Stephen Jones (Throsby, Australian Labor Party) Share this | Hansard source

I am pleased to speak today on the Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, which will provide better protection for consumers and encourage more Australians to seek financial advice. My starting point in matters such as this is with three simple propositions. The first proposition is that if somebody is going to charge a fee for service it is not unreasonable that they should get permission to charge that fee. The second proposition is that, if somebody is providing a service for which they may have some conflicts of interest, at the very least they should disclose those conflicts of interest, particularly where they are receiving a commission for the provision of that service and the service may not completely align with the interests of the person to whom they are providing it. The third fairly simple and, I believe, not unreasonable principle that I approach this matter from is that if a person's life savings are at risk then you should tread with care.

The financial advice industry in our country has been growing rapidly. In 2009, according to ASIC, retail funds under management stood at about $515 billion and the average annual growth rate for retail funds under management over the five years to 2009 was a very healthy 18.2 per cent. Compulsory superannuation, a policy innovation of the Labor government, has made an important contribution to this growth, and we can expect this trend to continue as the superannuation guarantee increases from nine per cent to 12 per cent—and we hope fervently that that legislation passes through the house in another place later this evening. The bills before the House today form a key part of the Gillard government's future financial advice reforms. These reforms not only will facilitate consumer access to advice but, importantly, will aim to improve the quality of that advice. The reforms will see consumers receiving financial advice that is in their best interests—that is, in the best interests of the consumers—rather than see consumers directed to products due to incentives or commissions offered to a particular financial adviser. These reforms recognise that financial advice can be distorted by incentives. The reforms will also ensure that it is simply unacceptable for advisers to place their own interests ahead of the interests of their clients in any circumstances.

The reforms are important. We need to rebuild consumer trust and confidence in the industry, a lot of which was lost in the wash-up of corporate collapses like Storm Financial, Westpoint and Trio Capital. Unfortunately, I know from firsthand experience, from constituents in the Illawarra and the Southern Highlands who have lost hundreds of thousands of dollars in their superannuation savings, there is much work to be done to rebuild confidence in the financial-planning industry.

As is known by many in this place, in December 2009 financial services firm Trio Capital was placed under external administration. This occurred following numerous breaches of Trio Capital's limited licensing conditions and following Trio Capital not being able to satisfy APRA's concerns regarding the valuation of its superannuation assets. The collapse of Trio/Astarra had a devastating impact on investors, particularly those in self-managed funds. I had the unfortunate duty to sit in my electorate office and hear the terrible stories from many of my constituents who have lost their entire life savings because they had them invested in self-managed funds in Trio/Astarra—self-managed funds that were recommended to them by their financial planner.

In the Illawarra, many locals put their trust in the advice provided to them by financial advisers Tarrants. We will never know the exact amount of funds lost, but it is estimated to be somewhere between $40 and $45 million. I am advised that Ross Tarrant received in excess of $840,000 in commissions for putting his clients into Trio. Those commissions were never disclosed to the clients of Trio. The clients lost their dough and the adviser made $840,000 in commissions. Most of the victims of the collapse of Trio, clients of Mr Tarrant, had absolutely no idea what the risks of entering into a self-managed superannuation fund arrangement were. They were assured by Mr Tarrant that these investments were secure. They only found out that this was not true in the hardest possible way.

Relevant to the bills before the House today, Mr Tarrant's clients knew nothing about the commissions he was receiving for putting them into Trio. I have already advised the total amount of those commissions—he received 3.3 per cent for each investment in Trio, as well as 1.95 per cent in annual fees for the advice he gave to clients. This advice, just like the investments, turned out to be worse than worthless. Many of my constituents have asked me: 'How could this happen? How could this be possible? How can we have a system that allows financial planners to get away with this type of behaviour?'

Despite the magnitude of the financial devastation that hit these unfortunate Trio investors, I believe that there are many, in fact the majority of, financial planners and advisers who, unlike Tarrants, give the interests of their clients the priority that those clients are paying for. They provide professional advice. It is important that we as legislators ensure that the legal framework surrounding this industry is robust and provides the best standards of consumer protection possible. We make absolutely no apology for bringing forward legislation, like these bills, that puts the interests of the consumers first.

Schedule 1 to the bill amends the Corporations Act 2001 to implement part of the government's Future of Financial Advice reforms. The underlying objective of the reforms is to improve the quality of financial advice while building trust and confidence in the financial planning industry through enhanced standards which align the interests of the adviser with the interests of the client and reduce conflicts of interest.

In addition to this bill, there will be further legislation which will implement other key components of the FoFA reforms, including the best interests duty and the ban on conflicted remuneration structures. The FoFA reforms represent the government's response to the inquiry by the Parliamentary Joint Committee on Corporations and Financial Services into financial products and services in Australia, the PJC inquiry. The bill contains two measures to enhance consumer protection and to instil in consumers more trust and confidence in financial planning through improved professional standards, greater transparency for clients and more effective power for the regulator, ASIC.

First, the bill sets in place arrangements which require financial advisers to obtain their retail client's agreement in order to charge them ongoing fees for financial advice, that is, the opt-in requirement. That conforms with the first of the principles that I spoke about in the introduction to my contribution, which is that if you are going to charge a fee for a service it is not unreasonable to get permission, and to get permission regularly, from the client to charge that fee. Currently, there are some clients of financial advisers that pay ongoing fees for current financial advice who receive little or no service. Some clients are also unaware of the amount of those fees. This is occurring despite the fact that most ongoing advice contracts allow a client to opt out at any time. The initial disclosure of ongoing advice fees does not assist as the disclosure is not ongoing.

Under the proposed arrangements, the basic requirement is that advisers must obtain their client's agreement to renew at least once every two years, as well as giving clients a fee disclosure statement at least once every 12 months. The renewal notice empowers a client to renew or end the ongoing fee arrangement, and 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 charged by the adviser. 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 penalty, which is lower than others in the Corporations Act, reflects the tailoring of the penalty to the nature of the offence. There is also flexibility as to when and how advisers obtain the renewal notice. The bill also provides additional grace periods—

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