Wednesday, 4 August 2021
Financial Sector Reform (Hayne Royal Commission Response — Better Advice) Bill 2021; Second Reading
[by video link] I am pleased to speak today in relation to the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021. As earlier speakers from the opposition have indicated, this is a bill that we will support. But I might add that it's a bill which comes three years after the Hayne royal commission and reflects the drip feed of responses to the Hayne royal commission's important recommendations that we continue to see in this place. The lack of speed, urgency and comprehensiveness in the government's response to that royal commission is a very strong reflection of the fact that that was a royal commission that this government never wanted to happen.
This particular bill implements recommendation 2.10. Specifically it expands the role of ASIC's existing Financial Services and Credit Panel to operate as a single professional disciplinary body for financial advisers, incorporates new penalties for advisers who breach professional obligations and introduces a new two-stage registration process for financial advisers. This bill has received bipartisan support from the Senate economics committee, and we support the recommendation of the independent senator on that committee that this bill be reviewed in two years time.
We support this bill, but I think it's important to make some observations of a broader nature in relation to some of the ongoing challenges that this bill doesn't address. I want to start by making the overall observation that financial advice is critically important for Australians. As many speakers have observed already in this debate, the amount of financial assets under the control of many Australians is increasing. It is critical that they have access to affordable and independent financial advice. There are many aspects of our lives where financial advice is critical—the types of insurance we obtain in order to protect ourselves and our families from calamity. It is also critical that we obtain financial advice in relation to the very complicated challenge of investing over our life cycle, so that we can use resources we have during our working lives and invest those well so that we can provide ourselves with as much income security and dignity in retirement as possible.
Financial advice is one of the most important sources of advice for many Australian families, but there are some longstanding challenges with the quality and costs of that advice. I would say that there is a trade-off in relation to some of the regulation that is appropriate when it comes to that advice. We all agree, I think, in this place that it is important that financial advisors become more professional in the way that they interact with their clients. Some of the aspects of the way in which that professionalisation will be achieved, however, can have trade-offs in relation to the cost and the accessibility of financial advice. That's one of the challenges in setting up appropriate regulation in this sphere. It has been a set of regulatory challenges that has been identified over a long period of time, with the Wallis inquiry, the Ripoll inquiry and all of the consultation that was undertaken in the Rudd-Gillard years in relation to the very important FOFA reforms, which, as many speakers have identified, were unfortunately undermined by this government.
There are some fundamental trade-offs involved, but we shouldn't ignore the fact that some of these trade-offs exist in relation to many other professions, like the remuneration of lawyers and the remuneration of real estate agents. There are many other areas of professional advice where there can be challenges in potential conflicts of interest and challenges in relation to whether there should be restrictions on the way in which professional advisors are remunerated, so we shouldn't see this as a unique example. It is not. Many of the challenges that financial advisors face in relation to the way that they are remunerated and regulated are definitely not insurmountable. We should be able to deal with them in this place and we need to deal with them in this place because the receipt of high-quality financial advice is so critical for the Australian people.
In light of some of those high-level challenges, I think it's critical to go back to the Hayne royal commission. Its final report on page 119 very usefully sets out some of the context. It says that there are three critically important issues that have emerged in relation to the provision of financial advice. The first is fees for no service, the second is what might be classified as poor-quality advice—or perhaps not acting in the client's best interests is one way of characterising that—and the third is the fragmented and ineffective disciplinary system for financial advisors. Very early on, the Hayne royal commission identified those three core issues. Importantly, it said that each of those issues has its root in the history of the financial services industry, and it's important to understand that history if we are to deal with each of those issues appropriately.
Critically, the Hayne royal commission on page 119 of its final report said:
Expressed in a single sentence, that history tells the story of an incomplete transformation – from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice.
That is the nub—the heart—of the issue. It is a profession and an industry that emanated from sales of certain products. It is critical that that industry, and that profession, evolves to a point where, at its core, it is about providing holistic advice to the client. It is already a long way down that path but there is still a journey to go.
When it comes to some of the specific challenges that the financial services industry has faced, again, it is useful to go back to the Hayne royal commission. The Hayne royal commission in its interim report identified the fact that, as the market for superannuation and investment products grew in scope within the Australian population, most financial advisors had come from a background of insurance sales in which a sales driven, commission based culture prevailed and comprehensive advice was not commonly sought or given. Again, that goes to the nub of the issue. We need to have a sector which is not driven by commissions and a sales culture, which we saw led to so many issues and so many vulnerable people being abused, but to a culture and an industry where it is comprehensive advice that is provided.
When it comes to conflicted advice, this is an issue that has been looked at on multiple occasions. The Wallis inquiry and the Hayne royal commission looked at this, and vertical integration by the banks was a large part of this. Vertical integration can provide efficiency but the Hayne royal commission said that the 'one-stop shop' which had become the model of so many banks can provide efficiencies, but, to quote, it said that it has an incentive to promote the owner's products over others 'even where they may not be ideal for the customer'. That was the problem of conflicted advice which was identified so much. Trying to help the industry evolve towards holistic provision of non-conflicted advice has been an issue for so long.
Why I think it is so important to raise all of those issues is that these have been looked at before. They were looked at by Wallace and they were looked at by Ripoll. And, of course, if we go back to FoFA, way back nine years ago, FoFA looked at so many of these issues and provided practical solutions. If we look at the amendments to the Corporations Act which were introduced all those many years ago, we see that at the heart of the FoFA reforms was a prospective ban on conflicted remuneration structures; a duty to act in the best interests of the client; an opt-in obligation that requires advice providers to renew their client's agreement to ongoing fees; an annual fee disclosure statement; and enhanced powers for ASIC. What I think is quite tragic is that all of those elements are reflected in the Hayne royal commission recommendations. So, when we fast forward a decade, what we see is that the 10 recommendations from the Hayne royal commission that relate specifically to financial advice were all there in FoFA.
When we go back to the debates around FoFA, we find that this government fought that piece of legislation and reform agenda tooth and nail. There wouldn't be anything in that six-year period of government that the opposition at the time, this Liberal-National party coalition, fought against harder. Perhaps the only thing they voted against more often was anything to do with climate change action. But, other than that, it was FoFA that they fought against with more passion than anything else. Yet what we see now after the Hayne royal commission is that we are revisiting all of those core issues which FoFA rightly put front and centre. But, of course, as soon as the Abbott government was elected, it did everything it could to undermine those critical recommendations.
So what we see with this government is that it didn't want the Hayne royal commission and it is reluctantly and belatedly implementing its recommendations. The Hayne royal commission itself reflects on the fact that Australia has lost a decade. If we'd implemented the FoFA recommendations, we could have had a decade where the financial services and financial advice sector had been professionalising and dealing with all of the challenges of implementing a more appropriate regulatory regime. Of course, you never get it right first up, but we could have been fixing all of the elements of the regulatory regime over the intervening years. Instead, we have had to start from scratch. That is a direct result of this government fighting tooth and nail to stop FoFA, then undermining it and then fighting tooth and nail to not have a royal commission—which then ended up recommending all of the key elements of FoFA.
This government is putting this bill forward. It is belatedly giving us a bill that reflects one recommendation of the 10. We will support it, as speakers on this side have indicated, but we should not lose sight of the fact that what this government has given us is a decade of inaction, a decade of going backwards. But not only that; in the intervening period not only have we had that lost decade where FoFA was undermined but we've also had FASEA. It was established in 2019 by the then Treasurer, now Prime Minister. This is an organisation that went through three CEOs in its first 18 months, an organisation that failed to provide appropriate standards in a timely and adequate fashion, and an organisation that was constantly changing a complicated examination process. So we support this bill in moving beyond FASEA, but, again, it's part of the context in which we see the complete mess that this government has create, with its decade of inaction in dealing with the fundamental issues that need to be dealt with to professionalise financial advice. But what the government has done has been a complete mess.
Even though we now have a recommendation to implement recommendation 2.10, so much is left undone. We still have inquiries coming in relation to commissions, life insurance and mortgage brokers, and there is so much uncertainty. I receive correspondence from advisers concerned about some of the existing mess in relation to FASEA but also in relation to the ongoing uncertainty. It would have been better if advisers had been provided with an overarching framework. If that had been the building block that we used to build a better approach that would have been the launching pad for the profession to evolve to far better position than we find them in today.
Those opposite, during their contributions on this bill, claimed that we demonise financial advice, but the irony here of course is that they're the ones who, at every stage, have undermined sensible reform in this area, and, where they have implemented any reform, such as FASEA, it has been a complete disaster for the profession. It's under their watch, of course, that the number of financial advisers is falling. It's under their watch that the profession feels more undermined and more uncertain than ever.
I want to go back to the initial point that I made, which is that financial advice is incredibly important. It is one of the most important sources of professional advice for people, particularly given their increasing financial assets, particularly given increasing life expectancy, particularly given the increasing complexity of financial products that people are having to navigate. It is absolutely imperative that people in our community have access to unconflicted, high-quality, 'best interests' financial advice, and it is absolutely critical, of course, that that profession is regulated in an appropriate way.
We deserve much better than what this government has put forward. We will support this bill, but this government needs to put forward a holistic framework and a strategy moving forward that is going to provide for the best possible settings for financial advice in the future. That is what financial advisers deserve, and that is what the people of Australia deserve.