Tuesday, 10 September 2019
Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019; Second Reading
That all words after "That" be omitted with a view to substituting the following words:
"whilst not declining to give the bill a second reading, the House notes that Labor would have acted on Commissioner Hayne's recommendation to end grandfathering arrangements for conflicted remuneration, with Labor's bill coming into effect a full year before the Coalition's legislation".
The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 implements recommendation 2.4 of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, a commission that the government was reluctant to agree to—and it appears, from the timetable of legislation, a commission that the government has been reluctant to legislate for. The bill does end grandfathered remuneration arrangements for financial advisers. Conflicted remuneration, including commissions and volume based fees, can drive advisers to make poor recommendations to clients, leaving them worse off.
To understand the context of this legislation, it's helpful to go back to the section of the act that it amends and to understand the reason that there were exceptions to that section within the act. This bill will ultimately amend section 963A of the Corporations Act, which defines and deals with conflicted remuneration. Conflicted remuneration is defined within that section of the act as:
… any benefit, whether monetary or non-monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
(a) could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
(b) could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.
What we have there in the Corporations Act is a prohibition upon conflicted remuneration for financial services licensees.
What is the purpose of this legislation? It is to remove the exceptions that were inserted within that section of the corporations law at the time it was introduced. Those of us who've been around this place for some time would remember that the Future of Financial Advice legislation, which was introduced by the previous Labor government, instituted the ban on conflicted remuneration. But members opposite, who were then the opposition, together with their friends within the financial services, were hell-bent on frustrating at every turn these provisions, these bans being inserted into the corporations law, and were equally concerned to ensure that wherever possible they could have inserted within the legislation certain exceptions. In shorthand, there were grandfathered provisions which applied to contracts or advice that had already been instituted prior to the passage and operative date of effect of this legislation.
We have seen through the Hayne royal commission the impact that these grandfathered remuneration arrangements have had. We've seen through the Hayne royal commission the impact of conflicted advice. If you read the final report of the royal commissioner, you can see example after example of where the interests of the financial adviser were conflicted with those for whom they were providing advice to—that is, the adviser has put their own interests ahead of the interests of the clients that they were advising. Where that has occurred, we've also seen the institutional impact of that. I'll pick one example to illustrate this. In the case of NULIS Nominees, the NAB subsidiary charged with overseeing the MLC superannuation funds, Commissioner Hayne found that the trustees may have breached their duty to act in the best interests of trustees by maintaining grandfathered commissions. They took this decision not on the basis of the amounts being paid to members but on the basis that dissatisfied financial advisers deprived of their commissions might withdraw clients from the fund. It is a clear instance where there was a clear conflict between the interests of the fund members and the interests of the advisers and where it was driving behaviour about where to invest money. And I can say that we are not talking about small sums of money.
Just a few more examples. When Westpac, to their credit, decided to end, ahead of this legislation, grandfathered conflicted remunerations, they advised that the annual cost of ceasing those conflicted remuneration payments would be $40.8 million. I'll repeat that—$40.8 million annually. That is $40.8 million annually that probably should have been going to the benefit of the fund members but instead was being paid, quite lawfully—I make no criticism; it was quite lawfully being paid—to the financial advisers. When the Commonwealth Bank of Australia decided to end their conflicted remuneration arrangements, they estimated that the annual hit to their revenue through the cessation of these conflicted remuneration arrangements would be $20 million per annum. So these are two financial institutions where $60 million per annum in money that should have been going to the benefit of the advised client was going ultimately to the benefit of the Commonwealth Bank and Westpac bank. There are other financial institutions in a similar situation. NAB, through the example that I have cited, has serious questions to answer to APRA. As Commissioner Hayne has said, case studies like these show that there is no case for these arrangements to be maintained any longer.
The bill also provides for regulations to establish a scheme that will require grandfathered remuneration to be passed to the retail clients where those commissions are still being paid. This is important, because in the two examples I've previously cited—in the case of Westpac and in the case of the CBA—the cessation of that grandfathered remuneration is not in itself enough. We need to ensure that that money is being returned to the benefit of the customers, who ultimately should be benefiting from that commission. This is an appropriate use of the regulations. It provides the flexibility to make detailed rules on the pass-through of grandfathered commissions and to react to changing industry circumstances and the enormous variation in circumstances in the grandfathered provisions paid.
Labor will be supporting this bill. As we've said at every opportunity, Labor are committed to seeing every single one of Commissioner Hayne's recommendations acted upon, and we'll be holding this lazy, part-time government to account to ensure that each and every one of these recommendations are implemented. The government, after all, voted 26 times against holding the royal commission; we can have no faith in their vigour, energy and enthusiasm for implementing the recommendations of the royal commission. According to the government's own implementation road map, only eight of the 76 recommendations have been implemented by the government since February—that is, if you give them credit for the three times that Commissioner Hayne explicitly recommended that the government do nothing. That is to say, of the eight recommendations that they are taking credit for having implemented to date, three of them involved doing nothing. Those opposite are very good at doing nothing.
Labor tabled a bill in this House in February this year that would have done what Commissioner Hayne had recommended in ending the conflicted grandfathered remuneration. Had that bill been dealt with, as Labor offered the government at that time, the ending of that grandfathered remuneration would have been implemented a full year before. I want you to think about the numbers that I gave a little earlier in my contribution—$40 million per annum in respect of Westpac customers and $20 million per annum in respect of CBA customers. If those figures are representative across the entire industry, we are talking about a lot of money indeed.
In June last year, Westpac announced that it would remove grandfathered commissions on the accounts of 140,000 clients. In August last year, the ANZ announced that it would start rebating commissions to clients on the OnePath platform. In September of last year, the NAB said that it would start rebating grandfathered commissions to its own clients, and in October of last year, the Commonwealth Bank also followed suit. You have to ask yourself this: if the banks can act quickly to do this, why can't the government? Why can't the government introduce legislation on an abridged timetable to ensure that this conflicted remuneration is no longer being paid?
The truth is that the coalition never wanted to deliver these reforms and they were never committed to reforms to the financial advice sector. Indeed, if the coalition had their way, these arrangements would have never been banned in the first place. They opposed the FOFA reforms and they have opposed every reform since then. It was the coalition who would now have you believe that they are on the same side as consumers, when they rolled back the reforms that were introduced by Labor when they won government in 2004.
The safety and security of consumers in the financial sector have frankly never been the priority of this government. Take for example the government's botched reforms to the professional standards in the advice sector. It is a very good case study. Since the government established the Financial Adviser Standards and Ethics Authority 2½ years ago, it has gone through three CEOs. It has been consistently late in delivering key legislative instruments and guidance, causing confusion and concern throughout the sector. It has been slow to consult with industry and consumer advocates.
The government has now admitted its own abysmal failure in rolling out the reforms to professional standards within the financial advice sector and has admitted that its own failure means it is going to have to delay the implementation of these critical reforms. What does that mean? It means simply this: there will be another two years where consumers won't be able to have the certainty that the advice that they receive is being delivered by professionals with the right qualifications. It is another example where the government has simply shown that it has no desire to make the common-sense fixes in broken parts of our financial advising system. When the government is finally forced to act by Labor and by pressure from the Australian community, it can't be trusted to get it right. So we will be carefully watching the implementation of this legislation to make sure the government doesn't botch it as well as the former reforms.
This legislation should not be seen as the end of the road. Anyone providing conflicted remuneration anywhere within the financial services sector has to know that they are now on notice, that they're in the eyes of the Australian people and reform is coming. Labor agrees with Commissioner Hayne: every exception to the ban on conflicted remuneration needs to be thoroughly examined. As Commissioner Hayne has said, intermediaries should always be expected to act in the best interests of their clients. In fact, he used the analogy that the person who attempts to stand in two canoes simply fails. Ends to exemptions for listed investment trusts, life insurance and other products are all on notice as well. ASIC will be conducting a review into these sectors as well, and they simply have to shape up.
We'll not stand by while ordinary Australians are pushed into bad products due to shonky commissions. In particular, we'll be watching very carefully to see what happens when ASIC reviews the insurance commissions in 2021. If there is a good case for them to be maintained, so be it, but you can expect Labor to ensure that these conflicts of interest do not persist.
In summing up, firstly I would like to thank those members who have contributed to this debate. The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 amends the Corporations Act to implement a key recommendation of the landmark Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
This bill will end the payment of grandfathered conflicted remuneration to financial advisers, with effect from 1 January 2021. Conflicted remuneration refers to remuneration paid to financial advisers by product issuers, which can influence the advice that they provide to retail clients about the product. When the ban on conflicted remuneration was introduced, in 2013, already existing arrangements to pay this remuneration to financial advisers were grandfathered, so the ban did not apply to them. It has now been six years since that ban was introduced; however, grandfathered conflicted remuneration remains a part of the financial advice industry. There is a clear need to end these grandfathered conflicted remuneration arrangements in the financial advice industry. As Commissioner Hayne said in the royal commission's final report, it is now clear that they have outlived their validity. Australians need to be able to access high-quality financial advice that they can trust, and this is critical to maintaining their financial wellbeing.
Grandfathered conflicted remuneration compromises this objective by entrenching customers in older, poorly performing products. This is because financial advisers may be unwilling to switch customers into newer, better products if it means the adviser will lose their entitlement to the grandfathered conflicted remuneration. To be clear, the total value of grandfathered conflicted remuneration is substantial. When ASIC looked at the value of grandfathered benefits in 2014, it found that on average licensees indicated that grandfathered benefits were worth around one-third of their total income, though substantially more or less than the average in some cases. More recently, the Productivity Commission found that 11 retail superannuation funds are estimated to have paid more than $400 million in grandfathered trailing adviser commissions in 2017.
Retail clients will be the major winners from this reform. The government's actions will mean they will receive higher quality advice and stop paying higher fees to fund grandfathered conflicted remuneration. The measures in this bill will not only end the payment of grandfathered conflicted remuneration; they will go further and require that any grandfathered benefits that remain in contracts after 1 January 2021 be passed on to the affected customers. This will ensure that the entities required to pay grandfathered conflicted remuneration, financial product manufacturers, are not able to keep benefits they would normally pay to financial advisers. The benefits must flow to customers.
ASIC will investigate industry behaviour in the period of 1 July 2019 to 1 January 2021 to determine whether the industry is passing through the benefits of removing grandfathered conflicted remuneration to consumers. They will complement action that we've already taken to drive improved consumer outcomes in the financial sector and ensure that misconduct in the sector is punished. This government is getting on with the job of delivering on the required reforms to improve consumer and small-business outcomes in the financial sector. Restoring trust in Australia's financial sector is part of our plan for a stronger economy. I commend this bill to the House.
The question is that the amendment be agreed to. A division is required. In accordance with standing order 133, the division is deferred until after the discussion of the matter of public importance.