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Wednesday, 22 August 2001
Page: 26376

Senator COONAN (5:01 PM) —I am very pleased to speak in support of the Financial Services Reform Bill 2001 and the related bills in this package that will revolutionise financial services in Australia and the provision of financial services in Australia. The bill contains landmark reforms, as earlier speakers have said. The reforms have been described in detail and I do not want to go over the detail again.

The bill restructures an industry that contributes about seven per cent to Australia's economy and employs close to 330,000 Australians. It will directly benefit the 17 million consumers of financial services in Australia and it will provide the industry with unprecedented opportunities to export services to an estimated three billion people in Asia and in other jurisdictions.

The purpose of the bill is to harmonise the fragmented regulatory regime for the financial services industry to ensure a consistent level of market integrity and consumer protection across the industry. It establishes a single licensing regime for the provision of financial services. Essentially, it proposes three key reforms: a harmonised licensing, disclosure and conduct framework for all financial service providers, a consistent and comparable framework for financial product disclosure and a streamlined regulatory regime for financial markets and for clearing and settlement facilities.

Consumers particularly will benefit from the introduction of a consistent framework of consumer protection. They will have an enhanced capacity to understand and compare different financial products and to evaluate financial advice. Consumers will also have access to efficient procedures to deal with complaints and to resolve disputes with financial service providers. I want to say something about that a little later. Industry will benefit by the cutting of compliance costs and the removal of regulatory barriers to the introduction of technological innovations. E-commerce will be boosted by the facilitation of electronic delivery of a range of financial services and products.

Today, our services sector is one of the most dynamic and innovative sectors of the Australian economy. It represents 72 per cent of GDP and this percentage is growing. Mining and agriculture represent over eight per cent and financial services represent over seven per cent of GDP. But when it comes to exports, it is a very different story. Services represent only one per cent, whereas the mining and manufacturing sector represents 55 per cent. Projections suggest that revenue from Asia's financial services industries will reach $US450 billion by the year 2011. In non-Japan Asia, real financial market revenues are expected to grow by 10 per cent per year. Obviously, there is significant potential for Australia to grow our export of financial and professional services. It is against this background and the need to meet the challenges of changing consumer needs, the forces of globalisation, technological advances and the blurring of traditional boundaries between different types of service providers that this bill has been introduced. This government is responding to consumer expectations for better service at less cost and greater returns on more diverse investments.

The bill delivers the third instalment of the reforms arising out of the 1997 financial system inquiry known as the Wallis report. The bill is essentially based on the premise that it is no longer possible for different institutions, services and products to be regulated under separate financial frameworks governing licensing, disclosure and other conduct obligations which vary across different industry sectors. The bill, as others have said, is complex and far reaching. For the purpose of my brief contribution today, I want to confine my comments to a couple of issues. The first is the complaint provisions. Under the bill, all licensees will be required to be members of an independent complaints scheme approved by the Australian Securities and Investments Commission within a two-year transition period. So far, ASIC has approved the insurance inquiry complaints scheme for general insurance as well as the financial industry complaints scheme. The latter covers licensed shareholders, financial planners, life insurers and fund managers. Obviously, providers of banking services and superannuation services will also require approval of an appropriate complaints scheme.

The significant improvement on existing complaints schemes is that, at the point of sale, either when buying a financial product or receiving financial advice, a provider will also be required to furnish a comprehensive disclosure document that will include information on how to make a complaint. This is a boost for the consumer, who otherwise might be unaware of how to make a complaint and might get discouraged by the difficulty of taking on a large institution and indeed overwhelmed by the financial burden of the cost implications of pursuing a complaint in court. Obviously, a cheap, effective and fair means of resolving disputes is in the interests of both the consumer and the financial provider, and there is a real interest in making that known right at the start.

It has to be said that not all complaints will be justified or will warrant a remedy, whatever a complainant might think. But where consumers have been misled or facts material to the risk being assumed have not been disclosed or adequately explained, or where the provider has been negligent and a consumer has suffered loss, an independent and readily accessible complaints mechanism can assist in sorting out responsibility before the matter escalates and entrenched positions are taken by either side.

Following what might be regarded as an exhaustive consultation process—as Senator Ferguson has said—that has included extensive industry consultation and two reports of the Parliamentary Joint Statutory Committee on Corporations and Securities, the government has brought forward some sensible amendments to the regulatory framework and uniform licensing provisions. Here I would also like to add my commendations on the work of the committee, which across party lines have worked through a very complex regulatory framework and have brought the bill to the chamber in a pretty sound state for debate. The key amendments are: retention of existing contractual arrangements with life companies; exempting lawyers and tax advisers who give incidental financial advice in the ordinary course of their activities; the exemption of pooled superannuation funds in the wholesale market; and some limitations on the taping of financial advice given by telephone to retail investors during takeovers.

I wish to briefly comment on the requirement that those selling financial products disclose all fees, charges and commissions, which has been the subject of earlier contributions. This requirement has been the subject of some criticism as having the potential to affect small agencies, typically in country Australia, which sell general insurance, often as an adjunct to some other business such as a stock and station agency or a pharmacy. One of the arguments advanced in favour of the proposition that those agents selling risk products should be exempt from disclosure is that the commission paid will have no direct impact on the ultimate outcome for the consumer. However, this view overlooks the fact that the underlying objective of the bill is to ensure that the consumer is protected and given sufficient information in a form that will enable them to make an informed choice.

The amount of commission paid to an agent is a material fact that may influence a consumer's choice of provider. It may also signal how keen a provider is to get the business. When faced with two largely identical products from two different providers, why would an agent not go for the one that pays the highest commission? In that scenario, the decision would be influenced by the financial interests of the agent rather than factors that would impact on the consumer such as the service history or the financial health of the provider. It must be said in defence of agents—and I wholeheartedly accept this—that most would be influenced quite properly by a number of factors, including competitive premiums and how to provide a good service for their client. However, it is not as clear-cut as it should be. Any material factors going to the formation of a contract which could influence a consumer's choice of provider should be transparent and disclosed. I do not think that the arguments advanced for exemption are sufficient to outweigh the consumer's right to know about the financial reward that the agent will gain by recommending a certain provider.

No doubt these reforms will require adjustments, and the two-year transitional period seems not unreasonable in the circumstances. As Chair of the Senate Regulations and Ordinances Committee, I look forward to scrutinising the detailed machinery of the regulatory scheme to ensure fairness and that personal rights are protected. The regulations are also subject to an extensive consultation process with industry and consumer representative bodies.

Finally, the bill represents new approaches to regulation of market misconduct. The explanatory memorandum makes it clear that the existing law in the Corporations Act is intended to be reproduced but extended to all financial products and markets. Lawyers and those advising industry will need to be alive to the implications that the application of the Criminal Code will bring to conduct regulated by the bill. As this is a speech and not a legal advice—sometimes I tend to slip into my former role—I will but refer to the comprehensive and thoughtful exploration of these legal issues in a paper given by Joe Longo, special counsel to Freehill's lawyers, and delivered on 31 May at Sydney University's law school.

Senator Ian Campbell —A fine Western Australian.

Senator COONAN —He is a good Western Australian. I quote the concluding paragraph:

For lawyers, great care will need to be taken to identify the legislative strand which supports a particular conclusion. For industry, while much of the substance of the regulatory approach presently found in the Corporations Act is intended to be reproduced in proposed Chapter 7, the attempt to take a unified approach to regulating financial products generally will, I think, force industry to reconsider its compliance strategies as regulatory and market attention is, in effect, refocussed on a range of financial products that historically may not have been regarded as being relevant to market manipulation and insider trading, for example.

I commend the paper to those who are interested in the market misconduct provisions.

It would be remiss of me if I did not also note the role that Senator Ian Campbell played in the development of many aspects of this legislation. There have been a lot of players in this, as well as extensive consultation, but while we have quite rightly praised the efforts of the committee we should also note that Senator Ian Campbell played a pivotal role in earlier incarnations of this bill. Having said all that, I will now sit down. I commend the bill to the Senate.