Carol Brown (Tasmania, Australian Labor Party, Shadow Assistant Minister for Infrastructure and Regional Tourism) Share this | Link to this | Hansard source

The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 implements recommendation 2.4 of the Hayne royal commission into misconduct in the financial services sector. Six months after the commission's final report, the bill ends grandfathering arrangements for conflicted remuneration for financial advisers. The royal commission highlighted the extent to which conflicted remuneration can erode member balances and lead financial advisers to provide advice that could be at odds with members' best interests. Speaking on the banking royal commission's final report, Treasurer Josh Frydenberg said:

Grandfathered conflicted remuneration can entrench clients in older products even when newer, better and more affordable products are available on the market.

The practice for conflicted remuneration or commissions for advice has been ingrained practice in the financial sector for a number of years. Ending these grandfathered arrangements will provide certainty to consumers and make clear to the sector what is expected of them.

Labor will be supporting this bill. Prosperity and fairness are core Labor values. They are values that should be central to Australia's financial services sector. Labor led the charge for a strong and fair financial sector. Labor instigated the sweeping reforms in financial advice in 2012 and, when it became clear that more needed to be done, Labor called for a royal commission two years before the coalition were dragged to implement it. That is why we are committed to implementing all 86 of the Hayne royal commission recommendations.

We will be holding this government to account on the implementation of these reforms. They never wanted a royal commission into the banks in the first place. This government voted against it 26 times before they were forced into it. Mr Morrison was so opposed to the idea of a royal commission that he was dragged into it by the banks themselves, and the Morrison government are now dragging their heels on implementing the reforms that could clean up the banking sector and get our financial services sector back on track. Since the election, we are only now seeing the first legislation relating to the royal commission being brought before the parliament. This government is big on talk and slow on action. According to the government's own implementation road map, only eight recommendations out of the 76 have been implemented by the government since February.

While this bill will end conflicted remuneration, it won't do so for almost two years. Conflicted remuneration has been proven to lead to poor advice and poor member outcomes. These arrangements shouldn't remain any longer. The government had a chance to act sooner. In February, Labor tabled a bill in the House of Representatives that would've done what Commissioner Hayne recommended and ended grandfathering arrangements for conflicted remuneration. That bill would've come into effect a full year before the coalition's bill will even start. It would have ended commissions for good, and it would have done it sooner.

Labor is determined to see these arrangements end. Consumers cannot continue to fall victim to the damage of commissions that leave them in poorly performing products and saddled with excessive fees. This government is moving at a glacial pace—so slow that even the banks are moving faster than them to clean up their own poor practices. In June 2018, Westpac announced that they would remove grandfathered commissions on the accounts of 140,000 clients. In August 2018, ANZ announced they would start rebating commissions to clients on the OnePath platform. In September 2018, NAB also said they'd start rebating grandfathered commissions to their own clients. And in October of last year, the Commonwealth Bank committed to rebating nearly $20 million to 50,000 clients of Commonwealth Financial Planning.

The sector is ready and able to end the conflicted remuneration practices. The coalition has always been dragged to the table when it comes to reforming financial advice. It wasn't too long ago that the coalition were voting against reforms to end commissions. It wasn't until Labor introduced the Future of Financial Advice reforms in 2012 that members gained protection from conflicted advice.

In 2014, the coalition government were quick to move to water-down these reforms. In particular, the coalition sought to wind back the best interest duty and restrictions on conflicted remuneration. In other words, this government thought it was a good idea to wind back protection for members and to support the interests of financial planners who were conflicted in their advice. It took Labor and a coalition of common sense to disallow these reforms.

The coalition would have you believe that they're on the side of consumers. Nothing about their history suggests this is true. This government cannot be trusted to put consumers' interests first and cannot be trusted to implement the banking royal commission recommendations. Even more recently, the government have bungled reforms to professional standards in the advice sector. The Financial Adviser Standards and Ethics Authority has gone through three CEOs in 2½ years since it's been operating. The government has pushed back the deadlines for advisers to meet key educational and qualification requirements. The chaos in delivering on these reforms is diminishing standards in the financial advice sector, and it's consumers who pay the price.

At every turn, this government has sought to delay, water-down or vote against cleaning up the finance sector. Only Labor has been consistent in pushing for reforms to the banks plagued by scandal. We don't intend to stop, and we will be holding the government to account on implementing the banking royal commission's recommendations. Labor believes that this is only the first step in ending conflicted remuneration in the finance sector. Commissioner Hayne said:

Advisers facing a conflict between self-interest and duty have too often sought to strike some compromise between the two competing forces rather than, as the law has required, to give priority to the interests of the client or member.

More needs to be done to ensure that intermediaries are acting in the best interests of their clients. Labor believes that ending exemptions for listed investment trusts, life insurance and other financial products should also be considered. Labor wants to see a prosperous and fair financial sector. The sooner the banking royal commission recommendations are implemented, the stronger our finance sector will be.

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

This chamber has seen some fireworks on this bill over the last seven years since I've been here. It's a bit sad to see this go through with such a fizzer tonight, with hardly anyone on the speaking list and with not even a full time allotment taken up by the Australian Labor Party, considering the pedigree of the legislation we're dealing with and all the debate that we've seen over the years, both in the House and here, culminating in a royal commission, with $77 million of taxpayers' money going into looking at the financial services sector and what many of the senators had known for years needed to be thoroughly reformed.

Let me say, tonight, I welcome the first piece of legislation from this government following the Hayne royal commission. I look forward to, as I understand it, over 20 pieces of legislation that are likely to come before the 46th Parliament.

This issue we're dealing with tonight, conflicted remuneration, has been at the heart of the problems that we've seen in the financial services sector in Australia. I've openly admitted in Senate inquiries going back to 2012 through to the debates we had in 2016-17, that I was part of that culture. I worked in a financial services company for many years. I understood that sales based culture within newly vertically integrated companies—that is, banks, like the Commonwealth Bank and the National Australia Bank, and a whole range of other financial services companies. They had seen the chance to grow their earnings and grow their profits by bolting on new businesses, new platforms, allowing their customer bases to be their main asset and being able to cross-sell a whole range of different products to their customers and of course reap the profits from doing that.

But of course that raised the fundamental issue about what happens if you have a sales based culture in your organisation—that, by the way starts at the top; it starts with the CEO. The Greens have put forward a private senator's bill in this place, incidentally, to cap CEO pay. And Senator Bragg: I may bring forward the legislation again in a slightly changed form so we can have that debate again. The sales culture starts with CEOs, and—pardon the use of this term—it trickles down to the staff and the salespeople on the booths, all the way down the banks. It's about driving revenue. It's about meeting targets. The problem with that, while it might be good for the banks, is that it hasn't always been in the customer's interests. I can say from my experience working in financial services and having seen what I've seen over dozens of Senate inquiries that it often isn't necessarily in the customer's interests.

So what exactly is conflicted remuneration? It's 2019, and this issue was raised squarely and firmly in the Ripoll report in 2009—nearly 10 years ago. The Ripoll report identified significant structural tensions in the finance industry that give rise to conflicts of interest and affect the advice consumers receive. The report says:

On one hand, clients seek out financial advisers to obtain professional guidance on the investment decisions that will serve their interests, particularly with a view to maximising retirement income. On the other hand, financial advisers act as a critical distribution channel for financial product manufacturers, often through vertically integrated business models or the payment of commissions and other remuneration-based incentives.

The Ripoll report then noted different ways in which advisers can be paid or remunerated directly or indirectly by product manufacturers for their clients' financial decisions, concluding:

These payments place financial advisers in the role of both broker and expert adviser, with the potentially competing objectives of maximising remuneration via product sales and providing professional, strategic financial advice that serves clients' interests.

So what did we do about this sales based culture? I remember raising this issue several times in this chamber, including during question time, and being told that what we'd seen in the financial services industry was just a few rotten apples. Well, I didn't believe that was the case. I believed that because of conflicted remuneration and because of a sales based culture this issue was systemic. I actually remember in 2015 asking Senator Brandis this exact question and asking him whether he would support a royal commission into banks and financial services. And I remember him getting up and saying, 'How dare you slander an entire industry'—that this is just a few rotten apples. Well, the few-rotten-apples excuse went out the door, and I think what we heard in the royal commission was very telling. But, to be truthful, a number of us had heard very similar stories when we'd attended multiple Senate inquiries, going back to 2012.

I want to just talk through a brief time line before I get to the royal commission and what their recommendations were. To Labor's credit, following the Ripoll report they introduced the first FoFA—future of financial advice—legislation in 2011. That was brought before this place in June 2012. At the time it was decided that changes to conflicted remuneration wouldn't be effective until 2013, but there were a number of carve outs on that conflicted remuneration, including grandfathered commissions—commissions that financial advisers and financial advice companies could keep in place. I remember the lobbyists coming into my office, as I'm sure they came into other senators' offices, at the time, saying: 'This will affect the price, for example, that we'll get if we sold our business; these contracts were entered into in good faith,' et cetera.

Because the conditions placed on FOFA in 2012 were voluntary—they weren't mandatory until 2013—we saw a change of government and therefore a change to the approach of FOFA. We saw legislation brought before this place by the Abbott government called the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014. That didn't pass this place because there was significant resistance from Labor, the Greens and the crossbench. But, before I get to that resistance, I do want to point out that the banks, especially the big banks—I remember questioning the Australian Banking Association in a Senate inquiry. And, having worked in finance myself, I asked why the banks hadn't changed their front-end systems and their back-office systems to account for the FOFA laws if they knew they were coming from 2012 to 2013. The ABA spokesperson at the time said, 'Senator, that's because we had a deal with both Labor and Liberal that, after the election, the FOFA laws would be changed.' In other words, they were pretty confident that those FOFA laws were going to be weakened and diluted in their favour. While Labor got their mojo back and went hard at trying to regain the ground on the FOFA legislation and years of their hard work going back to the Ripoll report, the coalition did bring before this place both a bill, as I mentioned, and regulations to weaken the FOFA laws, the Future of Financial Advice laws.

That was one of the more colourful times that I remember of my short seven years in the Senate. I actually felt the wind change in this chamber when we defeated those regulations. I remember Senator Muir came on board. That was maybe the first time he'd ever voted against the government. Recently, it's been written in about books just how much pressure the crossbench were under from Senator Cormann to make sure we didn't disallow those FOFA regulations. But, in the end, to his credit, Senator Dastyari rounded up the troops and got everyone together, including Senator Xenophon and the Greens. We formed an alliance—which had quite a rude acronym, which I won't mention in the Senate today—that was designed to try and defeat the weakening of these FOFA laws, and that's exactly what we did. I think things changed for the Palmer United Party after that. We saw Senator Lambie leave the Palmer United Party. We saw Senator Muir stand up, and we started to actually have a real opposition in this chamber, especially to weakening financial advice at a time when we could all see, through multiple Senate inquiries, the evidence and testimonies from victims and the scandals which were breaking weekly in the financial news, by journalists like Adele Ferguson and others. And a number of whistleblowers came forward.

To provide a backdrop for this, we had a campaign for a royal commission. I'm only saying this because I heard Labor mention this several times in their contribution. Let me get it on record again that the Greens were the first political party to campaign for a royal commission into the banks and financial services. I was on the original inquiry, with Senator Mark Bishop, when the committee recommended as one of its 90 or so recommendations that the Senate consider a royal commission. The problem for Senator Bishop was that, while he had his heart in this, the Labor Party squarely didn't. And, while Senator Williams had openly called for a royal commission into the banks because of his experience before he became a senator, neither his party, the National Party, nor the Liberal Party had their hearts in a royal commission into the banks. So the Greens took on the role of agent provocateur. We pushed and we pushed. And Labor in this chamber voted against Greens' calls for a royal commission. They like to highlight how the Liberals voted against their cause over in the other place, but it took the Greens two years, working with the crossbench, to get Labor to support the cause for a royal commission into the banks. And I think it's the best thing that Mr Bill Shorten did when he was Leader of the Opposition, and it very nearly won him the 2016 election.

Once we had a Greens private member's bill pass this place—it was certainly the first time that a private member's bill of mine passed the Senate—and it was not a bill for a royal commission, because we can't call for a royal commission in parliament but we can call for a parliamentary commission of inquiry, which is a royal commission that reports to parliament and not the executive. It has only ever been used once in Australia's history. The UK parliament had a similar look at the use of parliamentary commissions of inquiry around the Iraq war and also issues with their financial services industry. The Greens private member's bill passed the Senate and it bounced around in the House. It was looked at by a number of Nationals, renegade LNP members of parliament and a whole range of people who wanted a royal commission. Senator O'Sullivan, in the end, threatened to put up his own bill for a parliamentary commission of inquiry, but, if the Greens hadn't discovered that, explored that, normalised that and got it through here, it would never have happened. And, may I say, the terms of reference for that parliamentary commission of inquiry that were put up by the Nationals pretty much copied the Greens' terms of reference, and the final terms of reference for the royal commission put up by Senator O'Dwyer were pretty much exactly the same as the terms of reference for the Greens' parliamentary commission of inquiry.

So I would say it was the team effort of everyone involved in this place to try and get a proper probe into the banks and the financial services industry—into the rotten heart of why we'd seen so much fraud, deception and misconduct. What was one of the key recommendations of the royal commission? To remove grandfathered commissions. There were many recommendations and this one, no doubt, has been fairly easy to legislate. But I will say on record too that the Greens voted against the original FOFA legislation that allowed the grandfathering of these conflicted remunerations, because we felt they needed to go.

Here, tonight, we finally get to put an end to what I think has been a very sorry saga and chapter in Australia's financial services history. A number of people I know, including friends, are financial advisors, and, having worked in this industry myself, I understand the critical importance of good financial advice. Indeed, the financial services industry was hoping to get good legislation in place and get a new start so that there could be increased confidence in the services that it wants to offer Australians—services that I feel are absolutely critical for all of us to better understand how we plan for our retirement and how we budget.

The royal commission noted that certain arrangements made before the FOFA reforms came into force in July 2013 that would have otherwise fallen within the ban on conflicted remuneration remain excluded from the definition of 'conflicted remuneration'. According to Justice Hayne:

... despite it being recognised that the grandfathered forms of remuneration are conflicted remuneration (because they could reasonably be expected to influence the choice of financial product recommended by a licensee or representative to retail clients, or could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative), charging and receiving these exempted forms of remuneration has been permitted to continue.

And:

At the time the grandfathering arrangements were first introduced, participants in the industry could say that sudden change in remuneration arrangements may bring untoward consequences for countervailing benefits that would not outweigh the harms of disruption ... Even if the arguments relied on to justify the grandfathering exception were valid when that exception was introduced, it is now clear that they have outlived their validity.

This is obviously not going to fix all the problems that we've seen in the financial services industry emerge in recent years and there's a number of other things we have to do. I noted this morning the Treasurer's call to the ACCC to probe the banks. That's certainly something the Greens are going to support because the Greens actually wrote to Justice Hayne in a 90-page submission, and we've been calling for the ACCC to regulate the banks and take over from ASIC the retail role in the regulation of the banks—keeping ASIC on the wholesale market side of the equation and having the ACCC regulate the banks on the retail side of the equation. They're a fearless, trusted watchdog, and that's no doubt why the government has appointed them to this probe.

But I can't help being a little bit cynical that the Treasurer's popular—dare I say populist—zeal to make sure that interest rate cuts are passed on in full looks like a very neat distraction from the signal, or the warning or the message, that continued cuts to record-low interest rates are telling us: the economy is in trouble. It's very convenient to distract away from what we should all be discussing, and that is if we're getting to a point where monetary policy is becoming ineffective. I remember my lecturer at university saying, 'Once it reaches that point, it's like pushing a piece of string.' It's very difficult to get it to work for you.

There are other things we need to be doing in this country if we're sailing into such strong headwinds. It seems to me that not only is the Treasurer talking about the banks not passing on interest rates a good distraction from the warning that we should all be feeling from cuts to record-low interest rates but also it's an attempt to continue to inflate the housing market and talk up the housing market. All this money in the economy is going to unproductive investment in the housing market when it could be going to productive investment like long-term infrastructure projects. For three years now, the Greens have been banging the drum on this. In 2016 we not only took a policy to significantly increase infrastructure spending but took a policy for an infrastructure bank on how we would finance it—a government-run infrastructure bank.

While I've got a minute and 12 seconds left, let me say that, while we're on the subject of mortgages, why don't we have tracker mortgages, or mortgage trackers if you like? Mr Greg Medcraft used to talk about this a lot. Why can't we offer products like that through the Reserve Bank or through a people's bank, a publicly owned bank? There are so many things we could do to fix this problem rather than just hold an inquiry into the banks. We know the government is not going to legislate the banks to pass on full interest rate cuts, so what's the point?

There are really good alternatives. You copied our idea on bank portability. We're very happy about that. You came onboard with the call for a banking royal commission. You came onboard with the Greens' 10-year campaign to get a levy on the banks. Why not increase the levy to 20 basis points? Give equal risk weightings to all banks, rather than penalising the smaller banks that don't have that too-big-to-fail guarantee. There are so many good things we can do in this chamber if we work together. So I'm glad this has happened tonight. This has been a seven-year-long road for me, but an even longer road for others. I commend this bill. (Time expired)

Andrew Bragg (NSW, Liberal Party) Share this | Link to this | Hansard source

The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 is a great example of our government getting on with the job of implementing the Hayne royal commission. Over the next year or so in this place, we can expect to see a lot of legislation. In fact, I would say that you will see more legislation relating to that review than you would see across almost the whole government. This is very much the long kiss goodnight to commissions, and especially in respect of commissions that have been paid on the back of compulsory super. That is a very good thing. I think there have been many instances where people have, in fact, been paid handsomely with an annuity payment stream for not really doing a lot of work. As Senator Whish-Wilson has pointed out, it was the 2010 so-called Ripoll inquiry's recommendation 4 which simply said:

The committee recommends that government consult with and support industry in developing the most appropriate mechanism by which to cease payments from financial product manufacturers to financial advisers.

That was 10 years ago. I think that's important to put on the record. I understand—and I respect that there will be some consternation within the financial advisory sector—about the loss of these revenues. But the reality is this was at the end of 2009 and we're now in 2019, so there's very much been a long kiss goodnight.

If anyone was unsure about what the Hayne royal commission was all about, it very much focused on the systemic malfeasance in the wealth management sector, which I think had shocked many people. I think many people, including myself, who had opposed a royal commission were made to think very carefully about what was presented to that inquiry. People talk about a banking royal commission a lot, but it was, in fact, significantly weighted towards malfeasance in wealth management. I think there was a culture whereby people were able to effectively take this money and not do a whole lot of work, which Hayne himself pointed out in the section on fee for no service. He pointed out that there could be no justification, effectively, for this sort of behaviour.

We have acted swiftly to implement this review, this very significant body of work presented by Commissioner Hayne. As I said, the scale of the malfeasance in the wealth management sector has shocked many, myself included, and this bill basically puts an end to these payments over the next two years. I'll repeat it again for the record: I understand that there will be some financial advisers who will feel aggrieved about that, but the fact is our government have shown, I think very credibly, that we are absolutely on the side of the worker, the saver and the retiree. It was very important to demonstrate that there could be no justification for these payments to continue beyond 2021 when you consider that there has been the writing on the wall now for a decade—that this sort of business model, in the end, especially where it was built around compulsory super, was going to come to an end. I very much commend this bill to the Senate. I think it's an appropriate bill as part of a package on advice.

One final thing, if I may, on advice: I think financial advice is very important. One thing that I know that we will all be conscious of is: we don't want to put good financial advice outside of the reach of the average income earner, and I think there is a natural pendulum shift that's had to occur because of the scale of the wrongdoing in that sector. But I know that the minister and the executive government will think very carefully about all the future steps that are taken beyond this bill, which is proportionate and appropriate, to ensure that people can actually get financial advice. That's because it is important that people engage and think about what their objectives are, and I do worry about the idea of compulsory super being this idea that it's going to solve all your problems—that set-and-forget mentality. We want people to get good advice; we don't want it to be conflicted. It's been too conflicted in the past and built upon the compulsory super system, which has, I think, a number of problems. I certainly commend this bill to the Senate as a very important part of our response to the royal commission.

Gerard Rennick (Queensland, Liberal Party) Share this | Link to this | Hansard source

I rise to contribute to the debate on the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019. Might I say, I didn't need a royal commission to know that it was always going to end up like this, because, basically, markets are predicated on a risk-reward return, and the people who were earning the fees on these products weren't taking the risk. When you go and force people to give up 10 per cent of their income to people that they don't know for the entire period of their life, they're unsophisticated investors and you're going to get an occasional six-month return statement that says, 'Your fund has grown by plus two per cent,' that's not very good disclosure.

I'm really pleased that I'm here to support this because, when I first started off in finance in 1991 in public practice, in accounting, our financial advice was simply straight-up business services. You pretty much charged for your bookkeeping and preparing the tax return. You'd set the structure up, and that was it. You generally invested in hard assets—none of this paper-shuffling stuff. So well done; this is a great bill.

This bill amends the Corporations Act to end the payment of the grandfathered conflicted remuneration of financial advisers. Conflicted remuneration refers to remuneration paid to financial advisers by product issuers, which can influence the advice they provide to retail clients about the product. When the ban on conflicted remuneration was introduced in 2013, already existing arrangements to pay this remuneration to financial advisers were grandfathered so that the ban did not apply to them. Grandfathered conflicted remuneration presents an ongoing conflict of interest, which can harm retail clients by potentially entrenching customers in older products even when newer, better and more affordable products are available on the market. Ending grandfathered conflicted remuneration was a key recommendation of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Commissioner Hayne called for the end of grandfathering in the royal commission's final report, stating, 'There can be, and is, no justification for maintaining the grandfathering provisions.'

The following sections have been highlighted by my Senate colleagues, but I will touch on them again. The act includes provisions that ban conflicted remuneration and certain other remuneration in relation to financial advice provided to retail clients. These provisions aim to more closely align the interests of those who provide financial product advice with the interests of their retail clients. In particular, division 4 of part 7.7A of the act bans the payment and receipt of benefits which have the potential to influence financial advice provided to retail clients about financial products. Division 5 of part 7.7A of the act bans platform operators from accepting volume based shelf space fees. Division 5 of part 7.7A of the act bans financial services licensees and authorised representatives of financial services licensees from charging asset based fees to retail clients in relation to borrowed amounts.

These divisions generally apply to benefits given or, with respect to asset based fees on borrowed amounts, fees charged from 1 July 2013. However, there are currently exemptions to these divisions for grandfathered arrangements. Under the grandfathering provisions, the bans on accepting and giving conflicted remuneration do not apply to benefits paid under arrangements entered into before 1 July 2013, except with respect to benefits given by a platform operator. The ban on charging volume based shelf space fees does not apply to benefits given under arrangements entered into before 1 July 2013. The ban on charging asset based fees—one of my favourites—to retail clients on borrowed amounts only applies to the extent that the borrowed amounts are used, or are to be used, to acquire financial products on or after 1 July 2013.

On 1 February 2019, the final report of the royal commission recommended that grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable. On 4 February 2019, in its response to the royal commission, the government announced that it would end the grandfathering of conflicted remuneration to financial advisers, effective from 1 January 2021, and mandate that previously grandfathered conflicted remuneration be rebated to customers.

On 22 February 2019, the government released an exposure draft bill to this effect for public consultation. The draft bill also provided for regulations to be made to provide for the pass through to customers of the benefits of any previously grandfathered conflicted remuneration, remaining in contracts after 1 January 2021. Submissions were received from a number of stakeholders, including industry bodies and consumer groups.

On 28 March 2019, the government released exposure draft regulations for public consultation. These draft regulations also provide details on how benefits must be rebated to customers and details of record-keeping obligations on persons required to pass through benefits. These draft regulations also repealed a number of other grandfathering. The bill removes grandfathering arrangements for conflicted remuneration and other banned remuneration effective from 1 January 2021.

In summarising, as part of ending grandfathering, the government will also make regulations prior to 1 January 2021 that will repeal a number of other grandfathering arrangements which are contained in part 7.7A of the Corporations Regulations 2001. The bill also enables regulations to provide for a scheme under which amounts that would otherwise have been paid as conflicted remuneration are rebated to affected customers. The government's reforms will benefit customers by better aligning adviser and client interests, so that retail clients can receive higher quality advice and stop paying higher fees to refund grandfathered conflicted remuneration.

This bill fully implements the recommendation of the Hayne royal commission and, importantly, goes further by providing for the pass through of grandfathered benefits to customers where grandfathered commissions remain payable in contracts after 1 January 2021. This ensures that it is customers, and not product issuers, who benefit from these reforms. The coalition government is taking action on all 76 recommendations contained in the royal commission's final report. This bill reflects our commitment to deliver on these recommendations in a timely manner to restore trust in the financial system. Ending grandfathered commissions paid to financial advisers will lift the quality of financial advice to provide better outcomes for customers.

This government is getting on with the job of delivering meaningful reforms to improve customer outcomes and build a stronger economy. I commend this bill to the chamber.

James Paterson (Victoria, Liberal Party) Share this | Link to 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.

David Van (Victoria, Liberal Party) Share this | Link to this | Hansard source

I rise to support the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019. This bill amends the Corporations Act to end the payment of grandfathered conflicted remuneration to financial advisers. Conflicted remuneration refers to the remuneration paid to financial advisers by product issuers, which can influence the advice they provide to retail clients about those products. When the ban on conflicted remuneration was introduced in 2013, already-existing arrangements to pay this remuneration to financial advisers was grandfathered so that the ban did not apply to them. Grandfathered conflicted remuneration presents an ongoing conflict of interest which can harm retail clients by entrenching customers in older products, even where newer, better and more affordable products are available on the market.

The final report of the royal commission recommended ending grandfathering of conflicted remuneration. Commissioner Hayne, a former justice of the High Court, stated emphatically that grandfathering provisions have now outlived their validity and can no longer be justified. The government is acting on this recommendation. A ban on grandfathered commissions would bring all existing financial advice contracts into line with the 2013 ban on commissions under the Future of Financial Advice reforms. Further, Commissioner Hayne's report strongly rejected arguments that repealing grandfathering would be unconstitutional. It said:

It is time to ignore the ghostly apparition of constitutional challenge conjured forth by those who, for their own financial advantage, oppose change that will free advice about, or recommendation of, financial products from the influence of the adviser's personal financial advantage.

The Future of Financial Advice laws banned billions of dollars of trailing commissions, and it's now time to bring those commissions to an end. This is, after all, how we protect our consumers. Addressing legacy products at a later time will not defeat the purpose of removing grandfathering. Ending grandfathering will better align the interests of advisers and their clients, ensuring that clients in legacy products can benefit from better-quality advice and lower-cost products. After all, surely this is why we're here.

The promoters of failed investments like Westpoint, Storm Financial, Timbercorp and Great Southern, to name just a few, paid outsized commissions to financial planners to attract people into their schemes. This can no longer go ahead. These commissions were, as the bill calls them, conflicted remuneration. Those conflicts can no longer go forward. The government's legislation will end the grandfathering of conflicted remuneration paid to financial advisers by 2021. This is likely to be of most benefit to older investors. That is because they are much more likely to be in investments and superannuation funds where an adviser is being paid a trail commission—again, a conflicted remuneration. Sections of the financial services industry are calling for the deadline for the ending of grandfathering to be extended to give planners more time to adjust. However, it must be seen that the government's timetable should be adhered to. These advice firms have seen the writing on the wall for trail commissions and other conflicted remuneration for many, many years.

On 4 February 2019, the government released Restoring trust in Australia's financial system, the Morrison government's comprehensive response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. In it, the government committed to take action on all 76 of the royal commission's recommendations and, in a number of important areas, go further. It represents the largest and most comprehensive corporate and financial services law reform package since the 1990s. Of the royal commission's 76 recommendations, 54 were directed to the government, 12 to the regulators and 10 to the industry. Of the 54 recommendations directed to government, over 40 of them require legislation. In addition to the commission's 76 recommendations, the government, in its response, announced a further 18 commitments to address issues raised in the final report of the royal commission. The government has implemented 15 of the commitments it outlined in the response to the royal commission's final report. These comprise eight of the 54 recommendations that were directed to the government and seven of the 18 additional commitments. Significant progress has also been made on a further five recommendations, with draft legislation either introduced to the parliament or released for comment or detailed consultation papers issued.

The government's implementation timetable is ambitious. Excluding the reviews that are to be conducted in 2022, under the implementation roadmap, by mid-2020 close to 90 per cent of our commitments will have been implemented. By the end of 2020 remaining royal commission recommendations requiring legislation will have been introduced. In this implementation roadmap, we set out how we will deliver on the remaining royal commission recommendations and on additional actions committed to. This will provide clarity and certainty to consumers, industry and regulators on the rollout of the reforms. The industry has no excuses for not having already transitioned their business to a fee-for-service model. The models are outdated and need to be changed now. I commend this bill to the Senate.

Jane Hume (Victoria, Liberal Party, Assistant Minister for Superannuation, Financial Services and Financial Technology) Share this | Link to this | Hansard source

First, I would like to thank those senators who have contributed to this debate. The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 amends the Corporations Act to implement a key recommendation of the landmark Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The bill will end the payment of grandfathered conflicted remuneration to financial advisers, with effect from 1 January 2020. Conflicted remuneration refers remuneration paid to financial advisers by product issuers which can influence the advice that they provide to retail clients about that product. When the ban on conflicted remuneration was first introduced, in 2013, already-existing arrangements to pay this remuneration to financial advisers were grandfathered so that the ban did not necessarily apply to them. But it's now been six years since that ban was first introduced. However, grandfathered conflicted remuneration remains a part of the financial advice industry.

There's a clear need to end these grandfathered conflicted remuneration arrangements in the financial advice industry. As Commissioner Hayne said in the royal commission's financial report, 'it is now clear that they have outlived their validity'. Australians need to be able to access high-quality financial advice that they can trust. This is critical to maintaining their financial wellbeing. Grandfathered conflicted remuneration compromises this objective by entrenching customers in older and poorly performing products. This is because financial advisers may be unwilling to switch their customers into newer or better products if it means the adviser will lose his or her entitlements to the grandfathered conflicted remuneration.

To be clear, the total value of grandfathered conflicted remuneration is substantial. When ASIC looked at the value of grandfathered benefits in 2014 it found that, on average, licensees indicated that grandfathered benefits were worth around one third of their total income, although substantially more or less than the average in some cases. More recently, the Productivity Commission found that 11 retail superannuation funds are estimated to have paid more than $400 million in grandfathered trailing adviser commissions in 2017—$400 million of everyday Australians' retirement savings being paid out in commissions. Retail clients will therefore be the major winner of this reform. The government's actions mean that they will receive much higher-quality advice and will stop paying the higher fees to fund those grandfathered conflicted remuneration arrangements.

The measures in this bill not only will end the payment of grandfathered conflicted remuneration but also will go further and require that any grandfathered benefits that remain in contracts after 1 January 2021 should be passed on to the affected customers. This will ensure that the entities required to pay grandfathered conflicted remuneration—the financial product manufacturers—are not able to keep the benefits they would normally pay to financial advisers for themselves. The benefits must flow to customers.

By ending grandfathered conflicted remuneration, the government's reforms will better align the interests of advisers and their clients. It will mean that clients can receive better-quality advice and stop paying the higher fees that result from paying those grandfathered conflicted remunerations to the adviser. To ensure that customers receive that benefit from the reform, the bill provides for regulations to establish the mechanism to pass these benefits on to clients. Specifying these requirements in regulations is the most appropriate approach because it provides the ability to make more-detailed rules on how benefits must be passed through and provides for flexibility to respond to changing industry circumstances in a more-timely manner. While a number of firms have already taken steps to end grandfathering, it is clear that this reform will be a significant change for the financial advice industry.

Ending grandfathering will potentially require renegotiation of existing contracts, and for product manufacturers it will require potentially significant systems changes to enable that rebating of the previously grandfathered benefits to clients. Recognising this, the bill provides a transitional period for the industry by ending grandfathering. It will take effect from 1 January 2021. However, this does not mean that the firms in question should drag their feet in making those necessary changes.

To increase the pressure on the industry to act swiftly to make those required changes, the government has issued a ministerial direction to ASIC to undertake an investigation into industry actions in the lead-up to the end of grandfathering. ASIC will investigate industry behaviour in the period of 1 July 2019 this year right through to 1 January 2021 to determine whether industry is in fact passing through the benefits of the removal of grandfathered conflicted remuneration to consumers. They will complement action that we have already taken to drive improved consumer outcomes in the financial sector and ensure that misconduct in the sector is appropriately punished.

Senator Brown's earlier assertion is entirely incorrect. In fact the government has moved swiftly to implement all 76 recommendations of the Hayne royal commission. Since releasing our response to the royal commission the government has in fact instigated and responded to the APRA capability review led by Graeme Samuel, AC. We have expanded the remit of the Australian Financial Complaints Authority, AFCA, to require it to establish an historical redress scheme to consider eligible financial complaints dating right back to 1 January 2008, the period covered by the banking royal commission. We have also amended legislation to extend ASIC's product intervention power and to impose design and distribution obligations on all financial and credit products within ASIC's regulatory responsibility. The government has initiated work with the states and territories towards establishing a national farm debt mediation scheme and has released consultation papers on the removal of the exemption for insurance claims handling, the enforceability of financial services industry codes, the merits of universal terms of MySuper products and the superannuation binding death benefit nominations for Indigenous Australians. These actions demonstrate that this government is getting on with the job of delivering on the required reforms to improve consumer and small-business outcomes in the financial sector. Restoring trust in Australia's financial sector is part of our plan for a stronger economy. I commend this bill to the Senate.

Question agreed to.

Bill read a second time.