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Monday, 19 March 2012
Page: 3301


Mr HOCKEY (North Sydney) (18:04): For many Australians, financial advice is an essential service. As Australians increase their savings and accrue large amounts of superannuation it should be no surprise that the provision of financial advice has now become a key component of the financial services industry. The coalition recognises the role that financial advisers play in helping Australians to better manage financial risks and to maximise financial opportunities. In providing this important service, financial service providers deal with other people's money. That is why it is important to have an appropriately robust regulatory framework in place to ensure effective consumer protection and to ensure that high-quality financial services and advice remain available, accessible and affordable.

Australia has a strong record of reform in the regulation of financial services with a progressive unification and simplification of the regulation of financial products and financial service providers. This largely reflects the financial reforms of the previous coalition government when I was the financial services minister. This has allowed strong growth in the provision of financial services and products to non-professional investors such as households and small businesses. Financial services now comprise 10 per cent of Australia's gross domestic product. That is a larger contribution to the economy on an annual basis than the mining industry, manufacturing or agriculture. I have continued my interest in this area in opposition.

As part of the coalition's banking reform package launched in October 2010, I called for further simplification of my beloved Financial Services Reform Act to make the business of actually getting out and doing business easier and simpler. Unfortunately, the future of financial advice bills are not legislation that makes life for business easier and simpler. Financial advice must be affordable, simple to understand and it must put the needs of the client first. This FoFA legislation fails on all three of these metrics. It increases cost for practitioners and clients by adding unnecessary costs and red tape. It is overly complex. This will lead to a reduction in business activity and will cost jobs. It fails to establish the strongest requirements for fiduciary duty. The government has just left too little time between this legislation and the implementation date for these changes. The legislation becomes effective on 1 July this year, a scant 3½ months away. The current implementation time frame is unrealistic, creating great uncertainty for the industry. Business will need to change processes and change software and will need to train advisers—all before business has seen the regulations.

There are also changes relating to the provision of the MySuper legislation before the parliament. This too will require changes in processes, software and training but change for that will come into effect on only 1 July 2013, a full year after FoFA. It seems odd that the government would mandate one part of the changes to commence in July 2012 with another part to commence one year later. It makes sense for these changes to occur on the same day, ideally 1 July 2013. John Brogden, head of the Financial Services Council, has said the implementation time frame is 'not realistic' and the 1 July 2012 date is 'inconceivable', particularly because industry has not seen the accompanying regulations. He fears a situation where the industry would 'know what the law says on 30 June 2012 for an implementation one minute later'.

The government should delay commencement of the FoFA legislation until 2013 to bring it into line with the government's proposed MySuper changes. This would give the government and the industry 12 months to work together on the regulations, to implement the new systems and to make personnel changes. The FoFA legislation as it stands will cost Australian jobs in the financial services industry. Since the beginning of this year there have been over 5,700 announced job losses in Australia, including many thousands of jobs lost in financial services. The $700 million initial implementation cost of the proposed changes and the $350 million cost thereafter is entirely borne by the industry. While it may be possible to subsequently pass some of this cost through to consumers, the brunt is expected to be borne by financial planners. This will cost jobs. Mr Craig Meller, Managing Director of AMP Financial Services, gave evidence of potential job losses to the parliamentary joint committee. He stated:

… the initial impact will be on financial planners and even the explanatory memorandum to the bill forecasts a halving of planner numbers in the next few years. We believe that this could lead to job losses in the industry of up to 25,000 over that period. We also fail to see how this would improve advice access.

Mr Richard Klipin, Chief Executive Officer of the Association of Financial Advisers, concurred with this assessment of job losses:

… FoFA, as it stands, will decimate the financial advice profession. Over 6,800 adviser jobs are at risk and over 30,000 jobs in total.

This seems entirely contrary to the government's budget-time promise that it will create jobs, jobs, jobs. Perhaps the Prime Minister sees these jobs as merely growing pains but I can assure her that they will be very real to the men and women who lose their jobs as a result of this legislation. Labor's opt-in provisions require Australians to resign contracts with their financial advisers every two years. This will unnecessarily add red tape, increase costs and create enormous uncertainty for clients and businesses. There is no precedent for this anywhere in the world. It would seem that the minister wants Australia to become the world leader in financial services red tape and nothing else.

These changes were not included in the Ripoll inquiry report in 2009. The only body which proposed mandatory opt-in was the Industry Super Network run by the unions—that is, out of 407 submissions to the Ripoll inquiry only one submission, that of the Industry Super Network, called for the introduction of opt-in. The inquiry chose not to recommend this idea. It was a Labor-dominated inquiry and not even they believed that opt-in was right. Nevertheless, Minister Shorten continued with this initiative regardless of the feedback from everyone else. The Financial Ombudsman Service stated in their submission to the PJC inquiry that the complaints to the service frequently include aspects where clients have inadvertently not filled out forms. This issue will only get worse under FoFA where clients will be forced to sign more forms to continue to receive advice, rather than simply opting out when they are unhappy with the quality or level of advice. If a consumer fails to complete a renewal notice in a 30-day period, they will be left high and dry, without financial advice and without the added protection that brings. This could mean that they will not be advised of changes to the law or of opportunities or problems in their financial portfolio.

Better knowledge of the work of financial advisers is needed—not overburden but some regulations that are complex for both advisers and the clients. In our view there are already three requirements that provide appropriate consumer protection while not imposing excessive costs and red tape. The first is the requirement for advisers to act in the best interests of the client. The second is transparency around fees charged when entering into the financial advice relationship. The third is the ongoing capacity for clients to opt out of that relationship if it is, in their judgment, not delivering value.

Another aspect of the FoFA legislation which was not recommended by the Ripoll inquiry but has crept its way into the legislation is retrospective fee disclosure statements. Clients seeking financial advice already receive regular fee disclosure statements in relation to any financial product they hold. The legislation requires this currently available information to be consolidated into an additional annual fee statement provided by the financial adviser. This creates an extra regulatory burden for advisers and an extra layer of costs for clients. The Financial Services Council has estimated the implementation costs for existing clients would be $98, but for new clients it would be $54 a year. Like so many of the FoFA reforms, the government said one thing to stakeholders and then did something entirely different. The industry was led to believe the new fee disclosure statements would apply only to new, not existing, clients. The industry took the government at their word, as have the Australian people on many occasions.

The role of the opposition is to hold the government to account, and we will. The government's longstanding commitment to only prospectively apply detailed fee disclosure statements should stand. Of course, this is yet another broken promise from the Gillard government. I have long argued that financial planners should have a fiduciary obligation to act in the best interests of their clients rather than in their own interests or in the interests of a product provider. The government's own Ripoll inquiry recommended that. Recommendation 1 of the report said:

The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own.

I find it strange that the government has chosen not to implement a fiduciary duty. Instead, it has opted for a far less stringent 'best interests' duty. Nevertheless, it is better than nothing. Proposed section 961B(2) sets out conditions that must be met in exercising this best interests duty. For example, an adviser must attempt to understand a client's personal circumstances. This provision makes sense; in fact, it is common sense. It is sensible to ensure financial advisers consider all of their clients' known circumstances when providing advice, and it is also sensible to ensure that the adviser has conducted a thorough investigation of the financial products that best suit the needs of the client. However the government, obviously not satisfied with its requirements in section 961B(2), has chosen to burden the financial advice industry with a catch-all clause in proposed section 961B(2)(g), which states that an adviser must have:

… taken any other step that would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

Since these 'other steps' are not specified, financial advisers, and everyone else, can have no comfort as to whether they have complied with their best interests duty or not. This just creates more uncertainty, and it will lead to more litigation, have no doubt about it, Mr Deputy Speaker. The coalition proposes to remove section 961B(2)(g) but to retain the rest of 961B(2). This will retain the best interests duty and create certainty for those attempting to comply with this legislation.

The coalition's next concern is with the definition of 'conflicted remuneration structures'. We believe that it is too broad and ambiguous and that it will create uncertainty among industry and clients. Let me be very clear: the coalition supports the banning of conflicted remuneration structures; however, much has already been done voluntarily by the industry to reduce the prevalence of conflicted remuneration structures. This process is already happening at an industry level, largely without the assistance of government. This arises from the general community becoming more aware of the importance and worth of financial advisers.

The FoFA legislation outlines three broad categories of conflicted remuneration. The first is monetary conflicted remuneration, the second is non-monetary conflicted remuneration and the third is other banned remuneration, such as shelf-space fees. In relation to monetary conflicted remuneration, the provisions in sections 963A and 963B are, to say the least, confusing. They have the potential to complicate matters so that general advice contained in marketing campaigns or previous advice could be inadvertently banned. These provisions have drawn sharp criticism from many stakeholders, including the Law Council of Australia, who stated:

… a product issuer who provides general financial product advice (for example in the form of a product disclosure statement), could be prohibited by the ban on conflicted remuneration from receiving a management fee as the fee could be interpreted as being capable of influencing its general advice to investors.

This could have the effect of meaning financial advisers provide less, rather than more, information to their clients. The industry need urgent clarification about whether advice they provide that is general in nature could be adversely affected by this legislation if such advice is part of the management of the funds and therefore carries a management fee. This difficulty could be avoided if the following changes were made. First, general advice should be specifically exempt from the definition of conflicted remuneration. Second, the proceeds of the sale of a financial-planning business between a licensee and its authorised representatives should be specifically exempt from the ban on conflicted remuneration. Third, section 963B(1)(c) should be amended to link the payment for advice to a specific advice provider rather than to any representative of a licensee, and it should apply only where there is a causal link between past advice and current advice.

With relation to non-monetary conflicted remuneration, the legislation imposes a $300 limit on the value of certain non-monetary benefits. There is uncertainty as to whether this $300 limit applies on a per employee basis or as an aggregate across all employees at a firm. Again, the coalition calls for urgent clarification as to the intent of this part of the legislation. We are similarly concerned that the exemption to the $300 cap for education or training purposes relates only to services provided 'relevant to the provision of financial product advice'. This means that training in software programs, running a small business and effective communication with clients may not be allowed under the new FoFA regulatory regime. Training like this is necessary to ensure the financial advice sector, like any other business, is professional and accountable. Effective training by industry, including professional development courses relating to business, software or industry processes, is an important way for the financial advice sector to improve its standards and the quality of the service it provides. To restrict this type of training provided by licensees will severely impact on the professionalism of the industry, and it runs completely counter to the aims of the legislation.

The coalition fears that the banning of commissions for risk insurance inside superannuation will leave many more Australians underinsured because it will drive up the upfront cost of such insurance. We do not subscribe to Labor's assertion that commissions on risk insurance are in themselves a conflicted remuneration structure. We do not believe this policy will work. We know from recent experience in the United Kingdom that the banning of commissions on risk insurance does not work. The UK has recently reversed its decision—just as we head into it, thanks to the government. Australians who wish to enter voluntarily into agreements for risk insurance should be free to choose a remuneration arrangement that best suits their circumstances. This may, in some cases, include a commission.

The coalition is also concerned that the provisions regarding the grandfathering of the conflicted remuneration regime are imperfect and that they unfairly and unduly infringe on existing contractual arrangements. Existing contractual arrangements must be recognised and grandfathered to preserve existing property rights. These provisions contained in clauses 1528(1) and 1528(2) create uncertainty, particularly for platform providers who have often locked in contracts with businesses and individuals many years in advance.

The coalition shares the concern of the industry that the anti-avoidance provision contained in clause 965 was included in the bill before the industry had the opportunity to assess its impact. It was not part of the initial FoFA proposal. Item 10 of the bill inserts proposed section 965, which makes it a civil penalty offence for a person to enter into a scheme if the sole or dominant purpose was to avoid the application of proposed part 7.7A, including the best interests test. We have no issues with the provision in principle but will not support its application to legally permitted, exempted or grandfathered arrangements. The legislation does not explicitly exclude existing arrangements. As the Financial Services Council noted:

Specifically, the wording of s965 does not exclude existing arrangements which may inadvertently capture legitimate, and legally binding, arrangements already entered into.

The legislation should be amended to capture only circumstances occurring after the commencement of the legislation.

The coalition is a strong supporter of ASIC being the sole regulator in the financial advice sector. I helped to set it up—I am a great believer in ASIC. The Financial Services Reform Act, which I as minister introduced into parliament in 2001, recognised that it was not efficient for different financial institutions, services and products to be regulated under separate frameworks. The act brought all of the various elements of the financial advice industry under the one regulator, ASIC. It gave ASIC considerable powers to regulate and oversee the industry.

However, as I outlined in our banking plan, I am the first to admit that there is more to be done. The issue of the powers of ASIC was a major focus of the Ripoll inquiry. This bill gives ASIC the power to refuse to grant, to suspend or to cancel an Australian financial services licence where a person is likely to contravene its obligations as a licensee. You heard that correctly—likely. ASIC is to be given powers to suspend somebody from their business on the basis of an assessment of what they might do, not what they have actually done. Not only is this an obvious contravention of natural justice but it is clearly a step too far. The powers were not recommended by the Ripoll inquiry and they are flawed.

As the sole regulator, ASIC must not be given, in the words of the joint accounting bodies, carte blanche with regard to its powers to suspend. The powers must be based on actions, not assumptions or assumed intentions. There must be strict guidelines set for its powers and for how it uses them, as well as for rights of appeal and procedural fairness. The Law Council of Australia stridently criticised this when they noted:

There is no standard of proof which must be satisfied by ASIC and no prescription of the matters which go to whether a person is "likely to contravene" their obligations.

Many of the problems of financial advice in Australia have not come from a deficiency in regulation but from a deficiency in enforcement. The Ripoll inquiry noted:

The committee is of the general view that situations where investors lose their entire savings because of poor financial advice are more often a problem of enforcing existing regulations, rather than being due to regulatory inadequacy. Where financial advisers are operating outside regulatory parameters, the consequences of those actions should not necessarily be attributed to the content of the regulations.

Many of the recommendations of the Ripoll inquiry were sensible and widely supported. A future coalition government would wrap up all of the work that has been done thus far with a full review of the financial system—a son of Wallis or grand-daughter of Campbell, whatever you will. I have long been an advocate, especially after the global financial crisis, of a full review—something not undertaken since 1996.

As a freedom of information request last year showed, even the Treasurer's own department recommends a full inquiry into the financial system. Unfortunately, instead of following the good lead of the Ripoll inquiry, the government has allowed its FoFA reform package to be hijacked by vested interests, creating more than two years of unnecessary regulatory uncertainty and significant upheaval for the financial services industry. This legislation must be amended to create certainty.

Perhaps the most damning aspect of this legislation is that it fails the government's own tests for simplicity, transparency and regulatory impact. The executive director of the government's own Office of Best Practice Regulation, Jason McNamara, said the impact analysis accompanying the legislation 'was not at a standard that we would pass'. This is the government's own internal adviser saying that the legislation was not at a standard that they would pass. The impact analysis was particularly poor in some of the crucial and contentious areas of regulation, including the opt-in and annual disclosure sections.

The government must, as a matter of principle, withdraw this legislation until a full and compliant regulatory impact statement is submitted. This is the only option the government should consider. Accordingly, I move:

That all words after "That" be omitted with a view to substituting the following words: "the House declines to give further consideration of the bill and of the Corporations Amendment (Further Future of Financial Advice) Bill 2011 until after the Government has tabled for the bills a Regulatory Impact Statement which has been assessed by the Office of Best Practice Regulation as compliant with its requirements.

The DEPUTY SPEAKER ( Mr Oakeshott ): Is the amendment seconded?

Mr Billson: Mr Deputy Speaker, I second the motion.