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Tuesday, 4 November 2003
Page: 21990

Mr CIOBO (8:16 PM) —I had the good fortune to be raised in a family in which my father was a financial planner, involved in the financial services industry for in excess of 30 years. It is within that context and from that family background that I am very pleased to speak to the Financial Services Reform Amendment Bill 2003. This bill, like a series of bills before it, makes amendments that industry has called for to the Financial Services Reform Act—in particular a number of amendments that industry has highlighted to me and other members of the Parliamentary Joint Committee on Corporations and Financial Services. I believe that my family background has provided me with unique insight into some of the concerns that various members of the industry have raised before the committee, as well as at various times in the media and in private meetings with me, with respect to the Financial Services Reform Act.

By way of background, it is a funny situation that Australians tend to have a lackadaisical attitude when it comes to financial services and knowledge of financial services. Many Australians are very informed about the property market. They are informed about many of the goods and services that they purchase and consume, yet there seems to be a common shroud of ignorance in many parts of Australia about what is the appropriate level of knowledge and degree of sophistication when it comes to investing in the financial services market. In large part, that is what gave rise to the Financial Services Reform Act. That was driven by the fact that there was a complex series of regulations across a variety of acts that in part led to consumer confusion about the way in which various products were regulated.

The financial services industry prior to the introduction of the Financial Services Reform Act was fragmented. It was fragmented by institutions and it was fragmented by products and services. The FSRA sought to bring it all under the one umbrella so that Australians would have a greater opportunity to compare on a level playing field the various products and services that were offered across a variety of institutions. For example, if you looked at the situation prior to the introduction of the FSRA, you saw that securities and futures contracts, as well as futures markets, were governed under the Corporations Act. The regulatory arrangements for deposit products were contained in the Banking Act 1959. The arrangements for general and life insurance were contained in the Insurance Act 1973, the Insurance (Agents and Brokers) Act 1984, the Insurance Contracts Act 1984 and the Life Insurance Act 1995. Superannuation was regulated by the Retirement Savings Account Act 1997 and the Superannuation Industry (Supervision) Act 1993.

All of those pieces of legislation demonstrate and highlight the way in which financial services were a mishmash of regulations. This mishmash was what, to a large extent, caused consumer confusion about the financial services industry. It is therefore a very pleasing outcome that the Howard government sought to provide as much information and as great an opportunity as possible so that consumers could compare on a level playing field the various products, services and institutions; hence, the reason for the introduction of the FSRA.

It all came about in 1997 because of the financial system inquiry which examined the regulatory arrangements that were in place. It found that this high degree of inconsistent regulation caused consumer confusion. As a consequence, it sought to bring all of this under the FSRA. The revision of regulatory arrangements in 2001 sought to introduce as part of the Corporations Law amendments one solid act that dealt with all of these conflicting pieces of regulation for the financial services sector. As a consequence of the FSRA, all of this is now contained within chapter 7 of the Corporations Act.

In 1997 the Treasurer announced the introduction of the Corporate Law Economic Reform Program, or CLERP. In particular, CLERP 6 examined financial markets and investment products. It was under CLERP 6 that the various key mechanisms were implemented as part of the Financial Services Reform Act. In essence, it put in place a number of key provisions, such as a single licensing disclosure and conduct framework for all financial service providers and a uniform disclosure regime for financial products. It also introduced a revised regulatory regime for financial markets, such as the Australian Stock Exchange and the Sydney Futures Exchange, as well as clearing and settlement facilities associated with those exchanges.

FSRA is of course, though, augmented by a large number of regulations. The previous speaker made mention of some of those regulations and some of the things the regulations seek to do. In addition to that, the Australian Securities and Investments Commission has also released a number of policy statements that seek to provide as much clarity to these reforms as possible under FSRA.

With the introduction of FSRA—its operations commenced on 11 March 2002—there was put in place a two-year transition period that ends on 10 March 2004. So, with all this new law introduced to provide greater consumer clarity in terms of comparing products and services, why do we have this bill before the House today? The reason for it is that, with the wholesale change, some unforeseen consequences flowed from these reforms. In particular, we have seen a large number of instances in which industry has asked for certain amendments to be made to regulations to ensure that there would be greater ease for those stakeholders in industry to reform and ensure that they complied with the new FSRA environment.

In large part, the government has been extremely proactive in terms of ensuring that we consult with industry and ensuring that we take into account the views that they have put forward. As I mentioned, my involvement in the Joint Committee on Corporations and Financial Services has demonstrated to me some of the very specific ways in which industry is seeking some reform. The types of reforms that industry has raised with me are contained within the bill that is before the House today. I am also especially grateful to the Assistant Treasurer, who has visited my electorate on a number of occasions and taken the time to sit with me and a number of my constituents on the Gold Coast to talk about the way in which the FSRA has had an impact on their dealings.

In no small part, there are provisions contained within this bill that I can say have been raised by stakeholders in the financial services industry on the Gold Coast. There are provisions contained within this bill that I know will satisfy some of their concerns about some of the anomalies that arise under FSRA. As I said, I am very pleased that the Assistant Treasurer in particular has been willing and able to come to the Gold Coast on many occasions to sit down and talk with my constituents and to listen to some of the concerns they have. In such a way, we have been able to introduce this bill to directly address some of their concerns.

It once again underscores the way in which the Howard government is willing to listen and to respond to industry concerns, to make sure that their concerns are not simply rebounded off a blank wall but rather are listened to and used to ensure that our legislation is even more effective than we originally intended. In that regard I am very pleased that this bill provides clarification and amendments regarding stakeholder concerns, to enable them to have an easier transition to the new FSRA environment.

Key provisions in this bill cover the following issues: the regulation of unsolicited offers to purchase financial products off-market; the definition of basic deposit product; licensing exemptions for foreign financial services providers; combining a financial services guide and a product disclosure statement into a single document; and some exemption and modification powers to be provided to ASIC. I know that the opposition speaker before me made reference to some of these, and I intend to touch upon these in a short while.

With respect to the main provisions of this bill, I am pleased that schedule 1 deals with unsolicited offers to purchase financial products off-market. This in large part is a response to the conduct of Mr David Tweed and his company, National Exchange Corporation Pty Ltd. Mr Tweed wrote to a number of small shareholders offering to purchase their shares at well below the market price of the shares. He did not disclose to those shareholders that the offer price was below market price. As a consequence, those shareholders who upon receipt of his offer accepted it lost large amounts of money in agreeing to sell shares to Mr Tweed. It is unconscionable conduct and it is conduct that is now captured as a consequence of these reforms to the FSRA.

I was also pleased to see this contained within this particular bill because I had a lengthy discussion with a former federal Young Liberal president Mr Gerard Paynter on this issue. He highlighted to me some of the concerns that he had when a number of shareholders had been contacted via letter by someone seeking to solicit their shares from them at below market price. These provisions respond very directly to those particular concerns.

The key provisions are in proposed section 1019E, which specifies the way in which off-market offers are to be made—that is, the offer must be personally addressed. Subsequent provisions are contained in proposed sections 1019F to 1019G, which deal with the actual requirements for the offer—that is, it cannot extend for a period longer than 12 months. The provisions also specify what must be contained in the offer document. In particular, for example, the offer document must contain the price for the financial product, the market value of the product and, if it cannot be traded on the financial market, an estimate of the value of the product as at the date of the offer.

I am also pleased to see that enforcement provisions are contained within this bill. In particular, item 8 specifies that ASIC may use its stop order powers where the offer document either fails to contain the information required or is misleading or deceptive. In addition to this, I am very pleased that it contains criminal penalties that will apply if there is a failure to comply with the requirements that I mentioned earlier. I am also pleased to see the introduction of civil penalties as an available remedy to seek redress should there be failure to provide relevant information as required by proposed section 1019G.

In terms of the definition of basic deposit products, I listened with great interest before when the ALP raised some of their concerns with respect to the extension of the definition to apply to products that have a maturation point of beyond two years. I am a little perplexed, I have to say. I fail to understand why it is that the ALP still have some confusion over the laws of demand and supply. In particular, I heard the previous speaker mention the fact that the ALP were concerned that these regulations might give rise to a situation where the supply of an on-call product of two years or less is withdrawn as a consequence of the introduction of this bill. That to me would be quite to the contrary of basic economic principles. What is widely known by any first-year economics students is that supply responds to demand.

The proposition that the ALP put forward—that if a regulation such as this were passed it would see the collapse of the two-year on-call deposit products—is, quite frankly, preposterous. It is very clear that if there is consumer demand for these kinds of products then consumers will be able to get these particular products from those who are willing to supply them. Those companies that are willing to supply them will always respond to market demand—it does not operate the other way around. So I am uncertain why the ALP would be so concerned about the expansion of the definition from two years to five years.

The point I would reinforce is that there are reforms contained within this bill that industry has called for. It is very clear that there are high costs of compliance with regard to the kind of disclosure required under the FSRA, and this is disclosure that industry would rather not have to make. There seems to be no true public benefit that flows from it. That has been very clear from the evidence that has come before the government. So on that basis the expansion to a five-year maturation point is a very reasonable, measured and appropriate expansion to ensure minimised compliance costs without any real increase in consumer risk as a consequence of the expansion of this definition.

In addition to that, I would like to also refer to the ALP's concerns, as I heard from the previous speaker, about live market advice. I know from speaking with a number of my constituents who deal in a live market situation that the position as it existed prior to this bill coming before the House, and which would continue to exist if this bill were not passed, is a situation in which stockbrokers in the main would need to be writing statements of advice to consumers on a regular basis, irrespective of the degree of sophistication of the particular consumer. Indeed, these provisions deal with highly sophisticated investors that are dealing in shares on a regular basis.

It is quite absurd for the ALP to insist that a stockbroker ought to be running back to his very sophisticated client on a regular basis to obtain from them an update on their particular financial situation when the provisions contained here are driven towards those that are sophisticated investors. So an exemption for live market advice and an exemption that there not be a statement of advice provided on a regular basis under this particular provision in this bill is again a very reasonable measure that will ensure that the government is amending the FSRA in such a way that the concerns of stockbrokers are addressed.

Finally, I would just like to touch on the ALP's concerns about whether or not adequate safeguards will be put in place to enable ASIC to have power to amend and to exempt. It is my contention, and it is very clear, that these particular provisions in this bill simply give ASIC the power to ensure that it can undertake the decisions that are necessary in a live market situation to respond to industry concerns. The ability to grant modifications or exemptions is a reasonable one. It is not dealing with large parcels of the industry which might be causing consumer concern. Rather, it provides ASIC—which has demonstrated time and time again that it is a very good regulator and it is a very good watchdog—with the kinds of powers that it needs.

In summary, this bill is an important bill. It signifies that this government is listening to industry stakeholders and that this government is more than happy to amend the FSRA to ensure that we create the best environment possible—an environment that takes note of the concerns of industry and responds to them in a way that provides a more comprehensive FSRA that meets their needs.