Tuesday, 11 February 2020
Treasury Laws Amendment (2019 Measures No. 3) Bill 2019; Second Reading
In my earlier contribution to this debate on the Treasury Laws Amendment (2019 Measures No. 3) Bill 2019, I gave a detailed outline of, in particular, chapter 7 of the Corporations Law, which regulates the licensing of financial advisers. It was important that I go through that background, because it sets the context for the observations I'm about to make. Labor supports the amendment, but the amendment is necessary only because of the utter shambles this government finds itself in.
The professional standards for financial advisers reforms received bipartisan support in this place back in 2017. The legislation followed a joint parliamentary inquiry into professional standards in the industry—one that, once again, had unanimous support from all members of the committee. The intent of the reforms was to ensure that all professionals who provided personal financial advice, whether they be stockbrokers, insurance advisers or financial planners, would meet the same sort of professional standards expected of other professions, whether they be an accountant, a lawyer, a medical practitioner or any of the other recognised professions.
The standards, which are set out by the independent Financial Adviser Standards and Ethics Authority, hereafter FASEA, include requirements for advisers to meet education standards, pass a professional exam, to have professional experience and to meet continuing professional development requirements. These are all reasonable requirements. Most importantly, they require financial advisers to be able to abide by a clear, professional code of ethics that ensures that they act in the best interests of their customers. I'm sure that most financial advisers already do abide by a very high ethical standard, but it is quite clear from the findings of the Hayne royal commission that there have been far too many instances of advisers failing to meet that benchmark. So these reforms were sensible and reasonable, and, to be frank, I was surprised to see the Liberal National government support the regulations back in 2015.
The original legislation included generous transition arrangements for existing advisers. I want to go through them, because we're amending those already very, very generous transitional arrangements. Under the original 2015 announcement, existing financial advisers would have until January 2021—nearly four years after the passage of the original legislation—to pass a professional exam. I repeat that: it was 2015 when they were put on notice and 2017 when it was enacted, so for nearly four years they were put on notice that they would have to pass a professional exam. And, nearly seven years after the passage of the legislation, they would have the opportunity to update their professional educational qualifications to meet the new requirements.
At the risk of being repetitious, I also want to point out that this is 11 years since the Ripoll committee made its original recommendations—a report that I know you're very familiar with, Mr Speaker. This is eight years since the Future of Financial Advice reforms, which were first ushered in by the member for McMahon and then the member for Maribyrnong, against full-throated opposition from those opposite. It's five years since the announcement, yet still they could not get it right—so, at the harshest, five years, at the most generous, 11 years. You've had 11 years to get that right, and you still couldn't get that right. The horror show has unfolded since then under the leadership revolving door and the cavalcade of Liberal ministers, treasurers and assistant treasurers—the latest one, sitting across the table at the moment, has apparently made these timelines unreasonable.
It gets worse: the independent body, established by the former minister for financial services, has been through three different CEOs in its first 18 months. Perhaps that is a sign of confidence in the overseeing minister! The consultation with the industry itself has been almost entirely absent for the first of those 18 months. Standards were issued mere days before they were due to come into effect, and the FASEA exam, as the minister pointed out in his second reading speech, wasn't in a location which was going to make it even possible for a large swathe of financial advisers to be able to attend and sit that exam, let alone pass it. This is monumental incompetence, incompetence on an Olympic scale.
So, yes, we will support the legislation. But in doing so, we have to point out incompetence and mistake, incompetence and mistake, minister after minister after minister, which has visited this great uncertainty upon an industry which is already going through considerable upheaval. We will support the legislation. I foreshadowed in this second reading speech that I'll have a substantive amendment to make, which will go to the substance of these laws, but I urge all honourable members of this place to support the second reading amendment as well as the bill before the House. I move:
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 criticises the Government and the responsible Ministers for their mishandling of and delays to the reforms to professional standards for financial advisers, resulting in significant uncertainty for both members of the industry and consumers".
Thank you very much. The original question was that this bill be now read a second time. To this the honourable member for Whitlam has moved as an amendment that all words after 'That' be omitted with a view to substituting other words. The question now is that the amendment be agreed to. I call the member for Bowman.
We certainly do oppose this amendment that's been proposed by the opposition. There are three schedules here. We're talking about changes to testamentary trusts, for which I think there's general agreement. There's a second schedule here—where we're talking about extensions of time for the profession to meet their obligations under continuing professional development—and then a third minor schedule.
But what the opposition is trying to do, of course, is to remove what is currently an exemption under conflicted remuneration. They are interests in an MIS that are proposed to be quoted on a prescribed financial market or a listed investment company. What we believe on this side of the chamber is that that needs to be reviewed. It's completely appropriate that we go out and ask industry for their views in this. This public consultation is absolutely vital to actually understand the mood and the temperature of the market. Deciding to ignore or to overrule these important steps is to, basically, assume—as an opposition—that that's going to be the will of the sector. We need to be listening to experts wherever we can.
This four-week consultation is not a long period. It's targeted, it's going to be well delivered and it looks at the merits of the current stamping-fee exemption, which does exist. This isn't the only element of financial practice where there is potential conflicted interest, but it needs to be explored fully within the sector. It allows us to make—as a government—an informed decision on whether to retain, to remove or to simply modify the current arrangements. It's not a long period of time, and that's why we oppose these amendments put forward by the opposition today.
Back to the financial sector themselves—this has been a long and protracted battle for both sides of parliament. There are no points in just cheap shots at each other. Fundamentally, the process started well before the Ripoll review. It's one that's been rolled out through a large profession. They recognise the need for these changes to be made. They've asked for more time—for very good reason. In many cases, these FASEA exams weren't even ready in time. They weren't available to regional areas. So it's important that that is provided and there's adequate time. The FASEA exam having the additional year—to 1 January 2022—is reasonable, and I think the overall requirements for the other specific, specialist areas through to 2026 is a significant period of time now for the profession to adapt and join. We want to see that that happens.
There's some concern from the sector that they've been pilloried and criticised unfairly, and I think that's not an unreasonable perception in many cases. The profession has been let down by not always complete and adequate representation by their bodies. They haven't worked together to make sure that the views of the sector were put forward early, so now we're mounting a rearguard move to give the financial-planning sector a chance to express their say. These extra two years absolutely do that.
If you can get a PhD between now and 2026, you can meet your professional-development obligations over that time, no matter how busy your professional requirements are. I speak as a medical practitioner who went through exactly the same process with the instigation of AHPRA nearly 10 years ago. Every medical practitioner had to go through this step. It can be painful and difficult, and medical specialists have tailored requirements. One of the great concerns from the financial-planning sector is that no matter who you are, you have to do all of the modules, even if you're not actually working in those specific areas. Over time I do wonder whether there'll be additional specialisation within the sector, but that time is not yet. There are simply not enough of the sector that have demonstrated these fundamental seven levels of training, and that needs to occur. There's general agreement that that has to happen, but, over time, I think there is a place for more specialisation. Most registration boards around the world can demonstrate that, and I hope that FASEA heads in that direction.
In conclusion, there have been great concerns particularly for people in mid-career and particularly for those who made substantial investments to buy practices in terms of the impact that this legislation would have. It's the greater good; it has to occur. But those people can say, 'The coalition was listening.' In the last federal election, I committed every Sunday to meeting with financial planners one by one. For many weeks they were extremely concerned about something other than a coalition victory. So they can say that this legislation is in the right hands of the right party and being delivered at the right time.
Periodically in this House, we have a serious conversation about who's standing up for consumers and who's standing up for vested interests. We had that conversation in 2012 when Labor moved the future of financial advice reforms, opposed by the coalition. As the Hayne royal commission highlighted:
There must be recognition that conflicts of interests and conflicts between duty and interest should be eliminated rather than 'managed' …
Yet, when it came to office, the coalition set about winding back the future of financial advice reforms, ensuring that no longer did a best-interest duty need to be followed. It would seem to be fundamental that a financial advisor needs to act in the best interests of their client, yet the coalition somehow thought that that ought not be the law of the land. Part of this wind back involved the creation of a loophole affecting units or shares in listed investment trusts and listed investment companies. That has led to a significant increase in the market, with the LIC and LIT market doubling in size to $45 billion since 2015.
ASIC has looked at the performance of these financial vehicles and the picture is not a pretty one. Over the LICs and LITs issued since 2015, they find 42 issued with a stamping fee, or a selling fee, and six without a stamping fee. Overall, their return since inception is minus 6.1 per cent. The returns of those with a stamping fee averaged minus 7.3 per cent, and without a stamping fee, three per cent. This compares to significantly larger returns in the stock market as a whole. The expenses of LICs and LITs are very high and the returns to those who purchase them are very low, but the stamping fees have ensured that many of those advising or broking have garnered significant commissions. These include, according to news reports, advisers and brokers at National Australia Bank, Taylor Collison, Morgans Financial, Crestone Wealth Management, Evans Dixon, Ord Minnett, Bell Potter Securities, Morgan Stanley and Patersons Securities.
A recent survey by Morningstar business surveyed 6,740 experts, advisers and non-advisers, and asked if they thought stamping fees were appropriate. Some of the comments from advisers included the following: 'Absolutely unethical. No justification for ever accepting such fees.' Another stated: 'It is a clear sales commission to sell a product to clients. I have seen it in operation in many businesses, where they target the selling of these products purely to generate revenue.' Another said, 'We're a 100 per cent fee-for-service firm,' and another said, 'It is simply a conflict of interest.' Of the advisers in the survey, only 17 per cent said they accepted stamping fees, while 74 per cent said no and nine per cent said it depended. When asked whether the ban on receiving stamping fees should extend to stockbrokers, more than 70 per cent said that they believed stamping fees should be banned completely. One of the strongest advocates on this has been Christopher Joye, who has written repeatedly and was quoted in the AustralianFinancial Review about the importance of getting rid of this exemption. He writes:
I believe any selling fees above say 0.25% are large enough to conflict financial advisers, especially when this selling fee is added to the other transaction fees, including arranger fees and manager fees, which can easily push it above 1%.
I commend the member for Whitlam, who has worked hard on this to get answers out of a government which has, at every turn, seemed to want to defend vested interests rather than consumers and which is, even now, pushing back against a sensible proposal to close a loophole that allows selling fees to accompany a product which has been systematically losing money for investors.
Time is of the essence. According to one article, there are another 20 to 30 listed investment trusts purportedly in the pipeline. There is a risk that this continuation of conflicted advice could lead to more investors finding themselves in these underperforming products. This is an exemption which should not have been put in place. We now know that the Australian Securities and Investments Commission privately advised the government that it was, 'hard to justify,' according to freedom of information requests published by the Financial Review and discussed by John Kehoe and Aleks Vickovich. It appears that the coalition ignored the regulator and ignored warnings of detriment to consumers if these products were allowed to be sold.
CHOICE has warned against this product, linking the sale of this product to the findings out of the royal commission. The CHOICE chief executive, Alan Kirkland, said:
The final report of the royal commission said that exceptions to the ban on conflicted remuneration should be eliminated, and this evidence demonstrates how important it will be to do just that when the government reviews the quality of financial advice in two years' time.
As the member for Whitlam has pointed out, the coalition has been on the go-slow when it comes to implementing the recommendations of the Hayne royal commission. And yet again we see, in the case of these stamping fees, the coalition dragging their heels rather than immediately going out and doing what is the right thing by investors. I commend the work of the member for Whitlam in standing up for consumers and standing up for investors against those who are ripping off the small end of town.
I rise to speak on the Treasury Laws Amendment (2019 Measures No. 3) Bill 2019 today because I think it is a significant piece of legislation that needs thorough debate, particularly on the way the government has handled this piece of legislation. I want to add my voice to the words of the member for Whitlam and the member for Fenner in how they have articulated Labor's position.
From time to time in this chamber we hear about how the coalition are allegedly better economic and financial managers and that they sometimes appear to be prudent and hold a high attention to detail when it comes to the nation's budget—and all the other talking points that we hear from members of the government—but we know that this simply isn't the case. I want to highlight that directly in this bill that we are debating today. This bill is the government introducing legislation to clean up their own mess.
As we've heard from the shadow minister and the assistant shadow minister, while Labor generally supports the measures contained in this bill, the bill really only emphasises the poor record of those opposite when it comes to managing financial affairs and, indeed, making rushed and, in my opinion, ill-informed decisions that impact on the economy and local businesses. I want to highlight that in terms of a number of local businesses and operators that have contacted me in relation to the specifics of this bill. I'm confident that just about every member of parliament would have had—I hope they've had—the same conversations and the same representations from the financial sector and financial service providers.
To truly grasp the stuff-up by this government in having to introduce this bill, it's worth considering some other facts when it comes to what else they've stuffed up with the economy. I want to talk about private investment, which has shrunk by 20 per cent since the government changed hands—and, by another measure, that hasn't been this weak in the three decades since the recession of the early 1990s.
Private business investment has continued to fall in the most recent quarter and over the past year. Ongoing weakness in business confidence and recent downgrades to the capital expenditure outlook also have economists expecting that this poor performance will continue. Examples of this that I want to relate to the bill today include the latest Deloitte Access Economics Business Outlook. The report found that retail has endured its deepest downturn since 1990, that construction is shrinking at its fastest rate since 1999 and that farmers and finance have had their worst period since the GFC. But in relation to the bill and the impact that this potentially has had on local small businesses, when it comes to the facts and the economy the record is pretty clear. GDP and wages growth have fallen well below budget forecasts. The unemployment rate has increased above what the government said it would and economic growth has deteriorated to its slowest pace since the GFC, and we know that net debt has skyrocketed to the new record highs.
So, what brings us to this bill here today? I want to focus my remarks today particularly on schedule 2 of the bill. I'm sure most members on this side of the House—and I would hope all members of the House—have had firsthand experience of exactly how this sort of bungling from the government has had a direct impact on small businesses, particularly in my local community. Schedule 2 is an unfortunate but necessary amendment following the government's mishandling of the reforms to the professional standards for financial advisers. These reforms were passed, as we know, with bipartisan support in 2017 and set new standards for financial advisers which were to come into effect from 1 January 2019. These new standards are particularly important considering the misconduct identified in the financial advice sector by the banking royal commission. However, the government's independent standard-setting body, the Financial Adviser Standards and Ethics Authority, was extremely slow to set standards. As a result, financial advisers have been placed in the difficult position of being asked to comply with standards and complete exams with very short notice. The government's decision to defer the educational exam requirements is absolutely appropriate given their failures.
I want to take the time to incorporate into my speech today correspondence that I've received from a local financial planner, who introduced himself to me by saying:
I provide advice and service to a range of clients across the age and wealth spectrum, from a lady in her 60s who has been on the Disability Support Pension for many years, to some young clients with young children that are looking at options regarding renovating their current house or moving, to clients that have either retired or about to retire and who in some cases are looking at applying for the age pension through to clients that are multi-millionaires.
This financial planner was quick to point out that he and many other financial advisers had been placed in a difficult position because of the mishandling of this very piece of legislation we are debating today. In his correspondence to me he went on to say:
The Code of Ethics, as it currently stands, needs to be implemented on 1 January 2020, some 4½ weeks away—
This was at the end of last year—
However, the body implementing the Code, the Financial Adviser Standards and Ethics Authority, or FASEA, has not yet provided its final framework, despite the fact that some of the obligations listed in their most recent draft guidance will have a profound impact on myself and a number of my clients. My concern is that due to the wording of the guidance almost every financial planner in the country will be in breach of the Code of Ethics on 1 January.
In this debate today, and as we are debating an important piece of legislation, we've had limited contributions from the members of the government, and at not one stage has anyone had the guts to get up and say: 'We got it wrong. We apologise for the uncertainty. We apologise for the concern.' It is tough out there in the economic climate in this nation. We know that small business is struggling. We know that times are tough. The fact that financial planners have been put into this position is regrettable, and I really wish the government would actually admit that they've stuffed this up and now we are cleaning up what is a pretty large mess by the government's own handling.
The financial planner went on to say:
It would be both wise and practical for new legislation to be applied to all parties providing financial advice (self-employed financial advisors and financial institutions and the banks); there should be a 6 to 12 month transition and implementation period; and the absurd anomalies in the current proposed changes be reviewed with consultation with the practitioners it directly affects.
The hundreds, if not thousands, of emails like this received by government members show just how poorly thought out this process has been.
In researching this speech today I thought that surely there must have been some mistake and the government could not have dropped the ball like they have. But, as we heard from the shadow minister, sadly, we were both wrong. In a media release on 11 October 2019, the Treasurer said:
A Code of Ethics will be applied by law from 1 January 2020, and financial advisers will be expected to meet the code's high ethical standards.
The Treasurer also thanked the professional associations and acknowledged the considerable amount of time and resources taken towards implementing code monitoring by the end of the year. I'm sure that these associations have done their best in a timely manner to help support the industry, but, as we've seen from correspondence from my local residents, the government certainly has not. At this current juncture the government really more resembles The Hunger Games movie. They are ripping each other apart and are more worried about their own jobs rather than the impact that this is having on small businesses across Australia.
Their independent standard-setting body, the Financial Adviser Standards and Ethics Authority, has been under-resourced, slow to consult and slower yet to release standards and set exams. These failures have placed impossible pressures on financial advisers to comply with the new standards. But rather than take the proper time needed to get this right, ASIC said:
… the Government announced it will accelerate the establishment of a new disciplinary system and single disciplinary body for financial advisers …
This will replace the role of monitoring bodies that were due to be established by industry associations under the professional standard reforms for financial advisers. Then, just over a month later, after realising the magnitude of this problem and this stuff-up, a follow-up media release on the ASIC website stated:
As announced on 14 November 2019, ASIC has taken action to provide certainty to Australian financial services (AFS) licensees that they will not be in breach of the law because their financial advisers were not able to register with an ASIC-approved compliance scheme by 1 January 2020, as originally required.
ASIC's action follows a Government announcement that it would accelerate the establishment of a single disciplinary body for financial advisers and the withdrawal of applications for ASIC approval of a compliance scheme.
You can clearly see the confusion and chaos in this chamber on most days, as we witnessed yesterday, and the back-and-forth that the government has had with businesses and local residents who have contacted me. New dates, old dates, compliance dates, accelerating, decelerating—what a mess. Yet, as I said in my opening remarks, these are the same members of parliament who form government in this country and who say: 'Trust us. We've got the right settings for the economy.' Those opposite come in here and trumpet themselves as the party of stable government. They are either falling apart on the floor of parliament or completely causing disruption and chaos in the financial sector.
They are not content with letting the economy just grind to a halt. They are now adding barriers and confusing red tape for those people, as the Prime Minister so kindly says, who have a go. But not when you look at the mess of legislation that they are bringing in. They are not having a go and they are not getting a go under this government. There is chaos and confusion in this sector. Rather than confuse businesses, they should be setting clear, transparent and considered time lines that will not throw more uncertainty into the economy than what the government has already created.
I should also touch on the amendments proposed by Labor for this bill. As we heard from the shadow minister, these amendments would remove the current legislative exemption from conflicted remuneration rules for financial advisers in relation to selling of units or shares in listed investment trusts and listed investment companies. So let's be very clear on why this is the case. We know that, since 2015, the market has doubled in size to $45 billion. This is despite regular underperformance, high management fees and the delisting of two LITs and LICs due to fraud in the last four years. ASIC has conducted research on the performance of the 48 LICs and LITs listed since 2015. They've produced negative returns on average, with worse returns for those entities that pay higher commissions. So it's clear that growth in this market has been driven by a legislative exemption to conflicted remuneration rules, created by the coalition in 2014, where financial advisers can receive stamping fees, a form of commission, when they sell LITs and LICs to their clients.
Mr Bowen interjecting—
As I take the interjection from the shadow minister—do not get me started on pay day lending. If you get me started on that, I will not finish, and we will have extension of time after extension of time. And I'm glad that the relevant minister is at the table because, while he hasn't overseen this specific mess or this botched piece of legislation, he has taken five years to actually deliver reforms.
Nonetheless, it's clear that the evidence has stacked up to show that this is not a government which makes decisions in the best interests of business. Despite all the rhetoric and all the claims of looking after small business, this legislation proves that it's a mess. You cannot trust the coalition to look after the financial sector, whether it be because of its slow action on the banking royal commission or because of its inaction on pay day lending and loan sharks in this country. When it comes to financial investors and planners, you cannot trust this government. This government's only concern is doing as little as possible. The bill today shows that: it has to clean up a terrible mess. Day by day it becomes clearer that, when it comes to managing the economy and looking after small business, this government cannot be trusted.
Whilst Labor will be supporting this bill today, we have moved substantive amendments to it. I look forward to members of parliament supporting them in the interests of openness and transparency and to give small businesses and the financial sector a fair go.
I thank all the members who have spoken on the Treasury Laws Amendment (2019 Measures No. 3) Bill 2019. We don't agree with the amendments moved by the opposition. They are finding longer, more complicated and more negative ways of displaying that they will be supporting this bill, and we welcome that support.
This bill contains a number of measures that improve the integrity of the tax system, provide flexibility in completing new financial adviser requirements and ensure existing legislation operates as intended. To recap, schedule 1 amends the Income Tax Assessment Act 1936 to clarify that, from 1 July 2019, the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased's estate or the proceeds of the disposal or investment of those assets. This is an integrity measure, which was first announced in the 2018-19 budget, to deter taxpayers from using testamentary trusts as tax planning vehicles rather than what they're intended to be, which is to provide for their family after death.
Schedule 2, as has been spoken about in the House today, delivers on the government's commitment to extend the time that existing financial advisers have to meet new exam and qualification requirements set by FASEA. In particular, the extension assists rural and regional advisers and working parents, including parents taking parental leave during this transition period, ensuring that we maintain a diverse adviser industry—a very responsible amendment from the government.
Finally, schedule 3 makes minor technical and machinery amendments to various Treasury portfolio legislation, including amendments to address technical deficiencies in those pieces of legislation, ensuring the law operates as intended, and to remove administrative inefficiencies. We don't support the opposition's amendments, and I commend the bill to the House.
The question is that the amendment be agreed to. There being more than one voice calling for a division, in accordance with standing order 133, the division is deferred until after the discussion of the matter of public importance.