Paul Fletcher (Bradfield, Liberal Party) Share this | Hansard source

I am pleased to speak on the Corporations Amendment (Future of Financial Advice) Bill 2011 as well as on part 2 of this compendium, the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. These bills are intended to be the culmination of the reform process, kicked off following the Ripoll inquiry into financial products and services. They deal with such matters as introducing a requirement for advisers to act in the best interests of clients; banning conflicted remuneration such as commissions, volume payments and soft-dollar benefits; requiring advisers to obtain client agreement to ongoing advice fees; mandating greater disclosure of fees; and giving ASIC greater powers.

In the time that is available to me, I want to make three points. Firstly, the key recommendations of the Ripoll report are uncontentious. To the extent that the bill adopts the uncontentious recommendations, we welcome them. Secondly, this bill, somewhat surprisingly, includes many changes which were not canvassed in the Ripoll report and they appear to be there largely because they were asked for by the Industry Super Network. Given the very cosy relationship between the parliamentary Labor Party and the industry super fund sector, the minister appears to have been very eager to respond to the policy agenda of the Industry Super Network. Thirdly, the implementation arrangements for this substantial package of reforms are hopelessly impractical and, once again, reveal that we have a government which has, amongst its key figures, people with virtually no experience of the practical complexities of running a business.

Let me turn firstly to the point that the key recommendations of the Ripoll inquiry are uncontentious. We are all agreed that the financial services and advice industry provides a very important service, helping Australians with their financial health and wellbeing. We also know that there have been some very unhappy episodes in recent years with the collapses of companies like Storm Financial, Trio and Westpoint. Emerging from these collapses, the Parliamentary Joint Committee on Corporations and Financial Services was asked to conduct a comprehensive inquiry into Australian financial products and services. The inquiry reported in November 2009. In the view of the coalition, the recommendations of the inquiry, in the main, were well considered and are sensible. The key recommendation, the centrepiece recommendation, is to introduce as a matter of law a fiduciary duty for financial advisers, requiring them to place the interests of their clients ahead of their own. It is very interesting to note that the inquiry did not recommend the introduction of a large and detailed set of complex new regulatory measures. Quite the contrary, the inquiry in its final report specifically noted that it was not an absence of regulation that was the problem, rather an absence of enforcement. Let me quote:

The committee is of the general view that situations where investors lose their entire savings because of poor financial advice are more often a problem of enforcing existing regulations, rather than being due to regulatory inadequacy. Where financial advisers are operating outside regulatory parameters, the consequences of those actions should not necessarily be attributed to the content of the regulations.

There was a very clear direction from the Ripoll inquiry that the solution to the problem was not the introduction of a complex new superstructure of detailed, prescriptive microregulation.

This brings me to the second point I wish to make to the chamber. There are very detailed regulatory changes contained in the bill which were not canvassed by the Ripoll inquiry at all. Let me mention three of them: retrospective fee disclosure, banning of commissions for insurance inside superannuation and what are colloquially known as the opt-in provisions. The retrospective fee disclosure provisions impose a requirement to introduce additional annual fee disclosure. The important point to note is that clients already receive regular statements provided by financial services product providers. There is now to be an additional requirement to produce an annual statement. It was initially understood that this would apply to new clients, those who became clients of the financial services adviser or provider post the implementation of the legislation. But at a late stage it emerged that the intention was that this requirement would apply to all clients. This greatly increases the cost and complexity of implementation.

If a product is 10, 15 or more years old, the consequence of this measure is that there will be a need to open up the legacy IT system which supports that product. As anybody who has had any exposure to IT systems in large corporates would know, that is always a risky, expensive and deeply fraught process. This is a regulatory measure which imposes substantial costs for very little public benefit. It is entirely typical of the kind of thing this government does again and again, because this government, the Rudd-Gillard government, is composed of people with zero practical private-sector experience. Naturally the last thing it would ever think about is the complexities of implementing updates to a sophisticated information technology system.

I turn to the question of the banning of commissions for insurance inside superannuation. Many people choose to obtain life and income insurance, and total and permanent disablement insurance, through their superannuation fund. It is a cost-effective way to obtain this important insurance because they are able to pay with pre-tax dollars. Typically they do this based upon advice from a financial adviser. The Parliamentary Joint Committee on Corporations and Financial Services, on which I serve, heard from the Corporate Super Specialist Alliance, which comprises financial advisers who specialise in this area. They had this to say:

Our major concern is that CSSA members will not be able to be remunerated for the work they perform once FoFA is implemented, as commissions are to be banned on both Superannuation investment and Group Insurance within Superannuation. There is no proposed model for fees to be charged for services provided on a group basis, and we believe that this needs to be addressed.

This measure will effectively discouraged the operation of an existing and proven distribution channel under which many people today are educated about the most cost-effective means to obtain insurance—that is, via their superannuation fund. Given that Australians are seriously underinsured, what is the possible policy logic for a measure which is likely to reduce rather than increase the number of people taking up insurance via superannuation?

The third area that I want to focus on is what is colloquially known as 'opt-in'—that is, the requirement contained in this legislation for every financial adviser to obtain written confirmation from a client every second year that he or she still wishes to retain that adviser. In substance, this is a restriction on all Australians, who are now to be barred by law from contracting with a financial adviser on terms that the contract stays in place until such time as the client determines otherwise. Instead, they will be prohibited by law from contracting for more than two years. This is an extraordinarily intrusive burden being placed upon both financial advisers and those wishing to retain financial advisers. It has been done at the request of only one organisation, the Industry Super Network, which is the lobby group for industry superannuation funds, the biggest of which is the $43 billion Australian Super. ISN provided to the original Ripoll inquiry the only submission arguing in favour of opt-in.

It is very interesting to reflect on the cosy ties between the parliamentary Labor Party, Australian Super and the Industry Super Network. The Minister for Financial Services and Superannuation, who has carriage of this legislation, is a former director of a predecessor organisation of Australian Super. So are two other current members of the Labor Party, Minister Combet and Senator Cameron, as well as the failed Labor candidate for Melbourne in the 2010 federal election, Cath Bowtell. So it is perhaps not surprising that this legislation is so responsive to the specific agenda of the big industry funds. But in so doing this legislation will bring substantial harm to financial advisers and their clients. Let me give two examples, provided to me by a financial planner in my own electorate. He told me of a client, in his mid-60s, who had just retired. When the adviser called his client for the annual review, the client said that his focus was on competing in the Bosphorus cross-continental swim between Asia and Europe. All his efforts would be going into training for that swim and that that would be his personal focus for a long period. He did not want to be distracted by his finances. He asked the adviser to manage his affairs, as he had been doing for some years. Only after the swim had been completed did the client want to come in for a more formal review. Perhaps unsurprisingly, this period of training, given the nature of the swim, extended to more than a year. As a consequence the adviser was essentially left with carriage of the client's affairs throughout that period. Under the proposed FoFA opt-in rules, contained in this draft legislation, the financial adviser would have been barred by law from doing this, even though it was his client's specific request, because the consequence would have been that he would have gone for more than two years without seeing the client.

Let me give a second example, provided to me by the same financial adviser. He has a client who is in her early 50s, who has recently been divorced, moved cities and changed her job. To compound her troubles she was then diagnosed with breast cancer. She called her financial adviser and gave him very clear instructions. She did not want to worry or even think about money for the foreseeable future as her only focus, which is perfectly understandable, was on dealing with her cancer and getting through it. In the end the cancer turned out to be a severe one. The surgery, chemotherapy, radiotherapy and then other complications took some two years to work through. If the opt-in rules had been in place the financial adviser—my constituent—would not have been able to respond to his client's specific request.

This is a disgraceful piece of policy. It is a transparent attempt by the big industry funds, on a competitive basis, to nobble independent financial advisers, and it is disgraceful that this government has agreed to it.

In the brief time that is available to me I wish to point out that yet again, as with just about everything this minister brings forward, the implementation arrangements are a complete mess. They are hopelessly impractical. The consistent theme from every stakeholder in the financial services sector to whom I have spoken over the last six months—and I have spoken to a very large number of them, because they come and see people who are members of the Parliamentary Joint Committee on Corporations and Financial Services—is that the implementation time frame proposed by Minister Shorten is wholly unrealistic and completely fails to understand the complexity of the task of refreshing and updating the very complex IT systems that are required to support products which may have several hundred thousand or even millions of customers. This is compounded by the fact that the FoFA changes were originally intended to take effect from 1 July 2012, and the MySuper changes, which affect the same group of stakeholders and involve another major round of IT changes, were due to take effect from 1 July 2013.

It is true that just last week the minister at last saw sense and announced that the implementation of the FoFA measures will be voluntary until 1 July 2013. But it is quite extraordinary that it took him until 15 March this year, slightly more than three months before the implementation date, to make this announcement. In the meantime, financial institutions have been facing huge pressures as they have tried to devise IT change programs without even knowing what their precise legal obligations are going to be. Even with this decision, the time frame that has been allowed is highly unrealistic.

In conclusion, the original recommendations in the Ripoll inquiry are widely accepted, but this bill expands greatly beyond those original recommendations and it is hard to avoid the suspicion that a key objective in this bill is to advance the agenda of one section of the superannuation industry. The interests of those seeking financial advice have come a distant second. (Time expired)

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