Nick Xenophon (SA, Independent) Share this | Hansard source

The Future of Financial Advice reforms legislation under the previous Labor Government was not perfect, but it was one I supported because it addressed some yawning gaps in protections for consumers of financial advice—gaps which turned into a chasm of financial disaster for too many Australians. Scandals involving Storm Financial, the Commonwealth Bank's financial planning arm, Timbercorp and Opes Prime have led to massive losses by more than 100,000 Australians, including many who lost their life savings.

Who wants to go back to the bad old days which saw planners inherently conflicted between earning commissions and giving advice in the best interests of their clients? Last week the government released details of its reforms to FoFA, and the Acting Assistant Treasurer has indicated he wants the measures implemented by regulation. This is not good enough. A legislative framework is preferable to relying on regulations, and I look forward to the release of the interim report of the Financial System Inquiry, headed by David Murray, which is due on 15 July. I also look forward to the release later this week of the report of the Senate Economics References Committee inquiry into the performance of ASIC, partly in relation to misconduct at Commonwealth Financial Planning Ltd.

Experts such as Dr Pamela Hanrahan of the Melbourne Law School have called for better targeted reform of not only financial advisers but also custodians, trustees, responsible entities, brokers and dealers. Dr Hanrahan, a former regional commissioner of ASIC, suggests ASIC should raise the bar for the industry by creating a register of dealers, brokers and advisers that are properly qualified and accredited by a professional body with proper disciplinary powers. She suggests advisers must accept a minimum four duties: a duty of care and diligence; an undiluted duty to act in the best interests of clients; a duty to avoid conflicts of interest (including on accepting conflicted commissions); and a duty of full disclosure.

Dr Hanrahan's approach appears sensible. Scrapping the best-interest requirement will only make consumers more vulnerable to being ripped off, so the government is wrong to abandon that test. In addition, the government has left the door open to big institutions earning commissions off some quite complex products—so long as they don't call it 'financial advice'. The distinction between services and products that do and do not attract commissions becomes pretty meaningless—customers can simply be referred to another department, and the institution will retain the business while another staff member earns the commission. Leaving the door open in this way is also a retrograde step, as is the move to wind back 'opt-in' requirements for advisers. If the industry has nothing to hide from its customers, then it has nothing to fear from requirements to get written confirmation that their services continue. This is important because two-thirds of financial services clients are completely passive, and may not even know they are paying advisers.

The government has already gone back to the drawing board with its ill-considered first round of proposed FoFA reforms. I suggest it needs to go back again in a way that will protect consumers and will best avoid any future financial scandals.