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Chapter 6 - Conclusions and recommendations
Support for the Bill
6.1
The Committee concludes that the Financial
Services Reform Bill 2001 has been generally well received by the financial
services industry. In particular, the Committee notes that key stakeholders are
satisfied with the main objectives of the Bill. The Committee also concludes
that the consultation process with interest groups, which preceded the final
Bill, was appropriate and effective. The Committee accepts that there are
problems with a number of aspects of the Bill, but that these do not affect
overall acceptance of the Bill. The Committee therefore recommends that
the Bill be passed.
Concerns about the process
6.2
The Committee concludes that certain
reservations expressed about the Bill are justified because the full nature of
its operation cannot be known until the Australian Securities and Investments
Commission (ASIC) releases its policy papers, and the Department of the
Treasury has finished drafting the regulations.
6.3
The Committee also endorses concerns that the
tight timeframe allowed for finalising the actual legislation and the
regulations will not allow affected sectors to participate fully in the
drafting processes.
6.4
The Committee is sympathetic to concerns that
lack of detail in the Bill might place too great a degree of responsibility on
ASIC to interpret the legislation, thus leading to reduced certainty about the
Bill’s operation. The Committee concludes that ASIC’s resources are already
stretched and any further responsibilities stemming from the current Bill would
require additional funding.
6.5
The Committee accepts that another concern for
industry participants is the timeframe for the transitional arrangements for
the move to the new financial regime. The Committee acknowledges some industry
unease about ASIC’s expectations that industry can meet requirements, including
the establishment of mechanisms for self-regulation, within the expected
timeframe.
6.6
The Committee concludes, however, that many of
these concerns will have been allayed by the 5 April 2001 statement by the
Minister for Financial Services, the Hon Joe Hockey MP, that the commencement
date of 1 October 2001 for the new regime is simply the date on which persons
may comply with the new regime if they wish. Those who need more time to comply
will generally have up to 1 October 2003.
6.7
The Committee acknowledges the desirability of
commencing the new regime as soon as possible, but recommends that the
two year transitional period be retained in order to assist those in the financial
services industry to comply with the new regime. The Committee also recommends
that the Government explore the possibility of additional funding for ASIC to
allow it to meet its new responsibilities.
Revoking of the media exemption
6.8
The Committee received substantial evidence from
media organisations that the imposition of the Bill, in absence of the
exemption provided under the Corporations Law, will impose real operational
difficulties on the media. These in turn would fundamentally challenge information
providers’ ability to fully inform consumers on the threshold of financial
reform.
6.9
The Committee notes the Minister’s statement
that there was no intention that the Bill should change the practical effect of
licensing requirements for media organisations. In this respect, the Committee
observes that the media has no quarrel with the requirement that those paid to
deliver financial advice, by whatever medium, should be subject to the Bill’s
licensing requirements. Instead, its concerns focus on the perceived threat to
the independent provision of information about financial services, which would
run counter to Australia’s commitments under the World Trade Organisation’s
General Agreement on Trade in Services (GATs).
6.10
The Committee therefore considers that revoking
the media exemption, without other adequate provisions being in place under the
Bill, will have unintended consequences for Australia’s media providers and for
consumers, and may have broader ramifications for Australia in an international
context. In this regard, the Committee notes the Minister’s commitment, in his
letter to the Chairman of 25 June, that a regulation will be cast, after
consultation with the industry, to ensure that the media will be exempted under
the definition of general advice, subject to certain disclosure requirements.
6.11
The Committee recognises that this was intended
to give media organisations the same degree of certainty to that provided
previously under the Corporations Law. However, the Committee is
persuaded by evidence that the matter should be addressed in the legislation,
and not in the regulations. The Committee therefore welcomes the Minister’s
further public commitment that the legislation will be amended so that media
organisations regain the certainty provided by the Corporations Law exemption.
6.12
The Committee recommends that Bill should
be amended as follows to provide that result:
- A media provider is not
required to obtain an Australian Financial Services Licence for a prescribed
publication which contains:
- general advice; or
- personal advice, unless:
- the media provider carries on the business of
providing personal advice, or
- the media provider's sole or principal purpose
is to influence people in making decisions in relation to a particular
financial product or class of financial products.
- For the purposes of sub-section (1):
media provider means a person who carries on a business with the sole or principal
purpose of providing information to the public and includes, without
limitation:
- a person licensed under the Broadcasting
Services Act 1992, the Australian Broadcasting Corporation, and the Special
Broadcasting Service Corporation;
- a publisher of a newspaper or periodical that is
generally available to the public, including over the internet;
- a publisher of an information service that is
generally available to the public by the means of transmission, sound
recordings, video recordings or data recordings, or over the internet;
- a person who is employed by, or provides
services to a person described by (a), (b) or (c) above, as a journalist or
commentator.
prescribed
publication means a publication made by a media
provider in the course of carrying on its business of providing information to
the public.
The regulations may contain specific provisions qualifying any of
the above meanings.
Telephone tape recording proposal
6.13
On consideration of the evidence, the Committee
concludes with industry that the Bill’s provisions on this issue have been
drafted with slight appreciation of the nature and operational features of the
shareholder telephone canvassing industry. The Committee notes that the
confidential nature of contacts made during takeovers is considered essential
to the bid process, and that the high degree of self-regulation imposed is
designed to protect both the client and the seller. The Committee also concedes
that the requirement to tape record all communications between targets and
bidders in all circumstances may be neither practically nor financially
feasible for industry participants.
6.14
In this respect, the Committee sees merit in the
Minister’s commitment, also articulated in the letter referred to above, that
an amendment will be moved to limit the scope of the proposal’s application.
After amendment, the Bill will require that only calls to retail shareholders
during a takeover bid need be recorded.
6.15
However, given the degree of concern expressed
about the inappropriateness of the proposal per se, the Committee
believes that the Government should review the objectives of the proposal, and
consider what alternative approaches would marry better with the present
operating features of the industry.
6.16
The Committee therefore recommends
that the Government should remove from the Bill the provisions relating to the
recording proposal and consider other options, such as whether the Australian
Securities and Investments Commission (ASIC) could play a role in supporting or
monitoring self-regulation in the telephone shareholder canvassing industry.
Issues relating to Australia as an international financial centre
6.17
In its report on the draft Financial Services
Reform Bill, the Committee noted that the intention of the Bill was to improve
Australia’s international competitive position and to enhance its role as an
international financial centre. In this context the Committee endorsed a number
of recommendations made by the Australian Stock Exchange Limited (ASX), in
particular a recommendation to increase the shareholder limit on the ASX from 5
per cent to 15 per cent. The Government subsequently announced that it had accepted
this recommendation, but did not accept all of the other matters endorsed by
the Committee.
6.18
In relation to the final Bill the Committee
accepts again the advice of the ASX that the Bill is deficient as it affects
Australia’s international competitiveness in an integrated global market. The
Committee endorses the ASX position that the Bill does not provide a level
playing field in that it fails to facilitate links between the ASX and foreign
exchanges, to reduce duplication of legislative requirements or to provide a
framework for mutual recognition. The Committee also accepts advice from Morgan
Stanley, Dean Witter and Goldman Sachs that concessions in the Bill for the
provision of financial services by overseas entities to wholesale clients in Australia
are insufficient. The result may be that the Bill will deter overseas financial
institutions from providing a full range of services to their Australian
corporate clients. The Committee considers that Australia’s competitive
position and its role as an international financial centre are of critical
importance to the success or otherwise of the aims of the Bill. It would be
unacceptable if the Bill did not provide the flexible and responsive
supervisory framework necessary to achieve these aims.
6.19
The Committee therefore recommends that
the Bill be amended to address these concerns. In particular, the Committee
endorses the view of the ASX that the Bill could provide a better framework for
mutual recognition by the use of specific policy directions for the exemption
and modification powers in the Bill. The Committee recommends that the
general objects clause of the Bill (s.760A) and the matters to be taken into
account by the Minister before making Australian market licensing decisions
(s.798A) or clearing and settlement licence decisions (s.827A), should be
amended to include this policy intention.
6.20
The Committee also endorses the views of Morgan
Stanley and Goldman Sachs that the territorial jurisdiction of the Bill
(s.911D) is very wide and may have adverse unintended consequences; and that
the Bill does not include a provision equivalent to s.93(5) of the Corporations
Law, under which unlicensed entities may act through licensees without
breaching the dealers licensing regime. The Committee recommends that
the Bill be amended to remedy these defects.
Issues raised by authorised deposit taking institutions (ADI)
6.21
In its report on the draft Bill the Committee
recommended that deposit products offered by ADI should be removed from the
definition of financial product. The Committee did this to ensure the viability
and level of services of ADI agencies in rural and regional areas, many of
which would otherwise be forced to close. In its response to the report the
Government undertook that the final Bill would exempt ADI deposit products that
are for a term of two years or less and have no management or break fees. The
Committee, however, concludes that this concession does not go far enough and
that there are fundamental problems with the operation and clarity of the
exemption. The Committee concludes that the exemption should apply to all basic
deposit products. This would comply with the formal intention of the Government
that the Bill should apply flexibly to basic deposit products because they are
well understood by retail consumers.
6.22
The Committee concludes that the failure of the
Bill to exempt all basic deposit products will lead to increased paperwork and
administrative costs, which will be passed on to the consumer. The Committee
also concludes that the two year limit for basic products is unnecessary and
will not enhance consumer protection. In particular the Committee concludes
that the present provision in the Bill will be a disincentive to offer such
products in ADI agencies, which in remote areas are more usual than banks.
6.23
The Committee therefore recommends that
the Bill should exempt from the definition of financial product all simple,
well known basic deposit products and related non-cash payment systems. To
achieve this the Bill should include an amendment in the same terms as set out
in paragraph 2.21 of this report, excluding such products from the definition
of financial product.
Issues which affect small business
6.24
The Committee accepted evidence that the Bill
may adversely affect small business in relation to two main matters.
6.25
The first of these matters is the disclosure of
the quantum of commission on risk financial products. As noted earlier, the
Committee identified this as a key issue in its report on the draft Bill,
recommending that the requirement be deleted. The evidence received by the
Committee during the present inquiry has confirmed this earlier conclusion. The
Committee accepts the views of small business operators that there is no
consumer demand for this type of disclosure, which could impede legitimate
market processes. The Committee rejects formal Government advice that quantum
disclosure will help consumers identify the potential influences or conflicts
of interest which an adviser may have in recommending a product. Instead, the Committee
prefers the view of the small business associations, who advise that cost and
service are the most important such influences, not commission. Accordingly,
the Committee recommends that the Bill should not require disclosure of
the quantum of commission on risk products.
6.26
The second matter is the potential for the Bill
to harm the continuing viability of small businesses and to reduce their market
value. The Committee concludes that these are genuine and legitimate concerns
which should be addressed. The Committee accepts evidence that the Bill appears
to be biased in favour of the large providers of financial services, at the
expense of small business, who are in direct contact with consumers. This bias
is demonstrated in a number of ways. For instance, the Committee concludes that
the required disclosure of the quantum of commission at the point of sale will
put downward pressure on commissions, to the detriment of small business and
the benefit of large operators. The Committee also concludes that the Bill will
increase proportional costs more for small business than for large. There also
seems to be adverse effects from changes made by the Bill to marketing
techniques and to the relationship between principal and agent, affecting the
agent’s right to work and to receive remuneration. The Committee also accepts
that the required training and educational qualifications will impact more
severely on small operators. The Committee concludes therefore that unless it
is amended the Bill will have adverse effects on small business as opposed to
more benign effects on big business.
6.27
The Committee accordingly recommends that
the Bill be amended to provide that:
- A licensee may revoke an authorisation without
the consent of the authorised representative only if that representative is
convicted of serious fraud. This will require an amendment of s.916A(4).
- A person may be the authorised representative of
two or more financial services licensees without the need for consent by each
of those licensees. This will require an amendment of s.916C.
- If ASIC suspends or cancels a financial services
licence, each authorised representative of that licensee is deemed to continue
to be authorised on the same terms and conditions as existed immediately prior
to the suspension or cancellation. Proposed s. 915H of the Bill already appears
to give ASIC the power to do this, but the Bill should be amended to make it a
formal requirement.
- If a licensee:
- becomes an insolvent under administration;
- a creditor’s or debtor’s petition is presented
under the Bankruptcy Act 1966 against the partnership; or
- becomes an externally-administered body
corporate;
then,
notwithstanding any other law, all fees and commissions (including trailing
commissions) payable to authorised representatives of the licensee as a
consequence of the authorisation, shall continue to be paid to the
representative as if the licensee had not become an insolvent, had a petition
presented or become externally-administered.
- If an
authorised representative of one or more financial services licensees (the
initial licensees), ceases to be the authorised representative of one or more
of these initial licensees and instead becomes the authorised representative of
one or more other financial services licensees, then all fees and commissions
(including trailing commissions) payable to an authorised representative as a
consequence of the authorisation or authorisations from the initial licensees,
shall continue to be paid to the authorised representative as if the authorised
representative were still the authorised representative of the initial
licensees.
- Upon commencement of this Act:
- all agreements between insurance agents and life
insurance companies relating to the retailing of life insurance products shall
be deemed to continue in force even though the insurance agent may become an
authorised representative;
- all fees and commissions (including trailing
commissions) payable to agents as a consequence of any agency agreement shall
continue to be paid to that agent;
- all benefits and contractual obligations
relating to agency agreements (including buy-back clauses) shall continue to be
enforceable as if this Act had not been passed; and
- nothing in this Act shall be deemed to prevent
authorised representatives from entering into contracts (which may include
buy-back clauses) with life insurance companies for the purpose of selling the
products of those companies.
Issues relating to the insurance industry
6.28
The insurance industry raised a number of
significant concerns with the Bill, as set out below.
Cooling off period
6.29
The Committee accepts the advice of insurance
companies that there are circumstances where the cooling off period of 14 days,
during which any financial product may be returned, may be an unnecessary and
impractical level of consumer protection. Renewal notices for insurance
policies are typically set out at least 14 days before the due date, but the
cooling off period starts from the date of renewal or the date of the
anniversary. The Committee concludes that existing industry practices provide a
sufficient level of consumer protection and therefore recommends that
the cooling off period should not apply to insurance renewals for which at
least 14 days notice is given.
6.30
The Committee does not accept that the cooling
off period should apply only to the initial issue of a product and not to
increase an existing holding. In these cases the Committee concludes that such
a decision is a separate independent transaction. However, the Committee does
accept and recommends that in the case of market linked financial
products such as managed funds that the foreshadowed regulations should provide
for adjustments to the amount repaid to reflect changes in the market.
Compulsory third party (CTP) and
workers’ compensation insurance
6.31
The Committee concludes that the Bill will have
undesirable consequences for the operation of these classes of statutory
insurance, which are provided in some States by government entities which will
not be subject to the Bill and in other States by private companies to which
the Bill will apply. This will result in regulatory complexity and increased
costs for the private insurers. The Committee endorses the general unanimity of
submissions that each of these classes of insurance should be excluded from the
operation of the Bill until regulatory uniformity is achieved in the form of a
uniform scheme. The Committee therefore recommends amendment of the Bill
to provide this exclusion.
Insurance quotes by telephone
6.32
The Committee concludes that the Bill causes
unnecessary and costly problems for insurance providers in relation to quotes
given by telephone. In particular, the Committee concludes that disclosure
requirements provide no appreciable protection for the large numbers of
telephone inquirers who only want a quote for competitive purposes. In any
event, if the consumer accepts the quote then full disclosure documentation is
provided. The Committee accepts evidence that the requirement will put pressure
on call centres and rural branches and agencies, increasing the cost of each
policy by 5–8 per cent. The Committee recommends that the Bill should
exclude from disclosure requirements the provision of a quotation alone for a
general insurance product.
Travel insurance
6.33
The Committee concludes that the Bill will have
adverse consequences in relation to travel insurance. The Committee concludes
that some provisions of the Bill are inherently inappropriate for the sale of
simple general insurance risk products such as travel insurance, which are
inherently different from the investment products for which the Bill appears
largely designed. The Bill could result in a breakdown of the distribution
structure for these products, which represent a significant proportion of
income for travel agents. The Committee therefore recommends that the
Bill be amended and administrative action taken in line with the industry
recommendations outlined earlier in this report.
Prohibition on hawking
6.34
The Committee concludes that there is no need to
amend the Bill in relation to the hawking of general insurance products in
rural areas. The Committee understands that the Bill permits insurance
providers to contact insureds or potential insureds to make an appointment to
discuss financial needs. The Committee concludes that personal visits by appointment
by insurance providers to insureds is the form of contact most beneficial to
consumers in rural areas and that the Bill provides for this.
Issues relating to declared professional bodies
6.35
In its report on the draft Bill the Committee
concluded that concerns then expressed about the provisions relating to
declared professional bodies were valid. The Government’s response to the
Committee’s report rejected this position on the grounds that, from a consumer
perspective, the loss suffered from poor financial advice provided incidentally
by an accountant, for example, is no less serious than the loss suffered if the
poor advice had been given by a full-time financial adviser. Nevertheless, the
Government undertook to clarify the extent to which incidental advice is caught
by the Bill.
6.36
The Committee concludes, however, that concerns
remain in this area. The Committee accepts that a solicitor engaged to advise
on all aspects of a matter in a professional capacity, cannot limit the advice
provided to matters of a legal nature, and indeed may be liable for failing to
give incidental financial advice. The Committee notes that it is therefore part
of a solicitor’s duty to provide financial advice in certain circumstances.
6.37
The Committee concludes that the exemption in
the Bill for incidental advice does not include financial advice given in this
way. Indeed, the Government’s response indicates that the Bill is intended to
apply to solicitors and accountants who provide incidental financial advice.
6.38
The Committee also concludes that at present few
if any professional bodies will seek to be declared for the purposes of the
Bill. The Committee endorses this position and questions whether ASIC should
divert resources from its core regulatory function to assume responsibilities
that could amount to the regulation of the legal and other professions.
6.39
The Committee endorses the concerns of
accounting bodies that their members who offer traditional accounting services
may come within the Bill.
6.40
The Committee concludes that there are
fundamental problems with provisions in the Bill relating both to declared
professional bodies and to incidental advice. The Committee recommends
that the Bill be amended to exclude incidental advice from the requirements of
the legislation.
Consumer protection issues
6.41
The Committee appreciates the considered
response of consumer representatives on a Bill that aims to benefit consumers.
The practical and conceptual issues raised include those addressed by industry
associations, as well some additional aspects of the legislation which consumer
groups judge may have adverse effects for consumers. The Committee notes that
the Government has already addressed a number of these, with mirror provisions
being installed under the ASIC Act, and the obligation to fairness reinstated.
6.42
The Committee also considers that it received
satisfactory answers to some issues raised in relation to exemptions. In regard
to exemptions for bank ‘clerks and cashiers’ and for those ‘acting outside
authority’, the Department of the Treasury and ASIC explained how the Bill
deals with the problems outlined. Similarly, the Committee considers that ASIC
satisfactorily resolved issues raised about external dispute resolution
mechanisms, and the Department of the Treasury about pressure selling.
6.43
In relation to industry self-regulation and
disclosure issues, the Committee concludes that a balance has to be sought
between consumer interests and what will benefit industry. The Committee has
some sympathy, for example, with the case put by life agents and, as noted
above, gave credence to their view that commission disclosure may unduly
disadvantage them, while not necessarily benefiting consumers. On the other
hand, taking into account consumer representatives’ concerns about the role of
professional bodies as monitors of compliance, the Committee considers that
there may be a need for some finetuning of oversight arrangements by ASIC.
6.44
The Committee therefore considers that ASIC may
have to play a more active role in developing guidelines and monitoring
industry self-regulation, and recommends that consultation with industry
and consumer representatives should continue throughout the regime’s
implementation to finetune that process.
6.45
Finally, while the Committee supports the
development of ethical investment as part of the diversification of Australia’s
investment portfolios, it concludes that the introduction of compulsory
disclosure requirements would not be appropriate under the Bill. Instead, the
Committee believes that market forces will deliver consumers the most
transparent disclosure of socially responsible investment strategies by
companies with a genuine commitment to applying them.
Superannuation
6.46
The Committee recognises that the Bill will take
the superannuation industry in Australia into a new era, commensurate with its
significance as the keystone of Government’s retirement policy. Concerns
expressed about the adequacy of the Bill to supervise the industry, given its
distinctive operation and its objectives, are understandable. However, the
Committee believes that the introduction of the single licensing and disclosure
regime will advantage and protect consumers.
6.47
In particular, the Bill’s key distinction
between wholesale and retail investors, and the definition of all superannuation
products as retail, is made in recognition of the importance of protecting
unsophisticated investors, such as superannuants with lump sums to invest. It
is also designed to carve out ‘wholesale’ or sophisticated investment
activities by individuals or large superannuation funds from the disclosure
requirements.
6.48
In this regard, the Committee notes the
Minister’s assurance, in his letter of 25 June, that any perceived anomalies in
the wholesale/retail distinction in relation to superannuation products will be
addressed. The Committee therefore welcomed advice from the Department of the
Treasury that the regulations would address concerns about the Product Value
Test threshold. The Committee also heard that the Department of the Treasury
was considering its options on the situation of pooled superannuation trusts
(PSTs), such as applying the professional investor test.
6.49
The Committee agrees that the treatment of PSTs
under the present legislation, in particular, is unworkable and concludes with
the Association of Australian Superannuation Funds of Australia (ASFA) that the
‘professional investor’ test should be applied to PSTs under the new regime.
The Committee therefore recommends that the current Corporations Law
‘professional investor’ exemption for superannuation funds with assets in
excess of $10 million, when these funds are invested in pooled superannuation
trusts, should apply and that amendments should be made to the Bill to that
effect.
6.50
On the basis of evidence, the Committee is
satisfied that corporate and industry funds will not be adversely affected by
the Bill. The Committee notes that corporate funds will not be subject to
capital adequacy requirements as APRA-regulated bodies. Concerns about the
effect of licensing requirements on superannuation boards of trustees also
appear to have been largely addressed by the amendments allowing for competency
to be held collectively across the board membership. The Committee concludes
that, if fund management expertise is required, then a board member, or
contracted expert, should be competent to fill that role. Similarly, if a board
trustee or fund representative actually does give product advice, then he or
she should be adequately qualified to do so, as required by the regime.
6.51
However, the Committee is aware that the
superannuation industry will face challenges in the transitional period where
regulation moves from SIS Act regulation to that introduced by the Bill.
Industry representatives have commented that the transitional arrangements for
the superannuation industry have not been clarified by the Financial Services
Reform (Consequential Provisions Bill) 2001.
6.52
The Committee therefore recommends that
ASIC and the Department of the Treasury should consult with superannuation
industry representatives about the best measures to ensure a smooth transition
for the superannuation industry into regulation by the Bill.
6.53
The Committee also recommends that to
facilitate that process, and to ensure ongoing transparency and avoid
duplication, the Government should consider preserving the powers of the
Superannuation Complaints Tribunal Committee (SCTC) under the SIS Act as the
appropriate dispute resolution mechanism for superannuation under the new
regime.
Review of the
operation of the Bill
6.54 The
Committee commends the Government for foreshadowing in the Bill’s Explanatory
Memorandum that the reforms contained in the Bill will be reviewed by the
Treasury, ASIC and CASAC ‘after the two year transition period for their
implementation.’ The Committee, however, notes that as the transition period
for the measures in the Bill is two years, it would be only after four or five
years have elapsed since the Bill’s commencement that the operation of the
reforms contained in the Bill could be adequately examined. The Committee
therefore recommends that, in addition to the foreshadowed review of the
Bill’s implementation, this Committee conducts a review of the operation of the
Bill. The Committee further recommends that this second, operational
review commence no later than five years after the commencement of the Bill.
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