Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Hansard source

We are dealing with the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 and associated bills. They represent some minor ad hoc changes, but, to the extent that they are regulatory reforms that reduce in a small way the red-tape burden facing Australian consumers and Australian business, particularly financial services business, Labor supports them. I would emphasise that these additional red-tape requirements on business were introduced by this government, and it is in the process of rolling them back. So Labor will support the package without amendment. The package includes changes to corporations regulation in the area of financial services, company reporting obligations, auditor independence, corporate governance, fundraising, takeovers and compliance and some other initiatives.

This bill will reduce some of the regulatory burden on providers of financial services. It will increase access to financial advice in some limited areas and will make improvements to other aspects of the financial services regulatory framework. The changes include removing the need for the provision of a statement of advice, the so-called SOA, when there is no recommendation in relation to a particular financial product and no remuneration and, secondly, where the amount to which the advice relates is under the prescribed threshold, proposed to be $15,000. In relation to superannuation, this will be limited to consolidation into or supplementation of an existing account; refining the circumstances where a financial services guide is not required to be provided, particularly at seminars; and some other measures in respect of the disclosure documentation issued under the Financial Services Reform Act.

This is the major area of contention in our financial services sector. What we have seen in the last three years is the issuing of disclosure documents by financial services institutions that vary in size but are generally from 50 to 100 pages. They are costly, complex and unreadable for most consumers. In addition, they have imposed an estimated additional cost, which is inevitably passed on to consumers, of some $200 million. I have been a longstanding critic of this approach. The Liberal government philosophy of protecting consumers is based on two approaches: firstly, you disclose in order to protect; and, secondly, you educate consumers. I must say that I am a sceptic of this approach. The one thing I can say is that there is overwhelming agreement in the financial services industry that the document being issued is a total dud when it comes to informing consumers. Only this government could believe that consumers would be informed by a 50- to 100-page document, and only this government could believe that that will protect consumers. That is why it is a total dud. It is on the record that the Labor Party has constantly outlined its concerns about this approach. It does not work.

Labor have announced policy that we intend to go through with, and we will apply the chainsaw to this disclosure documentation. Labor have announced policy that we will introduce in simple, standard, readable base documents incorporated in regulation of no more than three to four pages. If consumers, by request, wish to receive the more complex documents, that option will be available to them. What is the sense of issuing complex documents when consumers generally find them very difficult to read? They do not provide protection in any sense.

The measures in the bill represent the second attempt—so-called ‘refinements’. You always know when the government have got it wrong—they announce a ‘refinement’; refine this, refine that. They do not want to admit they got it wrong, so they issue a set of refinements. This is the second lot of refinements, and there are more coming. It is a piecemeal approach to attempt to improve the disclosure regime. The measures in the bill represent a partial reduction on the expansion of the lengthy documentation under this Liberal government. Labor support the measures as far as they go, but we will be much tougher in terms of a reduction in these basic documents.

What is concerning about the reforms is that the government appears to regard them as a stopgap measure. Why is it taking this approach? Well, we are only a few months out from the election. The government at least has received the signals loud and clear from consumer organisations and the financial services sector that these documents are doing more harm than good, so it has rushed in with a piecemeal set of measures—and there are more on the way—so as to be seen to be doing something, anything, about the problem. I do read the press releases of the Treasurer, the Assistant Treasurer and the parliamentary secretary. I must say I gave a wry smile when I read the heading of the parliamentary secretary’s press release in respect of this set of legislation. It read: ‘Pearce delivers consumer benefits and drives reduction in red tape’ and ‘Pearce continues delivering reductions in the red-tape burden’. It is a red-tape burden that this government introduced, and it is rolling it back in some limited ways.

My trusty adviser has just brought into the chamber a copy of these product disclosure documents. This one is typical of a product disclosure document in the area of financial services that is given to consumers. It is just incredible. This product disclosure statement is 74 pages long, and this is pretty typical of what consumers are being issued with. They are supposed to read and understand these statements to make an informed decision about financial services. This is the basis of the protection of consumers in our financial system. I certainly cannot understand a lot of the material in this particular document, and I do follow these issues a little more than most. Yet this is the sort of document presented. Here is another one which we have printed off the web. This one is 57 pages long. When you read these documents and attempt to understand them you ask: how on earth can the average consumer understand this sort of material?

We have the parliamentary secretary putting out a press release with the heading ‘Pearce delivers major insolvency law reform’. The government are partially correcting a red-tape burden of their own creation. They were warned. They were not just warned by me three or four years ago when we started to see these documents; they have been warned by the industry and by consumer groups that these documents are not providing the fundamental protection that is required. The parliamentary secretary talked about these so-called achievements, as represented by legislation, in his press release. Every time we get a new parliamentary secretary or assistant treasurer we get another set of refinements and another set of claims about reducing red tape.

The legislation we are considering was considered by the Parliamentary Joint Committee on Corporations and Financial Services. We had some seven or eight financial services organisations attend that committee hearing. What is clear from the submission presented by the Treasury, for example, is that this is a very ad hoc approach because there are further changes to come. I do not believe that they will address the problem, but there are a few further changes to come. So we are going to get yet another set of legislative changes sometime in the future—if the government is re-elected then it will probably be in the early part of next year—to again try to deal with some of these regulatory red-tape issues. So what will happen, of course, is that the legislation we are dealing with will pass the Senate and new regulations will be issued. Compliance officer is probably the fastest-growing occupation in the financial services sector at the moment. And is it any wonder? The compliance officers in financial institutions will get the regulations in the new legislation and they will adjust their processes. They will study what is required in the law and they will print new forms and new information. Then they will have to do it all over again next year when they get yet another set of so-called refinements. Treasury will be finalising some consultations in some other areas that are not dealt with in this particular legislation. In terms of the proposals presented here, as far as they go they seem okay.

We had the Australian Institute of Superannuation Trustees, IFSA and the Australian Bankers Association appear at the committee inquiry. When those various financial services organisations were questioned they all made the point that they believed this would increase efficiency and reduce red tape. That is a great claim to make, and it is generally correct. I then asked them: in what way would it reduce cost? I asked that because it is the increasing cost of this ineffective disclosure regime that we should be particularly concerned about. They were not able to identify any specific cost reductions even though they believed there would be greater efficiency and less paperwork. I also pressed them on the question of whether it would reduce price—because, at the end of the day, we have in some sections of our financial services sector very costly areas of operation.

What Labor wants to see is not only an improvement in efficiency and a reduction in cost but also a reduction in price to the consumer. I was disappointed that the representatives of industry, whom I have great respect for and whom I have worked with over many years, were unable to give an assurance that the cost to the consumer would decrease. If you argue that the bills represent increased efficiency and that there will be a reduction in cost then logically there should be a reduction in price for the Australian consumer. That assurance was not forthcoming. As I say, in general the bills do represent some progress toward simplifying some elements of our complex financial regulatory system.

There is one area in which I was particularly disappointed that greater work had not been done, and that is the provision of what is called limited advice within a product. If a consumer seeks advice about one aspect of a particular financial product, it is difficult under the Financial Services Reform Act to provide that without the issuing of lengthy, complex documents. I think much greater work could have been done in this area of provision of limited advice, rather than having a system that effectively forces the issuing of extraordinarily complex documents. In some ways this forces overservicing. For example, a person may simply want advice about their level of life insurance or death and disability insurance. I can compare this to going to a doctor for a particular ailment—it might be a cold—and the law effectively forcing the medical practitioner to give you a total health check and a range of prescriptions for everything that may go wrong in your entire life insofar as your health is concerned. You have actually gone there just to get some medical advice and treatment for your cold or flu. That is what we have ended up with in financial services in this country. As I have indicated, the Treasury submission indicates that there will be further piecemeal reform. Another example is that the Treasury were unable to come to a conclusion around the matter of sales recommendation. The Treasury submission itself says, ‘This matter will be the subject of ongoing development for possible inclusion in a future legislative vehicle.’

Another issue that I think concerned all members of the committee, and certainly concerned Labor, was that the regulations were not available. There are some important issues around consumer protection that we have been assured will be included in the regulations. Section 947D, we understand, will be provided for in the regulations to ensure that we do not have abuse of some of the changes that are being proposed. But those regulations are not available. This is particularly important when it comes to ensuring ongoing surveillance of, response to and corrective action for what is known as mis-selling. We understand that section 947D will be maintained, but we do not have the regulations. They have not been issued and yet they contain critical elements of this reform package. It is disturbing that after three years of operation of financial services reform these documents are still lengthy, complex and often unreadable.

There is another issue that astounds me. I asked Treasury whether they had undertaken any consumer testing of the impact of the simplifications that will flow from the legislation. Treasury have done no consumer testing. It seems to me to be fundamental that if you are trying to simplify documents giving advice to consumers you should ask consumers about what will work and what will be readable. Treasury have not done any of this to date. But Treasury are not the only ones who have done no consumer testing. ASIC is the regulator that oversees consumer protection in this area and, when it started issuing its advice to industry on these disclosure documents, it did no consumer testing. It just beggars belief that if you were to road test a disclosure regime you would not do consumer testing to help you to understand what it is that consumers will read and understand. I have been on the record constantly warning about the difficulties that this approach represents.

The last literacy survey that I read indicated that about 15 per cent of Australians are functionally illiterate. I understand the definition of that is that they are not able to read road maps or read through a telephone book. That is a lot of Australians who are functionally illiterate, let alone financially literate, meaning that they can read and understand financial documents. I am therefore an extreme sceptic about the other approach of this government towards the education of consumers. How do you educate 10 million Australians to be financially literate when about 15 per cent are functionally illiterate to start with? Educating so many people is a huge job. Try it, by any means, and we will certainly get increased financial literacy. But let us not believe that Australian consumers, through an education program and a disclosure program—particularly the one we have got—would be informed generally and would be able to make informed decisions around financial services. Generally, they will not be able to.

One of the other difficulties with these disclosure documents is that there is no uniformity. Everything that you would want to know is there. But if the economic theory of competition is that people will read and compare different disclosure documents and then come to an informed choice—and from that, prices will be driven down—it will not happen unless you have comparable documents. I do not blame the industry. And I do not blame the lawyers because they will only do what they are paid to do, and that is to cover all the eventualities—to cross the t’s and dot the i’s. It is not their fault. This is a fundamental failure of this government to understand the difficulties of consumer protection based on these particular documents and based on an approach for education. I do not blame the public servants. I have given Treasury a bit of a touch-up, but at the end of the day it is the government’s philosophical approach and lack of practicality that have led us to end up with a great mess. If you ask the victims of Westpoint and Fincorp whether they read the debenture disclosure documents, very few of them will say that they did. Even the new head of ASIC, the regulator, could not understand the documents. (Time expired)