AGLAND, Mr Reece, Manager, Member Integrity, Institute of Public Accountants

ELVY, Mr Hugh, Head, Financial Planning, Institute of Chartered Accountants in Australia

WALLER, Mrs Keddie, Policy Adviser, Financial Planning, CPA Australia

[14:20]

CHAIRMAN: Mr Elvy, would you like to make opening remarks?

Mr Elvy : The Joint Accounting Bodies would like to thank the committee for the opportunity to appear before you today. The Joint Accounting Bodies represent Australia's three professional accounting bodies being the CPA Australia, the Institute of Chartered Accountants in Australia and the Institute of Public Accountants. As a way of providing some background, together we represent over 180,000 professional accountants in Australia and internationally. Our members work in many diverse roles and industries, including over 40,000 members in public practice who provide a range of advisory, tax, accounting and audit services to individuals and small businesses. This includes probably over 6,000 members who are licensed financial planners.

Further, a component of the FOFA reforms includes the finalisation by the government of the replacement of the accountants' exemption. This may well lead to a significantly increased number of members of the accounting profession who will be involved in the financial advice industry. We and our members are therefore active stakeholders in the financial planning industry which, over time, will no doubt grow.

We appear before you today not merely to represent the views and various interests of our members but because, as professional bodies, we have an overriding mandate with respect to the public interest. The 'public interest' in this framework we take to mean the need for the public to have access to high-quality, affordable, transparent financial advice, free from conflicts including conflicted remuneration.

As such, we support the guiding principles of the government's FOFA proposals. The Joint Accounting Bodies believe that financial planners play a vital role in the community. Consumers who seek the advice of a professional financial planner will be financially better off than those who do not. However, the rationale of the future of financial advice reforms follows the fall-out in relation to certain financial advice and financial products as a consequence of the global financial crisis. These events created a level of mistrust and uncertainty by the public in the financial advice sector. In fact, ASIC stated in report 224 released in December last year that among some consumers—notably those who have never used a financial planner or those who have had a negative experience with a financial planner—one of the main reasons for not seeking advice was the lack of trust that they have in financial planners.

An objective of FOFA was to increase trust and confidence and to encourage more consumers to seek advice. When you consider the back drop of increasingly complex financial products, financial market volatility and the increased onus on consumers to make active financial decisions—including through compulsory superannuation, coupled with low levels of financial literacy—the need to encourage more consumers to seek accessible, transparent, quality financial advice is even more important. To achieve this, hard decisions must be made, which will impact on how the industry currently operates. We believe that if these reforms are properly implemented and are successful in influencing long-term positive behavioural changes they will lead to a more effective and professional industry that the public will come to trust.

I turn now to a couple of the main issues from our submission. We believe the majority of financial planners provide or endeavour to provide quality financial advice that is in the best interests of the client. The introduction of a statutory best-interest obligation will imbed this motivation in the financial advice framework and ensure all financial planners make certain that the interests of their clients remain paramount—above and beyond those of the planner, licensee and any relevant associates.

It is for this reason that we believe that the best interest obligation should apply to financial advice not just retail personal advice. A professional financial planner should always act in the best interests of their client, including general advice and advice provided to wholesale clients. We understand the concerns that the industry has over some of the elements of the best interest obligations and believe this must be addressed before implementation to ensure effective policy outcomes.

With regard to conflicted remuneration, the Joint Accounting Bodies believe all commissions have the potential to create real and perceived conflicts of interest. Therefore, while we support the legislation's endeavours to remove conflicts of interest, we believe that all payments deemed to be conflicted remuneration should be regulated consistently. Potentially, the proposed carve-outs in the FOFA bill may in fact weaken the effectiveness of the overall reforms and add a further level of administrative and compliance complexity. The carve-outs may also encourage licensees and planners to retain some forms of conflicted remuneration.

One of the areas about which there has obviously been a lot of comment is 'opt-in'. We support the intention of the policy of opt-in and annual disclosure. However, we understand that there continues to be a lack of clarity about the specific obligations of this policy reform. Therefore, we understand why the industry expressed its concern about these provisions and especially with a commencement date of 1 July 2012. The Joint Accounting Bodies believe all consumers who use a financial planner must be explicitly aware of the actual advice and services they receive and at what cost. While it is true that consumers may currently have a right to opt out, some consumers may not be aware that they can opt out or even be aware of what 'opt out' means. If financial advisers want to secure the trust of their clients they must ensure that every aspect of their relationship is transparent, coupled with open and ongoing communication. This is where we believe the opt-in provisions can help ensure this occurs by acting as a means for the consumer to be clearly informed about the services they receive and will receive and at what cost.

In addition and importantly, it will be a financial adviser's ability that will demonstrate the value of their advice and consumer engagement. However, to ensure the opt-in and annual disclosure statements are effective and add real value the client must employ the principles of clear, concise and effective communication. Given the uncertainty about some of the elements of the opt-in provisions, we would recommended a commencement date of 1 July 2013. Not only will this provide the industry and regulators with further time to ensure the effective transition so that FOFA can meet its policy objectives, it will align with the reforms from Stronger Super, which will help reduce costs in implementation. Thank you for the opportunity to make this opening statement, and we welcome any questions you may have.

CHAIRMAN: Thank you very much, Mr Elvy. You said in your opening remarks that your organisation covers 180,000 professional accountants across the broad scope of accountant practices and also those who provide advice within that framework—

Mr Elvy : Yes.

CHAIRMAN: and they are all active stakeholders. You said that you expected that over time this will grow.

Mr Elvy : Yes.

CHAIRMAN: Could you give us a bit more information on what you mean by 'it will grow over time '.

Mr Elvy : As we mentioned in the opening statement, between our three bodies we have 40,000 members who are in public practice, who are basically providing those tax advice services, audit services and so on. Currently, the government is looking into a licensing replacement for an exemption that exists. No doubt, once the government makes that announcement, many more professional accountants will be moving into the financial advice space. They will need to because of the licensing regime. We estimate that there will be maybe 5,000 or 10,000 new licensees as a result of a replacement for the accountants' exemption at some stage.

CHAIRMAN: Your view is that 5,000 to 10,000 accountants—

Mr Elvy : Licensees

CHAIRMAN: Sorry. Licensees, practices—a significant number obviously—

Mr Elvy : Absolutely.

CHAIRMAN: would move into the financial advice sector.

Mr Elvy : They will be required to, yes.

CHAIRMAN: Over what period of time?

Mr Elvy : As part of this FOFA package, it will depend on where the government actually lands in terms of some of the start dates, and it may well be over the next two to three years.

CHAIRMAN: So a fairly quick take-up after the introduction of FOFA. So it is a significant increase in numbers. We have heard a lot of evidence that some people expect that there will be a reduction in overall numbers of people providing advice. That is not your view? You have a different view?

Mr Elvy : With any legislative change, especially when it is as major as these FOFA reforms, there will be some advisers and other people in the industry who will leave. When you look at the Financial Services Reform Act that came in early 2000, a lot of financial planners left. They thought it was all too hard. No doubt as a result of FOFA there will be a certainly proportion of people who will think it is too hard and move on. Currently in terms of what the net position is, I really do not know. From the accounting profession's perspective, we believe that there will be a significant up-take over the next couple of years in this area.

CHAIRMAN: You support the annual disclosure issue but you have some concerns about its timing and clarity. Can you give us a bit more information about, for example, whether or not you have a view on its retrospectivity and how it would operate in practice.

Mrs Waller : We believe that a lot of planners already have this practice embedded within giving advice. If you read through the submissions that were put forward to the inquiry, a lot of them refer to fee schedules and agreements that they have with their clients. So we think opt-in is not about reinventing the wheel and adding another layer; it is about adapting those practices to make sure you have an effective mechanism to align the expectations of the client with the advice and services the financial planner is going to provide. It is going to require change, and for that reason we think that FOFA should be delayed until 1 July 2013.

A lot of this will also come down to the detail of what is going to be required in opt-in. We think to be effective it needs to be clear and concise. It should not be pages and pages but maybe one or two pages that outline what you will receive and what you are going to pay for that. We think a lot of the concern about this reform comes from not knowing what is going to be required under the regulations. Once that is confirmed, maybe there will be some more ease about this reform.

CHAIRMAN: There are also some differing views about the annual disclosure—the information you have just described—needing to be provided on the first anniversary and whether that means that it is retrospective at that date, looking back all the way through history or just the previous year, after it is introduced.

Mrs Waller : We see that it applies to the advice you provided and the fees you paid in the last 12 months and then disclosing the services and advice that will be provided in the next 12 months and the fees you are going to pay. Beyond that is unnecessary detail and will just make it too complex. It will not be an effective means of communication for the client. We know that the legislation proposes to require more than that, but we think it should be limited to that period so the client can make an effective decision about whether to opt in and keep going with the advice.

CHAIRMAN: And that is what it currently is?

Mrs Waller : There is also a requirement to talk about anticipated services—determining what you will provide and what you anticipate you will provide. We think it is a bit subjective and will not add value. It should be limited to what you have provided and what you propose to provide over the next 12 months and the fees that the client will pay for that. We should not try and guess or anticipate what they might need on top of what we are proposing to give them.

Mr FLETCHER: So you want some changes to the wording of the legislation regarding what should go in the fee disclosure statement?

Mrs Waller : Yes. We think it needs to be limited to those areas. Otherwise, all you are doing is adding information that is probably not relevant and is not going to help the consumer make an effective decision about the value of the advice they are receiving.

Mr FLETCHER: At the moment you think it is too open ended and expansive and imposes too great a burden on providers. Is that right?

Mrs Waller : We would say it is too subjective. We would have to try and anticipate the services we are going to provide, as opposed to telling them what we propose to provide and then trying to anticipate on top of that what we will provide. It is too subjective and it is not adding value.

Mr FLETCHER: Presumably one of the problems is that, if advisers are not sure what they are required to put there, for compliance reasons they will tend to err on the side of putting more in rather than less.

Mrs Waller :    And that will make the disclosure documents lengthy. Again, it will not meet the objective of being clear and concise.

Mr Elvy : For your information, the three accounting bodies have an independent standard setter, which is the Accounting Professional and Ethical Standards Board. One of the standards that we have, which is APS 12, is not mandated but basically encourages and provides guidance for all professional accountants to provide annual disclosure to their clients anyway. So for many of our members this will not make any difference.

CHAIRMAN: To be crystal clear about FOFA and what is expected of annual disclosure, given what we have just talked about, the legislation is not retrospective. It talks about providing this information on the first anniversary date about the year that has just passed, and it is prospective, about what will or could be paid in the future.

Mrs Waller : Yes, we would agree with that.

Senator BOYCE: I have one question. How many of your members currently hold AFSLs?

Mr Elvy : We have around 6,000 members who provide financial planning services. As for the number who hold licences, we would have to come back to you on that. I am not sure.

Mrs Waller : Yes, we might have to take that on notice.

Senator BOYCE: The reason for asking that is that we have had a number of groups tell us that the cost of this legislation is going to be quite onerous in terms of opt-ins and fee disclosure et cetera. Only a very small percentage of your members currently provide those sorts of services, so your experience of this would be somewhat less, would it not, than that of, say, a financial planning organisation?

Mr Elvy : I would say so. For many professional accountants in their practice, they would probably already have a framework in place for the terms of engagement and so on that they actually provide for their clients on an ongoing basis anyway. There is no doubt therefore they would have to make some changes, but for many of them it would be a new world even though the framework is already there for most of them.

Mrs Waller : It probably comes back to a point we made before that at the moment there are some guiding principles on what needs to be in the disclosure statements and the renewal statements, but they are not prescribed. I think that if we had that detail you would be able to do some more effective costings of what it is really going to take to implement this change. At the moment, I think people are guessing and there is a bit of confusion about what is in and what is out—a commission comes in: is it fee-for-service only? What is the interpretation? If we had that clarity it would be a lot easier to do the costings and understand what imposition this may or may not have and weigh that up against the value of the actual reform.

Senator CORMANN: In your submission, you called for an extension of the best interest duty to wholesale clients. Can you talk us through what your thinking is in relation to that?

Mrs Waller : If you are a professional, we believe providing advice that is in the best interest of your client should be the practice for all clients and in all circumstances. If you are calling yourself a professional financial adviser, regardless of whether your client is a retail client or a wholesale client, you should be upholding the same values, beliefs and systems when providing advice and for that reason we think that this obligation should apply to all advice scenarios.

Senator CORMANN: But I can only assume that the government's thinking would have been that a wholesale client would be somewhat less in need of stringent consumer protection and would be more sophisticated in dealing with an adviser and would be on more of an equal footing sort of relationship. Obviously, there is the overall common law fiduciary duty and the best interest duty, but I am interested in your thinking—you think that it is really necessary?

Mr Elvy : I think part of the issue that we are looking at with the FOFA reform package—this is going back to discussions in 2009—is about some behavioural and cultural changes in the industry. Therefore, when you are looking at the provision of advice, best interest is a behaviour similar to ethical behaviour and should be ingrained into everything that you provide, not just, 'Oh well, I have got a retail client; therefore, my requirements are here,' or, 'This client has a lot of money: now I have got different requirements.' So we are really looking at behavioural change in the industry.

Senator CORMANN: I would put it to you that, overwhelmingly, financial advisers would consider now that they act in the best interests of their client, but obviously, depending on what level the client is at, from the mum-and-dad investor up to a more sophisticated wholesale client. As an investment strategy, do you accept that there would be different standards in the way a duty like that would play out?

Mrs Waller : There are probably two things to note. A wholesale client might be a mum-and-dad investor, simply because of the amount of funds that they have. So the way the current framework works—

Senator CORMANN: But, if they have got a lot of funds, it stands to reason that they might be a bit more—

Mrs Waller : It does not mean they have a high level of financial literacy.

Mr Elvy : Maybe inheritance. At the moment a lot of people are getting inheritances, and they really do not have a level of sophistication, but they have got a lot of money.

Senator CORMANN: You have also suggested in your submission that execution-only sales should not be carved out of the ban on conflicted remuneration. Are you suggesting that traditional stockbroking activities should come under the auspices of FOFA where the government has said, 'Yes, we think there should be a carve-out'?

Mr Elvy : In regard to the execution-only sales, mainly in regard to life insurance and with managed investments and those sorts of things, as opposed to from a stockbroking perspective, the issue being—

Senator CORMANN: So commission on insurance, you think, is a conflicted remuneration structure, do you?

Mr Elvy : We believe that commissions as a remuneration structure probably do not align with professional advice. There are not that many professional occupations and so on where your remuneration is based on commissions.

Senator CORMANN: Commissions are a payment form. It is not as if in Australia people are overinsured. We do not have excessive sales of insurance on the basis of a commission structure. It is a payment structure that applies across the whole of the insurance industry. Unless there is an incentive to sell there would probably be even worse underinsurance. In the UK they looked at banning commissions on risk insurance and they had to back away from it at a 100 miles an hour because of the negative flow-on consequences. Why do you think it would be a good idea to ban commissions on risk insurance? I do actually think that not carving out execution-only sales would probably capture traditional stockbroking as well.

Mr Elvy : One of the drivers as part of the whole FOFA reform package revolves around the issue of perceptions. I agree with you in terms of what sort of conflicts actually exist from an insurance perspective as a result of a commission remuneration model and so on. However, if we are looking at developing greater trust and confidence and so on, there are some significant changes in the longer term, not overnight by any means—

Senator CORMANN: Let us leave superannuation to one side. As a client I know that, if I take out life insurance and I take advice on what would be the appropriate structure for my life insurance, I have got a choice: I pay a high upfront fee or I pay a commission over a period of time. It might suit me to pay a commission over a period of time. Why should I not be able to do it? The question is whether the commission arrangement is transparent or whether it is hidden. As long as it is transparent, what is the problem?

Mr Elvy : A number of the arguments with regard to transparency and disclosure that have come up over the last three or four years are that, despite the transparency and disclosure, a lot of consumers do not understand the advice that they have received. So a question mark has come up with regard to the disclosure side of things. With regard to commissions, I understand the view you are raising that as a consumer I should have the choices and the options. Our view and the statement we are making—and it may not necessarily be right at the moment in terms of appropriate timing—is that a commission remuneration model for the provision of professional advice from professionals does not align. If you are looking at trying to build greater confidence and trust in the industry then this may be one of the directions we need to head in.

Senator CORMANN: When I took out my first mortgage from a mortgage broker, he had 50-odd products from different providers and he said: 'You take this one. These are your interest rates and this is the upfront commission. I get the trailing commission.' It is the same with insurance. You have got an insurance broker who says: 'These are the 30 or 40 options. We recommend this one. This is what the payment structure is going to be.' I think it is well understood that commission based payments can be part of the remuneration structure in those sorts of circumstances for a service that is provided. As long as it is transparent, I do not understand where the conflict is.

Mr Elvy : Again it comes down to this idea of professional advice. I think that for the majority of people when they are looking at commissions they see that relating directly to sales, not that there is anything wrong with sales by any means, but part of what we are trying to do with these FOFA reforms is actually improve the professionalism and perception of the financial planning industry.

Senator CORMANN: But ultimately there will be a product involved. If you want to manage financial risk by taking out life insurance or income protection insurance, ultimately at the end of all of the advice you can possibly get there will be a product.

Mr Elvy : That is right.

Mrs Waller : I think what we are trying to say is that the value of seeing a financial adviser is the advice and that is where the focus should be. We need to break this nexus between advice and product and make it clear to the consumer. The reason you go and see a financial adviser is for professional advice and the planner should be remunerated for the advice and the value of that advice. The remuneration should not be determined by the product they then recommend.

Senator CORMANN: We agree on that in relation to investment products and so on, but in relation to insurance neither the government nor the opposition would agree with your proposition there.

Mrs Waller : Like we were saying, we are coming at it from the perspective of looking at remuneration that aligns long term more with the services of a professional. As Hugh was saying before, this is not something that would happen tomorrow or even in a couple of years. It is a long-term objective that will have to be looked at.

Senator CORMANN: As soon as you discontinue your insurance, the commission payments stop. So if you do not stay happy with the product you have taken out, that is the end of the commission payments. Anyway, I am not going to get bogged down on this path.

I have just a final question in relation to your suggestion that ASIC should issue a practice statement setting out how they intend to use their proposed new powers around the terms 'believe' and 'likely to contravene'. Can you just talk us through your thinking there, and how much lead time you think you would want to see from the time that the statement is issued by ASIC and the implementation.

Mr Agland : For us, the issue of giving any regulator such a broad power was not something that we looked at lightly. However we had to look at what is best for the clients and protecting their interest. ASIC has told us that often they have been hamstrung in taking the necessary action because of the existing legislation so giving them these powers would then allow them to take those actions. However we do not want to give ASIC carte blanche and we think that they need to set out in strict terms the circumstances in which they will use those powers and how they will use those powers and how people can then appeal against the use of those powers. Our concern was making sure that if ASIC had this power that there were some rules around it and they did not just have the capacity to take whatever action they wanted.

Senator BOYCE: Mr Agland, the police every day would find people that are likely to commit crimes and would quite like the power to do something about that. And they do not have it for reasons that our community has spelt out very clearly, I think. Do you think that it is acceptable for ASIC to have greater powers in this area?

Mr Agland : If it means that ASIC is able to take actions earlier to prevent clients losing their superannuation or their life savings—

Senator BOYCE: Someone who is going to be burgled tonight would probably like the police to have those powers too, as I said.

Senator CORMANN: You have probably read 1984 by George Orwell—maybe we can be convicted for thought crimes—

CHAIRMAN: Maybe while we are on the subject, to balance it up a bit; we are talking more around the issue particularly as raised by FOS, which is phoenix companies where there is a track record—

Senator CORMANN: No, I am asking about—

Senator BOYCE: It is broader than that.

Senator CORMANN: the ASIC power in the context of somebody who is likely to contravene and where ASIC believes that they are likely to contravene. It is a very low test, really, isn't it?

Mr Agland : It is quite a low test and that is why we are saying that ASIC needs to set out the circumstances where they would use those powers. We want it to be quite limited to circumstances where there is quite a big risk to clients' moneys, or there is a systemic issue that they need to an address. I think that these issues need to be talked about. I would not give—

Senator CORMANN: What you are saying here is that there is a risk, that there is excessive power to a regulator, to a government instrumentality, which if not carefully targeted could be abused and lead to unintended consequences.

Mr Agland : Yes, we agree. We do not want it to be completely open-ended. We accept that there is probably a need for them to have greater powers, but within certain circumstances. If they do not have any restrictions, the concern is that they might take actions that are inappropriate. So we are trying to say that there needs to be some stricture around how they use that power.

Senator BOYCE: I think it was the financial planners yesterday—and I cannot remember for sure—who suggested there should be an objective test in the legislation as to what 'likely to contravene' means. Would you support that approach?

Mr Agland : We would support an objective test, yes. I think that would lessen the concern out there that ASIC would abuse those powers.

Mr FLETCHER: Just back on the point that Senator Cormann was asking about in relation to the joint accounting bodies' views about the payment of commission on insurance products, can you just describe to us the business model that your members are involved with? Would any of your members provide insurance?

Mr Agland : Yes.

Mrs Waller : Absolutely, and we would have members who would operate under a commission based structure at the moment. So we have a practice and a professional standard APS trial which encourages fee for service in all client engagements. But it does not prohibit any particular form of remuneration.

Mr FLETCHER: So at the moment your members are free to provide insurance and receive commission providing they have disclosed that to the client.

Mrs Waller : Yes.

Mr FLETCHER: Is that essentially the position you consider should be maintained under the new law?

Mr Agland : With regards to the whole FOFA reforms we are saying that over time things such as the payment of commissions, where we believe there is conflicting remuneration, should be removed.

I am not saying from 1 July this year or even necessarily 2013. We have a standard that is being reviewed at the moment that is considering this in more detail and removing all of these remuneration structures.

Mr FLETCHER: Is there value to a client in having the convenience of going to an adviser to have a discussion about insurance needs and being advised, 'Well, you are underinsured,' or, 'You need this kind of insurance,' and then for the adviser to be able to say, 'I can arrange that insurance for you'—in other words, a one-stop shop? Is there value to a client in that? I am following up some of the things that Mrs Waller was saying about the differentiation between advice and the provision of the product.

Mrs Waller : The value of the advice would be to identify the risks to the client and say, 'These are areas where we see you have risks including that you are a young family, you are the sole income earner and you need to protect your family should something happen to you.' That would be the value of the advice. How to mitigate those risks might be to take out life insurance at this value and then the third step of that would be the actual product. We want consumers to understand that the value of going to see the planner is about identifying those risks, giving the family some sort of security and improving their future financial circumstances, not just focusing on the end product that is going to be recommended.

Mr FLETCHER: You presumably do not object to the person who provides the advice also being able to say, 'This is the product'?

Mrs Waller : Absolutely. It is part of the advice process. What we are saying is it is part of the process and it is an important part, but it needs to be considered where it is in the overall process—that is, the advice is the actual priority and the product is how you implement that advice. Twenty per cent of consumers go and see a financial planner. It is about increasing the awareness within the community of the value of going and seeking that advice, whether it is limited to financial risk, whether it is about investment or whether it is holistic. It is about the value of advice.

Mr FLETCHER: In your comments about section 962Q, you talk about the impact of that provision if commission is considered to be a fee. I think your concern is about the automatic termination arrangements and how that might play through into insurance. Is that right? Can you expand upon that?

Mrs Waller : This goes back to what we were saying before about needing clarity, about what the opt-in is designed to cover. If it is designed to cover a fee arrangement where I say, 'I am going to charge you X for the next 12 months and provide you X services,' then this issue does not come up. If it is about capturing every type of remuneration the adviser might receive, including the commission on the product, then we see there might be a potential risk there. If the commission is ongoing but the client does not want to engage in the advice, receiving the ongoing commission because they have still got the product would, by default, mean they are still opted in to that advice arrangement.

Mr FLETCHER: So the risk is that the section as presently drafted might have the consequence, where opt-in is required and the client does not opt in, that the client's insurance is terminated. Is that the risk you are highlighting?

Mrs Waller : I think we are looking at it the other way in that, if the client did not wish to continue the actual relationship with the adviser but wanted to retain the product and the product was ongoing, receipt of the commission would mean that the relationship continues because the adviser still receives the fee off the product. We are raising it as a concern that something needs to be addressed once we have clarity about what opt-in will require.

CHAIRMAN: Could you give us a bit more information on the insurance issue—for example, how many people seek out insurance directly? How much is insurance more a push product rather than a sought-out product? Everyone accepts that there is underinsurance as a general concept. Perhaps you could give us the view of your organisations as to how that works in practice.

 

Mr Elvy : From experience, having been in the industry for 20-odd years, generally speaking insurance is sold rather than bought. People often talk about wanting to invest money, and I guess it is the exciting world of making money and wealth and so on, as opposed to considering I am going to die, get sick or something along those lines. There is no doubt that when you are talking with a client you often have to—I will not say push—sell the benefits of insurance. It is unlikely that a client is going to come to you and say, 'I woke up this morning and I thought I would review my income protection.'

CHAIRMAN: Does that in itself attach a special responsibility? It is generally accepted that more often than not you have to really sell it. People are not necessarily asking for it or may not know what level they need.

Mr Elvy : In most cases when it comes to insurance they are just looking for someone they can trust to give them advice. Someone has probably raised it. Either they have had personal experience of knowing someone who has got ill, died or whatever and they think, 'I need to do something.' They just want someone to say: 'This is the advice that you need. This is the amount that you want. Let's arrange it.' For the majority of people, and I think we said this in our submission, financial literacy is still very low. So the primary thing that most consumers want is someone that they can trust and for them to just do it. They should have more responsibility, but at this stage most consumers do not. They need to find someone to do it for them.

Senator BOYCE: When you say insurance is a product that is sold to people rather than asked for by people, it would be irresponsible, would it not, not to include information about insurance in the advice that is given to most people? It is a risk management tool, isn't it?

Mr Elvy : Absolutely. I think the vast majority of financial planners who are providing holistic financial advice would incorporate the risk management issues and insurance. You would be negligent not to.

Mrs Waller : The issue is that still only 20 to 25 per cent of consumers are seeking that advice. We need to increase the number of people who are going out and actively seeking that advice to find out they are underinsured in the first place.

Senator BOYCE: That is part of the whole financial literacy problem—understanding financial risk.

CHAIRMAN: Mrs Waller, you said earlier that the value of seeing a financial adviser is the advice. Could you elaborate a bit more about what that means?

Mrs Waller : Yes. As I said before, we think it is important to break the nexus between advice and product. Financial planners are professionals providing a professional service to a consumer. It is about improving and providing security to their financial circumstances over time. We think the value of financial planning is the advice itself—what the recommendations are, how they are going to improve their circumstances. The value of seeing the adviser is the advice you are going to receive. The product is one of the last steps in the process of implementing that advice. But it is the advice itself that is going to add value for the client. The product will implement it and give you the means to do it, but it is the advice that kicks it off.

Mr FLETCHER: I understand the point you are making. I am not totally sure if I am persuaded by it. I am thinking by analogy, which is always a dangerous thing to do. If you go and see a heart specialist and the specialist says to you, 'You have dangerously clogged arteries; unless we do a heart transplant you are going to die,' that is the advice. Then the separate action that the surgeon will take, if you agree, is to do the transplant or the bypass operation. There is material value in that second part of it. There is material value in being provided with the product, quite separately from the advice.

Mrs Waller : I do not discount that at all and totally agree, but you do not want to meet with a heart surgeon or a financial planner and have them say, 'We're going to give you a heart transplant,' or, 'We're going to put you in product A.' You need to focus on the circumstances of the client, where they want to go, their objectives and their financial situation and give them the means to get them where they want to go. The means to get there is the advice; it is not product A. It could take a range of products and different things in combination to get there. It is about how we are going to get you there and saying, 'This is what we are going to do over time.' The product would be the means to implement that.

What we are saying is that you need to look at the strategic advice and separate that from the product advice, because it is strategic advice that is going to give you value. Not all consumers are going to need a product. Some consumers might go and see a financial adviser and just need some high-level advice to get them on the right road. It might even be budget advice or something like that to improve their financial literacy, as we were saying before. But that adds value for the client. There is no product in that, but the advice adds a great deal of value for the client.

CHAIRMAN: I agree with Mr Fletcher that using analogies is dangerous, but I kind of like that one. Is it fair to say in that context, in that analogy, that financial advice is unlike medicine? In medicine you might have a best product for the client; in financial advice there is technically no best product. It could be a whole suite of products and they could all be different, so it is really about the best advice rather than the best product. So it is quite different to medicine.

Mrs Waller : That is right.

CHAIRMAN: There being no further questions, thank you very much for your submission and thanks for your evidence today as well.

Proceedings suspended from 15:00 to 15:10