Jacinta Collins (Victoria, Australian Labor Party, Parliamentary Secretary for School Education and Workplace Relations) Share this | Link to this | Hansard source

I table two revised explanatory memoranda relating to these bills and move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows—

Corporations Amendment (Future of Financial Advice) Bill 2012

Today I introduce a bill which will amend the Corporations Act 2001 to better protect consumers. This bill improves the capacity of the corporate regulator, the Australian Securities and Investments Commission (ASIC), to act against unsatisfactory persons and it introduces a requirement for advisers to seek their clients' agreement every two years to continue to charge ongoing fees.

The initiatives in the bill implement part of the government's Future of Financial Advice reforms which is its response to the Parliamentary Joint Committee on Corporations and Financial Services' Inquiry into financial products and services in Australia that was established in the wake of collapses such as Storm Financial. The recent TRIO collapse is also relevant. This bill represents the first part of the FOFA reform package.

Importantly, the bill includes two key measures to enhance consumer protection and instil more trust and confidence in financial planning. Ultimately these reforms will encourage more Australians to seek financial advice.

Firstly, the bill sets in place arrangements which require financial advisers to obtain their retail clients' agreement every two years in order to charge them ongoing fees for financial advice (that is the opt-in requirement). Currently, there are some clients of financial advisers that pay ongoing fees for financial advice who receive little or no service. Some clients are also unaware of the amount of those fees or continue paying them because they are disengaged. This scenario arises both where the advice fee is paid via a third party product commission, and directly from the client to adviser. This is occurring despite the fact that most ongoing advice contracts allow a client to 'opt-out' at any time.

This measure promotes the active renewal by the client to ongoing fees for advice, with opportunities for them to consider whether they are receiving value for money. It also assists disengaged clients from paying ongoing fees that they don't need to be paying.

The current disclosure of ongoing fees at engagement in the statement of advice is not a sufficient safeguard, because the disclosure is not ongoing. A client might be paying fees that were outlined in a statement of advice they received from an adviser years ago.

The basic requirement is that advisers must obtain their clients agreement to renew at least once every two years.

The renewal notice empowers a client to renew or end the ongoing fee arrangement. If the client does not respond to the renewal notice, they are assumed to have terminated the advice relationship and no further fees can be charged by the adviser. If an adviser breaches by overcharging after a client has not opted in, they could be subject to a civil penalty. The maximum amount of this civil penalty which is lower than others in the Corporations Act, reflects the tailoring of the penalty to the nature of the offence.

There is considerable flexibility as to when and how advisers obtain the renewal notice. The bill also provides additional grace periods if a client inadvertently opts out by not responding to the renewal notice in time.

The disclosure notice is an important supplement to the renewal requirement. It includes fee and service information about the previous and forthcoming 12 months, and assists clients to understand whether they are receiving a service from their adviser commensurate with the ongoing fee that they are paying.

The renewal obligation applies to new arrangements after 1 July 2012, but does not apply to existing clients of financial advisers. However the annual disclosure obligation will apply to all clients of advisers.

Overall, the measure is about the focus being on the client, and what is in the client's best interest. This is line with the existing practice of many advisers. Not only is this the fair thing for the client, it is also professional best practice.

There has been a lot said about the cost that this measure will impose on financial advisers, and with this a variety of estimates of that cost. It is a matter of fact that for advisers that charge on a pure fee-for-service basis (that is, per hour or per piece of advice), the renewal measure will impose no cost whatsoever.

It is true that for advisers that have no contact with particular clients for a period of more than two years, then opt-in will impose a cost on that adviser either in chasing up the client or in losing the business altogether. However, it is not fair to characterise this latter case—the cost of losing business—as a new cost. The cost exists in the system right now, the only difference being that it is the disengaged client—rather than the disengaged adviser—that currently bears the cost.

This measure remedies that situation and ensures that the client, and their retirement savings, comes first.

Secondly, the bill enhances the capacity of ASIC to supervise the financial services industry and protect investors.

Providers of financial services must be licensed by ASIC as part of facilitating investor confidence that those persons are competent and are of good fame and character. Licensees also have representatives who act on their behalf.

ASIC has powers to protect the public, including powers to apply a variety of administrative remedies against a licensee (or its representatives) that breach the law.

During the PJC Inquiry, ASIC raised concern with its ability to protect investors by restricting or removing unscrupulous operators from the industry. A number of factors were impacting on the exercise of ASIC's powers, including decisions of the Administrative Appeals Tribunal (AAT) relating to when someone 'will' breach the law, the difficulty with removing individuals given the focus on licensees in the Corporations Act and the lack of scope for ASIC to remove representatives in certain circumstances, such as where they are not of good fame and character.

The changes implement the PJC recommendations in this area and will strengthen ASIC's administrative powers as they apply to licensees and representatives to strengthen the gate keeping function of the licensing regime and extend ASIC's powers to remove unsatisfactory persons from the industry.

The changes to the licensing and banning thresholds include that ASIC can refuse or cancel a licence, or ban a person, where the person is likely to contravene (rather than will breach) the law. ASIC may also remove representatives if they are not competent, of good fame and character or involved in its licensee's breach of the law.

The changes generally align the thresholds for licensing and banning with similar provisions under the National Consumer Credit Protection Act, which ASIC also administers.

As with the exercise of any administrative powers, an ASIC decision will be based on the individual circumstances of each case, but would generally take account of factors such as the nature and seriousness of the misconduct, the internal controls on the licensee or the person and the previous regulatory record of the person.

Existing review rights in relation to ASIC decisions about licensing and banning continue to apply, including to the AAT.

These changes should result in ASIC exercising its administrative powers more efficiently and effectively to protect investors.

In summary, the measures in this bill support the key public policy objectives of FOFA to improve consumer trust and confidence in the financial advice they receive, and improve professional standards.

Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012

Today I introduce a bill to amend the Corporations Act 2001 to bring into effect significant reform to the regulation of financial advice, which in turn will enhance trust and confidence in the sector.

Great nations do not remain great by pretending they can stay as they are. For every generation of Australians, it doesn’t matter if it’s in business or the community or in politics or the media, it falls to every generation to leave the place better than we found it.

Financial planners and those who work in financial services industry, implicitly, if not explicitly, understand that this change is an inevitable part of life. I believe that most financial planners see it as part of their role to make their dealings with their customers such that after having dealt with a planner, they’re better off than if they had never dealt sought financial advice.

This is why I’m a believer in the importance of financial advice, because we must endeavour in whatever we do to leave those in our families, in our immediate families, those in our streets, in our neighbourhoods, in our towns, in our communities ideally better off than before they had transactions with us. I believe that rule applies in business, in community, in sport and in politics.

The initiatives in the bill implement part of the Future of Financial Advice reforms, which forms the government’s response to the Parliamentary Joint Committee on Corporations and Financial Services' Inquiry into financial products and services in Australia. This bill represents the second of two tranches to implement the FOFA reform package, with the first tranche being introduced into this House last month.

The bill includes two key measures representing integral components of the reforms which go to the heart of boosting professionalism in the financial advice industry.

Firstly, the bill imposes a statutory best interests duty on financial advisers. As its name suggests, the duty requires advisers to act in the best interests of their clients, and to put their client’s interests ahead of their own.

The best interests duty is a legislative requirement to ensure the processes and motivations of financial advisers are focused on what is best for their clients. It is true that this will ultimately lead to better advice in many cases, but first and foremost it is about regulating conflicts, not the intrinsic quality of the advice provided.

The best interests duty does not require that advisers give the best advice. It does not invoke punishment if, with the benefit of hindsight, the advice does not prove to be perfect. It is not about guaranteeing clients the best investment returns on products.

In being able to satisfy the duty, the Bill strikes a balance between certainty and flexibility for the adviser. The duty requires the provider of the advice to take steps that would be reasonably regarded as being in the best interests of the client, given the client’s relevant circumstances.

In other words, discharging the duty will be relatively simple in some situations, and more involved where the circumstances are more complex.

By the same token, for the adviser that wants certainty around compliance above all else, the general obligation is supplemented by a provision setting out steps which, if satisfied, will be deemed sufficient for the adviser to have fulfilled the general obligation.

This is a common sense proposal which is long overdue. For the majority of advisers, this merely codifies how they already go about their business in dealing with clients. For those advisers that have not always put their client’s interests first, this reform will no doubt require them to make changes to the way that they do business. This can only be a good thing, both for the client, and for the advice industry generally.

Secondly, the bill implements a key aspect of the government’s response to the Ripoll Report—a ban on the receipt of conflicted remuneration by financial advisers, including commissions from product issuers.

It is absolutely crucial to the integrity of the advice industry—or any industry involving a high degree of trust and responsibility—that the consumer can be confident that the adviser is working for them.

It is only by ensuring that advisers’ only source of income is from their clients that clients can be sure that the adviser is working for them, rather than a product provider.

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.

But the message is clear—if in doubt about whether certain remuneration will conflict the advice that they provide to their client—the adviser would be prudent to err on the side of caution.

I should note that despite this necessary and overdue measure to eradicate conflicted remuneration, I am encouraged to see that a very large proportion of the industry is already moving away from product commissions and moving to a fee-for-service model. This is not only better for the client, but it is also best professional practice.

The most professional advisers working under a full fee-for-service model, who have already turned-off their trail commissions, will not be impacted by these reforms, except that there will now be a level playing field in the industry as far as legitimate remuneration sources is concerned. Increased transparency of fees will also assist consumers in comparing different advice costs, thereby enabling greater competition across the sector.

Also banned is the receipt of ‘soft-dollar’ or ‘non-monetary’ benefits over $300, with some exceptions around education and professional development. This creates hard obligations in regard to the practice that industry codes require of their members already.

The bill also contains some additional measures in relation to other forms of remuneration.

Advisers will not be able to charge asset-based fees (that is, fees calculated as a percentage of client funds) on client monies which are borrowed. Under the current law, an adviser can artificially increase the size of their advice fees by ‘gearing up’ their clients. While most planners advise their clients responsibly in this regard, such a fee model does not engender the right behaviour and is prohibited under the Bill.

I should emphasise that there is nothing to prevent advisers under this measure from recommending a gearing or borrowing strategy to their client. To the contrary, if this is in the client’s best interests then they should proceed with such a strategy. However, they will need to charge the client for those services in some other way, for example, by charging flat fee or hourly rate. Advisers can continue to charge asset-based fees on client funds that are not borrowed.

The bill also bans volume-based shelf-space fees from funds managers to platform operators. In short, product issuers will not be able to purchase ‘shelf-space’ on a platform menu by paying inflated fees. Platforms should be incentivised to put the most appropriate products on their menus, rather than lease positions to the highest bidder. Payment flows which represent reasonable value for scale will remain permissible.

Finally, while these measures around remuneration are important, they represent a large change to the industry and to individual businesses. It is for this reason that existing trail commission books will be ‘grandfathered’. This means that commissions from business entered into prior to the reforms can continue. Of course, commissions on new business and clients after 1 July 2012 will not be allowed.

This is a just outcome, and provides an adequate cushion for the industry to transition once the new laws are in place.

The government’s financial advice reforms complement our commitment to progressively increase the superannuation guarantee from 9 to 12 per cent. You cannot encourage Australians to save more for their retirement without ensuring the system is operating in their best interests.

In summary, the measures in this Bill support the key public policy objectives of FOFA to improve consumer trust and confidence in the financial advice they receive, and improve professional standards.

Debate adjourned.