Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Hansard source

I will read from the Senate inquiry report what the original aims of FoFA were:

…to improve the quality of financial advice while building trust and confidence in the financial advice industry through enhanced standards which align the interests of the adviser with the client and reduce conflicts of interest.

So they were pretty simple: to restore confidence and trust in the financial planning industry. I agree with Senator Williams when he says there are a lot of good smaller financial planners out there. There are. These laws were designed to restore trust and confidence in their industry and to grow their industry—to get more people seeking the provision of financial advice. The FoFA laws were not designed to protect the profits of big banks and to raise red tape for financial planners. At the end of the day, they were designed to strike the right balance on what was necessary to get more people in this country seeking financial advice, interested in getting financial advice and financially literate so that they can understand the balances they get at the end of the year on their superannuation.

The problem with getting your annual statement is that a lot of people do not look at it properly or they do not understand it. And a lot of them do not have ongoing relationships with their advisers. In smaller financial planning firms, like the ones I met with in Tasmania, there are a lot of good people that do have good relationships with their clients. You can see that. It is really obvious. But they are fee for service—they charge a set fee and they provide advice. What is wrong with the idea of putting in an opt-in, a box that needs to be checked at the end of every two years, along with your annual statements? What is wrong with actually asking clients to have a look properly at their statements and make a simple decision: 'Do I want to continue with this financial adviser? Am I happy with my returns? Should I seek an appointment with my financial adviser?' What is wrong with encouraging that direct interaction?

You may say that it adds to the costs of the provision of financial services. The Greens felt very strongly, from the evidence that we got from attending the inquiry and meeting over a dozen financial planners in Tasmania, that there is no evidence that this increases the cost of provision of financial services. It may be the case in the future, but, at this point in time, it is all conjecture and speculation. I accept there are some valid concerns that this may increase red tape, but there is no evidence based approach to this, because these FOFA reforms are either very new or they have not been introduced yet.

But we have a government introducing a weakened version of the original FoFA laws specifically to support the big banks. The evidence was there in the Senate inquiry. It is black and white. The Australian Bankers' Association got up and said that they had done a deal with the government to have these laws changed, to have these amendments brought in before 1 July, because that was what they had agreed to in their discussions with the government. Senator Bushby was there sitting next to me when it occurred. They also said they had had discussions with the previous government about getting these changes in before 1 July. They talked about compliance costs and said, if they did not get the changes delivered by 1 July, it would significantly enhance their compliance costs. But the real elephant in the FoFA room is not the fact that the FoFA laws in themselves, without the amendments, would increase compliance costs of financial planners or the big banks; the real elephant in the room is that the big banks especially, and the big financial services companies, believed that the FoFA laws, in their original intention, would impact on their profits. That is it.

When we talk about culture, it was very disappointing to see the previous head of the Commonwealth Bank using Senator Cormann's own slogan, 'a few rotten apples'. That is not the case. What the FoFA laws were designed to do—and I go back to it again—was to increase confidence and trust in the financial services industry, by changing culture. I used to teach a case study to my first-year finance students about the collapse of Barings Bank. Some of you may have seen the movie Rogue Trader. When Barings collapsed, it was one of the biggest financial scandals in market history—a couple of billion dollars wiped off, a bank sold for next to nothing. It was caused by a rogue trader. At least, that is what you think if you see the movie and you do not understand the depth of corporate culture. One guy, Nick Leeson, got away with trading on the one hand and running the compliance of the office on the other hand. He was writing enormous profits for Barings Bank over a long period of time and he was doing a lot of dodgy stuff. The reason it never got picked up by Barings management until it was too late was to do with culture. They were a profit-seeking organisation and he was their star trader, writing tens of millions of dollars worth of profits every year. But nobody stopped to ask the simple question: 'How is it possible to continue to generate these profits given the risk-return of the industry he is operating in?'

That is exactly what we uncovered in the ASIC inquiry around the Commonwealth Bank. Their star financial planner, Don Nguyen—who has been well and truly canvassed in Four Corners and other programs—was writing a lot of business for Commonwealth Bank. The parallels are uncanny. No-one was asking the question: 'How is it possible that this guy'—and not just him; there were others—'managed to write so much business and was their star financial planner for so long?' As it turned out he was committing fraud and acting unethically. He was putting clients into products that they did not know that they were being put into, because he was writing income and generating profits for the banks. Banks have moved into the financial planning industry for good reasons: it diversifies their risk return, it generates non-interest income where banks have traditionally made their money and it generates billions of dollars a year.

Looking across the FoFA laws, particularly the FoFA amendments, and focusing on this idea of conflicted remuneration, I made it very clear at the very first Senate inquiry I went to that we should be using the words 'financial incentives' and that this idea of commissions or conflicted remuneration was too narrow. It is that sales incentive and that culture in vertically integrated large financial service organisations that generates this culture of sales—selling product under general advice to customers. You could argue that that is not a bad thing—and I know Senator Bushby and the coalition probably do argue that a bank should have a right to make profits by selling financial products to customers—but think back to what these FoFA laws were originally designed to do. After a long period of consultation and a long history of financial collapses following, especially, the GFC—and we have seen more stuff wash through our Senate inquiry since then—this series of laws was designed to restore trust and confidence. The fact that consumer groups such as CHOICE and National Seniors Australia do not believe that these FoFA amendments strike is very serious.

The politics of this is very interesting. I hear in this chamber, and I heard it in the Senate inquiry and I actually got it from financial planners, that this is somehow a union industry superfund versus the banks issue. That is not the case. This is about protecting consumers and whether you put protecting consumers ahead of allowing banks to make more profits. That is really what it comes down to. In our dissenting report to the Senate inquiry we said that the Greens believe that all forms of conflicted remuneration should have been banned—not rebadged as Senator Cormann seems to have done. But we believe the other four amendments, such as opt-in and best interest, should be kept and studied and reviewed after five years to see whether they are adding to compliance costs and uncertainty in the industry. There is no evidence that that is the case now; there are only projections and concerns.

If we were bringing these laws in to protect consumers of financial services in this country, we should have at least given them a go. I believe that this sneaky attempt to bring in regulations the day before 1 July needs to be repealed. We need to bring back to this parliament legislation that can be debated in here so that we—including the new crossbenchers, who are now part of this—can have a good, close look at it. We need to go back to the start and look at whether we have struck the right balance between protecting consumers or protecting the profits of big banks that make billions of dollars of profits a year from selling products to clients.