think is the government's biggest flaw—that is, their inability to put themselves in the shoes of people from Middle Australia, people who are vulnerable or people whom they are supposed to represent but don't.

It is sickening in my view to see people on that side of the House line up to get up and suck up to the big banks and to try to show how tough they are and how useful they can be to some of the most powerful actors in our economy. What we need is people in this House who are prepared to stand up for the little guy in this conversation and stand up for people who need consumer protection. There is something particularly sickening, particularly appalling and particularly despicable about lining up with the most powerful forces in our economy to do over the least powerful people in our economy.

When you think about it this way, most people in Middle Australia would go to work and when they get home they would think about what they had achieved that day. It might be a bit of extra overtime to invest some of their salary in their financial security for the future; it might be paying off the mortgage—all kinds of financial decisions that people take in the ordinary lives. When those opposite go home after a long day at work and put the feet up, what they would have achieved today is an entirely different thing. They would have weakened consumer protection, they would have made it easier for advisers to act against the interests of their clients; they would have put the wrong incentives into the system; they would have reinstated the type of conflicts of interest that have bedevilled financial advice in recent times; and they would have tipped the balance further in favour of the big guy against the little guy. That should be something they should reflect on. They come into this place and at the end of a long day of work that is basically what they have done. This side of the House, whether it is the member for Blair, who is here, or others, are proud to stand up for people who deserve to be protected from the worst elements in the financial advice system.

There is a very intelligent guy called Amit Singh who wrote a very good piece on the Chifley Research Centre website recently about these reforms. He made two very strong points, I thought. The first one was: judge this conversation by who is on either side of the debate. On one side of the debate you have got a very small handful of big banks, effectively, and the Liberal Party. On the other side you do not just of the Labor Party; you have the experts; you have got the people who represent seniors, whether that be National Seniors or Council on the Aged; you have got consumer groups; you have got independent commentators—basically everyone but that tiny little group who think that consumers should be protected when it comes to their financial advice.

The other good point at Amit Singh made in this article in the Chifley Research Centre site was that when Chris Bowen, the member for McMahon, first introduced these changes in response to the very good work of the member for Oxley, there were people on that side of the House and people in the industry who said that they were unnecessary. They had egg on their face pretty soon after, really, because some of the issues that came to light, particularly in the Commonwealth Bank, happened so soon after post changes were introduced. The legislative changes that were put in place by Labor were to combat the type of atrocities we have seen perpetrated on average people by the Commonwealth Bank and others who have done the wrong thing in the system. I thought it was really indicative of that side of the House's approach to these sorts of things that when these issues were coming to light, when the whistleblower was getting the message out about some of the bad things that were being done to people who were clients of, in particular, that one bank in this instance, they were rushing through these changes with the assistance of the Palmer United Party.

These changes are not just unfair to people; they are not real smart—they are dumb changes, because the weakening of consumer protection here in Australia is going in completely the opposite direction to the movement in the financial sector around the world, which is towards greater stability and greater protection, whether that is the Basel III initiatives or all the other initiatives that are taking place in the international banking system to make sure that people are protected. What that really goes to is this sense that we have had a lot of turbulence in financial markets and in the economies of the world in the last six or seven years and really I think people who do not want to protect consumers, having learned those lessons, are really doing the wrong thing by their people. There is a saying, of course, that those who fail to learn the lessons of history are doomed to repeat them. It seems that on that side of the Hours they either do not remember the GFC or some other various financial scandals, they do not understand or they do not care. We should be spurred on by our lived experience, whether it is the GFC or whether it is some of those shameful activities that were part and parcel either of the crisis or of things that happened subsequently.

Around the world millions of people felt the impacts of the collapse of banks and small lenders. Shock waves went through the financial system and millions of jobs were lost. We were very fortunate in Australia for a whole range of factors but including very effective government stimulus under the Rudd and Gillard governments and Treasurer Swan. The stimulus did help protect Australia to avoid recession. There was a whole range of contracting factors to that as well. But as well as we did as a country by working together during the global financial crisis, we did not get through entirely unscathed and not every investor got through those episodes entirely unscathed either.

Other speakers have spoken about Storm Financial. There was $3 billion of debt on behalf of their 4,000 clients. There were all kinds of reckless activity engaged in in that period. The member for Oxley is the expert on some of these things, having conduct of the inquiry. I would encourage members of the House who have not done so to read some of that testimony, because there were some extraordinary examples brought to light in that process. There was one that I read about—Barry and Deanna Doyle, a semi-retired couple from Queensland. They had a combined income of less than $25,000 a year and through the advice they were getting from Storm and other institutions on that 25 grand a year they ended up with share portfolio costing $2.26 million with debts to match. Their annual interest payments ended up exceeding $190,000. All of this was done on the equity of their house, which was worth about $450,000. The fact that they were advised to leverage up to that extraordinary amount really is one of the lessons we really should take to heart. We really should learn from that episode. There are so many examples like it—people who were hurt by bad advice. There should be a clear imperative to act from that.

After that parliamentary inquiry led by the member for Oxley and the response put together by the member for McMahon, the last Labor government did undertake some significant reforms to better protect the consumer when it comes to financial advice. We did introduce reforms to protect investors and help the industry professionalise. We had one ultimate and worthy goal, which was to return trust and confidence in the system that had been rocked by the GFC and by various scandals. That meant better protecting consumers and safeguarding the stability and integrity of our financial system as a whole.

Other members have mentioned the various components of the Labor government's reforms. For the sake of completeness in my own contribution, these were: a ban on conflicted remuneration structures; a best-interests duty for financial advisers; a biannual opt-in provision for advice; simplification of the terms and conditions and the disclosure statements of financial advisers; and an annual disclosure statement of fees and details of services performed. The new government is intent on undermining these reforms. They remove protections from consumers and make it easier for unscrupulous agents to take advantage of vulnerable people.

One of the key reforms being unwound is the so-called best-interest test in the FoFA package. This is the one that imposed obligations on financial advisers giving client-specific advice—that the adviser 'must act in the best interest of the client in relation to that advice'. This is similar to the sorts of responsibilities and duties that fall on other professionals, like lawyers and accountants. That section was enforced by a seven-point check list. I will not go through all of the points, but the seventh of those was a catch-all provision plus an obligation that the adviser take 'any other step that at the time the advice is provided would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances'. That is a really important catch-all provision and the one, unfortunately, the government is seeking to remove. That will weaken protection for clients.

There should be nothing controversial about the best-interest catch-all provision. It seems bizarre in the extreme that people on that side of the House would think it not the duty of a financial adviser to act in the best interests of their client. Watering it down now means it is a mechanical check-list, which will just require financial advisers to go through the motions.

The best-interest test is vital because of the information asymmetry in financial advice. Obviously, people who work in this space know a lot more than their clients. It is important we protect consumers from those advisers who might want to take advantage. I am not saying all will, but it is important those protections are there, because if you are a mum-and-dad investor or a retiree and you are going to your adviser to try to work out how to invest your hard-earned money, you do not have the information available to you. You rely on that person. It is a relationship of trust and we need to bolster that relationship of trust with adequate consumer protection.

The changes to the best-interest test come on top of other proposed amendments. No longer will we require advisers to act with objectivity and care. Some advisers will be entirely exempt from even the weakened-down best-interest test. There are all kinds of changes that have been made to these laws. One of the biggest problems we have with the weakening of this legislation is the opening up of the sector to conflicted remuneration—the weakening of the section that bans financial advisers from getting monetary or non-monetary benefit that might influence the financial products they recommend. That is just common sense. You cannot have the incentives aligned in such a way that advisers try to make a buck from the disadvantaged or the people they are trying to represent. We will see the return of conflicted remuneration to the industry. This does not apply just to cash payments, it applies to all kinds of advantages that an adviser could have.

The reintroduction of conflicted remuneration will mean consumers will never again be confident that the advice they are receiving is good for them rather than just good for the adviser. That is the problem we have with the government watering this down.

Another problem is the weakening of our reform, the so-called opt-in requirement for financial advice. One of the revelations of the parliamentary inquiry is that approximately two-thirds of all financial-planning clients were passive. They were not getting advice, they were not in touch, but they were still paying fees, so they were getting charged for advice they were not receiving. We wanted to crack down on that. We wanted there to be, every two years, an opt-in requirement for their advice. This legislation removes that opt-in requirement. It also removes the requirement for an annual statement of fees, which is really important for people in understanding what they are getting.

The net effect of all these changes will be less trust and less confidence in the financial-advice sector. ASIC estimates that consumers lost about $5.7 billion between 2006 and 2010 as a result of the various scandals. This legislation makes those sorts of scandals likely to recur, and that is unforgiveable. The legislation will cost consumers and it will cost our economy. It will degrade trust and confidence in the financial-advice sector. Most importantly, it will make it more likely that real people—mum-and-dad investors—will lose money in a financial scandal. It is for these reasons that Labor opposes this bill.

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