Mathias Cormann (WA, Liberal Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

The coalition cannot support the Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012 in their current form. This government has run a highly conflicted and highly ideological anti small business agenda in the financial services space. Not only has this Labor government delivered $174 billion worth of accumulated deficits and $145 billion worth of government net debt; this is of course a government that has choked business in significant additional red tape and pursued a conflicted and self-serving ideological anti small business agenda in the financial services space. If this legislation were to be put to a vote in the Senate in its current form, we on the coalition side of this chamber would not be able to support it, because we stand up both for business and consumers and for sensible, well-balanced, good public policy. When this government is presented with an opportunity to impose more red tape, more complexity and more costs on both business and consumers they will always go that way, in particular if they can help to promote the vested interests agenda of their friends in the union-dominated industry super funds movement, which of course is right behind all the contentious aspects of this legislation.

If passed in their current form, these FoFA bills would unnecessarily increase red tape and the cost of advice for consumers, and they would also reduce consumer choice and competition. In our view the legislation before us today is unnecessarily complex and in large parts unclear. It is expected to cause job losses in the financial services industry. Even according to the government's own explanatory memorandum to this legislation, about 6,800 jobs in the financial services industry will go as a direct result of this legislation. Industry estimates are more in the range of 25,000 to 35,000. According to conservative industry estimates, it is also likely to cost about $700 million to implement and a further $350 million per annum to comply with the legislation. Mr Acting Deputy President Fawcett, you would think that a piece of legislation that will have this impact on an important industry like the financial services industry would have gone through a proper and rigorous policy development process, that the government would comply with their own internal process requirements in assessing the impact that that regulation will have on both the industry and consumers and that the government would properly assess the cost-benefit equation. But of course the government has not done that. The government has failed to assess. The government has failed to go through its own proper processes in assessing the merits or otherwise and in assessing the cost-benefit equation in this legislation.

I repeat: this is legislation which the government itself told us in the explanatory memorandum to this bill will cost about 6,800 jobs in the financial services industry and it is a piece of legislation which conservative industry estimates indicate will cost about $700 million to implement and a further $350 million to $375 million a year to comply with after. If you do not run a proper regulatory impact assessment on a piece of legislation like this, what legislation do you run a regulatory impact assessment on? If you throw your processes out the window for a piece of legislation like this, that process is quite frankly not worth the paper that it is written on.

In pursuing regulatory change, the parliament must focus on making things better, not just more complex and more costly for everyone. The parliament must avoid regulatory overreach where more red tape increases costs for both business and consumers for little or no additional consumer protection benefit. Parliament also needs to be mindful that the bills before us today have already caused an increased concentration of advice providers, driving an entirely undesirable reduction in competition and choice for consumers. The coalition supports sensible reforms which increase trust and confidence in Australia's financial advice and financial services industry by increasing transparency, choice and competition; however, any reforms in this area do need to strike the right balance between appropriate levels of consumer protection and the need to ensure the ongoing availability, accessibility and affordability of high-quality financial advice.

This deeply conflicted and highly ideological anti small business government has failed to achieve the right balance with by FoFA, because it failed to comply with its own most basic internal process requirements around best practice regulation. And of course it was none other than the government's own Office of Best Practice Regulation that made the very damning assessment that these bills do not comply with the government's own best practice regulation requirements. This is highly unsatisfactory, given the complexity and costs associated with, in particular, the contentious parts of the proposed FoFA changes. The coalition recommends that the parliament insist on a proper regulatory impact statement that complies with the government's own best practice regulation requirements. This is why, on behalf of the coalition, I will be moving a second reading amendment that requires the government comply with its own processes in relation to best practice regulation assessments and regulatory impact statements before the Senate considers these bills any further.

David Fawcett (SA, Liberal Party) Share this | Link to this | Hansard source

Senator Cormann, do you wish to move that amendment now?

Mathias Cormann (WA, Liberal Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

Thank you for your guidance, Mr Acting Deputy President. I move the amendment:

(1)   Schedule 1, items 14 and 15, page 4 (lines 14 to 21), omit the items, substitute:

14 Section 960

Insert:

life risk insurance superannuation product has the meaning given by subsection 963B(2).

15 Section 960

Insert:

MySuper product has the meaning given by subsection 963B(3).

(2)   Schedule 1, page 4 (after line 21), after item 15, insert:

15A Section 960

Insert:

personal intra fund superannuation advice has the meaning given by section 964N.

(3)   Schedule 1, item 21, page 5 (lines 18 and 19), omit "a meaning affected by section 964A", substitute "the meaning given by subsection 964A(2)".

(4)   Schedule 1, item 23, page 7 (line 6), after "identified", insert "through instructions, so far as is reasonably possible in the circumstances".

(5)   Schedule 1, item 23, page 7 (line 30), omit "circumstances;", substitute "circumstances.".

(6)   Schedule 1, item 23, page 7 (lines 31 to 33), omit paragraph 961B(2)(g).

(7)   Schedule 1, item 23, page 9 (lines 15 to 22), section 961E TO BE OPPOSED.

(8)   Schedule 1, item 24, page 16 (after line 10), before paragraph 963B(1)(a), insert:

  (aa)   the benefit is given to the licensee or representative solely in relation to the provision of general advice;

(9)   Schedule 1, item 24, page 16 (lines 13 to 18), omit paragraph 963B(1)(b), substitute:

  (b)   the benefit is given to the licensee or representative solely in relation to a life risk insurance product, other than a life risk insurance superannuation product (see subsection (2));

  (ba)   each of the following is satisfied:

  (i)   the benefit is given to the licensee or representative solely in relation to a life risk insurance superannuation product;

  (ii)   the product is not issued to an RSE licensee of a registrable superannuation entity, or a custodian in relation to a registrable superannuation entity, in relation to a MySuper product (see subsection (3));

  (iii)   the benefit is given by, or on behalf of, a person to whom the licensee or representative provided advice in relation to the life risk insurance superannuation product;

(10)   Schedule 1, item 24, page 16 (lines 23 to 26), omit subparagraph 963B(1)(c)(ii), substitute:

  (ii)   the benefit is not for financial product advice in relation to the product, or products of that class, given to the person as a retail client by that licensee or representative;

(11)   Schedule 1, item 24, page 16 (after line 32), after paragraph 963B(1)(d), insert:

  (da)   the benefit is given to the licensee or representative by an authorised representative of the licensee (the purchaser) in relation to the sale of a financial services business by the licensee to the purchaser;

(12)   Schedule 1, item 24, page 16 (line 35) to page 17 (line 18), omit subsections 963B(2) and (3), substitute:

  (2)   A life risk insurance product is a life risk insurance superannuation product if the product is issued to an RSE licensee of a registrable superannuation entity, or a custodian in relation to a registrable superannuation entity, for the benefit of a class of members of the entity or for one or more members of the entity.

  (3)   MySuper product has the same meaning as in the Superannuation Industry (Supervision) Act 1993, as in force on and after the commencement of item 6 of Schedule 1 to the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012.

(13)   Schedule 1, item 24, page 17 (lines 34 and 35), omit "the provision of financial product advice to persons as retail clients", substitute "carrying on a financial services business".

(14)   Schedule 1, item 24, page 17 (line 37), at the end of subparagraph 963C(c)(iii), add ", which must not require the benefit, or the education or training, to be provided in Australia".

(15)   Schedule 1, item 24, page 18 (lines 4 to 6), omit all the words from and including "in relation to" to the end of subparagraph 963C(d)(ii).

(16)   Schedule 1, item 24, page 18 (after line 14), after paragraph 963C(e), insert:

  (ea)   the benefit provider is the employer of the licensee or representative;

(17)   Schedule 1, item 24, page 21 (line 21), omit "a financial services licensee or an RSE licensee", substitute "the responsible entity of a registered scheme, an RSE licensee or the issuer of a managed investment product".

(18)   Schedule 1, item 24, page 22 (lines 11 to 29), omit subsections 964A(2) and (3), substitute:

  (2)   A volume based shelf space fee is a monetary product access payment which is not administrative in nature paid by a funds manager to the platform operator.

  (3)   To the extent that the benefit is not a volume based shelf space fee, a platform operator may accept an investment management fee scale discount on an amount payable or a rebate of an amount paid to the funds manager.

(19)   Schedule 1, item 24, page 25 (after line 7), at the end of Division 5, add:

Subdivision C—Fees for personal intra fund superannuation advice

964J Application to a financial services licensee acting as an authorised representative

     If a financial services licensee is acting as an authorised representative of another financial services licensee in relation to the provision of personal intra fund superannuation advice, this Subdivision applies to the first licensee in relation to the advice in that licensee's capacity as an authorised representative (rather than in the capacity of licensee).

964K Financial services licensees must not accept fees for personal intra fund superannuation advice other than from member to whom advice provided

  (1)   A financial services licensee that is a trustee of a regulated superannuation fund must not accept a fee in relation to the provision of personal intra fund superannuation advice to a member of the fund, other than from that member.

Note:   This subsection is a civil penalty provision (see section 1317E).

  (2)   A financial services licensee contravenes this subsection if:

  (a)   the licensee is a trustee of a regulated superannuation fund; and

  (b)   a representative, other than an authorised representative, of the licensee accepts a fee in relation to the provision of personal intra fund superannuation advice to a member of the fund, other than from that member; and

  (c)   the licensee is the, or a, responsible licensee in relation to the contravention.

Note:   This subsection is a civil penalty provision (see section 1317E).

  (3)   The regulations may provide that subsections (1) and (2) do not apply in prescribed circumstances.

964L Licensee must ensure compliance

     A financial services licensee that is a trustee of a regulated superannuation fund must take reasonable steps to ensure that representatives of the licensee do not accept a fee in relation to the provision of personal intra fund superannuation advice to a member of the fund, other than from that member.

Note:   This subsection is a civil penalty provision (see section 1317E).

964M Authorised representatives must not accept fees for personal intra fund superannuation advice other than from member to whom advice provided

  (1)   An authorised representative, of a financial services licensee that is a trustee of a regulated superannuation fund, must not accept a fee in relation to the provision of personal intra fund superannuation advice to a member of the fund, other than from that member.

Note:   This subsection is a civil penalty provision (see section 1317E).

  (2)   The regulations may provide that subsection (1) does not apply in prescribed circumstances.

964N What is personal intra fund superannuation advice?

  (1)   Advice is personal intra fund superannuation advice if:

  (a)   the advice is personal advice; and

  (b)   the advice is provided by a trustee of a regulated superannuation fund, or an authorised representative of the trustee, to a member of the fund as a retail client; and

  (c)   the trustee holds an Australian financial services licence that covers the provision of personal advice in relation to superannuation products; and

  (d)   the advice relates to the member's interest in the fund and does not also relate to:

  (i)   any other financial product (except eligible insurance (see subsection (2)) in relation to the member's interest in the fund); or

  (ii)   anything mentioned in subsection 765A(1) that would be a financial product but for that subsection (except eligible insurance in relation to the member's interest in the fund); or

  (iii)   any other matter specified in the regulations for the purposes of this subparagraph; and

  (e)   the fund is not a self managed superannuation fund (within the meaning of section 17A of the Superannuation Industry (Supervision) Act 1993).

  (2)   For the purposes of subparagraphs (1)(d)(i) and (ii), eligible insurance is insurance of a kind that the trustee maintains in relation to the members of the fund for the purpose of financing benefits to the members that are within the scope of the Superannuation Industry (Supervision) Act 1993.

964P Meaning of trustee and member of a regulated superannuation fund

     The following expressions have the same meaning when used in this Subdivision as they have in the Superannuation Industry (Supervision) Act 1993:

  (a)   member;

  (b)   regulated superannuation fund;

  (c)   trustee.

(20)   Schedule 1, item 28, page 26 (lines 7 and 8), omit paragraph (jaah).

(21)   Schedule 1, item 28, page 26 (after line 26), after paragraph (jaap), insert:

  (jaapa)   subsections 964K(1) and (2) (financial services licensee responsible for breach of fees accepted for personal intra fund superannuation advice);

  (jaapb)   section 964L (financial services licensee to ensure compliance with duty about accepting fees for personal intra fund superannuation advice);

  (jaapc)   subsection 964M(1) (authorised representative must not accept fee for personal intra fund superannuation advice other than from relevant member);

(22)   Schedule 1, item 30, page 27 (lines 12 and 13), omit subparagraph (1E)(b)(v).

(23)   Schedule 1, item 30, page 27 (after line 30), after subparagraph (1E)(b)(xiii), insert:

  (xiiia)   subsections 964K(1) and (2) (financial services licensee responsible for breach of fees accepted for personal intra fund superannuation advice);

  (xiiib)   section 964L (financial services licensee to ensure compliance with duty about accepting fees for personal intra fund superannuation advice);

  (xiiic)   subsection 964M(1) (authorised representative must not accept fee for personal intra fund superannuation advice other than from relevant member);

(24)   Schedule 1, item 30, page 27 (line 34), omit "or (v)".

(25)   Schedule 1, item 30, page 28 (line 3), omit "or (v)".

(26)   Schedule 1, item 33, page 29 (lines 15 to 18), omit all the words from and including "if:" to the end of subsection 1528(1), substitute "if the benefit is given under an arrangement entered into before the day on which that item commences".

(27)   Schedule 1, item 33, page 29 (line 33) to page 30 (line 1), omit "a financial services licensee, or an RSE licensee", substitute "the responsible entity of a registered scheme, an RSE licensee or the issuer of a managed investment product".

(28)   Schedule 1, item 33, page 30 (lines 4 and 5), omit "a financial services licensee, or an RSE licensee", substitute "the responsible entity of a registered scheme, an RSE licensee or the issuer of a managed investment product".

(29)   Schedule 1, item 33, page 30 (after line 28), at the end of Part 10.18, add:

1532 Application of ban on other remuneration—fees for personal intra fund superannuation advice

  (1)   Subdivision C of Division 5 of Part 7.7A, as inserted by item 24 of Schedule 1 to the amending Act, applies in relation to the provision of personal intra fund superannuation advice on or after the day on which that item commences (whether or not the advice was sought before that day).

  (2)   Despite subsection (1), that Subdivision does not apply in relation to the provision of personal intra fund superannuation advice to the extent that the operation of that Subdivision would result in an acquisition of property (within the meaning of paragraph 51(xxxi) of the Constitution) from a person otherwise than on just terms (within the meaning of that paragraph of the Constitution).

For example, there is no precedent in the world for introducing the sort of additional red tape that would result from the introduction of the government's opt-in proposal. Minister Shorten clearly is intent, at the behest of the Industry Super Network, on making Australia the world champions in red tape. I know we are very keen to be the world champions in many things, but the world champions in red tape is not a goal that we should aspire to as a nation. Every time you increase the levels of red tape, every time you increase complexity and impose unnecessary additional compliance burdens, you actually reduce our productivity and impose significant additional costs on the economy, which of course hold us back from reaching the full potential we should always be striving for.

The coalition have very constructively engaged in this debate. We have made a series of very sensible and constructive recommendations on how this flawed legislation currently before the Senate can be improved. In fact, the coalition have presented a 16-point plan as part of our dissenting report attached to the report of the parliamentary joint committee inquiry into this particular legislation, which sets out in some detail how we think this legislation can be improved. We urge this Labor government and we urge the Greens, even at this late stage, to carefully reflect on the recommendations we have made.

This is a process that has been going for some time. Ever since Minister Shorten took responsibility for this portfolio there has been a lot of chopping and changing. He has backed down on a number of his very ill-considered early forays in this space. In April 2011 he announced that the government would ban all commissions and like payments on all individual and group risk, which was always a dumb idea; it was always going to be bad policy, it was clearly ill-thought out and it was something he was pushed into by a vested interest agenda in part of one segment of the financial services market that he is particularly close to. Of course he had no choice other than to completely back down from what was always a bad idea and that was always driven by a deeply conflicted approach to policy development in this area. We think he should have done likewise in relation to some of the other contentious bids.

Where did all this start? All this started with the so-called Ripoll inquiry. Perhaps I can take a step back here. Financial advisers provide a very important service to the community. They help people with their financial health and wellbeing. They help people manage financial risks and maximise financial opportunities. They deal with other people's money, which is why it is important to have an appropriately robust regulatory framework in place. However, whenever we consider making changes to that regulatory framework we do, as I said earlier, have to work on getting the balance right. After the global financial crisis, clearly it was appropriate for us to consider whether the regulatory framework was still appropriate in the wake of collapses like Storm Financial, Westpoint, Trio and others. But let me just make the point that, overall, the financial services industry in Australia performed very, very well in the context of the global financial crisis. The incidents were isolated incidents, and the proposal to force clients to resign contracts with their advisers on a regular basis would have done nothing to prevent the collapse of Storm, Trio or Westpoint, for example.

Of course, the reason I can say that is that when the Ripoll inquiry—the Parliamentary Joint Committee on Corporations and Financial Services—ran a thorough inquiry in relation to all this in 2009, they received well in excess of 400 submissions. Out of all those submission, how many do you think recommended that we have enshrined in legislation a requirement that people should be forced to resign contracts with their financial advisers on a regular basis—the so-called opt-in proposal? Out of more than 400 submissions, one of those submissions recommended that we have a requirement enshrined in legislation that clients should be forced to resign contracts with their advisor on a regular basis, taking away the freedom of individuals to make their own choices and their own decisions on how long they want to engage into a contractual relationship with a particular service provider for. One single submission recommended that particular change. Two guesses as to who that one submission came from. It was the Industry Super Network, a gentleman called David Whitely. He came to see me, week in week out, and said, 'Can't I negotiate a deal with you?' He came to see me in my office as if he were talking on behalf of the government, trying to negotiate a deal.

There is only one reason Minister Shorten has put this particular aspect into this legislation, and that is that the Industry Super Network and David Whitely insisted on it. It is not about good policy. I am very happy for Bernie Ripoll; he has since been promoted to Parliamentary Secretary to the Treasurer, and good luck to him. He was a very good chair of that inquiry, and the Parliamentary Joint Committee on Corporations and Financial Services, under his leadership, did a very good job. It delivered a unanimous bipartisan report with a series of 11 or 12 recommendations that were very sensible recommendations, widely supported across the industry and with bipartisan support across the parliament. And what did Mr Shorten do? Instead of implementing those recommendations he jumped on the one recommendation that was put forward by the Industry Super Network—one out of more than 400 submissions—and said, 'No, I'm going to attach that to it.' That means it was 2½ years after the Ripoll inquiry reported before we actually got the opportunity to deal with this legislation to improve the financial services regulatory framework. This minister has allowed the reform agenda to be completely hijacked by one particular vested-interest perspective in the financial services market, which clearly is pursuing a particular commercial interest. If this was about good policy, we could have implemented the 11 recommendations made by the Ripoll inquiry back in November-December 2009. That was years ago. We could have had the better and improved financial services regulatory framework in place years ago. But because this government and this minister were so intent on pursuing a conflicted, vested-interest agenda here we are years later.

This is legislation that is supposed to come into effect on 1 July 2012. That is 11 days away. So here we have a piece of legislation which is very complex and which has significant system change requirements at the end of it and we are debating it in the Senate today. I can well understand why this completely dysfunctional, incompetent and divided government want to guillotine debate on this bill tomorrow. If they do not guillotine debate on this tomorrow, we might well still be debating it after it is supposed to have come into effect. Then magnanimously at some point the minister said: 'We are going to have a soft start. We are going to leave it optional as to whether people comply with it from 1 July 2012. The hard start is going to be as of 1 July 2013.' When this legislation went through the House of Representatives the government was not even ready to move amendments to that effect, even though the government had made those commitments way earlier. The way the government and Minister Shorten have handled this debate has been incompetent, chaotic and disrespectful to an important industry across Australia. It has had serious implications already on the structure of the industry and not for the better for consumers. It has already resulted, as I said earlier, in reduced choice, reduced competition and increased costs for consumers for little or no additional consumer protection benefit.

There are a series of very specific issues that we are concerned about in relation to these bills—for example, the chopping and changing. The minister had given commitments for sometime, all throughout the consultation period, that the changes in terms of the additional annual fee disclosure requirements and the opt-in requirements would be prospective only—that they would not apply to existing clients; they would only apply to new clients. When the draft of the legislation was released in the second half of last year, out of nowhere, all of a sudden, they were to apply to everyone. I do not expect people in Treasury to necessarily know how a business is run. I do not expect people in the Labor government to know how business is run. But they should make it their business to find out what the cost implications and system implications of some of the changes they are pursuing are ultimately for consumers before they impose all this additional red tape and complexity.

We have long supported the introduction of a best interest duty. We have long supported that. If we had had a sensible discussion on how that should be enshrined into the Corporations Act we could have passed it long ago. The best interest duty really should be an important and central part of the FoFA changes. However, the way it is currently drafted in this legislation is not clear enough. It still leaves the opportunity for confusion, and we should avoid confusion and minimise the risk of future disputes by tightening up the definition of the best interest duty. The current version of the proposed best interest duty included in the current FoFA bill is certainly an improvement on the version included in the exposure draft; however, the coalition remain concerned that the catch-all provision contained in proposed section 961B(2)(g) would create uncertainty for both clients and their advisers. We recommend that this clause be removed from the best interest duty.

We also think it is important to provide certainty around the provision of scaled advice. One way of ensuring that clients are able to access affordable and appropriate financial advice would be to allow advisers and their clients to limit the scope of the advice to a series of discrete areas identified by the clients rather than to mandate a full financial plan in every case. We also think that the government still has a bit of work to do on fixing the status of risk insurance inside superannuation.

In short, if the coalition is elected to government at the next election, we will fix Labor's FoFA mess because this legislation, which has already been passed by the House of Representatives, never went through a proper regulatory impact assessment, because Labor's FoFA bills will increase red tape and costs for both business and consumers by reducing choice, competition and diversity across the financial services industry, because it is unnecessarily complex and in large part still unclear and because, according to Minister Shorten himself, it will cause job losses in the financial services industry. We, the coalition, if we are successful at the next election, will pursue the complete removal of opt in, pursue the simplification and streamlining of the additional annual fee disclosure requirements, improve the best interest duty, provide certainty around the provision and availability of scaled advice and refine the ban of commissions on risk insurance inside superannuation further to go beyond the backdown that the minister has pursued since his April 2011 announcement. The government's handling of this legislation has been completely inept and the Senate should not be supporting these currently deeply flawed bills. (Time expired)

Matt Thistlethwaite (NSW, Australian Labor Party) Share this | Link to this | Hansard source

I am pleased to rise in support of the Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012. I was pleased to be a member of the Parliamentary Joint Committee on Corporations and Financial Services that conducted an extensive inquiry into the proposed operations of these bills. The bills have come about as a result of an inquiry that was conducted by the parliamentary joint committee into financial products and services in Australia. This inquiry came about as a result of the shocking circumstances that occurred in the case of Opes Prime and Storm Financial, where there were financial collapses and thousands of particularly small-time mum and dad investors lost millions of dollars in retirement income and savings.

The government acted to ensure that appropriate regulation was put in place to prevent these circumstances in the future. These reforms deliver on that commitment to strengthen the regulatory framework around the provision of financial services in this country and to improve the quality of financial advice that is being provided by product suppliers and advisers to investors. This new system will build trust and confidence in the financial planning industry through enhanced standards, through the alignment of the interests of consumers and advisers and through a reduction in conflicts.

The first tranche of the legislation is the Corporations Amendment (Future of Financial Advice) Bill. This bill amends the Corporations Act to require financial advisers to provide a fee disclosure statement to a client when charging advice fees for longer than 12 months and to require financial advisers to provide a renewal notice to a client when charging advice fees for longer than 24 months. The bill also extends the Australian Securities and Investments Commission's licensing and planning powers used to supervise the financial services industry. These reforms will apply to advisers and fee recipients in situations where they provide personal advice.

The first aspect of this bill sets in place arrangements which require financial advisers to obtain their retail clients' agreement in order to charge ongoing fees for financial advice. This is known as the opt-in requirement. This comes about as a result of unengaged investors being unaware of commissions and fees that they may be charged in certain circumstances relating to advice and products that they use in respect of financial services. Currently there are some clients of financial advisers who pay ongoing fees for financial advice who receive little or no service. Some clients are unaware of the amount of fees that they pay, and this is occurring despite the fact that most ongoing advice contracts allow a client to opt out at any time.

The initial disclosure of ongoing advice fees does not assist, as the disclosure is not ongoing. That is the basis of these reforms—to ensure that that lethargy is taken out of the relationship and that there is ongoing disclosure. Under these arrangements, the basic requirement is that advisers must obtain their clients' agreement to renew at least once every two years, as well as giving clients the fee disclosure statement at least every year. The renewal notice empowers the 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 the adviser breaches by overcharging after the client has not opted in, they could be subject to a civil penalty. There is flexibility as to when and how advisers obtain the renewal notice. The bill provides for additional grace periods if a client inadvertently opts out by not responding to a renewal notice on time.

The disclosure notice is an important supplement to the renewal requirement and supports fee transparency. 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. This reform very much focuses on what is in the client's best interests.

The second aspect of this bill is that providers of financial advice must be licensed by ASIC as part of facilitating investor confidence that those persons are competent and of good fame and character. Licensees also have representatives who act on their behalf, and ASIC has powers to protect the public, including by applying a variety of administrative remedies against a licensee who breaches the law.

During the parliamentary joint committee inquiry into the provision of financial services, a number of witnesses and ASIC raised concerns about ASIC's 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 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 in this bill implement the recommendations of the parliamentary joint committee and will strengthen that important gatekeeping function of the role the public expect ASIC to play when it comes to the licensing of those providing financial services in our economy.

The regime will 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 that person is likely to contravene the law. ASIC may also remove representatives if they are not competent, if they are not of good fame and character or if they are involved in breaches of the law. Again, this ensures that integrity, respect and confidence are built into the system. This is aimed at providing better service for clients.

In respect of this law, an amendment was moved and accepted in the House of Representatives to allow for a voluntary commencement date rather than a compulsory commencement date for this provision of 1 July this year, with a mandatory commencement date to apply from July 2013. This will allow providers in the industry to do what they do best: compete with each other to ensure that there is a race to become FoFA compliant, thus ensuring that their advisers and those working to provide financial advice comply with the new laws. I think that we will see such a race to ensure compliance with FoFA and that particular firms and advisers will then advertise their compliance to the market. It will be a means of attracting customers and improving professionalism and of driving change in the industry with the aim of ensuring better financial advice for people.

The second tranche of the FoFA reforms is contained in the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012. This bill contains two key measures to improve professionalism, relating to the quality of advice and to boosting confidence. This will be done by employing and imposing a statutory best interest duty on financial advisers. As the name suggests, the duty requires advisers to act in the best interests of their clients and to put their clients' interests ahead of their own. One would think that would be a common practice. Unfortunately, advice to the parliamentary joint committee was that that does not always occur, particularly in circumstances where commissions may apply to the provision of particular products and to the on-selling of those to clients in the industry. The duty does not require advisers to give their best advice, but it is a legislative requirement that financial advisers' processes and motivations are focused on what is in the best interests of their clients. It is true that, ultimately, this will lead to better advice in most cases, but first and foremost it is about regulating conflicts of interest not about the intrinsic quality of the advice provided. The bill strikes a balance between certainty and flexibility for the adviser in satisfying the duty. The duty requires that the provider of the advice take steps that would reasonably be regarded as being in the best interests of the client.

The legislation states the circumstances and steps that a prudent adviser should take to satisfy the duty. They include identifying the objectives, financial situation and needs of the client that were disclosed; identifying the subject matter of the advice that is being sought; identifying the objectives, financial situation and needs of the client that would reasonably be considered to be relevant; making reasonable inquiries to obtain a complete and accurate picture of the client's circumstances and basing all judgments in advising the client on the client's relevant circumstances. Those are some of the points in the legislation that advisers can look to for guidance on fulfilling the best interest duty.

The second aspect of this tranche of the legislation is that the bill imposes a key aspect of the government's response to the Ripoll report—the parliamentary joint committee report—that is, a ban on the receipt of conflicted remuneration by financial advisers, including commissions from product issuers. It is crucial to the integrity of the advice industry that the consumer can be confident that the adviser is working for them rather than for the product provider. For the most part, advisers will not be able to receive remuneration from product issuers or from anyone else if that remuneration could reasonably be expected to influence financial advice provided to a retail client. These reforms do not prevent an adviser receiving a particular stream of income if the adviser is confident that that income does not conflict advice. For example, in the case of the receipt of income related to volume product sales or investable funds there is a presumption that the income will conflict advice; however, this is a presumption only. If the adviser can demonstrate that receipt of the income does not conflict advice then such remuneration will be permissible under the bill. There are reasonable exceptions built into this tranche of the legislation, which relate to advice associated with insurance products, life insurance that is not bundled as part of a superannuation product and other related advice.

The aims of these reforms are very much to ensure that people can have confidence in getting financial advice and ultimately that more Australians will seek financial advice, particularly in the context of their superannuation investments. It is well understood by the Australian community that most people, particularly younger Australians, are uninterested in and uninformed about their superannuation investments. The focus of these reforms is to ensure that those investors can have confidence in the system of advice and, importantly, that they can get advice that is appropriate to their circumstances. It is often referred to as scaled advice and is particularly appropriate for younger investors and people investing in superannuation. For instance, if someone is seeking basic information about an investment product, they may walk into a bank or go to a financial adviser to seek advice on how they should invest the $10,000 or $20,000 they have sitting in a bank account. This 'best interests' duty and the other reforms to the Corporations Act will drive and inspire people's confidence in that advice, and ensure that there are appropriate safeguards and exemptions for the providers of that advice from authorised deposit-taking institutions—and there are certain carve-outs in respect of those ADIs.

All in all, these reforms are positive ones. They are part of the suite of reforms introduced into this area by the minister, Bill Shorten, aimed at boosting the confidence of people seeking financial advice in this country in the advice they receive, aimed at ensuring more people seek financial advice and aimed at improving the quality of the financial advice that is being given. But ultimately these reforms are ensuring that, as the population ages and people begin to invest more and more in their superannuation, they make wiser decisions, decisions that are in their best interests and in the interests of the productivity of this economy. I commend these bills to the Senate.

Don Farrell (SA, Australian Labor Party, Parliamentary Secretary for Sustainability and Urban Water) Share this | Link to this | Hansard source

I table two supplementary explanatory memoranda relating to the government amendments to be moved to the Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012.

Sue Boyce (Queensland, Liberal Party) Share this | Link to this | Hansard source

I am pleased to have the opportunity to speak on the FoFA bills. We in the coalition support financial reform—intelligent, good financial reform. We are not entirely sure that that is what we have here. I am privileged, I think, to have been a member of the Parliamentary Joint Committee on Corporations and Financial Services for a number of years, and to be deputy chair in the more recent past. I was involved in what is now known as the Ripoll inquiry, which came up with a bipartisan report containing some very sensible ideas on how to go about improving the financial planning industry—improving not just the delivery of financial services but also Australians' knowledge of financial services.

I must admit that I continue to be concerned that, while we discuss the lack of engagement of investors in their investments in many cases, we do not really analyse why that might be. There have been a number of inquiries into how we get people to be more engaged. One thing that suddenly emerged from nowhere and is still in this legislation is the idea of a mandatory opt-in by people receiving financial planning services. Every two years, they must sign a letter sent to them by their adviser which says, 'Yes, I still want to be advised by you.' If it were that simple to engage people, that would be wonderful. But that is not how it happens.

It seems to me that we really need to consider more carefully the delivery of superannuation to the many investment funds it currently goes into. Employees do not see their superannuation, under the super guarantee levy arrangements, except as a line item on a statement of their wages. It is not money that they are consciously asked to put into super. It is not money that they perceive as having been cordoned off from one use in favour of another use. In effect, the majority of workers in Australia see their pay minus the super levy, and that is what is they see as their base income. They really do not think of that nine per cent amount, which is set to increase, as theirs. I think that is one of the issues that we need to look at far more closely: how we engage consumers, investors, in their investments.

So the Ripoll inquiry came up with its bipartisan report, and then suddenly, out of nowhere, some of the recommendations were taken up in the FoFA legislation, while others were completely ignored. One of the more irritating aspects of looking at this legislation when we did was that there was other legislation around the MySuper scheme that was not known at the time and other regulations that were not known at the time. A good deal of the inquiry was taken up by financial planners and others explaining to us how incredibly difficult it would be for them to redesign their systems so that they could meet the government's implementation date of 1 July 2012, which at the time was about four months away. Of course, all that is now irrelevant because yes—thank goodness—Mr Shorten did see that it was foolish to ask the financial sector to change systems for the purposes of the opt-in and fee disclosure provisions from 1 July 2012 when everything would have to be to rearranged all over again from 1 July 2013 for the MySuper provisions, which will affect pretty much the same information deliverers.

So at least that recommendation was taken up. But it did mean, as I said before, that quite a lot of the committee's work was wasted in looking into issues which subsequently changed. I think that can only be one demonstration of how poorly some of this material was thought out before it was first put into the legislation. The fact that we have yet more explanatory memoranda tabled tonight by the government about amendments to the legislation suggests at least that they are listening but also that they should have listened a lot earlier to what is being said by stakeholders throughout the industry and by others.

This is the second time today I have spoken about the government's implementation deadlines for material. It would be nice if only in the e-health area the government was also prepared to put the mandatory start date out to July next year not July this year when we have the bizarre situation described earlier by Parliamentary Secretary McLucas that for an e-health online system you can only register over the phone or in person at a Medicare office on the start date of 1 July. At least we know with this one that it is voluntary for financial planners to begin to send out information saying, 'Do you want me to be your financial adviser from 1 July 2012 and mandatory from next year?' At least that is a start. Hopefully online systems will all be sorted out by then. However, we continue to find the opt-in system a strange and anti-business approach to take.

We have quite a lot of governance in this area. There is no reason we cannot continue to improve it. Many financial planners are small businesses. It would seem to me there has been no effort whatsoever put into understanding the needs of small business involved in this area. They range from huge organisations through to quite small organisations and the different needs of those two areas have never been properly assessed or looked at by the government in terms of the legislation. The Financial Services Council had a function in Parliament House this very evening which was addressed by Minister Shorten. Members of the Financial Services Council account for $1.8 trillion of Australian investments, a staggering amount and just a proportion of the funds under investment in Australia. In fact the financial services industry accounts for 10 per cent of GDP and, as was pointed out tonight by Minister Shorten, we have a very small export industry of financial services planning and advice. If that were to be expanded, as it certainly should be with the growing middle classes of Indonesia, China, India et cetera, we can expect this to become an even more massive industry. It is not a massive industry made up of all massive players; there are many small players in this industry, people represented by the Financial Planning Association, for example. They can be quite small, one professional adviser businesses with some administrative support. We need to think about that as well when we take issues around the provision of financial advice into consideration.

I was interested to see that the Financial Planning Association has looked at some with amendments to the FoFA bill and said: 'It's heavily amended. It's not exactly what we wanted but it does deliver. In the end, the final shape of FoFA delivers a sensible outcome for Australia's professional planners and their clients.' With some of the reforms that suddenly emerged halfway through, Mr Mike Rantall, the CEO of the Financial Planning Association said:

We have fought hard for our members from the first hurdle to the last. We hope they will see that the end result is what counts. For FPA members the formal opt-in process may not apply and they may not be subject to the law at all. Our members are also in the best possible position to be captured under the restricted definition of the term 'financial planner' which will be tabled in parliament next year. There are no other groups or bodies that can claim these concessions for their members.

So one hopes that all the mays and mights and 'We'll let you know next year' come to pass for the Financial Planning Association. It was more interesting that Mr Shorten tonight described the financial services industry—not just the Financial Services Council whose members were in attendance—as 'the quiet achievers of our economy'. I suspect they have in many ways been the quiet achievers but they have also been achievers who have not been terribly well consulted by the government, a point made by, for example, shadow Assistant Treasurer, Senator Cormann. He pointed out that we have the government to thank for the constant stream of people from the financial services industry seeking to see him to say: 'Please don't put this legislation through. Please do what you can to stop it.' As our shadow Treasurer, Mr Hockey, has said, we would not be intending to proceed; we will change the opt-in provision when we become the government.

Australia does have a very proud record of reform in the regulation of financial services with progressive unification and simplification of the regulation of the provision of financial services and also of financial services providers. This largely reflects the financial reforms made by previous coalition governments. Certainly, we have no problems with the fact that there is more work to be done, but we started it. We have a strong and proud history in that area and it is an area that we will continue to watch very closely, both to ensure that there is strong governance and that there is sustainability within the industry.

Financial services now comprise 10 per cent of Australia's gross domestic product, which is in fact a larger contribution to the economy than mining, manufacturing or agriculture. So, clearly, it is very important to Australia.

Financial advice must be affordable and simple to understand and it must put the needs of the client first. We have no issues whatsoever with that approach. FoFA, of course, does not meet any of those three criteria. It does not make advice more affordable, it is not simple to understand and it does not put the needs of the client first. It pretends to, but it does not. It increases costs for practitioners and clients by adding unnecessary costs and red tape. It is overly complex and it will lead to a reduction in business activity and will cost jobs. As well, the rather conflated best interests duty used in this legislation fails to establish the strongest requirements of a fiduciary duty.

From 1 July this year the opt-in provisions are voluntarily available. I notice that the explanatory memorandum was produced so quickly that instead of using the word 'voluntary', it uses the words 'weren't voluntarily'. It is just a little grammatical slip, but it does demonstrate how quickly the government has tried to fling all of this together. However, it will be fascinating to see how many financial services advisers and planners are knocking on the door on 1 July saying: 'Let's voluntarily send out these things. We want to voluntarily get our clients to opt-in.' It will be fascinating to see the numbers there. I think we will find that the vast majority will wait for it to become mandatory, on 1 July 2013.

The current time frame for the implementation is now somewhat realistic. Businesses have to change processes and software and they have to train advisers, all before they have even seen the regulations that underpin the legislation. The fact that they have to take so long telling the government this and the fact that we had to hold an inquiry and spend a lot of time just repeating the fact that it was impossible for the industry to change in 3½ months are just two indicators of how this government goes.

The FoFA legislation is still quite likely to cost Australian jobs in the financial services industry. It will lead to the closure of a lot of smaller companies. It will just get too hard. There will be a need for new computer systems and better online facilities—it will just get too hard. In fact, our committee was told that there would be a $700 million initial implementation cost for the proposed changes and a $350 million cost annually thereafter, which would be borne by the industry. This was not agreed with by the Industry Super Network, which represents the union based superannuation programs. They thought differently, but they were the only organisation that did think differently.

We had evidence from AMP and from the CEO of the Association of Financial Advisers, all saying that there was a strong likelihood of jobs being lost. In fact, Mr Klipin from the Association of Financial Advisers said that over 6,800 adviser jobs are at risk. Nothing about this legislation has changed that, except that it has been somewhat pushed out by the fact that it is not mandatory until next year for the opt-in and other provision to have effect.

As the opposition, we see our role as being one of holding the government to account, and we are definitely going to do that. Our longstanding commitment to prospectively apply detailed fee disclosure statements stands. The government's commitment to that should stand, too, but of course it is not. I find it strange that the government has chosen not to implement a fiduciary-duty provision in this. The best thing we have is this confusion called the 'best interests duty'. That is better than nothing, but it is still a bit of a problem.

The other aspect of this legislation concerns some of the powers given to ASIC. They can now have the power to suspend somebody from their business on the basis of an assessment of what they might do, not what they have actually done. If they are likely to contravene the obligations of an Australian financial services licence, they can be suspended. I asked ASIC how they would know if an organisation or an individual was 'likely to contravene' its obligations. They said, 'Oh, we can work it out from history, and we will have a tick and flick sheet that we can design for this.' How ridiculous. This, too, is something that must be amended.