Chris Bowen (Prospect, Australian Labor Party, Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

by leave—The government is committed to ensuring that the financial advice Australians receive is in their best interests. On 26 April this year, I announced the Rudd government’s Future of Financial Advice reform package, which contained significant policy measures that improve the quality of financial advice, enhance retail investor protection and improve trust and confidence in the financial planning industry.

These reforms represent a comprehensive government response to the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into financial products and services in Australia, which investigated issues associated with recent financial product and service provider collapses, such as Storm Financial and Opes Prime.

The government recognises the important role played by financial advisers in assisting Australians plan for their future. By 2050, one in four Australians will be over 65. Longer-term challenges such as the ageing of the population, as well as recent events such as the global financial crisis, underscore the need for quality advice.

At their core, the reforms will address the conflicts of interest that have coloured the perception—and sometimes the reality—of the quality of financial advice provided to Australian investors. If financial advice is to be an important part of investment decision-making in this country—and I believe it should—then it must abide by a fundamental ethical principle. That principle is that the financial advice given to Australian investors should be in their best interests.

This issue is also very much about the future professionalism of the industry. Good financial planners should not have their reputation affected by some in the industry who do the wrong thing. It has also been put to me that raising the professional standing of the industry will encourage more people to become advisers.

The Future of Financial Advice contains three key reforms, which will apply from 1 July 2012:

• A ban on conflicted remuneration structures, such as commissions and volume-based payments. Percentage-based fees (also known as ‘assets under management’ fees) can only be charged on ungeared products or investment amounts;
• The introduction of a statutory fiduciary duty for financial advisers requiring them to act in the best interests of their clients, subject to a ‘reasonable steps’ qualification; and
• A new ‘product neutral’ adviser charging regime which is all about ensuring that advisers and clients agree to the fees and services provided, and that those fees are clear, while retaining flexible options for consumers to pay for advice. This includes a requirement for retail clients to agree to the fees and to annually renew (by opting in) to an adviser’s continued services.

There are a number of other important measures contained in the package which will assist in facilitating simple and more affordable advice, provide enhanced investor protection and increase the professionalism of the financial advice industry in general.

There will be an expansion of the availability of low-cost simple advice to provide access to financial advice. The existing package which provides for simple advice within superannuation funds (known as intrafund advice) will be extended to new topics to facilitate simple, single issue, personal advice in a compliant matter. There will also be a review of whether simple advice can be provided in a compliant matter outside intrafund advice. The accountants’ licensing exemption will be removed, with consultation on an appropriate replacement.

ASIC’s powers to act against unscrupulous operators will be enhanced, professional standards for advisers will be reviewed by an expert advisory panel, the classification of sophisticated and unsophisticated investors will be reviewed and the option of introducing a statutory compensation scheme will be examined by an expert in the corporate law field.

In total the package represents a very significant reform for financial services and will greatly improve the quality and availability of financial advice in Australia. I would now like to briefly touch on some matters that have been raised in relation to these measures.

One key issue surrounds how the reforms, particularly the ban on commissions, affects a consumer’s right to choose how they pay for advice. While I support the idea of consumers making their own informed decisions, the reality is that disclosure of commissions does not deal with the fundamental conflict of interest created by the commission.

Some say that a more simple disclosure regime is the answer to the current lack of consumer understanding in relation to fees and commissions. While simple disclosure is almost always better than complicated disclosure, it is not the answer here. I have looked at this question very carefully and I am convinced that, in this area, we cannot simply rely on disclosure alone. It is not good enough for an investor—who may have limited understanding of financial markets or may, for example, have English as a second language—to come to an adviser for advice, only to be handed pages of fine print and be expected to fend for themselves. Instead, the removal of conflicts of interest will lead to better quality of advice for investors, a conclusion supported by the considerable evidence given to the PJC inquiry.

While there will be a ban on conflicted payments, I am not interested in a government-prescribed one-size-fits-all approach to fees. There will still be flexibility in how advisers can charge clients, and how clients can pay for advice. It is open to advisers to devise a charging structure that suits them and their clients. That structure could include hourly fees and percentage fees—subject, of course, to the guiding principles of the reforms. I anticipate the changes will encourage innovation in adviser charging, for the benefit of both advisers and clients.

Through the annual renewal process (by requiring customers to opt-in), financial advisers will engage with their customers and assist them to see the value of the advice provided, with fees being directly related to the services provided.

The opt-in provision is an important measure. As I stated when the reforms were announced, the government will consult with industry about the form of the annual renewal notice and the period after which the initial advice is given that it will first apply. I was very clear about this when the reforms were announced, including explicitly outlining this in the information pack we released when we announced the reforms.

Most surveys show that about one in five Australians receives financial advice. While I agree that clients benefit from and may often need holistic advice, there are cases where clients have relatively simple financial questions they need answered, and where simple advice will be quite sufficient for that purpose. If we want more Australians to receive advice, I believe we need to try and find a way to deliver more affordable advice (including so called intrafund advice) and increase its use.

It is interesting to note that intrafund advice has already been very successful, with some funds reporting interest from their members well above their expectations. The introduction of intrafund advice has also enabled smaller financial planning firms to generate new business by providing intrafund advice services to super fund members.

Major reform is difficult and requires a mature and measured approach from industry. To respond to change in any other way diminishes an industry’s standing in the eyes of the community. I welcome the positive response from a range of stakeholders, including many in the industry, to the government’s financial advice reforms.

The Financial Planning Association and the Investment and Financial Services Association have agreed that the broad thrust of our reform package is sensible and much needed. I have been particularly pleased by the number of emails and letters of support I have received from individual planners and smaller planning practices who understand how beneficial these reforms are for their customers and, therefore, how beneficial they are for the industry.

The financial advice industry both large and small is working positively and effectively with the government on these reforms—reforms that do fundamentally change the way the industry will operate. There are times when we disagree, but the industry has shown it is willing to undertake difficult reform that is in the community’s interest and work constructively with government on its implementation.

Banning conflicted remuneration structures, such as commissions, will greatly reduce the incidence of investors being recommended financial products as a result of sales incentives offered to advisers. An ASIC shadow shopping survey found that unreasonable advice was about six times more common if the adviser had an actual conflict from remuneration.

The government was hoping for bipartisan support for these sensible but difficult reforms. Instead, the coalition has been critical of the government’s Future of Financial Advice reforms despite the overwhelming majority of industry and consumer stakeholder groups supporting it. The coalition’s position can be summarised very simply—they are the only ones still backing sales commissions.

The coalition’s position on sales commissions is code for supporting investors receiving financial advice that may not be in their best interests; the sort of advice that, as we have seen in recent corporate history, has led to investors losing their life savings. So inexplicable is the coalition’s position that JP Morgan described it in the following terms in a 15 June research note to clients:

They also appear rather perplexingly to be against the banning of commissions (conflicted remuneration structures) something the industry as a whole appears to have decided to move away from.

What we have here is a coalition so intent on opposing government policy that they are opposing important reform that industry is willing to undertake and consumer groups have welcomed.

I look forward to working with stakeholders across the industry and consumer groups, as we move to implement this important reform package. Although I have set out the broad policy direction, I expect that there will be a significant amount of consultation in relation to the finer implementation details of the package. There will also be a public exposure of draft legislation in due course.

I understand and appreciate that some stakeholders are keen to know further details about the reforms—such as the timing, consultation processes, and the detail of how certain policies will be determined. This is why, on 17 May, I announced the commencement of consultation including the establishment of a website—the Future of Financial Advice website—which communicates important information about the reforms, including a ‘Questions and Answers’ section, as well as providing ongoing updates about upcoming consultation with stakeholders.

Public information sessions will be held in Adelaide, Brisbane, Melbourne, Perth and Sydney in late June and early July of this year. The public information sessions are designed to provide an overview of the reforms and give stakeholders an opportunity to ask questions and raise issues. Details of the public consultations, including how to register, are now available on the Future of Financial Advice website.

While the reforms seek to improve the quality of advice, which is in the client’s best interests, they will also carry important benefits for the financial advice industry. I see the reforms to financial advice and our wide-ranging changes to superannuation as being inextricably linked. Put simply, we could not ask Australians to set aside 12 per cent of their income for superannuation, without ensuring that the system was being managed in their best interests.

The reforms will also support our ongoing work to position Australia as a financial services centre in the Asia-Pacific region. It would be impossible to ask professionals in other countries to place their trust and confidence in our financial planning industry if Australians do not. This point was emphasised by the Australian Financial Centre Forum, which we commissioned to recommend ways to position Australia as a regional financial services centre. The forum observed that realisation of opportunities to attract overseas capital to Australia depends on, ‘amongst other things, the reputation and integrity of Australia’s financial advisory sector being maintained and, where necessary, improved’. To this end, their report argued that resolving conflicts of interest in the financial planning industry was ‘a prerequisite for greater international engagement’.

I have a lot of confidence in the skills and expertise of Australia’s financial planners. I have confidence that our financial planners can not only provide high-quality advice to Australians but also develop as a significant potential export supplier. I want the financial advice industry in this country to grow and thrive. The reforms we announced last month, as well as those reforms we announced in April, are designed to ensure the industry is seen as honest, trustworthy and world’s best—with all the opportunities that that opens up. The government’s reforms will enhance the professional standing of the industry and ultimately encourage more investors to seek advice—something that is in all our best interests.

I ask leave of the House to move a motion to enable the member for Cowper to speak for 12 minutes.

Leave granted.

I move:

That so much of the standing orders be suspended as would prevent the member for Cowper speaking in reply to the ministerial statement for a period not exceeding 12 minutes.

Question agreed to.

Luke Hartsuyker (Cowper, National Party, Deputy Manager of Opposition Business in the House) Share this | Link to this | Hansard source

I am pleased to respond to the Minister for Financial Services, Superannuation and Corporate Law’s statement today on the topic of financial advice and the government’s supposed intent to remove conflicts of interest in providing that advice. I am pleased to respond because it gives me the opportunity to correct the minister on many of the statements he has made today. As with everything this minister does, there is a massive gap between his rhetoric and the reality of policy outcomes.

The minister argues that the coalition support investors receiving financial advice that may not be in their best interests. This is a complete misrepresentation of the statements made by the coalition, and nothing could be further from the truth. The coalition support efforts to minimise the potential for conflicts of interest within the financial advisory industry. We have previously stated that trailing commissions which do not provide the investor with an opportunity to opt out should be removed from the industry, and payments made by product manufacturers to advisers must in fact be for the provision of advice and not merely an income stream for the adviser. However, the coalition have expressed concerns about how the Rudd Labor government’s intent with this legislation could hurt small business financial planners and could impact on the ability of low-income earners to receive financial advice.

As I said, we have expressed concerns about the massive gap between what the minister says and what the minister actually does. With much fanfare, Minister Bowen announced on 26 April on Sky News:

…  the key change has been the banning of commissions and payments from financial providers to financial advisers.

That was shortly before some of the details were released by the minister, on the same day. Those details were under the heading ‘Overhaul of financial advice’ and clearly state:

It is important to note that the—

reform—

does not prevent client-agreed deductions being allowed from a client’s investment to pay for financial advice or flexibility in payment options.

The minister did not explain in his statement today how a payment can be made out of a client’s investment if it has not originated from a product provider.

The reforms will not completely meet the minister’s promise to Ross Greenwood on 26 April. He said of the reforms:

… they’ll stop people getting advice to invest in bad products which happen to be in the best interests of advisers but are clearly not in the best interests of ordinary mum and dad investors.

By suggesting that all commissions offer advice not in the interests of investors, the minister is making an attack on the financial planning industry, particularly small businesses involved in that industry. My office has been flooded with inquiries from small business financial planners who are concerned that they will not be able to offer services to mum and dad investors into the future and that these reforms have the potential to force a complete restructuring of their business or in fact force them out of business. But this minister is not concerned about the jobs that are going to be lost. In fact, he has admitted that the reforms will destroy jobs in financial planning. The minister said on 26 April, in a press conference:

I recognise that some people won’t be happy with these reforms. I accept that some people will leave the financial planning industry as a result …

A survey conducted by Radar Results, which is a consulting firm to financial planners, found that one in four financial planners are considering leaving the industry as a result of these reforms. So the minister is perfectly happy for, potentially, 25 per cent of the employees in the financial services industry to lose their jobs as a result of the reforms.

However, there is some hope because, despite threatening to take their jobs away, the minister for financial services is consulting with the industry! We have heard a bit about consultation lately. So the minister is telling us he is consulting with industry—just like they consulted with industry on the great big new tax on mining! But even the minister himself recognised that he did not have the details right. He told 2GB on 26 April that the reform proposals ‘will need a lot of work; we’ll need to consult’. It sounds very familiar, ‘a lot of work’. In order to consult, Labor are providing information sessions in capital cities from 25 June to 1 July. So we have a one-week intensive consultation session at the end of the financial year. Financial planners are pretty busy at the end of the financial year. How can the government be taking the views of small business financial planners seriously when they arrange a consultation period for the last week of the financial year?

This is a minister who dismissed details of consultations with the Association of Financial Planners in a press release on 4 June, saying they were ‘based on newspaper headlines rather than the facts’. This is a minister who promised in May 2008, in relation to another of his failed policies, Fuelwatch:

Fuelwatch brings down petrol prices, puts downward pressure on petrol prices …

There is a credibility problem with this minister. This is the man who introduced Fuelwatch, which was originally going to save us money on petrol but then became just a medium for more information on fuel. Then we had GROCERYchoice, which was going to provide us with cheaper groceries—but you might have to drive 2½ thousand kilometres to get a packet of Tim Tams in order to save money. So we have a minister who has a bit of a credibility problem. He has a problem because there is a massive gap between his rhetoric and his delivery.

The coalition will be watching very carefully the way these reforms are implemented, because this government has a track record of poor implementation. They could not build school halls cost-effectively, they could not give away pink batts and there are a lot of financial planners out there who are concerned that the government cannot reform this industry without causing massive damage to small business.