Jane Hume (Victoria, Liberal Party, Assistant Minister for Superannuation, Financial Services and Financial Technology) Share this | Hansard source

First, I would like to thank those senators 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. The bill will end the payment of grandfathered conflicted remuneration to financial advisers, with effect from 1 January 2020. Conflicted remuneration refers remuneration paid to financial advisers by product issuers which can influence the advice that they provide to retail clients about that product. When the ban on conflicted remuneration was first introduced, in 2013, already-existing arrangements to pay this remuneration to financial advisers were grandfathered so that the ban did not necessarily apply to them. But it's now been six years since that ban was first introduced. However, grandfathered conflicted remuneration remains a part of the financial advice industry.

There's a clear need to end these grandfathered conflicted remuneration arrangements in the financial advice industry. As Commissioner Hayne said in the royal commission's financial 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. This is critical to maintaining their financial wellbeing. Grandfathered conflicted remuneration compromises this objective by entrenching customers in older and poorly performing products. This is because financial advisers may be unwilling to switch their customers into newer or better products if it means the adviser will lose his or her entitlements 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, although 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—$400 million of everyday Australians' retirement savings being paid out in commissions. Retail clients will therefore be the major winner of this reform. The government's actions mean that they will receive much higher-quality advice and will stop paying the higher fees to fund those grandfathered conflicted remuneration arrangements.

The measures in this bill not only will end the payment of grandfathered conflicted remuneration but also will go further and require that any grandfathered benefits that remain in contracts after 1 January 2021 should be passed on to the affected customers. This will ensure that the entities required to pay grandfathered conflicted remuneration—the financial product manufacturers—are not able to keep the benefits they would normally pay to financial advisers for themselves. The benefits must flow to customers.

By ending grandfathered conflicted remuneration, the government's reforms will better align the interests of advisers and their clients. It will mean that clients can receive better-quality advice and stop paying the higher fees that result from paying those grandfathered conflicted remunerations to the adviser. To ensure that customers receive that benefit from the reform, the bill provides for regulations to establish the mechanism to pass these benefits on to clients. Specifying these requirements in regulations is the most appropriate approach because it provides the ability to make more-detailed rules on how benefits must be passed through and provides for flexibility to respond to changing industry circumstances in a more-timely manner. While a number of firms have already taken steps to end grandfathering, it is clear that this reform will be a significant change for the financial advice industry.

Ending grandfathering will potentially require renegotiation of existing contracts, and for product manufacturers it will require potentially significant systems changes to enable that rebating of the previously grandfathered benefits to clients. Recognising this, the bill provides a transitional period for the industry by ending grandfathering. It will take effect from 1 January 2021. However, this does not mean that the firms in question should drag their feet in making those necessary changes.

To increase the pressure on the industry to act swiftly to make those required changes, the government has issued a ministerial direction to ASIC to undertake an investigation into industry actions in the lead-up to the end of grandfathering. ASIC will investigate industry behaviour in the period of 1 July 2019 this year right through to 1 January 2021 to determine whether industry is in fact passing through the benefits of the removal of grandfathered conflicted remuneration to consumers. They will complement action that we have already taken to drive improved consumer outcomes in the financial sector and ensure that misconduct in the sector is appropriately punished.

Senator Brown's earlier assertion is entirely incorrect. In fact the government has moved swiftly to implement all 76 recommendations of the Hayne royal commission. Since releasing our response to the royal commission the government has in fact instigated and responded to the APRA capability review led by Graeme Samuel, AC. We have expanded the remit of the Australian Financial Complaints Authority, AFCA, to require it to establish an historical redress scheme to consider eligible financial complaints dating right back to 1 January 2008, the period covered by the banking royal commission. We have also amended legislation to extend ASIC's product intervention power and to impose design and distribution obligations on all financial and credit products within ASIC's regulatory responsibility. The government has initiated work with the states and territories towards establishing a national farm debt mediation scheme and has released consultation papers on the removal of the exemption for insurance claims handling, the enforceability of financial services industry codes, the merits of universal terms of MySuper products and the superannuation binding death benefit nominations for Indigenous Australians. These actions demonstrate that 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 Senate.

Question agreed to.

Bill read a second time.