Matt Thistlethwaite (NSW, Australian Labor Party) Share this | Hansard source

I am pleased to rise in support of the Corporations Amendment (Future of Financial Advice) Bill 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012. I was pleased to be a member of the Parliamentary Joint Committee on Corporations and Financial Services that conducted an extensive inquiry into the proposed operations of these bills. The bills have come about as a result of an inquiry that was conducted by the parliamentary joint committee into financial products and services in Australia. This inquiry came about as a result of the shocking circumstances that occurred in the case of Opes Prime and Storm Financial, where there were financial collapses and thousands of particularly small-time mum and dad investors lost millions of dollars in retirement income and savings.

The government acted to ensure that appropriate regulation was put in place to prevent these circumstances in the future. These reforms deliver on that commitment to strengthen the regulatory framework around the provision of financial services in this country and to improve the quality of financial advice that is being provided by product suppliers and advisers to investors. This new system will build trust and confidence in the financial planning industry through enhanced standards, through the alignment of the interests of consumers and advisers and through a reduction in conflicts.

The first tranche of the legislation is the Corporations Amendment (Future of Financial Advice) Bill. This bill amends the Corporations Act to require financial advisers to provide a fee disclosure statement to a client when charging advice fees for longer than 12 months and to require financial advisers to provide a renewal notice to a client when charging advice fees for longer than 24 months. The bill also extends the Australian Securities and Investments Commission's licensing and planning powers used to supervise the financial services industry. These reforms will apply to advisers and fee recipients in situations where they provide personal advice.

The first aspect of this bill sets in place arrangements which require financial advisers to obtain their retail clients' agreement in order to charge ongoing fees for financial advice. This is known as the opt-in requirement. This comes about as a result of unengaged investors being unaware of commissions and fees that they may be charged in certain circumstances relating to advice and products that they use in respect of financial services. Currently there are some clients of financial advisers who pay ongoing fees for financial advice who receive little or no service. Some clients are unaware of the amount of fees that they pay, and 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. That is the basis of these reforms—to ensure that that lethargy is taken out of the relationship and that there is ongoing disclosure. Under these arrangements, the basic requirement is that advisers must obtain their clients' agreement to renew at least once every two years, as well as giving clients the fee disclosure statement at least every year. The renewal notice empowers the client 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 charged by the adviser. If the adviser breaches by overcharging after the client has not opted in, they could be subject to a civil penalty. There is flexibility as to when and how advisers obtain the renewal notice. The bill provides for additional grace periods if a client inadvertently opts out by not responding to a renewal notice on time.

The disclosure notice is an important supplement to the renewal requirement and supports fee transparency. It includes fee and service information about the previous and forthcoming 12 months and assists clients to understand whether they are receiving a service from their adviser commensurate with the ongoing fee that they are paying. This reform very much focuses on what is in the client's best interests.

The second aspect of this bill is that providers of financial advice must be licensed by ASIC as part of facilitating investor confidence that those persons are competent and of good fame and character. Licensees also have representatives who act on their behalf, and ASIC has powers to protect the public, including by applying a variety of administrative remedies against a licensee who breaches the law.

During the parliamentary joint committee inquiry into the provision of financial services, a number of witnesses and ASIC raised concerns about ASIC's ability to protect investors by restricting or removing unscrupulous operators from the industry. A number of factors were impacting on the exercise of ASIC's powers, including decisions of the Administrative Appeals Tribunal relating to when someone will breach the law, the difficulty with removing individuals given the focus on licensees in the Corporations Act and the lack of scope for ASIC to remove representatives in certain circumstances, such as where they are not of good fame and character. The changes in this bill implement the recommendations of the parliamentary joint committee and will strengthen that important gatekeeping function of the role the public expect ASIC to play when it comes to the licensing of those providing financial services in our economy.

The regime will extend ASIC's powers to remove unsatisfactory persons from the industry. The changes to the licensing and banning thresholds include that ASIC can refuse or cancel a licence or ban a person where that person is likely to contravene the law. ASIC may also remove representatives if they are not competent, if they are not of good fame and character or if they are involved in breaches of the law. Again, this ensures that integrity, respect and confidence are built into the system. This is aimed at providing better service for clients.

In respect of this law, an amendment was moved and accepted in the House of Representatives to allow for a voluntary commencement date rather than a compulsory commencement date for this provision of 1 July this year, with a mandatory commencement date to apply from July 2013. This will allow providers in the industry to do what they do best: compete with each other to ensure that there is a race to become FoFA compliant, thus ensuring that their advisers and those working to provide financial advice comply with the new laws. I think that we will see such a race to ensure compliance with FoFA and that particular firms and advisers will then advertise their compliance to the market. It will be a means of attracting customers and improving professionalism and of driving change in the industry with the aim of ensuring better financial advice for people.

The second tranche of the FoFA reforms is contained in the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012. This bill contains two key measures to improve professionalism, relating to the quality of advice and to boosting confidence. This will be done by employing and imposing a statutory best interest duty on financial advisers. As the name suggests, the duty requires advisers to act in the best interests of their clients and to put their clients' interests ahead of their own. One would think that would be a common practice. Unfortunately, advice to the parliamentary joint committee was that that does not always occur, particularly in circumstances where commissions may apply to the provision of particular products and to the on-selling of those to clients in the industry. The duty does not require advisers to give their best advice, but it is a legislative requirement that financial advisers' processes and motivations are focused on what is in the best interests of their clients. It is true that, ultimately, this will lead to better advice in most cases, but first and foremost it is about regulating conflicts of interest not about the intrinsic quality of the advice provided. The bill strikes a balance between certainty and flexibility for the adviser in satisfying the duty. The duty requires that the provider of the advice take steps that would reasonably be regarded as being in the best interests of the client.

The legislation states the circumstances and steps that a prudent adviser should take to satisfy the duty. They include identifying the objectives, financial situation and needs of the client that were disclosed; identifying the subject matter of the advice that is being sought; identifying the objectives, financial situation and needs of the client that would reasonably be considered to be relevant; making reasonable inquiries to obtain a complete and accurate picture of the client's circumstances and basing all judgments in advising the client on the client's relevant circumstances. Those are some of the points in the legislation that advisers can look to for guidance on fulfilling the best interest duty.

The second aspect of this tranche of the legislation is that the bill imposes a key aspect of the government's response to the Ripoll report—the parliamentary joint committee report—that is, a ban on the receipt of conflicted remuneration by financial advisers, including commissions from product issuers. It is crucial to the integrity of the advice industry that the consumer can be confident that the adviser is working for them rather than for the product provider. For the most part, advisers will not be able to receive remuneration from product issuers or from anyone else if that remuneration could reasonably be expected to influence financial advice provided to a retail client. These reforms do not prevent an adviser receiving a particular stream of income if the adviser is confident that that income does not conflict advice. For example, in the case of the receipt of income related to volume product sales or investable funds there is a presumption that the income will conflict advice; however, this is a presumption only. If the adviser can demonstrate that receipt of the income does not conflict advice then such remuneration will be permissible under the bill. There are reasonable exceptions built into this tranche of the legislation, which relate to advice associated with insurance products, life insurance that is not bundled as part of a superannuation product and other related advice.

The aims of these reforms are very much to ensure that people can have confidence in getting financial advice and ultimately that more Australians will seek financial advice, particularly in the context of their superannuation investments. It is well understood by the Australian community that most people, particularly younger Australians, are uninterested in and uninformed about their superannuation investments. The focus of these reforms is to ensure that those investors can have confidence in the system of advice and, importantly, that they can get advice that is appropriate to their circumstances. It is often referred to as scaled advice and is particularly appropriate for younger investors and people investing in superannuation. For instance, if someone is seeking basic information about an investment product, they may walk into a bank or go to a financial adviser to seek advice on how they should invest the $10,000 or $20,000 they have sitting in a bank account. This 'best interests' duty and the other reforms to the Corporations Act will drive and inspire people's confidence in that advice, and ensure that there are appropriate safeguards and exemptions for the providers of that advice from authorised deposit-taking institutions—and there are certain carve-outs in respect of those ADIs.

All in all, these reforms are positive ones. They are part of the suite of reforms introduced into this area by the minister, Bill Shorten, aimed at boosting the confidence of people seeking financial advice in this country in the advice they receive, aimed at ensuring more people seek financial advice and aimed at improving the quality of the financial advice that is being given. But ultimately these reforms are ensuring that, as the population ages and people begin to invest more and more in their superannuation, they make wiser decisions, decisions that are in their best interests and in the interests of the productivity of this economy. I commend these bills to the Senate.