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Wednesday, 21 March 2012
Page: 3902


Mr CRAIG KELLY (Hughes) (16:52): I rise to speak on the Corporations Amendment (Future of Financial Advice) Bill 2011 and the cognate Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. The financial services and advice industry provides a very important service to many Australians. It helps Australians with their financial health and wellbeing. Financial advisers help Australians to manage financial risks and maximise the financial opportunities available in today's economy. But we must always remember that financial advice, like any other form of advice, is only an opinion or a recommendation offered as a guide. No financial opinion or recommendation can ever be perfect. For example, look at American economist Mr Alan Greenspan, who served as Chairman of the United States Federal Reserve Board from 1987 to 2006. He was a man credited with masterminding the postwar boom, who had a track record of demonstrating that there was hardly anyone else in the world more qualified to provide financial advice. But, following the GFC, Mr Greenspan admitted that he had been partially wrong. He said:

… I have found a flaw. I don't know how significant or permanent it is, but I have been very distressed by that fact.

When questioned further about his ideology and his opinion of the economy and economic advice, he said that his ideology was not working.

… that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

That reminds us that even the most qualified economists and financial advisers give just that—advice, which sometimes may not be in the best interests of their clients. The coalition recognises the role that financial advisers play in helping Australians to better manage the financial risks and to maximise the financial opportunities. In providing this service, financial advisers actually deal with other people's money. That is the reason why we must have an appropriate robust regulatory framework in place to ensure effective consumer protection and to ensure that high-quality services can be made available at a low cost and that they are accessible and affordable.

The financial services sector came through the GFC in reasonably good shape. But, like anything, there is always room for improvement. In pursuing any regulatory change, we must focus on making things better, not just more complex and not just creating more red tape and not just making it more costly for everyone. We must avoid any regulatory overreach where increased red tape increases costs for both business and consumers with no additional consumer protection or benefit. But, sadly, like so much we have seen from this government, this is flawed legislation, arising from a flawed process. The reform package was simply hijacked by vested interests after more than two years of unnecessary regulatory uncertainty and upheaval for our financial services industry. Confidence in our financial services industry requires that there be transparency, choice and competition. Unfortunately, these bills provide absolutely none of those three. We need to also make sure we are striking the right balance between appropriate levels of consumer protection—but again these bills fail.

I would like to quickly go through a few areas where the coalition believes that these bills fail. Firstly, they are unnecessarily complex and in large parts unclear. Secondly, they are expected to cause an actual increase in unemployment. Thirdly, they legislate to enshrine an unlevel playing field amongst advice providers, inappropriately favouring a government friendly business model against the interests of small business in the financial planning area. Fourthly, the reforms in this legislation are likely to cost about $700 million to implement and a further $350 million per annum to comply with, and they are conservative industry estimates.

I come to a few specifics about the impact of these bills on financial advice. Industry participants have expressed serious concerns about the detrimental effect that this legislation will have in its current form. The committee that investigated these bills received evidence from the Financial Services Council that the government's proposed changes would cost the industry $700 million to implement upfront and $350 million every year thereafter. I think the comments from Mr Richard Klipin, the chief executive officer of the Association of Financial Advisers, are worth reading. He suggests that the total job losses resulting from this legislation could exceed 30,000. He states:

In conclusion, 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 excludes the businesses they support in the communities they serve and the clients they service. A piece of legislation that inflicts this amount of damage is unacceptable.

He is exactly right. He continued:

FoFA as it stands will also increase the cost of advice to consumers.

He goes on to say:

This committee has already had evidence that FoFA will cost hundreds of millions of dollars to comply with—and this is just for the product providers at the big end of town. It will also decimate the provision of financial advice to clients in the bush and the regions. Advice will … become a service for the wealthy, and working families and lower- to middle-income Australians who really need advice will be priced out of the marketplace.

That comment alone shows why this legislation should at least be put on the backburner. I further offer some comments about financial advisers from AMP, who have expressed concern that these reforms would actually increase the concentration of players in the market and lessen competition. A representative of AMP stated:

… I think there is likely to be a migration of advisers to large players like AMP. So, despite the fact that we think there is some competitive advantage in the advice industry for this legislation to companies like my own, we do not believe it is in the broader interests of the financial advice industry that there should be what we think is likely, which would be a consolidation of advisers.

Further, Mr Grahame Evans, the Group General Manager of Professional Investment Services, stated:

Australia did not get to be the No. 1 financial services hub in the world and respected by everybody else because we were anticompetitive. I think this is an important aspect of FoFA. We have to make sure that, in our rush to protect the consumer, there is a balance between the objectives of being able to give the consumer appropriate protection and not reducing the competition that is out there in the marketplace.

We have seen the dangers of increasing market concentration in many sectors of our economy and we have learnt from the mistakes. We have seen the problems our supermarket sector and we have seen the problems in the trucking industry all relating to increasing market concentration. Unfortunately, that is what we see these bills doing. We see an increasing market concentration in the provision of financial advice whereby we risk creating financial planning services that are too big to fail.

Australia simply did not get to be the No. 1 financial services hub in the world and respected by everybody else because we were anticompetitive. I think this is an important aspect. We have to make sure that, in our rush to protect the consumer, we create a balance between the objectives of being able to give the consumer an appropriate level of protection and not reducing the competition that is out there in the marketplace, so not resulting in increasing market concentration. That is simply another reason why these bills in their current form should be opposed.

Another reason why these bills should be opposed is the unrealistic implementation time frame. As it stands, this legislation will actually become effective on 1 July this year, a little more than three months away. The current implementation time of a little more than three months is completely unrealistic, creating great uncertainty for the industry. Businesses will need to change processes, they will need to change software and they will need to train advisers—all before business has even seen the regulations. Three months is simply too short a period of time.

A few interesting comments concern the problem that it will all create. If we try and bring this legislation in and enforce this on our financial services industry in three months, we will create havoc. There will be mistakes made. It will all cost the industry likely even more than the $700 million estimate of implementation. What we should be actually doing, as the coalition has recommended, is this: even if the government thinks this legislation in its current form is the right way to go, its implementation should be postponed to 1 July 2013 so the changes are synchronised with the start of MySuper. In this way, it will make it much easier for the industry to work through these changes, to accept them and to make sure they are implemented on the lowest cost basis.

Another great problem with this legislation is the opt-in provisions. These opt-in provisions will add unnecessary additional costs and create red tape. The government's proposed two-yearly opt-in provisions will make it questionable whether they actually provide any consumer benefit. There is simply no precedent for these opt-in provisions and this increase in red tape anywhere else in the world, yet this is what this government is trying to do. Evidence received during the inquiry expressed concerns about the negative consequences which may flow to consumers who do not opt in within the required 30-day period. That is even though they may have intended to continue with their financial advice relationship and may even have assumed that the relationship was ongoing. Even where the lack of opt-in is inadvertent, clients are automatically deemed to have ended their financial advice relationship. In its submission, the Financial Planning Association expressed its concerns as follows:

Unfortunately, the legislation in its current form does not provide adequate protection to financial advice clients where 'the disclosure obligation' or 'renewal notice obligation' is not satisfied by the financial planner/licensee.

This is because, by virtue of the default, the client will no longer be considered to be an 'advice client' if the planner does not receive the client's opt-in renewal notice within the 30-day period. This may be completely contrary to what the client understands may be the relationship and could have significant ramifications at a later date when the client attempts to seek compensation from their planner for not advising them of changes to the law or market movements that may affect their financial position.

This also affects many of the small business financial planners out there. It affects the value of their business. They may have built up a business with customers, built up a personal relationship, but if this automatic opt-out provision is there, where another form needs to be sent out, it diminishes the value of their business, because those clients automatically fall away from being their clients if that customer fails to fill that form out.

I'm sure that we all know the number of forms that we get through the mail to fill out every day. If this legislation goes through, by simply failing to fill out one of those forms, which often a consumer would put aside and think was unnecessary, they are automatically be opted out of that financial planner's advice. This is simply another reason why this bill should be opposed.

Another problem is with the retrospective fee disclosure statements, because these were not part of the government's proposed changes until the very last minute. It was a last-minute throw-in that was done without any consultation with the industry, without any discussions of the ramifications or the unintended consequences that would result. Mr Richard Klipin, Chief Executive Officer of the AFA, told the committee investigating this bill:

Fee disclosure statements were never part of the conversation and never part of the consultation. They jumped in at the last minute and are retrospective. They are a redundant item and will just cost endless amounts of time and money and will be one of the reasons why a lot of advisers will focus on the higher value clients at the expense of low and middle income Australians.

This is why this bill is deeply flawed. Financial planning and advice is a very complex area. To throw in such late changes at the last minute, without proper consultation with the industry, without consideration for their consequences, simply is a reason why we have ended up with such a flawed bill.

There are many other problems with this bill. The coalition has put forward 16 recommendations. We ask the government to use common sense and reason and at least hold this bill off for another 12 months.