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Wednesday, 3 December 2003
Page: 18894


Senator STEPHENS (4:57 PM) —I would like to make some comments about the minority report of the Senate Economics Legislation Committee on the Financial Services Reform Amendment Bill 2003, if I may.


Senator Patterson —That will be refreshing, after that performance.


Senator STEPHENS —Yes, it is a bit difficult but I will try. I want to reiterate that the Labor members of the committee are very concerned that the government continues to make substantial changes to a key piece of amending legislation in relation to the financial services reform regime, with little opportunity for scrutiny or debate. I draw the attention of my colleagues to the fact that as of yesterday, 2 December, the ASIC web site noted that there were only eight days to go until 10 December, after which there is no guarantee that participants will be licensed by 10 March 2004—which is of course the critical date.

Although the March 2004 deadline is approaching, the government brought the bill on for debate in the House of Representatives on 5 November. In addition, the last batch of amendments was posted on the Treasury web site on 23 October, whilst the latest batch of regulations was provided by Treasury only in late October. Further regulations are expected to follow, so there is a level of uncertainty within the industry about what is still to come. I know that some members and senators are concerned that, unless we rush this through, the industry will not have time to prepare; but that argument really does not stack up if the government is actually still drafting some regulations.

It is very important for people to understand clearly that Labor are concerned about these amendments. Labor support the objectives of the Financial Services Reform Act 2001. We are keen to ensure that the government monitors the implementation of the act and the related regulations, but we believe that a post-implementation review is important to make sure that what has been put in place is effective in achieving the intended aims of the reforms. What Labor believe needs greater clarification is whether the proposed stockbroker exemptions strike an appropriate balance between commercial expediency and consumer protection. This was raised in the debate in the House of Representatives by Alan Griffin and, despite being dismissed out of hand by the parliamentary secretary, Mr Cameron, it is a concern of consumers that has been raised with some members of the committee.

Labor also want to be clear about whether the dollar disclosure regime will enhance or detract from the disclosure regime and whether it is appropriate to restrict the use of certain terms, such as `independent', in the manner contemplated by the regulations. As we have heard already, the way in which this inquiry was conducted—with short notice to witnesses and an incomplete hearing—means that not all the issues were canvassed by the committee. We see that the financial services regime is structured so that much of the detail is included in the regulations. We know the dangers of being asked to pass legislation without knowing how the amendments will operate in practice, as the detail to be contained in the regulations is still outstanding—and, as is so often the case, the devil may well be in the detail.

I would like to make some brief comments about the stockbroker exemption issue as well. Currently, section 946B relates to `execution related telephone advice', referred to in the explanatory memorandum as ERTA. That will be replaced by a new term, `further market related advice', in the latest amendments. We support the general approach taken by the amendments and recognise the practical difficulties faced by advisers in a live market situation. The further market related advice may be given over the telephone, by fax or by email, but the advice must be given in a live market situation. The key amendments to section 946B will mean that, although the client will be given a statement of advice initially, the provider will be exempt from the requirement to give a statement of advice for further market related advice. We have heard the argument that this makes sense, especially for stockbrokers, but it is fair to say that Labor want to be sure that we are delivering a balance between protecting consumers and responding to commercial needs. I do not think that that is an unreasonable proposition.

Section 945A creates a general obligation for entities to have a reasonable basis for any personal advice given which, according to the explanatory memorandum, requires them to determine the client's relevant personal circumstances. The Labor members of the committee are concerned that this general requirement may not be sufficient in this context. For example, it is unclear how an adviser such as a stockbroker would be aware whether a client's circumstances had in fact changed. We therefore believe that the new provision should include a requirement that the broker go back to the client at least annually to check whether their circumstances have changed. As noted in the minority report, even though the broker is no longer required to provide a statement, they are still required to make other disclosures in relation to issues such as remuneration and conflicts of interest.

In relation to dollar disclosure, we acknowledge that the Corporations Amendment Regulations 2003 (No. 8) and Statutory Rules 2003 (No. 282), previously known as batch 5, are of concern to the superannuation and funds management industry, as they introduce a new fee disclosure regime. Disclosure documents under the FSR Act, such as statements of advice, product disclosure statements and periodic statements, are required to include details of benefits, fees and charges. While the FSR Act requires parties to provide information about these charges, what exactly needs to be disclosed? The explanatory memorandum to the regulations says:

The lack of clarity in this requirement may potentially result in details of these items being provided in a form that may be considered sub-optimal from the consumer comprehension viewpoint. Accordingly, these regulations require industry to disclose items in dollar terms in the first instance, but if this is not seen to be reasonably practicable then the item is required to be disclosed in percentage terms.

Is it possible that the `reasonably practicable' test will allow providers to avoid disclosing fees and charges in dollar terms? Surely this could be the case, and certainly that is the concern of the Australian Consumers Association, which provided evidence to the inquiry. Ms Wolthuizen from the ACA said:

First of all, I think it would see not only a denial of relevant information contrary to the good disclosure principles enunciated by ASIC in PS 168 that disclosure be timely, relevant and complete, promote product understanding, promote comparison, highlight important information and have regard to consumers' needs, but in this case it would mean consumers are unlikely to get the very information they need when it comes to comparing different funds and the cost in particular of investing with different funds and different products.

People have a much poorer understanding of disclosures presented in percentage terms and we should not underestimate the importance of disclosure in dollar terms, because this is what consumers understand. Arguments that enhanced fee disclosure will increase costs are countered by Professor Ramsay in his report to ASIC entitled Disclosure of fees and charges in managed investments, where he suggests that fee disclosure is particularly important in periodic statements, as they give:

... details of the value of the investment and the investor therefore has a financial incentive to review the statement.

As the ACA reminded us, the importance of disclosure is all the more important in an environment of superannuation choice. ASIC has released a fee disclosure model incorporating an at-a-glance table, which does not allow investors to compare like with like. Labor's concerns about this approach are supported by research undertaken by the AFSA with Chant West, released in November, which found:

It is not clear that consumers will be able to understand ASIC's fee tables or make valid comparisons of bottom-line costs.

We are very sceptical that the industry will voluntarily disclose dollar amounts, although the Treasury suggests in the explanatory memorandum that it will increase over time. Labor strongly believe that changes to the fee disclosure models are required. Finally, Labor members of the committee are concerned about the proposal in batch 6 relating to the restriction of certain terms, such as `independent', and how the exemption would be granted, as well as the need for careful monitoring by ASIC of such a provision. The Labor members of the committee have reflected in the minority report our genuine concerns about the haste with which we have been required to deal with this bill and the lack of detail provided by a government still struggling to draft the appropriate regulations—hardly the best way to implement effective fiscal policy in the interests of all Australians. I predict that we will be back dealing with more amendments in relation to this bill in the not too distant future.

Question agreed to.