James Paterson (Victoria, Liberal Party) Share this | Hansard source

I rise also to make a contribution on the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019. I'll echo some of the points made by my coalition Senate colleagues already in this debate, but I have another couple of observations that I would also like to add about the process of implementing the recommendations of the royal commission, the pace at which we are doing it and also some of the concerns raised by industry stakeholders about this and other aspects of the royal commission recommendations.

As other senators have noted, this is an amendment to the Corporations Act to bring to an end the grandfathering that was put in place previously when conflicted remuneration was banned for financial advisers. It was previously paid to financial advisers by product issuers in a way which could have influenced the advice that they provided to their clients about the product. When it was banned in 2013, already existing arrangements to pay this remuneration to financial advisers was grandfathered so that the ban did not apply to them.

As a general principle, I think that when we make changes in this place to existing arrangements grandfathering is a good thing that we should largely adhere to. It is a fair thing to do for people who have lawfully entered into arrangements consistent with the policies of the day, in good faith, and if we are changing the rules on them it's fair that those rules apply prospectively and not retrospectively. In this case, however, the act of banning conflicted remuneration for future products but leaving it in place for some grandfathered products has led to a perverse set of outcomes. If you are a financial adviser and you have clients who you are receiving ongoing commissions from for products you have advised that they take up, you have an in-built incentive to maintain their existing patronage of those products even if newer and better products come on to the market. You are disincentivised from drawing their attention to new products because it will cost you money.

In this case grandfathering has led to some perverse outcomes and that's why it came in for such sustained and heavy criticism from the royal commission, and such a clear recommendation from the royal commissioner, because it presents that ongoing conflict of interest that if the government didn't take action to resolve would lead to ongoing perverse outcomes that are not in consumer interests. We do not want retail clients to be entrenched in older and inferior products just as a result of maintaining the best interests of their financial adviser, rather than their client. That's why this is a key recommendation of the royal commission and that's why the government is swiftly bringing an end to it. As the royal commissioner himself said, 'There can be, and is, no justification for maintaining the grandfathering provisions,' and the government agrees.

These reforms will benefit customers, because it will finally completely align adviser and client interests, so that retail clients can receive higher quality advice and cease paying higher fees to fund this ongoing grandfathered conflicted remuneration. This bill not only fully implements the royal commission's recommendation but actually goes further in a way which I will touch upon in a moment. But we believe that ending these conflicted remuneration arrangements will lift the quality of advice and provide better outcomes for customers.

I mentioned that, in some respects, this bill goes further than the recommendations of the royal commission—and, I believe, in a positive way. The government recognises it is essential that these arrangements are brought to an end as soon as possible. That's why an end date of 1 January 2021 was chosen—which achieves this outcome but also recognises the fact that ending this grandfathering is not a straightforward exercise for all financial advisers and will have a significant impact on the industry. There are some advisers and product issuers who will need to renegotiate their remuneration arrangements to remove these conflicted payments, and they may also need to renegotiate their arrangements with their clients to adjust for the fact that they are no longer going to be receiving this as compensation for the advice that they provide them.

So some product issuers will have to build new systems to pass through the benefits of previously grandfathered commissions to the retail clients. However, we do know that there are some players in the industry, due to the nature of their business or their size or scale, who have the capacity to move quickly and to end these practices more quickly. The government strongly encourages any player in the industry who is able to do that to do so as soon as possible. In doing so, we want to make sure that, if they do bring it to an end prior to the 1 January 2021 start date of this legislation, those rebates that would otherwise be collected by the adviser are in fact passed through to the clients and not held by the adviser. That's what we've asked ASIC to monitor and report on industry actions for the period from 1 July 2019 to 1 January 2021. As chair of the Joint Committee on Corporations and Financial Services, which has oversight of ASIC, I will be asking ASIC about their progress in observing this and making sure that advisers are adhering to this.

I want to turn now to the government's implementation of the royal commission recommendations more broadly. As has been noted, there were 76 recommendations and the government is in fact taking a number of additional actions on top of the 76 that were recommended, some of which were recommended to government and some of which were recommended to industry. By the end of this year, the government has committed to ensuring that 20 of those commitments—about one-third of what the government has agreed to do—will be implemented or have legislation before the parliament. By the middle of next year, we commit to ensuring that 50 of those commitments—which is close to 90 per cent of the government's commitments—will have been implemented or have the legislation before the parliament. By the end of 2020, all recommendations that the government has promised to take action on will be introduced to parliament.

That is a very, very swift pace of change. This is incredibly complex, extensive legislation that requires very careful drafting and consultation to ensure that it achieves its intended objectives. Doing so in such a swift way is something that the community certainly expects of us. The government needs to do it quickly but should not do it any more quickly than is necessary to implement it correctly. We do no-one any favours if it is rushed and not done wisely. One of the important aspects of the government's commitment is that in three years time, when all of these recommendations should be legislated and implemented, the government will establish an independent review to assess the extent to which changes in industry practices have in fact led to improved consumer outcomes and whether any further reform is necessary. Ultimately what we are aiming to do is improve outcomes for consumers. It is vitally important, when we engage in such extensive and considerable change, that we ensure that the intended objectives are being met and achieved.

Similarly, there will also be a review of the regulators' actions at the same time. That is because one of the findings of the royal commission was that not only did our financial institutions fail us; our regulators failed us, and our oversight mechanisms for our regulators were insufficient and inadequate. The new oversight mechanisms that the government is establishing, including an expert financial regulator for our other regulators, will be able to conduct a review of their conduct.

Finally, many of us in this place have received representations from the industry about this change. They have revolved around a couple of concerns. One is the time line for this change and the other is the impact of these changes on customers who might not otherwise be able to afford up-front financial advice and may have to pay out of pocket to do that. I don't doubt the sincerity of the industry in raising these concerns with the government. But faced with such clear recommendations from the royal commission, and the findings of the royal commission that these practices will lead to substandard and in some cases unethical advice to clients, we as a government have no choice but to implement it and implement it swiftly—as we are doing. What I would say to industry is that if you are right, if you believe that this will lead to unintended consequences, then the burden is on you to collect the evidence of those unintended consequences occurring in fact and present it to government as part of the in-built review mechanism that I referred to that will take place in about three years time. That will be an opportunity to demonstrate, if the parliament has erred in the view of the industry, that there is in fact hard evidence of that happening, and we will be able to take action to address that.

I think we in this place should all share a concern—and I've heard other senators mention this—that, as a result of not only changes like this but also the cumulative effect of all the changes that are happening in this space, we don't make financial advice unaffordable and inaccessible for ordinary customers. Wealthy people have always been able to, and will always be able to, afford financial advice. We don't need to spend too much time worrying about their capacity to get it. But, in an era when we know financial literacy is not as strong as we would like it to be and when financial products are becoming increasingly complex, it's vitally important that all Australians, no matter what their means, have access to really good, high-quality, affordable financial advice. We certainly wouldn't want, as a result of unintended consequences of changes like this, financial advice becoming inaccessible or unaffordable. I think that's a goal which we all share and which we're all mindful of, and I'm sure, going forward, that it will be a key aspect of the review mechanism that is put in place. So, with that, I commend the bill to the chamber.