John Williams (NSW, National Party) Share this | Hansard source

Senator Moore was the guilty one. In January 2009, a meeting was held in Redcliffe, which is just on the outskirts of Brisbane, and I was called to go to that meeting. We had seen the collapse of Storm Financial. I think it is the only time—no, I have been up to Redcliffe since, because I got a message that there was some search on about my explaining when I went to the Sunshine Coast and how much it cost the taxpayer. I have not been to the Sunshine Coast, but that is another issue we will address with Senator Sterle in a question on notice to the FPA later on.

That meeting was held in a hall packed with about 400 people—60, 65, 70 years of age—who did not know where to turn. Storm Financial had collapsed. What had they done through financial advice? They had mortgaged their homes. What they had worked for all their lives, everything, was on the line. What does a couple do at the age of 70 if they are put out of their home and they have nothing left? Live on the pension? Pay the rent? They were devastated. The one guarantee I gave them that night was that I would seek a Senate inquiry into the very issue of the collapse of Storm Financial.

There are two things I see were wrong then: one was the product and the other was the advice. Let us look at the product. What is a margin loan? For the many listening on their radios now and perhaps some around the Senate who are watching TV in their rooms, an example of a margin loan is that a couple might have a house worth $600,000. It is unencumbered because they have paid it off throughout their life and have reared their family. They are lent $300,000, which is 50 per cent of the value of the house, so it is a $600,000 house and they get a $300,000 loan. That $300,000 is then used as a deposit on a $3 million loan to buy shares. So with no income or very little income, perhaps a little bit of money, they get $3 million worth of shares. The bank or financial institution, whether it be Macquarie Margin Lending or whatever, holds those shares as security, and each week or each month that couple is given money from Storm Financial. They could just retire and live the life of Riley with money flowing in every month and have not a problem in the world—but that was until the stock market crashed. When those $3 million of assets become $1.5 million you have got a real problem. If you are the financial institution and for your $3 million loan those assets are now valued at $1.5 million you have got a real problem. So, of course, the banks called them in.

I will now talk about the product. We have regulations for our cars—and I know that you, Mr Acting Deputy President Marshall, being the very mechanically minded sort of chap you are, would know this—and if your car has power steering, as all cars have these days, the regulations in Australia say if the power-steering pump belt breaks you must still be able to steer the vehicle. So these are regulations that we have in Australia for safety reasons. I question the safety reasons when it comes to financial products. I see ASIC as the corporate watchdog seeing that the products being sold out there in the market are not like the car whose brakes may fail due to a lack of safety regulations and standards in Australia so that if you are going down a hill you crash into a tree. We cannot have financial products on the market that, using the analogy I draw, see people crashing into a tree, especially in the later years of their life when, being frank, they are past the best of their working days and they do not have time to rebuild. It is a tragedy when the financial advice and the products are the two problems.

I was glad to be part of that parliamentary joint committee chaired by Mr Bernie Ripoll MP, a well-known bike rider around the place as he is very keen every morning to get out on his bike and ride with many others. The inquiry was about a bad product. Even during our inquiry the then boss of the Commonwealth Bank, Ralph Norris, said that the bank had done wrong and they would correct it, but I do not know if that has been the case and I think those kind words and sentiment put out by Mr Norris at the time have not been followed up with proper settlements. But, hopefully, most of those people are still in their houses. I have actually sat in a bank mediation meeting in Brisbane with a Storm Financial client and her husband, trying to sort things out for them. That was not the only bank mediation meeting I have sat in on in the last 12 months, I can assure you.

So here were these problems with the product and the advice and, as I said, the product was there whereby people could live the life of Riley, just simply retire and put their house up for mortgage—only to find that when the wheels fell off the cart with the stock market in 2008 their security went and they were in real financial trouble and it was all badly mismanaged. Storm Financial said it was up to the banks that were the lenders to notify the clients that a margin call was on, but the lenders said, 'No, it was Storm Financial managing that and it has nothing to do with us.' The buck-passing went on through the inquiry, but the fact was that the stock market crashed in the global financial crisis and thousands of people involved in Storm Financial were in serious difficulty. I think it was about $4.6 billion in total—a hell of a lot of money. So that was the end result.

Have we learned from that? From that inquiry the main recommendation was that financial advisers have the interests of their clients first and foremost as their fiduciary duty of care. Well, that is obvious; that is how it should be, but I do not know if it always has been like that. We hear of cases where financial advisers in selling their products were recommending products on which they might make better commission—the products from the bank or institution that they represent—even though the products might not perform as well as others. They were doing that because the particular salesman or saleswoman got the best commission. That is why that recommendation was there in the report, so that they must put the interests of their client first, not put first what is best for the person selling the product. That is obvious, and there are many other recommendations.

As I said, the problem was not only about the advice, with the Storm case, but about the product. The product was bad. It was leveraged too high. It was geared too high. It was just amazing that when the share market went up and the book value of those who invested in it went up they got a call from the bank or from Storm: 'We can lend you another couple of hundred thousand dollars. You can buy more shares. We will gear you up more.' That is what the people did as they followed the advice. Of course, when it all crashed it crashed in a big way, putting tremendous financial pressure on those people. Many of those people are in the later years of their life. They are mainly 65 to 75 years old. Some are even a lot older than that. It was a tragedy.

Given the PJC recommendations, it was a good inquiry. It was a learning experience for me. I will quote from the committee report:

The committee is firmly of the opinion that, for at least a subset of Storm's investment clients—namely, clients on average incomes at or near the end of their working lives—the advice to engage in an aggressive leveraged investment strategy was clearly inappropriate. … Some of Storm's clients did not understand, or fully understand, that by borrowing against the equity they had in their family home they were, effectively, putting their ownership of that home at risk.

The committee worked very hard and came up with very strong recommendations. As I said, the key one was that financial advisers must put their client's interests ahead of their own. The government was asleep at the wheel—again, surprise, surprise! Instead of implementing these very good recommendations, its reform package has been a mish-mash. Over the past couple of years there have been many changes to the proposed regulatory arrangements under FoFA to the point where everyone is confused and uncertain as to what the government's plans actually are.

Let us talk about upfront fees. Take seeking financial advice. I am one of those people who usually learn the hard way. I remember that a couple of years ago I was concerned about the market in considering my little bit of superannuation so I said I would put it on fixed interest. So I got in touch with AGEST, who handle our superannuation, and to me 'fixed interest' was fixed interest in the bank so you eliminated the risk of the market. But I found out only afterwards that 'fixed interest' was actually to do with the bond market and when interest rates went up you lost money, so that would be another experience. Luckily, I did go into the bond market about eight weeks ago with my little bit of super, and we have seen interest rates falling so it is probably the first time in my life that I have picked it right.

If we are going to have upfront fees I hope that does not scare people away from financial advice. We all do our own job. You do not expect people running small businesses, working on machinery, working on farms or working in supermarkets to be experts on where to invest their money when they get a little nest egg set aside. Those people who self-manage retirement funds, who have taken out their superannuation and manage their own money, need good, strong advice; otherwise, it can all turn sour. As I said, this happens too often when people are in their later years. My concern is the upfront fees. If you seek some advice from someone and say, 'I've got $200,000. Where will I invest it?' they can say, 'Hang on. First of all, your fees are $2,500.' You say, 'What?' and they say, 'Yes, it's $2,500 to spend a day with me and draw up your plan et cetera.' I am concerned that people will walk away and say, 'I'm not paying $2,500 to seek some financial advice,' when in fact it could be the best advice they ever get in their lives. That is concerning; however, that is the situation.

There is no doubt that people will leave the financial advice industry. The unemployment stack will grow. I want to bring up a few points for you, Mr Acting Deputy President Marshall, because I know you are very interested in this topic. In meetings I have had with industry stakeholders the biggest concern was the opt-in provision, which is a mandatory requirement on consumers to re-sign contracts with the financial adviser on a regular basis, every couple of years. This will lead to more red tape for financial planners and consumers. Does it surprise anyone that the Labor government is introducing more red tape? That would not shock anyone—people listening on the radio, people watching on television. It would not shock anyone that this government is introducing more red tape.

The coalition supports the introduction of the best-interest duty for financial advisers into the Corporations Act. Unfortunately, this government, as in many of its programs, cannot seem to get the definition correct. We support the banning of conflicted payment structures, such as a product commission, within the financial services industry, but the Ripoll inquiry did not make any recommendation to ban commissions paid for risk insurance products. Banning commissions on risk insurance products will increase costs for consumers, remove choice and leave many people worse off, particularly small business people who self-manage their super. We agree that Australians who receive automatic risk insurance within their super fund without accessing any advice should not be required to pay commissions, but we do believe that those who require and seek advice about risk cover inside or outside the super fund should have the same opportunity to choose the arrangement that is most appropriate for them.

The legislation as it currently stands need a lot of improvement, and the coalition will be moving amendments to make it better for Australians. It is too late for those people who were devastated by the collapse of Storm Financial and others, but we are committed to making it better for all Australians. Amendments will be moved by my colleague Senator Cormann, who I think has done a magnificent job in this sector. He has met with industry, he has been with the stakeholders, he has listened. He has learnt so much and he is all over the subject. No doubt Senator Cormann will be putting forward amendments which will make this legislation better. If it is not made better, no doubt the coalition will not support it. We talk about debating and making legislation better in the Senate. That is what this place is for. I hope the guillotine does not drop on this very important bill. Let me quote something that Senator Chris Evans said. It is a very important quote, I feel. On 14 June 2005 Senator Chris Evans, Leader of the Government in the Senate, said:

... the Senate has both a right and a responsibility to debate and review legislation—this legislation and all other legislation that comes before the parliament. That is what Australians expect from this chamber.

They were the magic words of Senator Evans. I will give quote something else from Senator Evans. On 14 June 2005 he said:

It is our responsibility to provide an alternative view of legislation, to speak out when we think things are wrong and to fight for those people whose interests we represent.

Let us hope that Senator Evans sticks to those words today.

I was reading in the paper how the Prime Minister, Ms Gillard, has been over in Mexico at the G20 giving financial advice. What grounds does she have to advise other countries on how to run their country? Perhaps she should go to the website of the Australian Office of Financial Management and have a look at last Friday's $231.8 billion gross debt that this government has built at a rapid rate of knots. You must be concerned about where it is going to end up. In the budget the government has raised the ceiling to $300 billion. What is this about—mortgaging away our children's future? And here we have the Prime Minister giving economic and financial advice to the G20 in Mexico. How ironic! Have a look at our financial management here as far as managing the money goes, which is the job of this place to do on behalf of the Australian people. There was a $231.8 billion deficit last Friday, growing at a rapid rate of knots.

This is important legislation. It needs to be debated. I hope the Greens look at the amendments that Senator Cormann will present to this chamber, which make this legislation better—a lot better. I will back Senator Cormann's knowledge on this issue way before anyone in the Greens when it comes to financial management and regulation, and I hope the Greens show some common sense when these amendments come before this place so we can make this legislation better for the millions of Australians for a long time ahead. If not, no doubt we will tell Australians what the Greens actually think about making bad legislation better.