Paul Fletcher (Bradfield, Liberal Party, Parliamentary Secretary to the Minister for Communications) Share this | Hansard source

I am very pleased to rise to speak on the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014. In the brief time available to me I would like to make three points. The first is that the set of stronger legislative protections for Australians obtaining financial advice that were introduced under the last government are broadly supported by the coalition. We made that clear at the time, and that continues to be our position. Having said that, Labor's future of financial advice legislation nevertheless contains some troubling instances of legislative overreach where the social costs of the measure exceeded the benefits. Indeed, in some cases the consequence was that financial advice became less readily available than it had previously been. Therefore, the third point I make is that the coalition took to the last election a promise to make some amendments to the future of financial advice legislation to get the balance right in this critical area so as to protect consumers and to ensure the greatest possible availability of financial advice.

Let me turn to the first point: the broad support of the coalition for the reform direction that was pursued under the previous government. As the previous speaker, the member for Kingsford Smith, pointed out, the genesis of these measures goes back to an inquiry conducted by the Parliamentary Joint Committee on Corporations and Financial Services following the collapse of Storm Financial, which occurred as one of the many consequences of the global financial crisis. There was a very sharp in equities prices, and t emerged that a significant number of Australians—many of them not financially sophisticated—had been put into pretty risky schemes under which they mortgaged their homes to buy a portfolio of shares. The share market fell sharply, the value of the share portfolios fell and many Australians—many of them not financially sophisticated—ended up in a very difficult position as a result. The key recommendation of that inquiry, known as the Ripoll inquiry—the inquiry of the Parliamentary Joint Committee on Corporations and Financial Services—was to impose a fiduciary duty on financial advisers requiring them to place the interests of their clients ahead of their own. Of course, the coalition clearly supports that principle.

I want to highlight one observation made in the final report of the Ripoll inquiry, where it was specifically noted that it was not an absence of regulation that was the problem, it was an absence of enforcement. I 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.

Somewhere along the line that principle got lost and the FoFA measures got built around some sensible core principles and a significant encrustation of excessive and counterproductive regulatory burden. There were measures contained within the FoFA legislation which imposed social costs which exceeded the social benefit.

Let me mention, for example, the retrospective fee disclosure requirement. Many products currently in the market are 10, 15 or more years old. The retrospective fee disclosure requirement meant that major financial service providers were required to open up and make major changes to their legacy IT systems which support those products. Such an exercise is always risky, expensive and deeply fraught. Indeed, the Financial Services Council estimated that its members would incur around $1.5 billion in cost in implementing these changes in the area of superannuation advice and insurance reforms.

I want to make an important related point here. One of the evils which the future of financial advice legislation was designed to address purportedly was advisers who were, in substance, salespeople employed by banks or other product manufacturers, as opposed to independent providers of advice. But one of the perverse consequences of the future of financial advice legislation has been that some of its provisions have made the business model of genuinely independent advisers harder to sustain than before. For example, the requirement to provide a single annual fee statement can be more difficult to meet for an independent financial adviser who might have put his or her clients into a range of products from a range of different product manufacturers—I use the industry jargon—than for somebody who is tied to a particular product manufacturer and puts all of his or her clients into the products of that particular manufacturer. Similarly, the opt-in requirement creates difficulties for independent advisers competing against large organisations with huge sales and marketing budgets.

I make the point that it is one thing to talk about the objectives of legislation, but it is another thing to carefully analyse the actual effects on a market—on both providers and on consumers—of those provisions. In the detailed analysis that the coalition did in relation to the measures in the future of financial advice package, there were a number of instances of measures that we thought, in substance, worsened the position from the point of view of the desirability of making financial advice as broadly available as possible. So Australians who are called upon to make significant financial decisions in relation to such matters as insurance and superannuation as they plan for their retirement—should I pay down my mortgage, should I put more money into an equity fund or into bonds?—should have the widest possible availability of affordable financial advice. One of the principles which guided the coalition as we looked at the measures in the legislative package was: which ones advance the position toward achieving that desirable objective and which ones end up causing that position to be harder to achieve?

The opt-in requirement, which I mentioned briefly before, is a requirement under which every financial adviser is compelled to obtain written confirmation from a client every second year that the client still wishes to retain that adviser. It is worth making the point that the opt-in requirement was dreamed up by the Industry Super Network, which is the lobby group for industry superannuation funds. You can see why they like that measure. It makes very little difference to the business model of the industry funds, while doing a pretty effective job of disrupting the business model used by retail funds in which financial advisers play important roles.

It, no doubt, did no harm at all to the Industry Super Network's prospects of getting a hearing on the desirability of introducing this opt-in requirement that the Minister for Financial Services and Superannuation at the time was our friend the member for Maribyrnong, now the Leader of the Opposition. He, of course, is a former director of a predecessor organisation of the biggest of the industry super funds, Australian Super. Again, I make the point that there were a range of motivations swirling around, and a number of the provisions which ended up in the legislation were not necessarily motivated exclusively by a desire to protect Australian consumers. There may well have been other motivations which were also in the mind of the Rudd-Gillard-Rudd Labor government in introducing those measures.

A similar analysis could be made of the future of financial advice provisions, which had the effect of making it more difficult for financial advisers to deliver what is known as scaled advice. 'Scaled advice' is another one of the jargon terms that pervades this area. It refers to the provision of advice which is limited in scope to some extent. For example, advice on superannuation products rather than on a holistic financial plan.

Feedback from the industry is that the current legislative provisions have resulted in increased costs and in significant legal uncertainty for advisers who do not feel that it truly allows them to provide scaled advice to their clients. In other words, the provisions as they presently operate may require an adviser to investigate all of the client's financial services, even when advice is sought on a specific and narrow issue.

The consequence of that is that Australians who seek financial advice on a specific and defined issue may find it harder to get that advice because there is a set of legislative provisions which now make it more difficult for advisers to deliver that advice. If you say that the policy objective is to maximise the availability of financial advice to Australians who need that, whether that be broad-ranging advice addressing the totality of their life and financial circumstances or whether it be more narrowly defined scaled financial advice, then we believe that some of the settings in the current legislation need revising.

That is why I now turn to the third part of what I want to say. This bill gives effect to a commitment made by the coalition at the last election that we would make some changes to get the balance right. In the last parliament, the Parliamentary Joint Committee on Corporations and Financial Services, of which I was a member, contained a number of coalition members and senators. We issued a minority report, with 16 recommendations. We went to the 2013 election with commitments based upon those recommendations. We committed that we would remove the opt-in arrangements and bring about the simplification and streamlining of the additional annual fee disclosure requirements. We would improve the operation of the best interest duty and provide certainty around the provision and availability of scaled advice.

I want to comment particularly on the best interest duty, because we have heard from speakers on the other side of the House that, in some way, in the measures in this bill we are gutting the best interest duty contained in the legislation. Nothing could be further from the truth, as the most cursory examination of the legislative provisions makes clear.

The first point I highlight is that the requirement for a financial adviser to act in the best interests of his or her client is set out in subsection 961(B)(1) of the Corporations Act. There is no change to that provision contained in the bill before the House this afternoon.

The second point I make is that subsection 961B(2) outlines the steps that an adviser may go through to show that he or she has satisfied the duty to act in the best interests of his or her client. There are six steps that are now in the legislation and that will remain in the legislation after this bill goes through.

The first is a requirement to identify the subject matter of the advice sought and the objectives, financial situation and needs of the client. I am somewhat paraphrasing and simplifying. The second is to identify the objectives, financial situation and needs of the client that are disclosed to the adviser. The third requirement is, where it was reasonably apparent that information relating to the client's relevant circumstances was incomplete or inaccurate, to make reasonable inquiries to obtain complete and accurate information. The fourth step for the adviser to take is to assess whether the adviser has the expertise required to provide the client with advice on the subject matter sought. The fifth step is if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product then, firstly, conduct a reasonable investigation into the financial product that might achieve the objectives and meet the needs of the client that would reasonably be considered as relevant to advice on that subject matter and, secondly, assess the information gathered in the investigation. The sixth step is to base all judgements in advising the client on the client's relevant circumstances.

That is a very comprehensive set of steps, which, if a financial adviser goes through them, both the adviser and the client have certainty about the best interests duty being met. There is only one provision which we are removing from the act in this bill and that is a catch-all requirement that, as well as all of the steps I have gone through, an adviser must take any other reasonable step that would be regarded as being in the best interests of the client, given the client's relevant circumstances.

That is an inherently uncertain provision. It is quite unclear what it means. It is quite unclear what obligation it imposes on a financial adviser and we are removing that uncertainty by making that narrow, technical amendment to remove that provision. But the vast substance of this regime remains in place. There are specific, targeted amendments in this bill to cause the regime to operate more efficiently. I commend the bill to the House.

See this speech in context