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Thursday, 13 October 2011
Page: 11797

Mr SHORTEN (MaribyrnongAssistant Treasurer and Minister for Financial Services and Superannuation) (09:32): I move:

That this bill be now read a second time.

Today I introduce a bill which will amend the Corporations Act 2001 to better protect consumers. I am pleased to do so in the presence of so many firefighters who are members of their union and promoting the long-term interests of their members. It is great they are here. These measures which I refer to constitute a growth strategy for the financial planning and advice industry. They are fundamentally about improving consumer confidence and financial advice and, therefore, increasing the propensity of everyday Australians to seek advice. To the Gillard government these amendments are, therefore, both pro-business and pro-consumer. This bill will improve the capacity of the corporate regulator, the Australian Securities and Investments Commission (ASIC), to act against unsatisfactory persons and it introduces a requirement for financial advisers to seek their clients' agreement every two years to continue to charge ongoing fees.

The initiatives in the bill implement part of the government's Future of Financial Advice reforms which is its response to the Parliamentary Joint Committee on Corporations and Financial Services' inquiry into financial products and services in Australia that was established in the wake of collapses such as Storm Financial. It was chaired by the member for Oxley. The recent TRIO collapse is also relevant. This bill represents the first part of the FOFA reform package.

Importantly, the bill includes two key measures to enhance consumer protection and instil more trust and confidence in financial planning.

Firstly, the bill sets in place arrangements which require financial advisers to obtain their retail clients' agreement every two years in order to charge them ongoing fees for financial advice (that is the opt-in requirement). Currently, there are some clients of financial advisers that pay ongoing fees for financial advice who receive little or no service. Some clients are unaware of the amount of these fees and continue paying them because they are disengaged. This scenario can arise both where the advice fee is paid via a third party product commission, and directly from the client to adviser. This is occurring despite the fact that most ongoing advice contracts allow a client to opt-out at any time.

The government's new measure promotes the active renewal by the client to ongoing fees for advice, with opportunities for them to consider whether they are receiving value for money. It also assists disengaged clients from paying ongoing fees that they should not be paying.

The current disclosure of ongoing fees at engagement in the statement of advice the first time you get advice is an insufficient safeguard, because the disclosure is not ongoing after your first meeting with the planner in some cases. A client might be paying fees that were outlined in a statement of advice they received from an adviser years ago.

The basic requirement is that advisers must obtain their clients' agreement to renew at least once every two years.

The renewal notice empowers a client to renew or end the ongoing fee arrangement. If the client does not respond to the renewal notice, they are assumed to have terminated the advice relationship and no further fees can be deducted by the adviser from the client. If an adviser breaches by overcharging after a client has not opted in, they could be subject to a civil penalty. The maximum amount of this civil penalty, which is lower than others in the Corporations Act, reflects the tailoring of the penalty to suit the nature of the offence.

There is considerable flexibility as to when and how advisers obtain the renewal notice. The bill also provides additional grace periods if a client inadvertently opts out by not responding to the renewal notice in time.

The disclosure requirement is an important supplement to the renewal requirement. It includes fee and service information about the previous and forthcoming 12 months, and assists clients to understand whether they are receiving a service from their adviser commensurate with the ongoing fee that they are paying.

The renewal obligation will apply to new arrangements after 1 July 2012, but does not apply to existing clients of financial advisers. However the annual disclosure obligation will apply to all clients of advisers.

Overall, the measure is about the focus being on the client of the financial adviser, and what is in the client's best interest. This is line with the existing practice of many advisers. Not only is this the fair thing for the client, it is also professional best practice. There has been a lot of scaremongering about the cost that this measure will impose on financial advisers, and with this a variety of estimates of that cost. It is a matter of fact that for advisers that charge on a pure fee-for-service basis (that is, per hour or per piece of advice), the renewal measure will impose no cost whatsoever.

It is true that for advisers who have no contact with particular clients for a period of more than two years, then opt-in will impose a cost on that adviser, either in chasing up the client or in losing the business. However, it is not fair to characterise this latter case—the cost of losing business—as a new cost. The cost exists in the system right now, the only difference being that it is the disengaged client—rather than the disengaged adviser—that is currently bearing the cost.

This measure remedies that situation and ensures that the client, and their retirement savings, comes first. I would also like to emphasise at this point that the government undertook a thorough, methodical and open-minded consultation process with industry, consumer advocates and financial services experts. While parties started in significantly different places, I believe that through persistence and negotiation effort we were able to arrive at a destination that has prompted widespread support from the industry, the experts and consumer groups. I would like to record the government's appreciation to key participants in these lengthy but valuable discussions—such as consumer advocate Choice and a number of the retail and industry superannuation funds and their representatives and the Financial Planning Association—who deserve recognition in this place for their professional commitment to improving trust and confidence in financial advice.

Secondly, the bill enhances the capacity of ASIC to supervise the financial services industry and protect investors.

Providers of financial services must be licensed by ASIC as part of facilitating investor confidence that those persons are competent and are of good character. Licensees also have representatives who act on their behalf.

ASIC has powers to protect the public, including powers to apply a variety of administrative remedies against a licensee (or its representatives) that breach the law.

During the Ripoll inquiry, ASIC raised concern with its ability to protect investors by restricting or removing unscrupulous operators from the industry. A number of factors were impacting on the exercise of ASIC's powers, including decisions of the Administrative Appeals Tribunal (AAT) relating to when someone 'will' breach the law, the difficulty with removing individuals given the focus on licensees in the Corporations Act and the lack of scope for ASIC to remove representatives in certain circumstances, such as where they are not of good fame and character.

The changes implement the Ripoll recommendations in this area and will strengthen ASIC's administrative powers as they apply to licensees and representatives to strengthen the gate-keeping function of the licensing regime and extend ASIC's powers to remove unsatisfactory persons from the industry.

The changes to the licensing and banning thresholds include that ASIC can refuse or cancel a licence, or ban a person, where that person is likely to contravene (rather than breach) the law. ASIC may also remove representatives if they are not competent, of good fame and character or if they are involved in its licensee's breach of the law.

The changes generally align the thresholds for licensing and banning with similar provisions under the National Consumer Credit Protection Act, which ASIC also administers.

As with the exercise of any administrative powers, an ASIC decision will be based on the individual circumstances of each case, but would generally take account of factors such as the nature and seriousness of the misconduct, the internal controls on the licensee or the person and the previous regulatory record of the person.

Existing review rights in relation to ASIC decisions about licensing and banning continue to apply, including to the AAT.

These changes should result in ASIC exercising its administrative powers more efficiently and effectively to protect investors. The government readily acknowledges that these future financial advice reforms sit firmly beside our commitments to boost and strengthen superannuation. If we are going to encourage Australians to compulsorily to save more for their retirement, we must ensure that the wealth management system is operating in the best interests of people for whose retirement savings incomes they are administering.

The Gillard government celebrates the demographic fact that Australians are living longer than ever before and that the goal of lifetime income security after someone has retired is a most worthy one that is part of modern Labor's DNA. We want Australians who have worked hard all their life and paid taxes to retire in dignity and comfort and we want them to have real confidence that those who are providing advice on where to invest their savings will do it well. Might I say that we do believe that most financial planners are very professional and we have high confidence in them. I am proud to support and be part of a government which has not shirked the challenge, has taken the proverbial bull by the horns when it comes to the financial planning and advice and is improving this important industry for Australia's future prosperity. But be in no doubt that this government understands that the arc of Australia's economic future will continue to bend towards our strengthened financial services. The Gillard government is a huge supporter of financial services: we believe in the opportunities of the Asian century and the rise and rise of a new middle class throughout Asia. This presents Australia's wealth management and financial services industry with enormous potential.

In summary, the measures in this bill support the key public policy objectives of Future of Financial Advice to improve consumer trust and confidence in the financial advice they receive, and improve professional standards.

Debate adjourned.