Stuart Robert (Fadden, Liberal Party) Share this | Link to this | Hansard source

I rise to provide some comments into the inquiry of the Joint Parliamentary Committee on Corporations and Financial Services into financial products and services in Australia. Whilst I do, let me thank the secretariat for their good work; the member for Oxley, Bernie Ripoll, who led the committee; Senator Brett Mason, who was deputy chair; and the Hon. Chris Pearce, the member for Aston, and shadow minister for financial services, superannuation and corporate law.

Hard-earned funds, totalling $70 billion, of Australians have been lost. In the last 18 months corporate collapses such as Storm, Opes Prime, Great Southern and Timbercorp, as well as other companies, have gone under. No banks have failed. Indeed, of only eight AA-rated, or above, banks in the world, four of them are Australian. Our banking system has proven to be the most robust in the world. Despite the catastrophic loss of equity in savings, with most people’s superannuation savings being halved, with many people realising losses through selling down shares, our financial services regime, based principally on chapter 6 and 7 of the Corporations Act and on the financial areas of the ASIC Act, continues to be the strongest and most robust in the world. Over 150 banks have failed and we lost none. Compare that to the crisis of the late eighties and early nineties when more than five banks in Australia failed.

However, there is much that we as a nation and indeed as a parliament—a body of legislators—can learn from the last 18 months. We have already seen some of those lessons being learnt through margin-lending legislation, whereby there is now a requirement upon margin lenders to inform both the client and their adviser of a margin call. Evidence before the committee showed that, in September 2008, there were 2,000 margin calls per day being issued against Australians. It appeared that the vast majority of clients were informed of those margin calls and had the opportunity to make restoration and bring the margins back into loan-to-value ratios. There is one glaring example and that of course is Storm Financial where, for upwards of eight, nine, 10 and, in some cases, 12 weeks clients of Storm were, in many cases, unaware of a margin call requirement—the end case of course being the Commonwealth selling down and closing the Storm index funds and losing over $5 billion of hard-earned funds of Australians.

The financial devastation that the collapse of the likes of Storm and Opes Prime, Timbercorp and Great Southern has caused cannot be underestimated. Collectively, over $10 billion of life savings of ordinary Australians was lost. These included pensioners, who were, some say, duped into actually mortgaging their home for an excessive margin loan into a Storm Financial or other product, only to find out they had lost everything. The toll of human wreckage goes into the thousands. Within such an environment—praising God that, indeed, our nation did not fall into recession, in most part due to the way we started, the strength of our financial services regime, the lack of debt and the robustness of that financial services regime—as we now move into growth it is important to look back and learn the lessons of the past and to look at how we as legislators can actually improve the financial services regime. No matter how good it may be, it can improve; hence the inquiry into financial products and services in Australia had that charter and, indeed, has produced 11 recommendations to achieve that end state: to improve the financial services regime.

Whilst the 11 recommendations cover a range of areas, from disclosure to education to working with industry as it seeks to address the issue of commissions, there is no more important, no more wide-ranging recommendation than the first one—that is, that the Corporations Act be amended to explicitly include a fiduciary duty requiring financial advisers operating under an AFSL to place their clients’ interests ahead of their own. The committee has recommended that we amend chapter 7 of the Corporations Act to require a fiducial duty of care from advisers, a legal duty of care, a legal responsibility that advisers put the interests of their clients, without fear or favour, before any of their own interests. This will put the legal requirements of financial advisers on a par with lawyers and accountants. It will lift the financial services industry into a proper, robust and professional space with full legal requirements. It will require that advisers duly consider the statement of advice they give, knowing full well that that statement of advice may well be admissible in court because of their fiducial duty of care. It will require advisers to think very carefully about their remuneration structures, especially any commissions or payments they are getting from a product provider at the back-end, because those remuneration structures, those commissions may well be admissible in a court of law as per their fiducial duty of good faith.

Financial advisers will now need to rethink exactly how they engage with clients, the statement of advice that they provide and what has caused them to come to that statement of advice, and, if need be, they will need to defend that statement of advice. That is a sweeping, all-encompassing change to how the financial services industry is operating. In fairness to the industry, many parts of it are already operating along those lines, with a sense of good faith behind them. For many firms, recommendation 1, no matter how sweeping, will be somewhat passe because that is the way they already operate their businesses. For others, it may well be a requirement to look very closely into the mirror and determine exactly how they provide their advice.

The industry has stated through the FPA, IFSA and AFA that they are looking at the issue of commissions. They are looking at how financial advisers are remunerated. Recommendation 4 is that the government consult with and support industry in those sorts of moves. The committee believes it would be inappropriate to regulate and say that commissions are banned. People need to have choice. Advisers need to have choice. We need to ensure that financial advice is readily available for all people, not just for those on high incomes. Recommendation 4 allows the industry time to work with its members, with its clients and, if need be, with legislative support work through how they look at commissions.

The committee has done an excellent job and I thank the members of the committee from both sides of the House who produced a truly bipartisan report and who worked through the dreadful issues of the financial losses of so many families and their wrecked and shattered lives, many of whom will never recover. The committee looked at how we can improve the system. Noting that the financial services regime is already robust, how do we improve it to ensure that it is better placed for the storms that will come again?

Do the recommendations mean that no financial services firm will collapse in the future? No, they do not. Storm Financial did not have any commissions back to product providers. Many of its advisers had masters degrees; however, what Storm Financial, and perhaps others, did not do was to ensure that their fiducial duty of care was enacted when dealing with their clients. What Storm and others did was to leverage upon leverage their clients’ interests into the market. They treated all clients in the same way through super leveraging themselves into a bull and growing market and then leveraging unrealised gains back into that market. When the market eventually fell, as all markets do, Storm was unable to recover the assets of their clients.

I certainly commend the report to the government. It makes a range of very solid and very sound recommendations. I look forward to working with the industry going forward as it seeks to continue to enhance its professionalism and provide services to the Australian community.

Julie Owens (Parramatta, Australian Labor Party) Share this | Link to 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.

Sharon Grierson (Newcastle, Australian Labor Party) Share this | Link to this | Hansard source

I am very pleased to speak on the report of the Inquiry into Financial Products and Services in Australia by the Joint Committee on Corporations and Financial Services. The report has received a great deal of attention and arises from events that also received a great deal of attention, particularly the recent collapses of, for example, Storm Financial and Opes Prime. The strength of the committee’s recommendations rests on over 400 submissions that were received, more than half of which came from people affected by the collapse of Storm Financial. I think everyone knows the reality of the tragedy experienced by people and how devastating the effect was when people made decisions on advice that led to considerable loss. I praise the committee for their patience and sensitivity in dealing with so many individuals who were prepared to come forward and share their personal stories. It was not a case of their always being misled or of their not being aware of the risks—sometimes they were, sometimes they were not—but we have found that honest pricing, analysis or disclosure of risk has been a real issue in terms of the false confidence that preceded the global financial crisis. It certainly distorted behaviours both in the financial sector and by investors, and it certainly had a devastating impact when things went drastically wrong.

My colleagues who have spoken on this have said that we were not a judge or jury, and we were not. We were not there as a court and we were not there to be the final arbiter on these matters, but we certainly were there to expose the issues, to draw attention to the factors that caused these losses and to try to recommend better ways forward, ways that would not just strengthen the financial services industry but also protect the interests of Australian investors and Australians who avail themselves of financial services.

In our final deliberations we said that, for some individuals, there was clearly inappropriate advice and we noted that there was a preference by financial advisors and an acceptance by lenders of a one-size-fits-all approach. That is never the best case for the interests of the individual and, in drawing attention to those sorts of practices, I hope we have perhaps made people scrutinise their responsibility when looking at vulnerable individuals or the customers and clients who come to them, and their understanding that each of them has individual circumstances and should be assessed individually.

There was a lot of evidence around the shifting of responsibility, perhaps too casually and too carelessly, or around the failure by some to accept that they had a responsibility, whether it was the banks, the financial advisors, the lenders or even the investors. As a result, all those I have mentioned now know that they could have done better. We cannot wind back the clock, nor can we change what did occur for people, and we can never develop or guarantee an absolutely failsafe system. But we can expose the issues and the problems and we can get people to account for their behaviour, which is very hard to do. So I congratulate the Chair, who is sitting beside me, because to have all our banks present in public hearings was quite an achievement. I know that behind the scenes he, and our secretariat, worked very hard to make sure that those who had played a role were there to account for themselves.

The committee’s overall recommendations are there to improve the system. They are designed to improve professionalism, behaviour and, hopefully, outcomes. They deal with setting up a better regulatory framework around financial advice and overcoming conflicts of interest. I have been very pleased to listen to the chairman, Bernie Ripoll, speaking in the media today and last night around the area of fiduciary duty. It is not acceptable that conflict of interest exists between investors and financial advisers. There will always be the greatest protection when there is an acceptance that the interests of the investor must go before the interests of the adviser. There cannot be a conflict of interest. If financial advisers and planners are to be taken seriously then they must take seriously their responsibility to their clients’ interests and put them first. So our major recommendation is a very appropriate one.

There has been discussion about whether we can make people do things and make the industry do things. There is some problem with standards, and we have encouraged the industry itself to be involved in improving those standards so that there is public confidence in services provided. There has been a lot of discussion about how financial advisers set their fees and the relationship they have with their client around that. I spoke at the Newcastle chapter of the Financial Planning Association, and they shared with me their concerns. Often financial advisers are very small operators. They explained to me some of the complexity around deciding how fees are set. I do praise the committee’s report for allowing some flexibility in regard to the choice of fees and some self-regulation in that way. An excellent measure that we also recommended was that there can be no kickbacks—commissions—from a product developer who obviously gives incentives to financial planners and advisers to sell their products to an ordinary investor. That is a very, very strong recommendation, I agree, and I am very pleased that that is there. If you take the conflict of interest measure and the requirement to take no kickbacks or fees, and you commit to that, I think that is a very good way forward.

We have also recommended that the government consider the implications of making the cost of financial advice tax deductible. I have been on previous committees that looked at this issue, and I can only say that one committee I was on recommended that young people, particularly in their first job or on first joining a superannuation fund, should be given at least one session of tax-free financial advice. But in our report we are looking at it in a more holistic way, and I would very much welcome the study of that by the government.

We have also recommended that ASIC step up. It is really important for ASIC to have a strong role to play, to be resourced, to be the enforcer, to be able to look at competencies and standards for the industry and to be able to effect change and improvement. So we have proposed some more effective regulatory enforcement measures, and I must praise the government for its reforms under the Corporations Act.

We have also recommended around financial literacy. I have strong views that some of the methods we use do not reach the most vulnerable groups, and we know that vulnerable groups are people who perhaps have cash in their hands—be it a lump sum, retirement money, a superannuation payout or a redundancy. They have got money to invest, and I do think that ASIC should do more around that area. But we have also recognised that ASIC understands the problem. We have made recommendations to lower the threshold for ASIC to remove individuals and licensees from the industry.

To protect investors when collapses do occur, we did recommend that some statutory last-resort compensation funds for investors be considered. We have seen that the professional indemnity insurance scheme has a great number of deficiencies when it comes to protecting the interests of investors.

Our work around margin loans and margin calls was noted by the government. Their reform measures in the Corporations Act preceded our report but I think was certainly shaped by our report. That has been the wonderful thing about this inquiry. I think the government was listening, ASIC was listening, consultations were constant and the government were responding. I congratulate all the members. I know that the Queensland members, in particular, were seriously concerned for many of their constituents who suffered losses. I know that the chairman, in his relationships with the sector, and the people who submitted strengthened our reputation and our status and the quality of this report. I hope that that will be recognised by the government when they respond to our recommendations.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

by leave—Thank you very much, Mr Deputy Speaker Georganas, and to the opposition, for allowing me the time to speak. History is a hard lesson to learn again. That is something that I always have in the back of my mind. In 1927 the internationally renowned economist John Maynard Keynes categorically said, ‘We will not have any more crashes in our time.’ This profound observation just before the greatest market crash of all time teaches us that making sweeping statements or being overly excited about one’s self-importance are both recipes for disaster. Today many will expect legislators to find the silver bullet that prevents the likes of the Storm Financials of the world and others from ever happening again in the future. But history should teach us that a complete cure is elusive while meaningful reform and progressive improvement are the best medicine, although I have got to say that they are not quite as colourful at the time.

Reform in the financial services sector has been evolving continuously over the past 30 years. But rarely does an event on the scale of the global financial crisis give us the opportunity to accelerate reform in a sector crying out for a fresh direction. Some would argue that because Australia fared better than most in the global financial crisis then reform is only necessary at the margins or that investors should be better informed. Unfortunately, this is the case of the selective analysis, where some are all too willing to forget the catastrophic lessons learned by many unfortunate souls.

Of course short memory is not new and the status quo always suits some more than it does others. But I am certain that that would not be the view of the tens of thousands of investors that have lost in agribusiness management investment schemes, lost their life savings and more with Storm Financial, and all those caught up in the Opes Prime Stockbroking swindle along with dozens of other similar enterprises. Court cases, legal action and compensation schemes aside, people are seeking acknowledgement of their circumstances and someone with authority to recognise the devastating impact of what has happened to them. People want simple answers and they want practical solutions. While the basic principles of life and money have never changed—the only things that are guaranteed are death and tax; if it is too good to be true then it usually is; don’t put all your eggs in one basket; and don’t believe everything you read or hear—we also need to recognise that life is not always that clear or that transparent.

Everyone at some point in time needs protection from those that would take advantage of all of us—the vulnerable, the elderly or those without sufficient understanding. Hence there is the need to regulate markets, behaviour and corporations in this sector, which I think is essential. No-one should argue that without the rules or in a free-for-all environment not much would work in any effective manner. Survival of the fittest sometimes also equals survival of very few. Of course too much of this good thing—regulation—can also be a bad thing. Striking a balance between the cost of regulation and a free market is always the challenge of governments and industry. This is not a question of how much regulation but how well it works and how efficient it is for the sector that makes any real sense in the end.

Under reforms from past governments and regulators the financial services sector has made good progress, albeit with the expected cries of concern at the time for the end of the sector as we know it with tens of thousands of jobs at risk—similar to the cries you will hear at other times of reform. Of course this is to be expected and does not reflect in any way the reality either in the industry or in the growth in products and innovation or jobs that are created through progressive reform.

That is exactly what the recommendations of the Parliamentary Joint Committee on Corporations and Financial Services aimed at delivering, and I believe did deliver. The report on the financial services sector lays down clear markers and a plan for the future about direction, about the quality of advice and about the appropriateness of remuneration models. With current research indicating that only two to three people get advice at all, it is clear that something in the sector does not work today. It indicates the problems faced by the sector are wide ranging and require a rethink. My view has always been that rather than squabble over the small industry pie we must consider serious reform for growth to capture the other 75 per cent and to understand why they cannot afford financial advice or do not see the possible value in it in the first place.

Reform at its core must be principles based, with a focus on consumer protection and value for money. An industry standard of financial services that are a fair exchange of a fee for a service based on actual work performed must be the basis of the relationship between client and adviser, not between manufacturer and adviser. This, in concert with an explicit obligation to have a fiduciary responsibility—that is, a responsibility for those in a special position of trust—will drive the lifting of standards, drive the lifting of the quality of advice and remove the conflicts of interest that currently exist. As with most things in life, you get what you pay for. Unfortunately for many in recent years, they got more than they bargained for and are still left wearing the cost.

I had a short opportunity in the House recently to introduce the report, and I know that most people are focused on just a few of the recommendations, but I want to turn in the few minutes I have left to the other recommendations of the report, which I think are as significant as the major recommendations which underpin what needs to take place. Certainly I think that the heart of this report is about the fiduciary responsibility. It is about making clear to people in the advice industry that they have a responsibility to their clients and that that responsibility extends to the fact that it should be their clients’ interests first, ahead of their own interests. I think that is an important principle. Coupled with that principle is that of a complementary remuneration model, one that is fair. It is based on a fee—something that is tangible and understood, something that can be turned on or off and something that is a deal or a bargain between the client and the adviser, not something that is hidden, embedded or complicated into some product and that cannot be disentangled. I think that those two principles, along with quality of advice, form the basis of what this report is about.

But I want to turn also to ASIC. We certainly believe that ASIC ought to have much more focused attention on its role in this very complex area. ASIC covers a vastly greater proportion of people than APRA. It really regulates the consumer market and, as such, faces a much more difficult task. But we believe that ASIC has the appropriate people, the skills, the knowledge and the history to be able to do more in these areas. There is an expectation that ASIC as the regulator do more, and that is our expectation as well. That is not so much a critique of ASIC but just our expectation of what it ought to do in the future. We have made a number of recommendations around the regulator specifically.

That is coupled with extending the powers of ASIC to ban individuals from the sector, because all too often what we heard during this inquiry was that you had ‘bad people’—it is always the few rotten apples that make it bad for the whole sector. Unfortunately, they finish work on a Friday in a particular organisation—whether forced to leave or otherwise—and end up on a Monday morning working for somebody else down the road and continuing their poor practice. The industry say to me that that has to stop, and we agree with them. We think that has to stop. If there are bad people in the sector, they ought to go, because in the end it ought to be the client’s interests that are ahead of the adviser’s interests.

We believe that, in particular in relation to agribusiness MI schemes, those schemes ought to demonstrate a sufficient working capital to meet their current obligations. We saw the disaster of Great Southern and Timbercorp, which left more than 60,000 investors out of pocket. That is not good enough, and I think that there ought to be rules that reflect a better regulatory environment to make sure that people have confidence in the people that manage these schemes on their behalf.

We also agreed with ASIC, the regulator, that they could deny an application for a licence on the basis that a licensee may not comply with regulation or the law. That is a fairly big step forward but I think an important one in a preventative measure. All too often we have heard from the regulator that they can only act after the fact, after the incident or after a complaint. We believe that some more powers in this area are appropriate and can be well managed by the regulator. We also believe that having a strong, independent, industry based professional standards body that works in complement with the regulator would be a huge step forward in making regulation and compliance in the sector—which we acknowledge is very complex—an easier task.

We went further to say that we believe that there does exist a circumstance where an absolute last resort statutory compensation scheme could benefit some investors. We understand the moral hazard but we also believe that where particular organisations or individuals do the wrong thing, they are no longer covered by their insurance and investors should still have some minimal compensation in those circumstances. We took note of the great work done by the Financial Ombudsman Service and in the United Kingdom in this particular area.

All of these recommendations, if taken as a totality or as a whole, do work together. They work as complements to each other; they work in concert and can deliver a much more effective industry that is focused on consumer protection first. It is focused on standards and it is focused on lifting the educational levels within the sector. We have also made recommendations in terms of ASIC working more closely with the sector to develop those educational activities to be targeted at the right people. In particular the advisers themselves need to have a higher standard of education as the current standard is just far too low, as is acknowledged by the sector. All of these things coupled together can produce some real significant change, a real difference. It can restore credibility to financial services in this country and can provide the confidence that consumers need.

If we get all of those things right we can grow the market. I think that 25 per cent of people in Australia seeking financial advice is way too low. I know the industry agrees with me; it is too low. But currently there is nothing being done at a wholesale level which will actually take that 25 per cent of people to 50 per cent. I believe that people should have more ability to be independent in their retirement beyond what is provided as a safety net through a pension system provided by the government. There needs to be a little bit more and people do that through superannuation, through their own savings and through their home. They need to be more involved and more independent. They can do that through getting good, solid, sound financial advice about how to manage their savings and how to have a more independent retirement. That is an important thing.

But to do all of that you have to get the principles right in the sector first. I acknowledge how much work is being done currently in the sector by representatives—I will not mention any because I know if I leave some out the others will be cranky with me. There is some really good work being done to make sure that we lift those standards and make those improvements. If we get all of that right, not only will we grow the market, not only will we protect consumers but we will make a more effective and more efficient financial services sector in Australia. It can really be seen as a financial services hub in the Asia-Pacific region, which is where I believe there is huge growth potential for jobs in this country.

Lastly—and I have left it to last because I think it is significant that I mention it last in terms of the tax deductibility issue—unless we get all of those things right first we cannot get to the tax deduction. For me, I see it as the big carrot or the big opportunity for the financial services sector and for each individual person who works in it whether they are a licensee themselves or an authorised representative. If they want that big carrot in order to be able to deliver for individuals and grow that market then they need to get the rest of it right first. The regulatory system needs to be more effective and efficient. We have understood, in the work that we have done, that there is a cost to regulation. This is not about more regulation; it is about effective regulation. It is about setting the goals and the markers. I want to see a thriving financial services sector in the next five to 10 years. I want to see the base grow from 25 per cent to 50 per cent but I want to see it done in the right way. I believe that with the principles we have put down in this report we will achieve that.

Andrew Laming (Bowman, Liberal Party) Share this | Link to this | Hansard source

Mr Laming interjecting

Steve Georganas (Hindmarsh, Australian Labor Party) Share this | Link to this | Hansard source

Are you seeking an intervention, Member for Bowman?

Andrew Laming (Bowman, Liberal Party) Share this | Link to this | Hansard source

Mr Deputy Speaker, would the member for Oxley accept a question?

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

Will the member for Oxley accept an intervention?

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

Yes.

Andrew Laming (Bowman, Liberal Party) Share this | Link to this | Hansard source

Would the member provide his advice on whether he supports the shift from commission-based to fee-based remuneration for financial advice?

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

Absolutely, and I thank the member for his question. Recommendation 4 in the committee report is very clear. I will read it. It says:

The committee recommends that the government consult with and support industry…

I think that is really important.

… in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.

What that clearly says is to stop payments, all payments, whatever form they take. People can decide for themselves. We did not limit ourselves to one type of payment but the committee decided unanimously that it was all the payments. That can be volume bonuses, shelf fees, soft dollar incentives and commissions right across the board. We felt there was inherent conflict of interest that existed with a person being paid to sell you something. Often it is not clear that you are actually being sold a product rather than being provided advice. That is the clear point.

You can separate the two. People can genuinely pay to receive advice, and that advice does not need to be attached to a product. You can receive advice and have a product as well, and as long as that is transparent and clear you can live in both worlds. But currently there is a problem. There is a big grey area where often people who advise actually do not know whether it is advice or whether it is a product, and all too often we have seen people get caught up in that problem.

I am very happy with the recommendations in this report. I want to thank the Liberal Party, National Party and Labor Party members of the committee for their great work. (Time expired)

Debate (on motion by Ms King) adjourned.