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Wednesday, 23 October 2002
Page: 5746


Senator CHAPMAN (4:29 PM) —I present the report of the Parliamentary Joint Statutory Committee on Corporations and Financial Services on the regulations and Australian Securities and Investments Commission policy statements made under the Financial Services Reform Act 2001, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.


Senator CHAPMAN —I move:

That the Senate take note of the report.

I note that there is another report to be tabled which, I understand, the Senate desires to debate at length this afternoon. On that basis, I seek leave to have my remarks on the tabling of this document incorporated in Hansard.

Leave granted.

The statement read as follows

This report builds on the Committee's findings in two previous inquiries which were published in its Report on the Draft Financial Services Reform Bill tabled in August 2000, and the Report on the Financial Services Reform Bill 2001 tabled in August 2001.

Both inquiries found a high level of support for the legislation. However, at the inquiry into the Financial Services Reform Bill last year, reservations were expressed about how the Bill would work in practice. The main concerns were that the mechanisms for the implementation of the new legislation—the regulations and ASIC's policy statements—had not been finalised.

A widespread concern at the time was that the contemplated commencement date for the major regulatory provisions, namely, 1 October 2001, would not allow sufficient time for consultation in the drafting of the regulations. Although commencement was postponed until 11 March 2002, this still imposed a relatively tight timetable for the finalisation of the regulations, particularly given their fundamental role in the regulatory framework.

Another concern was that the legislation would place too great a responsibility on ASIC to provide the regulatory detail needed for implementation. It was considered this would produce too much uncertainty about the Act's operation.

Against this background and, following the commencement of the Act's major regulatory provisions on 11 March 2002, the Committee decided to hold an inquiry to ascertain the extent to which the regulations and ASIC's policy statements made under the Financial Services Reform Act 2001 were consistent with the stated objectives and principles of that Act.

The inquiry was announced and submissions invited on 6 April this year. Altogether 40 submissions and 7 supplementary submissions were received. The committee is grateful to those who invested the time and effort to make sometimes very detailed submissions.

The committee held four days of public hearings in May, July and August. The committee thanks those who so generously made themselves available at these hearings.

The main objects of the Act which I adverted to earlier are stated in section 760A. These are to promote:

· confident and informed decision making by consumers of financial products while facilitating efficiency, flexibility and innovation in the provision of those products and services;

· fairness, honestly and professionalism by those who provide financial services;

· fair, orderly and transparent markets for financial products; and

· the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

Based on evidence received, the Committee was able to conclude that, generally, the regulations and ASIC policy statements operated in harmony with the Act's objects.

However, the Committee identified several issues which demonstrated quite serious divergence from the Act's objectives, particularly those relating to the promotion of consumer protection and efficiency in the delivery of financial products and services.

I shall now turn to discuss these more compelling issues and the Committee's recommendations in relation to these.

Basic deposit products and non-cash payment facilities

The first relates to the regulation of basic deposit products and non-cash payment facilities by the Corporations Act.

The Committee received very disturbing evidence from the Bendigo Bank Group, the Credit Union Services Corporation, the Australian Association of Permanent Building Societies, the Australian Finance Conference and the Australian Bankers' Association all indicating that the inclusion of these basic banking products in the legislation has caused enormous disruption and cost to the industry just in terms of meeting the training requirements prescribed in ASIC's policy statement 146.

On the costs front, for example, the Bendigo Bank estimates it will spend close to $1 million on training in the first year and an additional $630,000 in the following year. The Credit Union Services Corporation (Australia) Limited estimates its members will be paying between $440 to $900 per employee for 6,000 employees. In total, that works out to between $2.6 and $5.4 million.

These basic banking products are of low or no risk and are well understood by consumers. The Committee is unable to identify how consumers will benefit from the application of Policy Statement 146 training requirements to staff advising on basic deposit products. The Committee is also unable to identify any justification for the significant initial and ongoing costs and disruption that training will impose on ADIs.

One thing is certain. If basic deposit products continue to be regulated by the Corporations Act, consumers will be the losers. Small branches and agencies—particularly in rural and regional areas—will have to be closed. The costs of training staff to provide advice on these basic banking products will render these smaller branches and agencies commercially unviable.

Furthermore, rural and regional areas are often serviced by agencies, for example, the local pharmacist or newsagent. How many pharmacists or newsagents will have the resources, time or inclination to undertake the type of training to provide a service in these very basic banking products?

Just providing very basic advice on these products will involve logistical problems for small branches and agencies. What happens to the customer if the only person trained to tell them about a basic deposit product is at lunch, sick or absent for some other reason? What happens to a small branch or agency that loses a trained adviser and cannot find a replacement? Where is the benefit to consumers in this?

The Committee recommended in its two previous reports on the FSR legislation that basic deposit products should not be regulated by the Corporations Act. The Committee has not departed from this view and, for the third time, recommends that basic deposit products and related non-cash payment facilities not be regulated by the Act.

Should the Government inexplicably fail to do this, the Committee recommends that ASIC urgently review Policy Statement 146 to make the training requirements more in keeping with the type of financial product involved and to recognise the training challenges presented by rural and regional areas.

Licensing of accountants

Accountants and licensing was another major issue raised before the Committee. At present, there are two licensing exemptions regarding accountants' activities:

1. the exemption for accountants who are registered tax agents regarding their tax agent's work. This exemption has only a very limited coverage because tax advice often overlaps with other business advice.

2. the purported exemption provided by regulation 7.1.29. This exemption simply does not work.

Accountants will therefore have to be licensed to carry out their professional activities even though these might fall into what would be regarded as traditional accounting activities. Importantly, these activities do not involve the marketing of financial products for commission or similar benefit. Furthermore, sufficient consumer safeguards are already there:

· accountants must carry PI insurance;

· they must belong to professional associations which oversee their activities;

· they must satisfy continuing professional educational requirements;

· they must observe codes of conduct; and

· they must practise quality assurance.

The Committee heard from The Institute of Chartered Accountants in Australia, CPA Australia, the Taxation Institute of Australia, the National Institute of Accountants, the National Tax and Accountants' Association, the Institute of Chartered Accountants of New Zealand and two practitioners that the licensing requirement will not improve efficiency but will add to costs which will be passed onto consumers.

Indeed, the costs involved in obtaining and maintaining a licence have been estimated by one of the industry groups as ranging from $12,000 to $15,000 on a cost recovery basis per accountant per year.

The Committee has been told that these costs will drive small suburban practices out of business. Importantly, these smaller practices currently deliver cost-effective services to the vast bulk of self-managed superannuation funds. Who will take over when these small practices have closed shop? Will costs increase as a result?

The Committee has been told that licensing costs will threaten the independence of accountants.

Accountants who cannot afford to be licensed, are finding that authorised representative status may only be available if they agree to sell financial products for commission. In other words, if the accountant is prepared to flog certain financial products for a licensee, the licensee will appoint the accountant as an authorised representative.

Worldcom, Enron and HIH to name just a few, are glaring reminders of the crucial importance of auditor independence in financial market regulation. It would be ironic indeed if a mandatory licensing requirement compromised the independence of accountants at a time when independence has emerged as a significant corporate governance issue. But this is what the FSR legislation is doing. It is compromising accountants' independence.

The Committee believes that urgent amendment of the legislation is required to provide accountants with a licensing exemption for their more traditional activities. In keeping with the recommendations of the Wallis Report, these activities would not include investment advice for which commissions or other benefits by parties unconnected to the client were payable.

The ongoing management charge

The specific disclosure requirements in the regulations regarding the ongoing management charge for superannuation funds attracted several submissions. These regulations were disallowed on 16 September 2002 following a motion by Senator Conroy.

The Committee notes that ASIC recently released a report, Disclosure of Fees and Charges in Managed Investments prepared by Professor Ian Ramsay. ASIC has indicated that the report is to be the starting point for ASIC's consultation with industry and consumer representatives regarding the future directions for disclosure.

The Committee has recommended that the Department of the Treasury and ASIC build on the momentum generated by Professor Ramsay's report to produce guidelines for a leading-edge, consumer-friendly model for disclosure of superannuation fees and charges that will facilitate comparability of funds.

Disclosure of unauthorised foreign insurers to wholesale clients

The Committee has recommended that the disclosure requirements applying for retail clients when insurance is placed with unauthorised foreign insurers also apply for wholesale clients. This merely continues what were the disclosure requirements under the now repealed Insurance (Agents and Brokers) Act 1984. The Committee is concerned that many small businesses—as wholesale clients—will be denied very pertinent information unless the same disclosure requirements apply to them as presently apply to retail clients.

The Committee has also recommended that the reporting requirements under the Insurance (Agents and Brokers) Act 1984 about unauthorised foreign insurers be re-instated. We believe it is important for the effective monitoring and regulation of the insurance industry that we have this sort of information available.

Offshore service providers—exemption from licensing

The Committee heard from the International Banks and Securities Association of Australia, Goldman Sachs and Morgan Stanley that regulation 7.6.01(1)(n) is posing quite significant difficulties in application.

This regulation aims to allow offshore service providers to deal in financial products in the Australian marketplace on condition that the services are arranged by a person holding the requisite licence. It appears that there is overlap between `dealing'—which is allowed—and `market making' and other activities which are not allowed.

We are concerned that problems with regulation 7.6.01(1)(n) could result in the withdrawal of offshore service providers from our domestic markets. The Committee has recommended therefore that the practical problems with the regulation be resolved urgently.

Licensing—the provision of custodial or depository services

The Committee received submissions about the definition of custodial or depository services.

The submissions claimed that the definition was so widely framed so that it caught a whole range of trustee activities that should not be regulated under the Corporations Act. Many instances were given of the inappropriate application of the definition.

For the sake of brevity, I'll mention just a couple of the types of activities that will be caught. There are the traditional or personal trustee corporation activities otherwise subject to State or Territory legislation. Here, we could be talking about the activities of a trustee appointed by the Court to act as the guardian or financial manager for a minor or a person with a disability.

Another activity that could be caught is the holding of shares or options to subscribe for shares by an employer as a trustee of an employee share scheme.

The Committee believes that the definition cast its net too widely. We have recommended that regulations be made to refine the scope of the definition.

Spread betting—licensing

During the inquiry, the Committee became aware that IG Index plc had obtained a licence to deal in and advise on a derivative. The derivative involves spread betting on financial indices.

Spread betting is not your typical financial product. It involves a form of high-risk gambling where losses can be open-ended. The Committee does not believe that activities such as spread betting should be licensed under the Corporations Act. The Act is supposed to be protecting consumers—certainly retail consumers. Instead, by allowing spread betting to be licensed, it is sending out the message that this high-risk gambling activity has the imprimatur of the Government.

Furthermore, it appears that some State and Territory gaming authorities do not want this activity conducted within their jurisdictions. Indeed, the South Australian gaming authority recently refused to licence a betting operation in relation to the 2002 Commonwealth Games.

The Committee urges joint action at Commonwealth and State level to ban spread betting on financial markets. At Commonwealth level, this can be achieved through amendment of the Corporations Act. At State level, governments would have to ensure that their gaming and wagering laws prohibited this type of gambling.

The spread betting issue alerted the Committee to a shortcoming in the Act's licensing provision. It appears that there is no mechanism whereby a discretion can be exercised regarding the granting of a financial services licence. Currently, ASIC must grant a licence if the statutory criteria are satisfied, regardless of whether the financial activity to be conducted will undermine the consumer-protection or other objectives of the Act.

The Committee believes this shortcoming should be remedied. The Committee has consequently recommended that the Government set up an appropriate mechanism whereby ASIC may refer these types of applications—that otherwise meet the statutory criteria—to an appropriate entity or person for a decision.

Small business—insurance multi-agents

At the two previous inquiries into the FSR legislation and again at this year's inquiry, the Committee heard from a number of insurance multi-agents about the adverse effects the FSR legislation is having on their businesses. We heard that licensees are using the FSR legislation as a pretext for terminating agents' contracts. We heard that multi-agents' bargaining power has been weakened. We have been told that multi-agents are being forced to sign up as authorised representatives generally on much less favourable terms than was previously the case.

The Committee is aware that section 1436A of the Corporations Act was inserted specifically as a protective measure so that insurance agents could continue to operate under the Insurance (Agents and Brokers) Act 1984 for the full two-year transitional period notwithstanding that their principals might transition before then. We are also aware that the legislation provides for cross-endorsements to allow multi-agents to operate as authorised representatives for more than one principal under the FSR regime. However, evidence received by the Committee suggests that licensees are reluctant to enter into cross-endorsements because of liability issues. This has had serious consequences for multi-agents.

The Committee heard evidence that quite fundamental re-structuring is occurring in parts of the insurance industry largely as a result of the FSR legislation. We are concerned that the legislation may be placing a reputable industry sector at a significant disadvantage. The Committee would like corrective action to be taken to ameliorate the difficulties caused by the legislation. The Committee has recommended that legislative amendments be made:

· to protect them from arbitrary termination of their existing contracts and the rights that go with them;

· to address the post-FSR trend away from cross-endorsements;

· to require payment of monies (including commissions) owed to multi-agents within a reasonable period;

· to provide for ASIC's exercise of its powers under section 915H of the Corporations Act to protect the position of insurance multi-agents should their licensee's licence be suspended or cancelled;

· to provide for the development of a mechanism (for example, a trust fund) to protect payments owed to a multi-agent where the multi-agent's principal becomes insolvent or bankrupt or where such is threatened. Protected payments would include those owed directly to the multi-agent by the principal or those payable to the principal by a product provider before they are drawn upon to pay the multi-agent.

In addition to the above recommendations, the Committee would strongly encourage the Department of the Treasury and ASIC to seek out non-legislative initiatives to redress the negatives that the FSR legislation has imposed on insurance multi-agents.

Fine-tuning the Act and regulations

Quite a number of submissions to the inquiry commented that the Act and regulations presented some quite significant `navigational' challenges. Instances of inconsistencies and anomalies were highlighted. One submission suggested that the complexities in the legislation would lead to increased operational and regulatory costs which ultimately would be passed onto consumers.

The Australian Stock Exchange Limited said that the structure of the Act and regulations made `full comprehension of relevant concepts in the Act difficult' and suggested that consideration could be given to including notes to the regulations with cross-references.

The FSR Act and regulations are extensive and complex, and it is inevitable that there will be teething problems. The Committee is satisfied that the Department of the Treasury is progressively attending to these. However, the Committee suggests that the Department of the Treasury consider ways in which the legislation might be made more `user-friendly'.

Final comment

I have not covered all of the matters raised during the inquiry. You will find most of these in the Committee's report. On behalf of the Committee, I am pleased to say that, generally, the Committee's findings are that the regulations and ASIC policy statements do meet the objectives of the FSR legislation which I spelt out earlier.

Considering the volume and complexity of the regulations developed by the Department of the Treasury, and the range of policy statements issued by ASIC, this is quite an achievement.

I offer my personal thanks and, I am confident, that of all of the Committee members to the staff of the Committee Secretariat. They have worked hard and long on the Inquiry, which has involved quite complex issues. My thanks therefore go to Committee Secretary, Kathleen Dermody and especially Bronwyn Meredith for their efforts, as well as to James Sampson from my own office.


Senator CHAPMAN —I seek leave to continue my remarks later.

Leave granted; debate adjourned.