ACTING CHAIR (Mr Griffin) —I declare open this public meeting of the Parliamentary Joint Committee on Corporations and Financial Services. This afternoon the committee will hold its fourth public hearing into the regulations and the ASIC policy statements made under the Financial Services Reform Act. Before we commence taking evidence, I reinforce for the record that all witnesses appearing before the committee are protected by parliamentary privilege with respect to evidence provided. Parliamentary privilege refers to the special rights and immunities attached to the parliament or its members and others necessary for the discharge of parliamentary functions without obstruction or fear of prosecution. Any act by any person which operates to the disadvantage of a witness on account of evidence given by that witness before this committee is treated as a breach of privilege. These privileges are intended to protect witnesses. I must also remind you, however, that the giving of false or misleading evidence to the committee may constitute a contempt of the Senate. Unless the committee should decide otherwise, this is a public hearing and, as such, all members of the public are welcome to attend. The committee prefers all evidence to be given in public but should you, at any stage, wish to give any part of your evidence in private, you may ask to do so and the committee will consider your request. The committee has before it a written submission from you. Are there any alterations or additions you would like to make to your submission at this stage?

Mr Gilbert —No.

ACTING CHAIR —Do you have an opening statement?

Mr Gilbert —The submission speaks for itself. We have appeared previously in this inquiry and gave evidence on the size of the industry's role in this regard. Very briefly, we support these regulations. We do so because we were involved in a long and quite involved set of negotiations with Treasury officials and, whilst we did not win all of the things that we wanted to win from this for our industry, the result is largely satisfactory to us. This industry at this time needs certainty of the regulations. To that end, I would like the committee to know that our members—our retail members, at least—have got product disclosure statements on the market, and to change those in the middle of this inquiry would be unfortunate and costly. Other sectors do not have those requirements, because they can wait until the end of the two years before the legislation takes effect for them, whereas my members have documents which roll out of currency during the next two years. Our industry is particularly affected by the start date and these provisions. That is why—but it is not only reason why—we have supported this set of regulations. That is all I wish to say.

CHAIRMAN —Mr French, do you have anything to add before we move to questions?

Mr French —No. That summarises our position. We are fully in support of the regulations.

Senator CONROY —Is IFSA aware that Australia operates a bicameral parliament?

Mr Gilbert —Absolutely.

Senator CONROY —Does IFSA believe that simply because the government of the day tables regulations in the Senate, the Senate should automatically rubber-stamp whatever the government does?

Mr Gilbert —That is why we are here today.

Senator CONROY —It is just that the tenor of your submission seemed to imply that the role of the Senate was merely to rubberstamp whatever the government told it to.

Mr Gilbert —We certainly have not used those words, nor would we ever. We have never presumed that the parliament was not supreme in this issue. The parliament is supreme, and if the parliament struck down these regulations our members would comply accordingly.

Senator CONROY —It has been speculated in the newspapers that IFSA, as with many others, had a role in commenting on the regulations before they were tabled. You might not have had the opportunity to clear that up the record. Are you aware if any consultations took place between the governments, the Treasury or anybody else with any of the other parties involved in the Senate before the regulations were tabled?

Mr Gilbert —Our discussions with the government were via the processes that the Treasury had initiated. When the regulations were tabled, we made contact with your official and also Senator Campbell's official to say that we could work with these regulations. Is that the time frame that you are talking about?

Senator CONROY —No. There were two parts to the question. One was to allow you, as there has been some speculation in the media about this, to have your say on it—

Mr Gilbert —If you would like me to clear that up, I will. I have no problem with that.

Senator CONROY —I am offering you the opportunity, if you want to take it.

Mr Gilbert —Thank you, I will. The comments made in the media were strange, because during the process in which the regulations were being formulated we had no contact with any minister, not the current parliamentary secretary or his predecessor, Minister Hockey. We had no contact in relation to those regulations with any advisers working for those ministers in Parliament House. To the best of my knowledge, the only contact that we had was sending Mr French to Canberra with eight other groups who were there at the table. The submission that we made was on the web site. If you have the opportunity to look at our submission, it does not necessarily reflect what the regulations are, but we understand what compromise is about, and we understand the need for a commercially viable and certain future for us. That is why we supported the regulations.

Mr French —Perhaps I could just add to that. I was present at all the consultative group meetings. I can say in all honesty that there was no spare room at the table because of the very broad representation—every conceivable stakeholder from both the industry and the consumer side was there. In fact, before we made our own submissions and went to those consultative meetings, our own consultation processes involved quite intensive meetings with consumer groups. Each of them was very thorough and very well attended by all stakeholders.

Senator CONROY —That was the first half of the question. This is the second half of the question: are you aware whether the government, before tabling the regulations, consulted with any other political party that is represented in the Senate?

Mr Gilbert —Again, I do not know because I have not asked anybody in the government on that front.

Senator CONROY —Are you aware whether the regulations were issued in a draft form before being tabled, as were all the other FSR legislation along the way and the ASIC working notes, which first were working documents before becoming the final documents?

Mr French —I could not swear to them all having been issued in draft form but certainly, to my recollection, all ASIC policy was and most of the regs were. The regulations were coming fairly thick and fast between October and March.

Senator CONROY —The ones tabled on 27 or 28 February, I think it was. Are you aware whether that particular set, which covered the issues where a disallowance was moved, was out in the public domain as a draft?

Mr French —My recollection is that they were issued in draft form and there will be a meeting to talk about them. We had a specific consultative group meeting which basically—

Senator CONROY —No. I can assure you that the consultative group meeting is not a public forum; it is an invitation only forum. I put that just to make sure you are aware of the distinction regarding the consultative process. In this particular case, I do not know whether you had to sign any confidentiality agreements there.

Mr French —No.

Senator CONROY —I know that the government does that with other legislation. But are you aware that the public discussion papers were issued in a public form?

Mr French —Beyond the formal consultative arrangements, I am not aware either way.

Senator CONROY —Treasury are here; we will be able to ask them shortly. Would it come as a surprise to you that other political parties were completely unaware of the content of those regulations until after they had been tabled in parliament or via the process?

Mr French —I would not comment on that. I think that is a matter for the minister and the government to comment on.

Senator CONROY —To avoid the concept of the Senate being a rubber stamp, do you think it is helpful if people are aware of things before they are jurisdiction st thrown on the table in an attitude of `take it or leave it'?

Mr Gilbert —I go back to my initial statement that IFSA would never presume the Senate to be a rubber stamp.

Senator CONROY —Are you aware of whether Treasury or your association did any marketplace testing of the OMC?

Mr Gilbert —I have thought long and hard about that issue, and I think that is a good question. All I can say is this: this industry has used a thing called a management expense ratio for the best part of the last 15 years, and I do not think anybody has been able to say that it has not been a good comparator between funds. Except for one difference, the management expense ratio essentially is the same as the OMC, and that one difference now is investment management charges. It used to have stamp duty attached to it; but, now that stamp duty has gone, the only difference is investment management charges. The MER is a worldwide best practice measure to compare funds. In looking at some web sites I noticed that the Canadians and the US have that particular model. We support the OMC because it has worked for us in the old superannuation regime, which had regulations which were promulgated by Labor when they were doing key feature statements post-1994 with the SG, and we believe that going forward it should work. It does what it says it is going to do: it is the ongoing management charge. It is not the charge going into a fund or the charge going out of a fund; it is the charge of staying in a fund.

Senator CONROY —Were you surprised that the OMC was being mandated only for the superannuation industry? Some of your members have indicated that they will be putting OMC in for both managed investments and super. Did it surprise you that there was a separation, given that this bill was designed for a single licensing regime with one fit?

Mr Gilbert —On that front, the OMC will be working for the superannuation industry and currently, via an industry standard, we are working on the MER. I would advise the committee that we are reviewing our standards post-FSR and we will be introducing the OMC for all nonsuperannuation products that our members offer. As we cover about 95 per cent—probably more—of the retail investment management market, there will be an OMC across both sectors. The advantage is that, by virtue of its products and the people going into it, the nonsuperannuation environment moves more rapidly and has far more innovation in it than the superannuation environment. I believe it is acceptable for us to run those standards as we have done for the last 10 years because it means that we can more readily adapt to the changing marketplace.

Senator CONROY —Will your MER be based on total cost to the consumer?

Mr Gilbert —No. The MER will be, as per the OMC, the ongoing management charge. So, if any charges are incurred through being in the fund on an ongoing basis, they will be in there.

Senator CONROY —Is it reasonable to exclude exit and entry charges? I think you also mentioned one other type of charge.

Mr Gilbert —There is no reason to exclude any ongoing charges. The reason for excluding entry and exit fees is that they do not fit into the pure definition of an OMC. I would advise the committee also that you can have a five per cent entry fee, but it is industry practice that that percentage be much lower. You can also have a five per cent exit fee and, again, that varies from customer to customer and fund to fund. But the constant here is the ongoing management charge. The other charges are disclosed under the PDS arrangements on a schedule and in the prospectus, and individuals can tailor those particular charges to their needs and their circumstances.

Senator CONROY —Obviously `OMC' represents ongoing management charge. There is no particular reason for those three initials; they are not sacrosanct. MER does not necessarily immediately stand out as meaning `this is ongoing'. You have referred to `the purer model of OMC'; why are you drawing a line between entry and exits costs to a consumer?

Mr Gilbert —Because all investors incur the ongoing management charge. In a trust, all investors have to be treated equally. But coming into the fund you might have an adviser who charges you five per cent, and that would be a charge peculiar to you. But you might not have an adviser and you might come in through Commonwealth securities, the web site funds manager, and all of those customers come in at zero.

Mr French —Or your adviser might rebate all the entry fees. Our information and understanding is that it is just not possible to include those in the OMC. The OMC is a calculation about, as Richard says, ongoing charges.

Mr Gilbert —Just to correct Mr French: the point is that, if you did, you could well be misleading half or three-quarters of the investors about the level of charges they are paying.

Senator CONROY —Explain that, please.

Mr Gilbert —If half the investors are coming in with a five per cent entry fee and that is then applied to the lot, the charge will go up for everybody and you will end up with an inflated OMC. The OMC is peculiar to those people who are in the fund. The OMC is for all people who are in the fund, whereas entry fees and exit fees will be selectively applied depending on the person's circumstances.

Senator CONROY —Will your MER for the managed investment side and, hopefully, the OMC side eventually be in dollar terms, where possible?

Mr Gilbert —That is what we are working towards. The $10,000 example is a good illustration of an average superannuation investor. As an industry, we have to work out whether that is applicable to the people in our particular nonsuper fund. So the average superannuation fund account, in the contribution sense, is only about $5,000 to $10,000, and I think that is why the $10,000 was struck. But in the nonsuperannuation environment the average balance is about $40,000. So we might have to look at that otherwise, if we use exactly the same methodology, we may well be misleading our customers.

Senator CONROY —I know you are aware of the Consumers Association's evidence, both to this committee and at its presentation to your own conference last week, which I congratulate you on. I think that association and ASFA described the OMC as dangerously misleading. Is that a fair description or an unfair description?

Mr Gilbert —I think there is some irrational exuberance in that statement. The OMC does what it purports to do: it tells the investor what they are paying, on average, for being in that fund. I would suggest that, if entry fees and exit fees were incorporated into that equation, the word `dangerously' would be inappropriate; it would be `very dangerously' or `highly dangerously' misleading. I think it was a very unfair statement.

CHAIRMAN —As there are no further questions, Mr French and Mr Gilbert, I thank you very much for appearing before the committee and answering questions.

[2.53 p.m.]