David Bushby (Tasmania, Liberal Party) Share this | Hansard source

Senator Bishop, in his 10-minute speech, referred to the absolutely heartbreaking financial collapses of a number of financial advising firms and the devastating effect that undoubtedly created for the people whose money was lost. And he canvassed a number of reasons for why that happened. Indeed, the original Ripoll inquiry, as it is now known, had as its catalyst these collapses. The report of that 2009 Ripoll inquiry was in fact bipartisan. All members of the committee in that report worked together to come up with a very solid piece of work which made a number of recommendations as to how we could work in this place to minimise the risk of similar collapses occurring in the future.

But, when FoFA legislation was put forward by the previous government, it was not a particularly accurate reflection of the recommendations from the Ripoll inquiry. It went much further. As a result, rather than a bipartisan approach being available at that point, the coalition felt it needed to put in a dissenting report so that it could more accurately reflect the findings of the Ripoll inquiry, which had conducted the most thorough in-depth investigations of these issues there possibly could have been. As I mentioned, the FoFA legislation went much further.

It is my proposition that, if we can get the changes to FoFA that we are now proposing through, the FoFA legislation that would then be in place would be a much truer and more accurate reflection of the recommendations of the original Ripoll inquiry than what we currently see.

At the recent ASIC inquiry hearings for the Economics References Committee, the chair of the Australian Securities and Investment Commission, Greg Medcraft, noted that only about 20 per cent of Australians are in a position to receive or are receiving proper financial advice. In his view, at least half of Australians should be enjoying the benefit of detailed and thorough financial advice. But there is no possibility whatsoever of achieving this aim unless the advice that is available to Australians is both accessible and affordable.

As in all regulatory matters, you need to strike the appropriate balance between imposing regulations to protect consumers and making sure they are accessible and affordable. Our contention is that the previous government's FoFA legislation did not strike that appropriate balance. On the contrary, it worked quite strongly to make financial advice that Australians need—I repeat: the advice that far more Australians need than are currently receiving it—far too expensive and less likely to be actually accessed.

I have a couple of key points. First, I want to make it clear that we are not abolishing FoFA. On the contrary, we are just fiddling at the edges, making improvements to the way that it works in line with our election commitments. As I mentioned, our election commitments are based on the coalition members' findings in the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the FoFA bills and more accurately reflect the outcomes of the Ripoll inquiry.

It is important also to note that we are not abolishing the best-interest duty; we are keeping it. But what we are doing is ensuring that there is a greater certainty for both consumers and financial advisers on how the best-interest duty will operate. It is also important to note that we are reintroducing sales commissions or conflicted remuneration for financial advisers.

On conflicted remuneration and commissions, I will make a couple of points. Mr Chris Bowen said recently a number of times—and I think he said it again this morning—that balanced scorecard payments are the same as commissions. I can tell you they are not. A balanced scorecard arrangement exists where an employee receives incentive remuneration that is calculated by reference to both volume based and non-volume based factors; for example, customer satisfaction, meeting training requirements and compliance targets et cetera. Importantly, that incentive payment is only allowed where it does not conflict advice and is only a small part of the overall bonus. And that is consistent with the original legislation introduced by Mr Bill Shorten when he was financial services minister. This is what Mr Shorten said in his second reading speech on FoFA on this issue on 24 November 2011:

For the most part, advisers will not be able to receive remuneration—from product issuers or from anyone else—which could reasonably be expected to influence financial advice provided to a retail client.

If an adviser is confident that a particular stream of income does not conflict advice, then these reforms do not prevent them from receiving that income. For example, in the case of the receipt of income related to volume of product sales or investible funds, there is a presumption that that income would conflict advice. However, this is a presumption only, and if the adviser can demonstrate that the receipt of the income does not conflict advice then such remuneration will be permissible under the bill.

That was from his second reading speech on 24 November 2011. It was also reflected in Bill Shorten's explanatory memorandum to his FoFA legislation. It said:

However, if it can be proved that, in the circumstances, the remuneration could not reasonably be expected to influence the choice of financial product recommended, or the financial product advice given, to retail clients … the remuneration is not conflicted and is not banned.

There was also an example of a payment under a balanced scorecard arrangement that could rebut the conflicted remuneration presumption in the explanatory memorandum.

Our proposal in this respect gives effect to that proposition contained in Mr Shorten's explanatory memorandum and second reading speech—nothing more and nothing less. The proposed provision provides business with certainty that they can continue to remunerate their employees under a balanced scorecard arrangement where that payment does not conflict with advice, as was envisaged by the original legislation and as enunciated by the then Assistant Treasurer and now Leader of the Opposition. Whilst the balanced scorecard payment provides an incentive for the employee to make more sales, it forms only a small part of the employee's total remuneration, and the employee needs to have satisfied a range of other criteria, such as customer satisfaction, to be eligible for the bonus.

Furthermore, the bonus is a one-off payment; there is no ongoing payment in relation to past sales—that is, there are no trailing commissions. By contrast, a commission is directly based on the number of products sold and no other non-volume related factors. The commission payment would in the past have been ongoing—that is, a trailing commission. Neither is the case with balanced scorecard payments.

As the acting Assistant Treasurer noted in a published editorial piece over the last few days,

Finally under Labor's FoFA legislation it was always envisaged that benefits to employees calculated on the volume of sales were permissible under a so-called balanced scorecard approach.

In a fuller version of the article, Senator Cormann wrote:

Labor in government, however, never got around to properly implementing that part of their stated intention through regulation. Consumer protections are inherent under this approach provided for under our legislation because there are clear criteria to ensure that any benefit does not directly influence advice. If, contrary to our clear expectations and our intention not to bring back conflicted remuneration the personal advice or for advice is providing general advice, developments in the market warrant our intervention. It could and would be addressed very quickly by relevant regulation. We don't believe it will be necessary.

In relation to the general advice exemption for employees of product advisers, this is about levelling the playing field across the financial services market after the special deals that Mr Shorten did with industry funds only.

Incentive payments for employees of product providers to provide general product advice are not conflicted remuneration. Their application is very limited: namely, to employees selling products issued or sold by licensees who have not provided any personal advice to the retail client in the last 12 months. Again, this is not intended to open the door for a return of conflicted remuneration, personal advice or advisers providing general advice; this is about restoring some competitive neutrality in the market as part of our efforts to ensure that we have the right balance between appropriate levels of consumer protection and affordable access to high-quality advice. We want consumers to continue to benefit from robust competition between both different business models and different businesses across the financial services market.

To summarise, the government continue to support the underlying goals of the FoFA reforms and we do not propose to change the vast majority of those reforms, but we do believe that the FoFA reforms went too far in imposing red tape and additional costs on business and, of course, those additional costs will be passed through to the consumer. Analysis by Treasury estimates that the government's amendments, if passed, would save the industry an average of approximately $190 million a year with further savings of $90 million in implementation costs. Those savings will, of course, be passed on to clients and improve the affordability and access of financial advice to Australians. The government is committed to amending the FoFA legislation to reduce these costs and make financial advice more affordable to consumers and has undertaken substantial consultation on the amendments and will continue to do so in the coming months.