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Wednesday, 21 March 2012
Page: 3913

Dr JENSEN (Tangney) (17:45): As stated by the government, the purpose of the Corporations Amendment (Future of Financial Advice) Bill 2011, which is being debated cognately with the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, is to tackle conflicts of interest within the financial planning industry in an effort to restore the confidence and trust of retail investors following the fallout from Storm Financial, Opes Prime, Westpoint and the like. The key test for the success of FoFA, supported by the coalition and peak industry bodies, will be improved transparency and increased access to advice as a consequence of these reforms. In its current draft the first will be achieved but the bill will fail to deliver the second. Advice will come at a higher cost and be provided to fewer people. This legislation is unnecessarily complex and unclear, is expected to increase unemployment and legislates unfair advantage to certain service providers, inappropriately favouring a government-friendly business model. It would be incredible if fewer Australians received advice because of these reforms.

The Minister for Financial Services and Superannuation has stated on a number of occasions that FoFA has broad industry support. This is largely the case. However, the coalition, and indeed the financial services industry, hold many concerns, addressed comprehensively in the coalition's dissenting report. Evidence before the recent Parliamentary Joint Committee on Corporations and Financial Services in its inquiry into this legislation confirmed our view that the legislation in its current form would be bad for consumers, bad for small business, bad for small business financial advisers and bad for the industry as a whole. It would unnecessarily increase red tape and increase costs for business and consumers while reducing choice, as well as reducing competition and diversity across the financial services industry.

In February 2009 the Parliamentary Joint Committee on Corporations and Financial Services conducted a comprehensive inquiry into Australian financial products and services. The centrepiece of the Ripoll inquiry's report was the recommendation to introduce fiduciary duty for financial advisers, requiring them to place their clients interests ahead of their own.

The Financial Services Council of Australia welcomed this report and has welcomed the majority of the reforms these bills offer. The industry already strives for higher standards for financial advisers, embraces a best-interest duty and wants the end of remuneration structures that have the potential to distort advice. These elements of the FoFA bills are important for the customer but also significant for the future growth and stability of the industry. Very constructively, the coalition has made a series of recommendations on how FoFA can be improved and progressed from here.

The coalition will be moving a series of amendments, including that the government be required to table a regulatory impact statement on FoFA consistent with the government's own process requirements. This must be done before anything else. Given the magnitude of the changes and the costs involved, it is imperative that a proper regulatory impact statement with a proper cost-benefit analysis be completed.

According to the government's own Office of Best Practice Regulation the government did not have before it adequate information to assess the impact of FoFA on business and customers—or, indeed, adequate information to assess the cost-benefit of the proposed changes. This simply is not satisfactory, given the complexity and costs associated with the contentious parts of the proposed changes. The minister must remove the contentious elements of this legislation and proceed with the important and widely supported FoFA reforms. The minister must remove the opt-in obligation, as it imposes unnecessary additional red tape and costs that are not reflected in any other industry or country. The imposition of a mandatory requirement on customers to re-sign contracts with their financial advisers on a regular basis is unreasonable and incurs costs for both planners and consumers. Remember, opt-in was never a part of the initial Ripoll inquiry recommendations. And the government has been unable to point to another example anywhere in the world where a government has sought to impose a mandatory requirement on consumers to re-sign contracts with their financial advisers on a regular basis. The coalition is strongly opposed to this element of the bills before the House. The inclusion of the best interests duty and the ban on conflicted remuneration address any factors that may have driven the inclusion of this clause. They offer appropriate transparency of fees charged and an ongoing capacity for clients of financial advisers to opt out of any advice relationship at any stage. This offers adequate consumer protection. Left without amendment consumers face increased costs and reduced access to appropriate advice as advisers reposition their offerings to the market to maintain turnover and productivity. Consumers will stop receiving advice or not seek advice at all.

In relation to removing the retrospective application of the additional annual fee disclosure requirement, again, the Ripoll inquiry made no recommendation to introduce an additional annual fee disclosure statement over and above the current regular statements provided to clients. This requirement in fact infringes on existing contractual arrangements and information that is already provided to clients. Failure to amend these measures will see a huge cost burden on industry for information consumers already receive. The Financial Services Council estimates that implementation of the fee disclosure requirement alone will cost approximately $54 for each new client and $98 for each existing client—an annual cost to the industry of $375 million. Like all costs these will be passed straight to the consumer. The government must be held to account for the commitment it made during the consultation process that these additional annual fee disclosure requirements would apply prospectively only.

Regarding improving the drafting of the best interest duty, the coalition supports the introduction of a statutory best interest duty for financial advisers into the Corporations Act. This is a central and very important part of the FoFA reforms. However, to avoid confusion and minimise the risk of future disputes it is important to get the drafting of the best interest duty absolutely right. Peak industry body the Association of Financial Advisers also support the best interest duty. But they too seek greater clarity and certainty for financial advisers. It is obvious that the government has struggled to come up with an appropriate definition of the best interest duty. The coalition remains concerned that a catch-all provision will create uncertainty for both clients and their advisers.

Proposed section 961B(2) defines a series of steps that are comprehensive in their definition and provide unambiguous guidance to advisers. However, paragraph (g) allows for any other steps that would be reasonably regarded as being in the best interests of the client. If there are further steps the legislation must clearly state so. They should be included in their entirety and paragraph (g) removed. Left as is, this section creates uncertainty that will eventually be tested in the courts. And, again, this section will lead to higher costs to the customer as ambiguity is likely to result in an increase in professional indemnity premiums. Regarding further refining the ban of commissions on risk insurance inside superannuation, the coalition supports the ban of conflicted remuneration structures such as product commissions within the financial services industry and commends the industry for moving proactively and effectively to abolish such conflicted remuneration structures. However, we do not consider commissions paid on advised risk insurance inside or outside superannuation to be conflicted remuneration structures. Again the government's own Ripoll inquiry did not make any recommendation to ban commissions paid for by risk insurance products. Banning such commissions will increase costs for consumers, remove choice and leave many people worse off, particularly small business people who self-manage their super.

To treat commissions on all risk insurance inside super differently from insurance outside super will also create inappropriate distortions which will fail to be in the best interests of customers. We agree that those Australians who receive automatic risk insurance within their super fund without accessing any advice should not be required to pay commissions. However, those Australians who require and seek advice to ensure adequate risk cover, whether inside or outside of their super fund, should have the freedom to do so.

We must also ensure that the ban on conflicted remuneration is not applied retrospectively. We must delay the implementation of FoFA to 1 July 2013 to align it with MySuper. The current implementation time frame of 1 July 2012 is completely unrealistic given that the proposed commencement date is less than four months away. Given the ongoing legislative uncertainty, implementation by this time is surely impossible. These two major changes require significant and expensive changes to the same financial service provider's IT systems and adviser training. It is the government's lack of understanding of practical business realities that sees it attempt to impose two different implementation dates involving significant and costly system changes in relatively quick succession. It is symptomatic of the government's chaotic approach not only to this policy area but to all legislation. Ultimately, the government must see that consumers' best interests must determine the timing of these reforms.

Dante De Gori of the Financial Planning Association of Australia told the Senate Economics Committee that his organisation supported a one-year transition and implementation of the scheme, emphasising the reforms had to be 'implemented accurately, while ensuring they are workable'. A one-year transition will 'allow all financial planners the time needed to implement these reforms in a transparent and efficient way'. The coalition agrees with this observation and, if amended, these regulations should not commence until 1 July 2013.

At a time when our population is ageing, growing superannuation balances mean Australians will need more and better financial advice. We must ensure that the implementation costs of these bills do not come at the expense of product development, in particularly post-retirement products. But the current regulatory change makes it hard for companies to allocate budgets to these projects. Over the past two years there have been continual and unexpected changes to the proposed regulatory arrangements under FoFA right up until the introduction of the current legislation. Companies are keen to develop better retirement products, but they cannot spend money on that if they have to spend money on FoFA. The current draft of this legislation will significantly and negatively impact not only customers but, most importantly, older and retired customers.

The Australian financial services industry performed very well in the stress test of the GFC. When it comes to providing financial advice in our region, the Australian market is considered best practice, with established industry bodies and licensed advisers with specific training. And efforts to professionalise financial advice and planning in Australia go back many years. There is no doubt that financial services reforms legislated in 2001 provided a solid regulatory foundation for our financial services industry. But there is always room for improvement.

The financial services minister and cross-bench members must seriously consider the coalition's amendments and support them. The original intent of the FoFA reforms should be adhered to, ensuring that all financial advice is in the client's best interests and financial advice should not be put out of reach of those who would benefit from it. Our goal must be to balance effective consumer protection with access to high-quality financial services that are available, accessible and affordable. We must avoid regulatory overreach that increases red tape and costs for both business and consumers with little or no additional consumer protection benefit. I call on the House to adopt the coalition's constructive recommendations and amendments to allow these important reforms to pass in a form that is beneficial both to industry and to the customer.