Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

For many Australians, financial advice is an essential service. As Australians increase their savings and accrue large amounts of superannuation it should be no surprise that the provision of financial advice has now become a key component of the financial services industry. The coalition recognises the role that financial advisers play in helping Australians to better manage financial risks and to maximise financial opportunities. In providing this important service, financial service providers deal with other people's money. That is why it is important to have an appropriately robust regulatory framework in place to ensure effective consumer protection and to ensure that high-quality financial services and advice remain available, accessible and affordable.

Australia has a strong record of reform in the regulation of financial services with a progressive unification and simplification of the regulation of financial products and financial service providers. This largely reflects the financial reforms of the previous coalition government when I was the financial services minister. This has allowed strong growth in the provision of financial services and products to non-professional investors such as households and small businesses. Financial services now comprise 10 per cent of Australia's gross domestic product. That is a larger contribution to the economy on an annual basis than the mining industry, manufacturing or agriculture. I have continued my interest in this area in opposition.

As part of the coalition's banking reform package launched in October 2010, I called for further simplification of my beloved Financial Services Reform Act to make the business of actually getting out and doing business easier and simpler. Unfortunately, the future of financial advice bills are not legislation that makes life for business easier and simpler. Financial advice must be affordable, simple to understand and it must put the needs of the client first. This FoFA legislation fails on all three of these metrics. It increases cost for practitioners and clients by adding unnecessary costs and red tape. It is overly complex. This will lead to a reduction in business activity and will cost jobs. It fails to establish the strongest requirements for fiduciary duty. The government has just left too little time between this legislation and the implementation date for these changes. The legislation becomes effective on 1 July this year, a scant 3½ months away. The current implementation time frame is unrealistic, creating great uncertainty for the industry. Business will need to change processes and change software and will need to train advisers—all before business has seen the regulations.

There are also changes relating to the provision of the MySuper legislation before the parliament. This too will require changes in processes, software and training but change for that will come into effect on only 1 July 2013, a full year after FoFA. It seems odd that the government would mandate one part of the changes to commence in July 2012 with another part to commence one year later. It makes sense for these changes to occur on the same day, ideally 1 July 2013. John Brogden, head of the Financial Services Council, has said the implementation time frame is 'not realistic' and the 1 July 2012 date is 'inconceivable', particularly because industry has not seen the accompanying regulations. He fears a situation where the industry would 'know what the law says on 30 June 2012 for an implementation one minute later'.

The government should delay commencement of the FoFA legislation until 2013 to bring it into line with the government's proposed MySuper changes. This would give the government and the industry 12 months to work together on the regulations, to implement the new systems and to make personnel changes. The FoFA legislation as it stands will cost Australian jobs in the financial services industry. Since the beginning of this year there have been over 5,700 announced job losses in Australia, including many thousands of jobs lost in financial services. The $700 million initial implementation cost of the proposed changes and the $350 million cost thereafter is entirely borne by the industry. While it may be possible to subsequently pass some of this cost through to consumers, the brunt is expected to be borne by financial planners. This will cost jobs. Mr Craig Meller, Managing Director of AMP Financial Services, gave evidence of potential job losses to the parliamentary joint committee. He stated:

… the initial impact will be on financial planners and even the explanatory memorandum to the bill forecasts a halving of planner numbers in the next few years. We believe that this could lead to job losses in the industry of up to 25,000 over that period. We also fail to see how this would improve advice access.

Mr Richard Klipin, Chief Executive Officer of the Association of Financial Advisers, concurred with this assessment of job losses:

… FoFA, as it stands, will decimate the financial advice profession. Over 6,800 adviser jobs are at risk and over 30,000 jobs in total.

This seems entirely contrary to the government's budget-time promise that it will create jobs, jobs, jobs. Perhaps the Prime Minister sees these jobs as merely growing pains but I can assure her that they will be very real to the men and women who lose their jobs as a result of this legislation. Labor's opt-in provisions require Australians to resign contracts with their financial advisers every two years. This will unnecessarily add red tape, increase costs and create enormous uncertainty for clients and businesses. There is no precedent for this anywhere in the world. It would seem that the minister wants Australia to become the world leader in financial services red tape and nothing else.

These changes were not included in the Ripoll inquiry report in 2009. The only body which proposed mandatory opt-in was the Industry Super Network run by the unions—that is, out of 407 submissions to the Ripoll inquiry only one submission, that of the Industry Super Network, called for the introduction of opt-in. The inquiry chose not to recommend this idea. It was a Labor-dominated inquiry and not even they believed that opt-in was right. Nevertheless, Minister Shorten continued with this initiative regardless of the feedback from everyone else. The Financial Ombudsman Service stated in their submission to the PJC inquiry that the complaints to the service frequently include aspects where clients have inadvertently not filled out forms. This issue will only get worse under FoFA where clients will be forced to sign more forms to continue to receive advice, rather than simply opting out when they are unhappy with the quality or level of advice. If a consumer fails to complete a renewal notice in a 30-day period, they will be left high and dry, without financial advice and without the added protection that brings. This could mean that they will not be advised of changes to the law or of opportunities or problems in their financial portfolio.

Better knowledge of the work of financial advisers is needed—not overburden but some regulations that are complex for both advisers and the clients. In our view there are already three requirements that provide appropriate consumer protection while not imposing excessive costs and red tape. The first is the requirement for advisers to act in the best interests of the client. The second is transparency around fees charged when entering into the financial advice relationship. The third is the ongoing capacity for clients to opt out of that relationship if it is, in their judgment, not delivering value.

Another aspect of the FoFA legislation which was not recommended by the Ripoll inquiry but has crept its way into the legislation is retrospective fee disclosure statements. Clients seeking financial advice already receive regular fee disclosure statements in relation to any financial product they hold. The legislation requires this currently available information to be consolidated into an additional annual fee statement provided by the financial adviser. This creates an extra regulatory burden for advisers and an extra layer of costs for clients. The Financial Services Council has estimated the implementation costs for existing clients would be $98, but for new clients it would be $54 a year. Like so many of the FoFA reforms, the government said one thing to stakeholders and then did something entirely different. The industry was led to believe the new fee disclosure statements would apply only to new, not existing, clients. The industry took the government at their word, as have the Australian people on many occasions.

The role of the opposition is to hold the government to account, and we will. The government's longstanding commitment to only prospectively apply detailed fee disclosure statements should stand. Of course, this is yet another broken promise from the Gillard government. I have long argued that financial planners should have a fiduciary obligation to act in the best interests of their clients rather than in their own interests or in the interests of a product provider. The government's own Ripoll inquiry recommended that. Recommendation 1 of the report said:

The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own.

I find it strange that the government has chosen not to implement a fiduciary duty. Instead, it has opted for a far less stringent 'best interests' duty. Nevertheless, it is better than nothing. Proposed section 961B(2) sets out conditions that must be met in exercising this best interests duty. For example, an adviser must attempt to understand a client's personal circumstances. This provision makes sense; in fact, it is common sense. It is sensible to ensure financial advisers consider all of their clients' known circumstances when providing advice, and it is also sensible to ensure that the adviser has conducted a thorough investigation of the financial products that best suit the needs of the client. However the government, obviously not satisfied with its requirements in section 961B(2), has chosen to burden the financial advice industry with a catch-all clause in proposed section 961B(2)(g), which states that an adviser must have:

… taken any other step that would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

Since these 'other steps' are not specified, financial advisers, and everyone else, can have no comfort as to whether they have complied with their best interests duty or not. This just creates more uncertainty, and it will lead to more litigation, have no doubt about it, Mr Deputy Speaker. The coalition proposes to remove section 961B(2)(g) but to retain the rest of 961B(2). This will retain the best interests duty and create certainty for those attempting to comply with this legislation.

The coalition's next concern is with the definition of 'conflicted remuneration structures'. We believe that it is too broad and ambiguous and that it will create uncertainty among industry and clients. Let me be very clear: the coalition supports the banning of conflicted remuneration structures; however, much has already been done voluntarily by the industry to reduce the prevalence of conflicted remuneration structures. This process is already happening at an industry level, largely without the assistance of government. This arises from the general community becoming more aware of the importance and worth of financial advisers.

The FoFA legislation outlines three broad categories of conflicted remuneration. The first is monetary conflicted remuneration, the second is non-monetary conflicted remuneration and the third is other banned remuneration, such as shelf-space fees. In relation to monetary conflicted remuneration, the provisions in sections 963A and 963B are, to say the least, confusing. They have the potential to complicate matters so that general advice contained in marketing campaigns or previous advice could be inadvertently banned. These provisions have drawn sharp criticism from many stakeholders, including the Law Council of Australia, who stated:

… a product issuer who provides general financial product advice (for example in the form of a product disclosure statement), could be prohibited by the ban on conflicted remuneration from receiving a management fee as the fee could be interpreted as being capable of influencing its general advice to investors.

This could have the effect of meaning financial advisers provide less, rather than more, information to their clients. The industry need urgent clarification about whether advice they provide that is general in nature could be adversely affected by this legislation if such advice is part of the management of the funds and therefore carries a management fee. This difficulty could be avoided if the following changes were made. First, general advice should be specifically exempt from the definition of conflicted remuneration. Second, the proceeds of the sale of a financial-planning business between a licensee and its authorised representatives should be specifically exempt from the ban on conflicted remuneration. Third, section 963B(1)(c) should be amended to link the payment for advice to a specific advice provider rather than to any representative of a licensee, and it should apply only where there is a causal link between past advice and current advice.

With relation to non-monetary conflicted remuneration, the legislation imposes a $300 limit on the value of certain non-monetary benefits. There is uncertainty as to whether this $300 limit applies on a per employee basis or as an aggregate across all employees at a firm. Again, the coalition calls for urgent clarification as to the intent of this part of the legislation. We are similarly concerned that the exemption to the $300 cap for education or training purposes relates only to services provided 'relevant to the provision of financial product advice'. This means that training in software programs, running a small business and effective communication with clients may not be allowed under the new FoFA regulatory regime. Training like this is necessary to ensure the financial advice sector, like any other business, is professional and accountable. Effective training by industry, including professional development courses relating to business, software or industry processes, is an important way for the financial advice sector to improve its standards and the quality of the service it provides. To restrict this type of training provided by licensees will severely impact on the professionalism of the industry, and it runs completely counter to the aims of the legislation.

The coalition fears that the banning of commissions for risk insurance inside superannuation will leave many more Australians underinsured because it will drive up the upfront cost of such insurance. We do not subscribe to Labor's assertion that commissions on risk insurance are in themselves a conflicted remuneration structure. We do not believe this policy will work. We know from recent experience in the United Kingdom that the banning of commissions on risk insurance does not work. The UK has recently reversed its decision—just as we head into it, thanks to the government. Australians who wish to enter voluntarily into agreements for risk insurance should be free to choose a remuneration arrangement that best suits their circumstances. This may, in some cases, include a commission.

The coalition is also concerned that the provisions regarding the grandfathering of the conflicted remuneration regime are imperfect and that they unfairly and unduly infringe on existing contractual arrangements. Existing contractual arrangements must be recognised and grandfathered to preserve existing property rights. These provisions contained in clauses 1528(1) and 1528(2) create uncertainty, particularly for platform providers who have often locked in contracts with businesses and individuals many years in advance.

The coalition shares the concern of the industry that the anti-avoidance provision contained in clause 965 was included in the bill before the industry had the opportunity to assess its impact. It was not part of the initial FoFA proposal. Item 10 of the bill inserts proposed section 965, which makes it a civil penalty offence for a person to enter into a scheme if the sole or dominant purpose was to avoid the application of proposed part 7.7A, including the best interests test. We have no issues with the provision in principle but will not support its application to legally permitted, exempted or grandfathered arrangements. The legislation does not explicitly exclude existing arrangements. As the Financial Services Council noted:

Specifically, the wording of s965 does not exclude existing arrangements which may inadvertently capture legitimate, and legally binding, arrangements already entered into.

The legislation should be amended to capture only circumstances occurring after the commencement of the legislation.

The coalition is a strong supporter of ASIC being the sole regulator in the financial advice sector. I helped to set it up—I am a great believer in ASIC. The Financial Services Reform Act, which I as minister introduced into parliament in 2001, recognised that it was not efficient for different financial institutions, services and products to be regulated under separate frameworks. The act brought all of the various elements of the financial advice industry under the one regulator, ASIC. It gave ASIC considerable powers to regulate and oversee the industry.

However, as I outlined in our banking plan, I am the first to admit that there is more to be done. The issue of the powers of ASIC was a major focus of the Ripoll inquiry. This bill gives ASIC the power to refuse to grant, to suspend or to cancel an Australian financial services licence where a person is likely to contravene its obligations as a licensee. You heard that correctly—likely. ASIC is to be given powers to suspend somebody from their business on the basis of an assessment of what they might do, not what they have actually done. Not only is this an obvious contravention of natural justice but it is clearly a step too far. The powers were not recommended by the Ripoll inquiry and they are flawed.

As the sole regulator, ASIC must not be given, in the words of the joint accounting bodies, carte blanche with regard to its powers to suspend. The powers must be based on actions, not assumptions or assumed intentions. There must be strict guidelines set for its powers and for how it uses them, as well as for rights of appeal and procedural fairness. The Law Council of Australia stridently criticised this when they noted:

There is no standard of proof which must be satisfied by ASIC and no prescription of the matters which go to whether a person is "likely to contravene" their obligations.

Many of the problems of financial advice in Australia have not come from a deficiency in regulation but from a deficiency in enforcement. The Ripoll inquiry noted:

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.

Many of the recommendations of the Ripoll inquiry were sensible and widely supported. A future coalition government would wrap up all of the work that has been done thus far with a full review of the financial system—a son of Wallis or grand-daughter of Campbell, whatever you will. I have long been an advocate, especially after the global financial crisis, of a full review—something not undertaken since 1996.

As a freedom of information request last year showed, even the Treasurer's own department recommends a full inquiry into the financial system. Unfortunately, instead of following the good lead of the Ripoll inquiry, the government has allowed its FoFA reform package to be hijacked by vested interests, creating more than two years of unnecessary regulatory uncertainty and significant upheaval for the financial services industry. This legislation must be amended to create certainty.

Perhaps the most damning aspect of this legislation is that it fails the government's own tests for simplicity, transparency and regulatory impact. The executive director of the government's own Office of Best Practice Regulation, Jason McNamara, said the impact analysis accompanying the legislation 'was not at a standard that we would pass'. This is the government's own internal adviser saying that the legislation was not at a standard that they would pass. The impact analysis was particularly poor in some of the crucial and contentious areas of regulation, including the opt-in and annual disclosure sections.

The government must, as a matter of principle, withdraw this legislation until a full and compliant regulatory impact statement is submitted. This is the only option the government should consider. Accordingly, I move:

That all words after "That" be omitted with a view to substituting the following words: "the House declines to give further consideration of the bill and of the Corporations Amendment (Further Future of Financial Advice) Bill 2011 until after the Government has tabled for the bills a Regulatory Impact Statement which has been assessed by the Office of Best Practice Regulation as compliant with its requirements.

Robert Oakeshott (Lyne, Independent) Share this | Link to this | Hansard source

Is the amendment seconded?

Bruce Billson (Dunkley, Liberal Party, Shadow Minister for Small Business, Competition Policy and Consumer Affairs) Share this | Link to this | Hansard source

Mr Deputy Speaker, I second the motion.

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak in support of the Corporations Amendment (Future of Financial Advice) Bill 2011 and the related bill before the House. Before I proceed to that, Deputy Speaker Leigh, since this is the first time I am appearing before you—at the bar, so to speak—I wanted to commend you for your judicious impartiality.

Sharon Bird (Cunningham, Australian Labor Party, Parliamentary Secretary for Higher Education and Skills) Share this | Link to this | Hansard source

In anticipation.

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

Yes, in anticipation. As a proud Queenslander, I also congratulate the Queensland Bulls on winning the Sheffield Shield for the first time in six years. I congratulate the captain, James Hopes, a Marcellin student, I think—I think he was at the school I taught at for a while—and the coach, Darren Lehmann, for the team's great effort.

I support the future of financial advice, or FoFA, bill for three reasons. First, it will provide greater protection for consumers and that is a good thing. Second, it is supported by financial planners. Third, it is very strongly supported by the superannuation industry. Those are three big ticks. This bill is about giving Australians greater confidence that the advice they are receiving from financial planners is independent and in their best interests—not their planner's best interests. I am sympathetic to some of the comments about fiduciary duty made by the member for North Sydney, but the legislation before the House is a fair compromise and should be supported.

This change is obviously good for consumers, but it is also good for financial planners. If consumers are given greater confidence, they will be more likely to use the services of financial planners—especially since we will see a sudden growth in this area after the MRRT legislation passes the Senate tonight, allowing the Gillard Labor government to increase the superannuation guarantee from nine per cent to 12 per cent. Sadly, the MRRT legislation was not supported by those opposite. One of the members currently sitting opposite would be on a 15 per cent superannuation contribution rate. But the member for Bowman would be on the equivalent of, I guess, 50 per cent or 60 per cent—whatever it works out to be if you are on the pre-2004 scheme. So it is interesting that we are here talking about an increase from nine per cent to 12 per cent for ordinary working Australians and about the impacts of that on society.

The Gillard Labor government is not increasing superannuation contributions in order to line the pockets of financial planners. Instead we wish to ensure that all Australians have a financially secure retirement. So we want to ensure that financial planners do not take advantage of their clients. That is why this bill introduces a requirement for financial advisers, every two years, to seek the agreement of their clients to continue to charge ongoing fees. That can be sought in quite a simple way.

There are currently some clients of financial advisers who pay ongoing fees for, arguably, little or no service in return. These fees can be in the form of third party commissions, so clients are unaware they are even paying them. Under the old system, it would not be far-fetched for a 20-year-old to be given advice once at the start of their relationship with a financial planner and then have ongoing fees charged for another 30, 40 or 50 years. As a solicitor, I would not support such practice. When a solicitor hangs up their shingle, they say, 'Every time I do work for you, I expect remuneration for the advice that I give.' They do not say, 'I expect to be remunerated for 30, 40 or 50 years into the future for one piece of advice.'

To avoid this scenario of ongoing fees being charged in return for little or no further service, this bill requires clients to make an informed decision about whether to pay ongoing fees for advice. Rather than just having the money siphoned off their investments, clients will instead be able to consider whether they are receiving value for money. While financial advisers are currently required to disclose ongoing fees at engagement, they are not currently required to do so on an ongoing basis. I note that was not raised as a matter of concern by the member for North Sydney in his contribution.

With the passing of this bill, at least once every two years advisers will be required to obtain the agreement of their clients to renew. It means a client has to agree to an ongoing relationship and financial planners cannot rest on the advice they provided years ago, or even—as is currently the case—on the advice provided by somebody else. When financial planners retire, they sometimes sell their books, in effect selling the right to the ongoing fees arising out of the past advice given. So the person who buys the business obtains an ongoing fee without ever having provided advice to the client. Under the new legislation, the person who buys the business will be required to continue to provide a service to the client if they want to retain the business.

I welcome the flexibility in this new requirement with respect to how advisers obtain a renewal notice and with respect to the grace periods that will apply when a client inadvertently opts out by not responding to a renewal notice. In addition to the mandatory renewal notice, advisers will be required to provide their clients with a disclosure statement including fee and service information. These renewal obligations will only apply to new accounts after 1 July 2012, not to existing clients. But the disclosure statement will apply to all clients of advisers.

This bill is all about ensuring that financial advisers act in the best interests of their clients. For most advisers, this bill will not affect their practice at all—not for skilled advisers who have an ongoing relationship with their customers. A good financial planner keeps in touch with their clients, saying things such as: 'The situation has changed. You should consider doing something else.' These good financial planners will continue to provide a quality service to their clients and to reap the benefits of the advice they provide.

This legislation is targeted at the few financial advisers who have not been acting in the best interests of their clients. Those planners might, as a result of this bill, lose some business or face the cost of improving their practices. But either way it will ensure a better service for consumers, and I am happy to stand behind a piece of legislation which does that. Those financial advisers who offer a professional service will get the most business. That is as it should be.

To that end, this bill also imposes a best interests duty on financial advisers—a duty to act in the best interests of their clients. It does not mean an adviser has to give the very best advice, but it does mean an adviser's processes and motivations must be focused on what is best for their clients. It is almost bizarre to contemplate that a financial adviser would not act in the best interests of their clients, but the fact that we have this legislation before us—and that it is not enthusiastically supported by those opposite—tells us there are too many rogues out there.

This legislation will put an end to that. It is very important to do so in the context of the MRRT legislation going through the Senate which will see an increase in the superannuation guarantee from nine per cent to 12 per cent. This will see more working Australians who are not familiar with financial services putting more money into superannuation. The bill also proposes a ban on the receipt of conflicted remuneration by financial advisers. That means advisers will not be able to receive payments from product issuers which could reasonably be expected to influence the financial advice provided to a client. It is common sense.

This is a long overdue reform that is crucial to the integrity of the industry. As people know, you cannot serve two masters and sometimes when giving advice that is going to remunerate people there can be a potential for conflict. You simply cannot have a situation where financial advisers are giving apparently independent advice and, all along, pocketing benefits from the advice that they give. It is massive conflict of interest. Obviously we do not tolerate it in politics, certainly not in Queensland and certainly not under the current Premier, and we should not tolerate it in private sphere either. I understand that much of the industry has already moved on this issue. I note the comment of the chief executive of the Financial Planning Association of Australia, Mark Rantall, who said:

We released our remuneration policy on banning investment commissions to members in 2009, which laid the groundwork for transparent payments, giving our members a head-start for the transition

I understand Mr Rantall speaks on behalf of about 8,000 financial planners—so he speaks with some authority. Obviously, for some financial planners—and I recognise those in my electorate who came to see me about this topic—it is a bit of a change. Change is something which the Labor Party embrace. Change for the good is something that can be tough for some. It will require readjustment and I ask for some tolerance from them because we are doing this for the greater good.

These measures are good for consumers and they are good for the integrity and professionalism of the financial planning industry. I am proud of Labor's record on superannuation and of the legislation before the House that will impact the industry. Obviously, when superannuation came in back in the early 1990s there were trade-offs by common workers and we are seeing the benefits for those people now when it comes to retirement. I think this part of the legislation before the chamber is part of that proud record. I am very pleased to support these bills.

Ewen Jones (Herbert, Liberal Party) Share this | Link to this | Hansard source

To the member for Moreton, you can pay a solicitor for doing nothing: it is called a retainer. Probably, when you were acting as a solicitor no-one bothered with that one with you, mate. I rise to speak on the Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. The collapse of Storm Financial during the GFC had a devastating impact on my electorate of Herbert. Any changes to the financial sector that this government make such as contained in this legislation will be of great interest to me and my constituents as we look to make sure that the financial sector is regulated in a way that allows it to grow and helps investors without encouraging practices that affected so many North Queenslanders during the Storm collapse.

One of the main changes in the FoFA bill is to require financial advisers to get approval for ongoing fees. The other major change is to make the Australian Securities and Investments Commission better able to supervise the financial services sector. The FoFA bill introduces an obligation for financial advisers to act in the best interest of the clients, with bans on conflicted remuneration so that advisers do not have a financial incentive to encourage their clients to buy certain products and bans on volume based shelf-space fees from asset managers and asset based fees on borrowed amounts.

While the coalition recognise the need to improve the regulatory framework within which the financial institutions operate, we have serious reservations about the content of these bills. In the midst of the GFC, the Parliamentary Joint Committee on Corporations and Financial Services, chaired by the Hon. Bernie Ripoll, ran an inquiry into the financial services industry, producing a report that included recommendations in late 2009. This Ripoll report had bipartisan support in the House, including for its recommended changes. In fact, 407 submissions were made to that Ripoll inquiry and only one called for the opt-in. The Ripoll inquiry did not call for the opt-in feature.

Now, over two years later, we see the proposed legislation before the House and it does not look much like the recommendations that both parties and much of the industry were in agreement with. Instead, this government have managed to let the committee's findings give way to lobbying from the industry super fund movement. The end result of this will be that the financial sector and their clients are set to suffer. I will give the member for Oxley his dues. He was very vigorous and very aggressive in his pursuit of what happened with Storm Financial. He came to Townsville on a number of occasions. A good friend of mine Max Tomlinson helped him with that inquiry during those times he came to Townsville to get the information that he obtained. I will give the member for Oxley his dues: he was very diligent. The report which had bipartisan support and the work that he put in to achieve that bipartisan support should not go unmentioned in this House.

These bills are far more complex than they need to be. They leave much of the content unclear. They will have an impact on employment within the financial sector. They will create an unfair environment and government-friendly businesses will thrive at the expense of others, and they come at an unreasonable cost—$700 million to implement and a further $350 million per year after that. Changes need to be made to these bills and the coalition will move a series of amendments, as foreshadowed by the member for North Sydney and shadow Treasurer, Mr Hockey. These amendments include the requirement for government to table a regulatory impact statement on the bill, the opt-in requirement to be removed from the FoFA bill, the additional annual fee disclosure requirement to not be applied retrospectively, an improvement in the drafting of the best interest duty, the further refinement of the ban on commissions on risk insurance inside super products and, finally, that the implementation be delayed until July 2013, the point at which the new MySuper product will be introduced.

In Townsville the finance sector is a vitally important one, helping Australians maximise the financial opportunities available to them. It is important that we make financial advice as affordable and reliable as possible and that Australians are able to trust the industry. This goes far beyond the provision of superannuation. The collapse of Storm Financial in Townsville dented the confidence of many North Queenslanders in the industry, even though the model used by Storm was completely different to that of other financial planners.

We must not lose sight of the need for these services to remain affordable. There will be a need for a balance between effective consumer protection and the cost impact of regulation. The Storm business model, in my understanding, required the customer to pay the provider upfront for services to be rendered—that is, their commission was taken in advance of any return on investment. The model worked fine as long as the market continued to grow and you were prepared to continually borrow to keep the model going. The provider carried no real risk They were not getting paid on effort. Rather, they were paid on salesmanship alone, with no commitment to the future. They took no risk if the system failed because they had already been paid—and that is where the Storm Financial system broke down. In Townsville, and throughout North Queensland, there were many, many people who fell for this poor business model and lost their futures. I understand their calls for fairness, but I ask them not to lump every financial planner into the same basket—and I say that to the government as well.

The vast majority of financial planners want to take you by the hand and walk you towards a bright future and a splendid retirement. The Storm model could never be assumed to have that in mind. My concern is that parts of this bill are unnecessarily burdensome on businesses and that this will impact on their ability to provide affordable financial advice. Nobody is denying the need for measured regulation of the financial sector, but it is local businesses and their consumers, like those in Townsville, that will suffer when we go too far. I have spoken to a number of financial advisers in Townsville. To a man and a woman, they are members of the community and often provide much more to that community than they receive. People like Lindsay and Marie Orchard from Financially Yours have built a great business not only by selling great products to clients but by actively seeking out the right product for the right client.

What people in the industry are telling me is that, if you make people pay upfront, younger people may baulk at the cost and defer their entry into superannuation schemes or other retirement financial advice packages, with obvious long-term consequences. The problem you have is that if you say to a 20-year-old, as the member for Moreton was saying, he has to pay upfront and come up with a $2,500 fee—$2,500 to a 20-year-old second-year apprentice is a lot of money—he will say he would rather spend that money down at the Great Northern on a Friday afternoon on beer off the wood. They are not going to jump into these products. That will have long-term consequences.

There is also the issue of people who are, to use the industry term, 'hard to set'. If a man who was overweight, over 30 and had associated health risks from playing 25 years of pretty poor rugby was to present himself to a set-fee agent, the answer he would probably get is that the agent could not find a suitable product—either that or the entry fee would be exorbitant to justify the work needed to find a company willing to take on the additional risk. But when you are a commission agent and get a trailing commission you work for the reward. The client does not particularly care if the agent gets a commission. In fact, I suggest that only a fool would believe that services are provided without a cost. If the cost is carried over a long length of time and is reasonable considering the work done, then I would suggest that people would be more than happy to pay, as has been the case with 99.9 per cent of commission based financial planners.

I am an auctioneer by trade. I charged commission for sales. I got rewarded depending on how good I was. I have done some great jobs and have received great reward. I have also done some absolute shockers and sustained net losses, but that is the name of the game. You cannot expect one-way traffic. You cannot expect to receive benefits without cost. You cannot be completely risk free. As an auctioneer or as a financial planner, you have to fight for the sale in the first place, using your skills as a salesman for the products you offer. All that does is put you in a position to work for your client. It is not simply an opportunity to get paid. That is the problem with this bill. The government wants to exclude people with the ability to sell and make a living.

I believe in commission It sorts out the professionals from the amateurs. In Townsville, we have people in financial planning, such as Deidre Walsh, the entire Haller family, Ross MacLean and others, who have provided these services to generations of Townsville people and North Queenslanders in general. We have people like Louise Previtera and Daniel Watts, who are backing themselves and earning a living to become career financial planners for future generations of North Queensland people. These are young people prepared to have a go and work the hours that are required to develop a business. They believe they can provide the services needed to maintain good clients and assist them to achieve their dreams.

No amount of legislation will stop people rorting the system. This legislation is not about trying to level the playing field. There is no other way of putting it: this legislation is about this government's hatred of small business and success. I can see no other reason to stop someone working 80 hours in the hope of getting someone covered and, in the process, establishing a relationship with the client which will last a long time into the future. This government wants everyone to work a 36-hour week—and if you want more they will stop you.

Nobody is denying that changes need to be made to the financial sector. We know the consequences of not doing something. But this government has once again squandered the support for change of the political and industrial environment by giving in to vested interests and overregulating. I say again: this is going to cost $700 million to implement and a further $350 million per year thereafter. Key changes are needed to this legislation so that it does not hurt financial sector businesses and, in turn, their clients. We know what those changes need to be and we will support this bill if the government makes them.

Gai Brodtmann (Canberra, Australian Labor Party) Share this | Link to this | Hansard source

It is a great pleasure to be able to speak on this bill tonight which seeks to amend the Corporations Act 2001 and to ensure greater regulation and reform of the Australian financial planning industry.

Before I go on, I just want to make some comments in regard to the member for Herbert's comments. He seems to think that Labor has a hatred of small business and a disdain for success. I take issue with that because the facts are completely to the contrary. We have just recently announced a small business commissioner, which is a very welcome innovation and was welcomed by COSBOA's Peter Strong here in Canberra just last week. We are also trying to introduce legislation so that we can give small business a tax cut come 1 July, and also a $6,500 instant asset write-off. The beauty of that asset write-off program is that, with this asset write-off—it is $6,500—you can have as many $6,500 as you want. So, speaking as someone who was in small business in my former life, it will be a huge boon. It will be a huge benefit for small business in terms of going out and updating and refreshing their technology and also in getting more clean energy technology. So it is going to be a very welcome program when it is introduced and very much welcomed by small business. So—with all due respect to the member for Herbert, who does have a small business background as I have had—I do take offence at and take issue with some of the sentiments that he just mentioned.

These two bills, the Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, are the culmination of work that began more than three years ago with the Parliamentary Joint Committee on Corporations and Financial Services' inquiry into financial products and services in Australia, and that was chaired by the member for Oxley who, I understand, is the parliamentary secretary for a number of these financial areas now. That inquiry was established in the wake of the global financial crisis and the collapse of financial companies such as Storm Financial and Opes Prime. And, out of that inquiry, the government developed a series of reforms known as the Future of Financial Advice reforms. These reforms complement the Gillard government's commitment to increase the superannuation guarantee from nine per cent to 12 per cent.

Superannuation is something the Gillard government has been working hard to introduce, and I am extremely proud that soon 8.4 million Australian workers will get a very welcome boost to their superannuation savings, thanks to Labor. But it would be somewhat irresponsible to make such a policy commitment without ensuring those increased retirement savings for millions of Australian families are protected now and into the future. That is one of the drivers of, one of the motivations for, this legislation that we are debating here tonight.

This legislation means that more people will be able to access financial advice and know that the advice they are receiving has their best interests at heart. Australians should have faith that the advice they are receiving is of high quality, and they should be able to have confidence in the financial services sector more broadly. I have no doubt that the financial crisis has had an impact on people's perceptions of our financial institutions, particularly when we saw what happened in the US, what happened with the Bank of Scotland and what happened in Europe, but I hope that, through these reforms, we can strengthen our finance industry and even encourage more people to seek out professional advice when it comes to important financial matters such as superannuation.

These amendments will do a number of things to address some key industry concerns. I want to reiterate that the Gillard government has consulted long and hard, not only with the industry but with consumers as well, to ensure that these reforms are robust. We believe these bills are needed to ensure our financial sector is both responsible and strong into the future. I would like to go through some of the reforms that are in these bills that we are seeking to introduce to our financial services industry here tonight.

The first tranche of the legislation focuses on two important reforms. The first is that the bill will require providers of financial advice to obtain client agreement for ongoing advice fees. The second element will enhance the ability of the Australian Securities and Investments Commission to supervise the financial services industry through changes to its licensing and banning powers.

Just going back to that first point: these measures will put in place requirements for financial advisers to obtain their customers' agreement every two years in order to keep charging them ongoing fees for their services. I think it is disappointing that there are some customers paying ongoing fees but receiving very little or no service. Some clients may even be unaware of how much these fees are costing them and may simply be continuing to pay them. This kind of behaviour only encourages distrust in the industry and risks alienating new customers. It is something that needs to change, from the point of view of both financial planners and their customers.

The new measures outlined in this bill will promote the active renewal by the client of ongoing fees for advice, with opportunities for them to consider whether they are receiving value for money. It will also assist to disengage clients from paying ongoing fees that they should not be paying. I hope that, through this change, more people will become aware of what they are paying for and take better charge of their financial situation. That is particularly important for me.

Secondly, the bill enhances the capacity of ASIC to supervise the financial services industry and protect investors. During the member for Oxley's inquiry, ASIC raised concerns as to its ability to protect investors by restricting or removing unscrupulous operators from the industry. The bill will strengthen the gatekeeping function of the licensing regime and extend ASIC's powers to remove unsatisfactory people from the industry. ASIC will be able to refuse or cancel a licence or ban a person where that person is likely to contravene rather than breach the law. ASIC may also remove representatives if they are not competent and of good fame and character, or if they are involved in its licensee's breach of the law.

The second tranche of legislation will build on these two important reforms by focusing on the interests of advisers and their clients. It will introduce a new statutory best-interests duty, requiring financial advisers to act in the best interests of their clients in the provision of personal financial product advice. And it will introduce a ban on commissions from product providers to financial advisers or firms. I have no doubt that the majority of financial advisers want to do the right thing by their clients and want to give them unbiased advice to the best of their ability. The best-interest duty requires financial planners and advisers to act in the best interests of the client and to give priority to the client in the event of conflict between the interests of the client and the interests of the individual who is providing the advice, or their employer. I therefore think this will be welcomed by many in the finance sector as simply a commonsense approach which merely codifies how they already go about their business—with integrity and professionalism. But for those advisers who do not always put their client's interests ahead of their own, this reform will no doubt be a wake-up call.

It is important that we have a strong financial sector, a sector people can place their trust in. We want more people to place their trust in financial advisers. It is a very important industry. Therefore we need to make it clear to the public that financial advisers are a professional industry, free from vested interests. We can only do that by ensuring that the adviser's only source of income is their client. This will ensure that client can have total confidence in the advice they are receiving.

Also banned is the receipt of other payments or benefits received by financial advisers or firms that could reasonably be expected to influence financial product advice, meaning soft-dollar or non-monetary benefits over $300, with some exceptions around education and professional development. This creates hard obligations in industry codes. There are some additional measures in relation to other forms of remuneration, but I am not going to go into those tonight.

Currently around one in five Australians rely on financial advice. We need to make sure that that advice is affordable and of high quality. I believe these bills seek to do just that, but I also want to make sure that these bills encourage more people to take charge of their own finances. Financial literacy is something I feel very strongly about. I am a huge advocate for the need for more people, particularly women, to take charge of their own finances.

There are some examples I would like to discuss briefly tonight. The first is some recent news from my sister-in-law about her mother, who was a single mum. She brought up her kids on her own and did it pretty tough, like my own mother did. She had all her life savings wiped out. She trusted a financial adviser and now all her savings have been wiped out. She had actually been in quite a comfortable position with her life savings and financial position. But, as a result of a poor investment and very poor advice, she is now in a pretty bleak financial position. She has no house and she is now on the pension. Previously, her future was looking incredibly comfortable as a result of all her hard work in socking money away in these programs recommended by her financial adviser. Now it is all gone. She was living with my sister-in-law for a while, and now she is living in rented property and is doing it tough on the pension.

These sorts of stories are constantly at the back of my mind when I think about this industry. As I said before, the majority of people in this industry are people of integrity and professionalism. There are a handful, though—a small part of the sector—who often do not do the right thing, and these are the people we are encouraging to have this wake-up call.

From my own experience—and I think I have mentioned it in this House before—when I went out in my own business in 2000 there was the difficulty that no-one was paying my super anymore. You have to work out how much super you need for when you retire and how much you need to contribute each year to make sure you have a comfortable retirement. First of all you need to work out how much you need, and then you need to work out how much you need to sock away each year to ensure that you can reach that goal.

I went to see a financial adviser to work out a range of elements of my financials at the time, particularly for a new business, and also to seek advice on what I should be doing with super. It was staggering: this woman obviously was not listening to a word I was saying. I paid a lot of money for her financial advice; from memory it was in excess of $1,500 for this session. She wanted to lock not just my savings but also my working capital finances in these special accounts that were all linked to one bank—and I am not going to mention the bank here. She kept giving me advice on programs I should be following that were not tailored to my needs; they were tailored to the off-the-shelf programs that were provided by this bank and this financial institution. So it was essentially tailored to her commissions and tailored to the products that were offered by the bank—tailored to someone else's needs, not my own.

I found that experience to be completely soul destroying, to be quite honest. In the end I subscribed to Money magazine, and I read a lot on the ACCC websites and just kept abreast of what was going on in terms of financial advice. That was not only incredibly empowering but also a lot cheaper than going out to get advice that did not meet my needs in the first place.

So I am a strong believer in the need for women to take charge of their own financial situation. It is disturbing that at this point in time 60 per cent of Australian women are retiring with no superannuation—none at all. I see many of them come through my office each week when I am not here. Some of the stories are quite bleak and sad. And the average woman who does retire with superannuation does so with less than half that of the average man. Too many women in our community are spending a couple of years living on their superannuation and then they just go on to the pension.

So I hope that, through these changes to the way financial advice is dispensed, our community—particularly the women in our community—will come to have a better understanding of their financial futures. After all, Labor's response to the GFC saved jobs and ensured that Australia avoided a recession. As a result, we delivered a strong economy with low taxes, low unemployment and low interest rates. This legislation will build on that work and make our financial systems even stronger. I commend the bills to the House.

Bert Van Manen (Forde, Liberal Party) Share this | Link to this | Hansard source

Before I get into the substance of my contribution tonight on the Corporations Amendment (Future of Financial Advice) Bill and the Corporations Amendment (Further Future of Financial Advice Measures) Bill, I would like to thank the member for Canberra for her contribution. The two examples that she finished off with are very relevant. The problem with the examples that she has just given us is that none of those examples would be protected by the regulations that are in this legislation.

The first example—and I have seen this firsthand—is an example of product failure. Product failure and bad advice are not necessarily the same thing. The problem with this whole discussion around the FoFA reforms is that they are all targeted at the financial planners, yet a lot of the problems that we have experienced over the past three or four years are failures of product. They are not failures of the advice necessarily—in some cases they are but not in all cases. The issues with people's superannuation today are a result of the GFC. They are not a result of poor planning advice per se.

Why, in this legislation, are we attacking people who are providing professional, long-term quality advice to the majority of their clients? There are people who have done the wrong thing, I have no argument with that. Superannuation today is underperforming because of global financial markets. It is also underperforming—and there was a report about it this morning—because the Australian share market has underperformed the US share market over the past four years. How much of that can we sheet back home to a loss of confidence in the Australian economy generally through poor government management, waste and excess? That is having far more effect on the value of people's superannuation funds than the advice that they are receiving. This is not the first time I have touched on this issue. As those here know well, I have a background in banking and financial services prior to entering this place. The vast majority of financial planners today are providing high-quality, professional advice to their clients. But, when you read these bills, you would think there was a bunch of crooks out there.

The second example that the member for Canberra gave was in dealing with a major financial institution. The fact is that these bills are not going to improve that situation; they are actually going to make that situation worse. This regulation is going to directly assist the big financial planning firms, most of which are now owned and run by the banks. The bills are also going to assist the industry super fund network, and there is plenty of stuff in these bills that comes directly from their single contribution to the Ripoll inquiry. The small financial planning practices that provide high-quality, independent professional advice are the ones that are going to go out of business. The very issue that the member for Canberra spoke about is not going to get better; it is going to get worse.

These bills emanate from the Ripoll inquiry, which was entered into as a result of the failure of Storm Financial, the failure of Trio Capital and the failure of Westpoint. Let us have a look at those three failures. Storm Financial was a failure of strategy as a result of the global financial crisis. It was a fee-for-service business. They did not charge commissions. So again this is a regulation that bears no resemblance to what has actually happened. It is arguable that Trio Capital was a case of fraudulent activity in a couple of its funds. This bill does not deal with fraudulent activity. With Westpoint, there was a failure of product due to changes in market circumstances. Again, this legislation does not deal with issues of product failure. It deals with failed products by saying that, because advisers put together a strategy and the product failed, they are bad advisers. That is not the case at all.

I fully support the argument that it is important that we have an appropriate regulatory framework to protect individuals, families and businesses. I think that is an eminently sensible path to pursue. Equally, that regulatory framework must balance consumer protection whilst ensuring affordability for all involved. Our Australian financial services industry, and the regulatory regime that currently underpins it, is recognised as one of the best in the world. There is no doubt this is largely because Australia's financial services reforms, legislated a decade or so ago, have provided a solid regulatory foundation for our financial services industry.

The member for Canberra touched on the fact that financial planners had not been removed from the industry for a variety of reasons and, therefore, we need to give ASIC more power. ASIC has more than enough power. The problem is that ASIC is not enforcing the rules that are already there. This is not the first time I have touched on this issue in this House. So why are we giving the regulators more power when they do not even enforce the rules that are already there? There are plenty of examples of bad advice over the years where those advisers have not been removed from the industry and it has been well known throughout the industry. So why has ASIC not acted in those circumstances?

Nevertheless, there is always room for improvement. However, improvement does not mean additional regulation for the sake of making change, particularly when it adds to the complexity of the regulation that is already there and that can quite adequately do the job. The last thing we need to do is to make things more complex and costly for consumers supporting this industry as a result of poorly planned or poorly motivated legislation. There is a tendency these days for this government to wrap things up in red tape, forcing an increase in costs to both businesses and consumers and leaving them feeling as though they have been ripped off when they should be feeling as if they have benefited. A lot can be learnt from the collapses of Storm Financial, Westpoint, Trio Capital and Opes Prime. We certainly need to review the lessons that can be learnt from that, but we do not need to throw the baby out with the bathwater. The Ripoll inquiry did a great job and made a number of very well considered and reasonable reform recommendations. The centrepiece of the inquiry's report was a recommendation to introduce a fiduciary duty for financial planners, requiring them to place their clients' interests ahead of their own. The report's recommendations provided a blueprint that the government could have adopted with bipartisan support. I could quite safely say that, even without this bit of regulation, any reputable financial planner would always have the view that their clients' interests came ahead of their own. In my experience, that is by far the majority of the financial planning industry. The industry has no issue with that part of the report. It accepts it and accepts that it needs to lift the standard and become more professional in a number of areas.

The committee was of the general view that, in situations where investors lose their entire savings because of poor financial advice, there was some problem with enforcing existing regulations, but it was the enforcement of the regulations, which I touched on before, rather than there being a regulatory inadequacy. So it comes back to why the regulators are not enforcing the regulations that are already there. Where financial advisers are operating outside regulatory parameters, the full weight of the law should be applied and they should be dealt with as a result; they should be removed from the industry. As a previous financial adviser I would like to see those people removed from the industry because we want to see it regarded as a profession and a professional industry.

Instead of implementing the recommendations made by the Ripoll inquiry, the government has allowed its Future of Financial Advice reform package to be hijacked by vested interests. Over the past two years, there has been a series of completely unexpected changes to the proposed regulatory arrangements under FoFA, even right up until the last couple of weeks. Invariably, this has been done without proper appreciation or assessment of the costs involved which, as the member for Herbert quite rightly pointed out, are $700 million to implement and some $350 million per annum to maintain.

It is important that these financial advice reforms are properly considered so that we do not create a situation where the big players in the industry gain strength and power at the expense of the small to medium-sized financial planning businesses that, by and large, provide the majority of the independent, high-quality financial planning advice to the Australian community. It is not the big banks, not the big financial institutions and not the industry super fund network that are providing independent advice. They are motivated by sales targets, bonuses and other things, and quite rightly this legislation seeks to cut those things out. It is the small financial planning practices that are built up over 20 or 30 years that are the true professionals and pioneers in this industry.

To that extent, I would like to touch on an email that I received from a person who has been in the industry since 1971, and it is one of the many inquiries I have received in my office. He touches on the matter of conflicted advice. Conflicted advice is where financial planning advice is provided through banks, insurance companies, fund managers and industry super funds. This financial adviser believes that advice provided by these financial institutions is not always in the best interests of the client. He also stated that it is clearly noticeable that, since the FoFA regulations were drafted, there is increased uncertainty about the changing face of the industry and how advice is given.

At this point, I will use a very personal example on the effect of these proposed regulations and the ongoing debate over the last couple of years about the future of this industry. A financial planner who was in the same dealer group that I was when I was doing financial planning found out, three days before the sale and restructure of his business were to occur, that the bank had pulled the funding because of the uncertainty about these regulations. The end result was that this gentleman committed suicide. That is what these regulations and this uncertainty have done to some people in the financial planning industry. I think the government should hang its head in shame.

The adviser who sent me this email went on to say that many of the small non-conflicted licensees are now being purchased by large institutions because they do not have the capacity anymore to raise finance or to restructure their businesses to comply with these new regulations. Again we come back to the point of the member for Canberra: we finish up with a raft of regulation that takes out the very people who provide the diversity and flexibility of advice that clients will not get from the big players in the industry. What value will that provide to the Australian community? I submit that it will provide none whatsoever. It actually goes totally against what we should be seeking to achieve in this place. We should be looking to encourage small business to grow, develop and provide genuine competition to the big players in the industry, who have their own interests at heart and not necessarily, I dare to say, their clients' best interests.

This financial adviser entered the industry in 1971, when 100 per cent of all businesses providing advice were conflicted and acted as agents for insurance companies. This has changed over the years, with clients wanting a more independent view of their options. The financial adviser is concerned that we are returning to a situation, turning 360 degrees and essentially going backwards, from where we have already come.

Ed Husic (Chifley, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak in favour of the Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. It is important to remember how we got here. A lot of the time, events occur out in the community—particularly in relation to people's financial situation—and there is rightfully a call for something to be done to protect people from these problems. The problem that one encounters is that there is a distance between the event and the response, naturally enough, because you need to consult and frame the legislation. By the time you get to the point of putting the legislation before the parliament, memories are not as clear as to how we got to the point of needing to put in new legislation and regulations.

Let us remember the collapse of Storm Financial and the impact that that had on people across the country. Storm had more than 14,000 clients with about $5 billion in funds under management when they went under. Around 3,000 of those investors were left owing hundreds of thousands of dollars to banks when their portfolios had borrowings placed against them. In many cases, investors had to sell their homes to repay these margin calls. We are not talking about high rollers making risky investment decisions; we are talking about ordinary mums and dads, grandparents and workers.

I want to go through some of the cases. The Courier Mail in 2009 outlined how a Sunshine Coast police officer by the name of Sean McArdle was burdened with a $1 million debt from his Storm investment. Then there is the story of a former TAFE teacher from Lane Cove, Brian Taylor, who lost close to $200,000 on his Storm investment. He was fortunate enough to keep his home. The Sydney Morning Herald reported later that year the story of Shayne and Tracey Bonnie, who lost at least $226,000 when Trio Capital, another firm, went under. And pharmacist Ian Hogg, who had planned to retire last year, had to continue working after losing $300,000. These are real life examples of people who have been hurt because the system has failed to protect them. Those people's life savings were lost overnight and people were literally impoverished as a result.

At the outset, it is important that we recognise that there were two people in particular who played a big part in bringing about these reforms. Firstly, the now Parliamentary Secretary to the Treasurer, the member for Oxley, as chair of the Parliamentary Joint Committee on Corporations and Financial Services, made a number of important recommendations in the committee's report entitled Inquiry into financial products and services in Australia. They are included in this bill. Secondly, it is important to commend the efforts of the Minister for Financial Services and Superannuation for his efforts in bringing the financial services sector on board with these reforms and achieving an equitable outcome for outcomes as well as those who provide these services.

This is not, as the member for Forde indicated in his contribution to the debate, regulation for the sake of regulation. This legislation is the result of some of those stories that I mentioned earlier. We had to respond. Unfortunately, it is never the case that anything in the financial services sector is straightforward. It is going to be complex. While the member for Forde made the point that we are putting in place complex regulations, it is worthwhile noting that in this sector that is just a fact of life. It is a sector that moves quickly and that has changing products and sometimes you need to not just operate within Australia's borders but be mindful of what is happening outside. This is not an easy path to tread. The contributions made by the member for Oxley and the minister should be recognised.

This legislation is within the framework of what the government is committed to: ensuring that Australians have the means and the incentives to save for their retirements. Australians today are living considerably longer, as is well documented, than they were at the time that the Keating Labor government introduced the superannuation guarantee way back in 1992. This is why the government's policy to share the wealth that is generated from our booming mining sector among all Australians is vital. Boosting compulsory superannuation from nine per cent to 12 per cent will increase the retirement savings of 8.4 million workers by $500 billion by the year 2035. It would be difficult for this government to reconcile placing so much emphasis on retirement savings only to allow those savings to be eroded by bad financial advice and unjustifiable fees.

These bills will make significant changes to the sector that Australians rely upon for financial advice and to take care of their retirement savings. This reform is to a large extent, as I indicated earlier in my contribution, a response to the collapse in recent years of major investment providers. I have mentioned Storm Financial and Trio Capital. But there was also Opes Prime and Westpoint. People were financial casualties of the collapse of those providers. These bills will strengthen the financial advice sector by growing consumer confidence in the services that they provide. But it will also give certainty to Australians who make use of these services and give them confidence that they will be protected from unscrupulous operators.

At this point it is worth nothing that sometimes when regulations are proposed people who are doing the right thing feel that in some way, shape or form they have been targeted because of the bad judgment calls of others. I can certainly appreciate that a view in that vein may exist. However, at the same time, given the large amounts of money involved—and again I go back to the cases that I highlighted earlier, in which ordinary mum and dad investors lost so much money—there is a requirement for us to act in their interests. That is why we have had to make these types of moves. Through the course of the consultation that has been undertaken to refine what was planned, industry comment has been taken into account to build a much more solid and rigorous sector.

This legislation will require financial advisers to obtain agreement from retail customers every two years in order to charge them an ongoing fee for financial advice. Presently, consumers who seek one-off financial advice may continue to be charged a fee for the initial advice many years after despite no ongoing service. This perhaps would not occur where investors were well engaged in the investments, but consider how many of us know exactly where our superannuation is invested and what fees are charged. The truth is that many of us are disengaged from time to time in matters pertaining to investments.

This new requirement will not just include direct payments from the retail client to the adviser, it will also capture third-party product commissions which effectively eat into investment returns. In future, financial advisers will be required to ask retail clients to renew or end the ongoing-fee arrangement. 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 deducted. However, I imagine one consequence of these reforms will be that it will obviously require a much more engaged relationship between advisers and clients. That in itself, one would imagine, would have the potential to improve financial literacy and ensure that people will not only be aware of their investments and the performance of those investments, but have a much more solid feel for the advice that is being provided.

The bills have measures to accommodate clients who inadvertently opt out of a relationship. They improve the capacity of the Australian Securities and Investments Commission as regulator to take action against persons it considers to be unsatisfactory because they have provided unscrupulous advice. In a measure that will further increase consumer confidence, the bills will impose a statutory best-interest duty on financial advisers. This would require advisers to place the best interest of the client ahead of their own commercial interest. Again, there would be a lot of advisers who would operate in this way but there are those who would take the occasion to act in their own interest rather than their client's. This in no way places a burden on advisers to provide flawless financial advice; nor does it guarantee the sorts of returns that might be discussed when providing advice. Rather, it regulates how advisers must deal with conflicts. For instance, a ban will be put in place to prevent advisers accepting conflicted remuneration, including commissions, from product issuers. This measure alone will help to beef up the integrity of the advice industry, thereby providing greater consumer confidence and helping to grow the industry. Knowing that advisers are receiving income only from clients and not from product issuers gives people confidence that their best interest is foremost in their adviser's mind.

The industry has accepted that a fee-for-service model is best practice, and many have begun to move away from a product commission model. These bills will ban advisers' receiving non-monetary benefits over $300, with some exceptions around education and professional development. I would like to remind the House that a lot of these reforms come about as a result of the impact of some of the major collapses of various investment houses. I would hate to think that constituents of mine could be faced with some of the losses that have been incurred by some consumers in the past few years. A practice in which financial advisers encourage investors to borrow against their investment, known as gearing, is responsible for a lot of the grief that others have experienced. Townsville Vietnam war veteran Steve Reynolds was, according to the Australian, one of the first victims of the Storm Financial collapse. Mr Reynolds, who was receiving a disability pension of $850 a fortnight, was given a loan of $1.2 million.

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

That's outrageous!

Ed Husic (Chifley, Australian Labor Party) Share this | Link to this | Hansard source

It is outrageous, as the member for Throsby indicates. He received a loan of $1.2 million despite having no capacity to repay the loan. Another affected investor, retiree Ian Jones, is reported to have asked his lender for a copy of his home loan application. He discovered that his income had been hugely overstated in order to secure margin loans of $700,000. These bills will now ban advisers charging a fee based on the percentage of client funds which are borrowed. This will discourage advisers recklessly advising clients to borrow against their investment in the manner of the types of cases I have just related to the House.

While much emphasis has been placed on the consumer protection measures, these bills have many other elements that are designed to give certainty to the industry and to minimise the financial impact of these new laws. The renewal obligation will apply only to new arrangements after 1 July this year and will not include existing relationships. Again, it is trying to balance out those clients who are already in the system against the new relationships that will be set up. I am assured that these bills will have minimal financial impact on financial advisers. Of course, where an adviser has no ongoing contact with the client there will be a small administrative cost to have the client renew their arrangement with the adviser. There is obviously no way you can get around that.

I should note that the collapse of Storm Financial affected not only investors but also people who owned and operated Storm Financial franchises. One such franchisee, Wally Fullerton-Smith, lost $1.8 million he had invested in his Storm franchise on the Gold Coast in Queensland, the state of the member for Ryan, who is in the chamber. Proof of debts submitted to Storm liquidator Worrells reveals that 12 franchisees owed $23.2 million when Storm collapsed. The Corporations Amendment (Future of Financial Advice) Bill 2011 is a win-win for advisers and consumers. Certainly, not every single person will agree with every single aspect of the reforms we are putting forward. But what everyone will agree on is that mum and dad investors should not lose to the tune of millions of dollars and that small businesses that have invested in good faith, thinking that they would be able to enhance and grow the business and provide a future for themselves, should not see their future disappear before their eyes because of the type of collapse that we have experienced previously. As I said at the start of my contribution: we need always to remember what events brought us to this point and that we are trying to minimise the chance of this occurring again and impacting on families in the devastating way it has in years past.

Jane Prentice (Ryan, Liberal Party) Share this | Link to this | Hansard source

I rise today to discuss the many concerning elements contained in the Corporations Amendment (Future of Financial Advice) Bill 2011 and its cognate Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. I am pleased to have the opportunity to speak on this important issue which will adversely affect the financial sector, consumers, advertisers and small business. In their current form, quite simply, these bills will unnecessarily increase red tape, increase the cost of financial advice for Australians and, at the same time, reduce consumer choice and competition.

Australia has a strong regulatory framework for the financial sector, with a clear regulatory divide between APRA and ASIC. This framework, strengthened by the Howard government in 2001, greatly assisted how this nation weathered the global financial crisis. However, our country has also seen several notable system failings which have left many Australians suffering financial difficulties, including the collapse of Storm Financial and Opes Prime.

I recently met with a constituent to discuss their experiences with the fallout of the Storm collapse. Hearing their story and knowing many others are in the same situation does point towards the need for some reform in this sector. That is why the coalition offered bipartisan support for the imposition of obligations for fiduciary duties for financial advisers, which require them to place their clients' interests ahead of their own.

The coalition was encouraged by the very widely supported recommendations of the original Ripoll inquiry in 2009. However, more than two years have passed since then without significant action and now the government has gone too far, as they so often do, in promoting overregulation and ignoring what is actually happening on the ground in the industry. Treasury itself has noted that the collapses of Storm Financial and Opes Prime were the result of underlying poor business models whilst also noting that the global financial crisis was a contributing factor. To be very explicit, the collapses, dreadful as they were, were not expressly the result of an inadequate regulatory structure. Moreover, many of the concerns listed in the original Ripoll inquiry were passed through parliament—for example, through the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 and other bills. As demonstrated on 29 February 2012 by the member for Oxley, the government is continuing to use the collapses of Storm and Opes Prime as a smokescreen and pretence to impose unnecessary burdens and imposts on financial advisers and their customers.

It needs to be put on the record that financial advisers play a key role in this country. It is a well-known fact that the movement of the baby boomer generation into retirement will have a major impact on younger generations, and prudent financial management throughout an entire lifetime will become more and more important as burdens on the public purse increase. With our busy lifestyles, however, few people have the necessary knowledge or time to undertake the research needed to make informed decisions regarding investments. This is where financial planners provide a specialised service. They help Australians who voluntarily choose to purchase their services better manage financial risks and maximise their own financial opportunities. As they handle other people's money, it is fundamental that we must have a vigorous regulatory system for the industry, which is why in 2001 the Howard government legislated important reforms to protect Australian consumers and provide a stable regulatory environment for the industry.

The proposals we are debating today to reform the future of financial advice are complex. They include the annual disclosure of advice fees to retail clients, the need for advisers or fee recipients to obtain the agreement of retail clients before continuing to charge ongoing fees, effectively acting as an opt-in clause, and also explicit incorporation in law, legislating the current common practice that retail clients can opt out or terminate their ongoing contract at any time.

Of course, this government purported to undertake what they called:

… extensive targeted consultation on key aspects and implementation details of the reforms through one-on-one consultations with stakeholders and meetings of the peak consultation group.

The proof is plain to see that the government has not been listening, as many key industry stakeholders, including the Association of Financial Advisers, have advocated that these FoFA bills be rejected.

The committee was advised time and time again that this legislation would cause huge additional costs, reduce employment levels in the industry and, for consumers, ultimately reduce the availability and access to quality advice. The Gillard Labor government did not listen to the Australian public when they implemented the world's biggest carbon tax. The Gillard government did not listen to the mining industry when they decided to impose the very damaging Minerals Resource Rent Tax. And the Gillard government are not listening now to the industry of financial advisers. As a result, the industry is quite rightly very worried and concerned about how these reforms will affect their businesses and how much these changes will cost them and, most importantly, their clients.

One of the most fundamentally concerning aspects of this bill, as noted by the coalition's dissenting report, is that the government has not prepared a proper regulatory impact statement for the actual effects that these reforms will have on the industry. Providing a proper impact statement is supposed to comply with the government's own best practice legislation requirements, and the government has again failed to meet its own standards.

With the erratic development of these bills— for example, the additional introduction of the further future of financial advice bill on 24 November 2011—the government has not provided adequate assessments of what these reforms will mean for the financial advice industry. In a Senate committee, Senator Mathias Cormann asked Mr Jason McNamara, the Executive Director of the Office of Best Practice Regulation, whether the government had enough 'adequate information to assess the cost benefit of the FoFA regulation changes'. Mr McNamara said that the government did not have such information. Senator Cormann then asked Mr McNamara whether the proposal to introduce a mandatory opt-in requirement was 'properly assessed'. Again, Mr McNamara agreed that it was not in fact properly assessed. Quite frankly, that is alarming. Clearly, it is yet another indicator of the dysfunctional nature of this Labor government. The government needs to take up the first recommendation of the coalition's dissenting report that the parliament defer the legislation until a regulatory impact statement is submitted that complies with the Office of Best Practice Regulation.

Unfortunately, the government's lack of attention to detail with respect to these bills gets worse. The Assistant Treasurer and the Minister for Financial Services and Superannuation tried to go further to force these bills through parliament without due consideration and consultation by parliament. As circulated by the government for the week of 13 to 16 February, they attempted to bring the FoFA legislation on for debate in parliament before the Parliamentary Joint Committee on Corporations and Financial Services had actually been able to deliver its report, recommendations or dissenting report. Again, this is evidence that the government is not serious about fulfilling the most fundamental role of parliamentary committees or following appropriate parliamentary and legislative processes. The consequence for the Australian people is legislation that does not receive sufficient consideration or deliberation. However, as I mentioned, the coalition have now released their dissenting report, which provides a robust assessment of the failings of this bill and the failure to fully deliberate on many of the proposed reforms. Regretfully, Mr Deputy Speaker, there is yet another example of the government failing to consult, this time regarding retrospective fee disclosure statements. While the government did suggest prospective fee disclosure statements—that is, for new clients and new customers—such a recommendation was never in the report of the Ripoll inquiry, and it was pointed out by many people to the Parliamentary Joint Committee on Corporations and Financial Services that the government had not discussed it at all with the industry. Mr Richard Klipin, the Chief Executive Officer of the Association of Financial Advisers, expressed it very succinctly when he said:

Fee disclosure statements were never part of the conversation and never part of the consultation.

The first time anyone saw a proposal of retrospective fee disclosure statements was when the minister tabled the proposal in October 2011. Regarding the opt-in proposal, there are serious concerns that this measure will merely increase red tape in the industry and add further costs at every stage of client-customer interaction. Treasury was unable to advise whether any other country in the world has enacted an opt-in requirement, and that is because there is no precedent for a measure of this kind. Forcing Australians to re-sign contracts with their financial advisers on a regular basis will have no appreciable benefit for clients, as there is already the opt-out feature. At present, if someone is unhappy with the service being provided they can decide to terminate their contract at any time, in most cases without any loss. It does not make sense to force them to re-sign a contract if their preference is to stay with that same financial planner. They can fill out a form to change who handles their super or to cancel an insurance contract. They can call their adviser, tell them they are not happy with the situation and go to someone else.

All this opt-in measure does is add another level of administrative burden—something which the members opposite always seem eager to do—for questionable benefit. For example, this bill creates a government mandated maximum time frame, during which consumers have 30 days to submit their opt-in agreement, whether it be to enter, renew or revise an agreement. Many Australians may inadvertently fail to comply with the government mandated maximum time frame of 30 days to submit their opt-in agreement. Considering the very technical language and careful consideration required before entering into an agreement, as noted in public hearings by the Financial Ombudsman Service, it is not difficult to foresee that many arrangements will by default cease to exist even if a client genuinely wishes to continue an agreement. This will create uncertainty and ramifications for the industry and their clients. Again, I encourage the government to remove this measure from their bill.

An additional ramification which concerns financial service providers is the cost and timing of implementation. We are debating today structural changes to an industry. It is proposed that these changes come into force on 1 July 2012, fewer than four months away. I have spoken to some certified financial planners in my electorate of Ryan, and they told me bluntly that it will be impossible for them to comply with the planned implementation date of these reforms by 1 July. All firms will need to spend a considerable amount of time, energy and money to change the fundamental structure of their business in only four months. They will have to retrain staff, change their IT systems and spend a considerable number of non-earning hours to make changes—and, I ask the government: for what appreciable benefit? As a result of rushing the implementation and of the increase in red tape and bureaucracy, the Financial Services Council has estimated that the regulatory impact of this bill will amount to approximately $700 million as the cost of upfront implementation and to a further $350 million annually. This government should know that when you suddenly impose an artificial increase on input costs only the very big businesses will be able to absorb the costs or pass them on to their customers. Many financial planners from smaller firms have commented to me that the industry super funds will be very happy with this arrangement because their smaller competitors will be unable to cope. These bills are very likely to cause a concentration of advice providers and ultimately reduce the competition and choice available for consumers.

Ultimately, the two fundamental proposals behind the bills are, firstly, to increase transparency in the industry and, secondly, to increase the access of consumers to quality advice. These two intentions will simply not be achieved and will in fact make it more difficult for consumers to access appropriate financial advice. The government should instead listen to the very constructive recommendations made in the coalition's dissenting report. I encourage the government to take on board the 16 recommendations and to listen to the industry so that they can get the policy balance right in this area.

It is absolutely crucial that the government goes back to the drawing board with these bills. When a government is trying to introduce important reforms that affect so many, it is imperative that such regulatory changes go through the proper process. I will always support sensible reforms which increase trust and confidence in the financial services industry. I will always support measures to increase transparency, measures to increase choice and measures to increase competition. However, I cannot support reforms which have negative impacts and ramifications. As such, I recommend that the House reject the bills before us.

Stephen Jones (Throsby, Australian Labor Party) Share this | Link to 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—

Kelvin Thomson (Wills, Australian Labor Party) Share this | Link to this | Hansard source

Order! It being 8 pm, the debate is interrupted with accordance with standing order 34. The debate is adjourned and the resumption of the debate will be made an order of the day for the next sitting. The member for Throsby will have leave to continue speaking when the debate is resumed.