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Chapter 3 - Issues raised in evidence
3.1
The bills received broad support from submitters, particularly in
relation to their objective of reducing the cost of compliance for companies
and those involved in the financial services industry. A number of respondents
welcomed Treasury's decision to defer further consideration of a new category
of advice dealing with sales recommendations. Various submissions also acknowledged
the consultation process with government in the development of the legislation.[1]
The general exception to this sentiment was in relation to the inclusion of
existing superannuation products in the provisions of the bills, a move which
caught some stakeholders by surprise.[2]
3.2
However, respondents expressed concern with some aspects of the
legislation, particularly provisions dealing with Statements of Advice (SoAs)
and Records of Advice (RoAs). This chapter outlines these areas of concern and
considers the evidence received in submissions and at the public hearing.
Statements of Advice
3.3
The proposal to exempt advisers from the requirement to provide a SoA in
certain circumstances elicited comment from most submitters. Typical of these
was the Institute of Chartered Accountants in Australia:
The Institute supports the intent of this proposal. This is an
important step forward for the access of financial advice by consumers and in
particular the provision of advice that is of a strategic nature.[3]
3.4
While there was broad support for the measure, some organisations
expressed reservations. For example, the Association of Superannuation Funds of
Australia (ASFA) offered qualified support for the general intent of the reform.
ASFA considered that changing the SoA requirements was potentially hazardous
and should be approached with caution, and that the requirement to provide a
comprehensive Record of Advice (RoA) in place of an SoA is critical to the
system maintaining the necessary consumer safeguards.[4]
The Australian Bankers' Association (ABA) criticised the exclusion of certain
types of advice from the exemption as a factor limiting the utility of the
amendments to financial services providers.[5]
3.5
In its testimony before the committee, Treasury officials advised that
regulations to support the bills would not be available for some time after the
bills' consideration by the Senate.[6]
This introduces a level of uncertainty into the future operation of a
significant number of the bills' provisions.
Records of Advice
3.6
In keeping with its role in achieving simplified disclosure and reduced
costs of compliance, the RoA proposal attracted general support, with much of
the commentary focusing on the information RoAs ought to contain.
3.7
ASFA emphasised the importance of the client being properly informed,
through the RoA, of the costs and other significant consequences of a decision
to move funds from one financial product to another.
ASFA strongly believes that any changes to the Statement of
Adice (SoA) requirement must be carefully done. Extending relief too far is
hazardous, particularly if it involves a person acquiring a new product or
moving monies between funds. The decision of an individual to join a fund,
acquire a new product or transfer or rollover significant amounts of money from
one fund to another should require investigation of the member's current
benefits and costs, and should ordinarily require the provision of an SoA.[7]
3.8
The Australian Institute of Superannuation Trustees (AIST) agreed, noting
that the supporting regulations should outline the content requirements of the
RoA. It also noted that allowing individual advisers to determine the level,
amount, content and specific details of the RoA would be inappropriate. AIST
expressed concern that, while the Explanatory Memorandum sets out a list of
content requirements for RoAs, these are not described in the legislation.[8]
3.9
There was also concern that advisers are obliged to provide a RoA to
clients only at their request, as is reported in the Explanatory Memorandum.[9]
Choice argued that:
To ensure that the RoA accurately reflects the advice the
consumer receives, a copy of the RoA must always be presented to the consumer.
The consumer needs to be satisfied it is a true reflection of their
interaction, especially if the RoA is later required for external dispute
resolution purposes.[10]
3.10
However, the committee notes an anomaly in that, at proposed section
946AA(5) of the Bill, the provision of a RoA is mandatory.
Threshold
3.11
Another area of concern relates to the operation of the SoA threshold,
and the level at which it should be set. The bill proposes to introduce a threshold
amount in relation to the provision of a SoA, which will be required to be
prepared and provided to the client if the amount to which the advice relates
is $15,000 or more. Where the amount is less than the threshold, the SoA will
be substituted with a RoA.
3.12
The evidence revealed a significant level of confusion about the
threshold and what should properly be counted in assessing whether a SoA or RoA
is required. ASFA was keen to see the definition of the proposed threshold
clarified, and in particular, how it applies to future investments. This is
particularly germane if the advice relates to superannuation, which is very
likely to exceed the threshold over time.[11]
ASFA was not alone in expressing confusion about the definition. In their
supplementary submission, the ABA put their concerns with the threshold this
way:
It is unclear how future investments will be treated. The
Explanatory Memorandum suggests that the threshold will relate to the value
that the initial investment and the future amounts anticipated to be reached in
the next 12 months. However, [proposed subsections 946AA(1) and (2), read
together] seem to restrict subsequent investments made in relation to the
advice. [Subsection 1] refers to the total value of all financial investments
in relation to which the advice is provided as not exceeding the threshold
amount. [Subsection 2] refers to the total value of investments as the 'total acquisition
value' and 'total disposal value'. This seems to unduly limit the relief so that
in practice it would only apply to one-off small sales or investments. We
suggest that the amendment be clarified so that the threshold relates to an
acquisition or disposal in a 12 month period.[12]
3.13
Many submitters who expressed an opinion on the threshold considered
clarity of its definition to be at least as important as the actual threshold
figure itself. Industry Super Network (ISN) argued:
[W]e agree that the objective of increasing access to advice for
small-scale investors is meritorious [but] in order to ensure that the reforms
achieve this end without unintended side effects we would urge the Committee to
ensure that the $15,000 threshold is well defined so that the total amount
under advice does not exceed this threshold.[13]
3.14
ISN were in the minority in advocating for a reduction in the proposed
threshold, to $10,000, on the basis that the increased limit had been arrived
at with insufficient consultation.[14]
3.15
Some stakeholders were dubious about the rationale behind the proposed
threshold of $15,000. The ABA, for example, considered that the figure appeared
to be arbitrary, and suggested that different thresholds should apply for
different classes of product, as each has a different usual minimum investment
amount.[15]
3.16
The Financial Planning Association supported the move to grant relief
from the need to provide extensive disclosure, and like the ABA, called for the
proposed threshold to be raised to $25,000, and for advisers to be able to
access the exemption even when being remunerated.[16]
IFSA took a similar view, arguing that the calculations undertaken by Treasury as
to the 'break even' point for advisers were inaccurate:
They have actually made an assumption that five per cent of
advice provided fell below $15,000. We have had feedback from at least one of
our members, who is a major provider of advice in the market, that three per
cent of the advice provided falls below $15,000. So, based on that assumption,
$25,000 is probably about right.[17]
3.17
While a number of submitters considered the possible utility of
anti-avoidance provisions in relation to the threshold, Treasury officials
submitted that they could see no clear way for the threshold to be abused
without the knowledge and consent of the client.[18]
No product recommendation and no
remuneration
3.18
One of the central tenets of the bills is the exclusion for the adviser
from a requirement to provide an SoA in circumstances where they receive no
remuneration and in which they do not recommend a financial product.
3.19
One issue that was raised by a number of witnesses is the definition of
remuneration. To access the exemption, the bill requires that the adviser not
receive any direct remuneration or other benefit, other than remuneration
already being received for earlier advice, either for, or in relation to, the
product.[19]
3.20
The ABA submitted that, in practice, different models of remuneration in
the industry made interpretation and compliance with the provision potentially
difficult. Elaborating on their concerns, the ABA submitted that:
Advisers may operate under a number of remuneration structures
including on a fee for service basis; under a commission structure linked to a
licensed dealer; through salary or wages; or via a plan fee paid directly from
a fund/product. Advisers may use more than one of these remuneration
structures, depending on their business model and client base ... [I]t is unclear
how the amendment would impact on an adviser that receives a salary not related
to the advice. It is our view that a more definite description of remuneration
should be provided.[20]
3.21
AIST were concerned by the use of the word 'directly' in the provision,
considering the possibility that 'soft dollar' inducements could be received by
advisers while still attracting the exemption.[21]
ISN shared this concern, and joined with AIST in recommending that the word
'direct' be deleted, or the words 'and indirect' be added to the provision.[22]
3.22
Another commonly raised issue was the inclusion within the terms of the
exemption of advice to 'hold' a product, owing to the requirement that advisers
seeking the exemption do not recommend the acquisition or disposal of a
product. Choice expressed a common sentiment when they submitted:
There is no reason why trailing commissions earned on hold
advice, which have the potential to generate conflicts of interest for the adviser,
should be exempted from the SoA process, particularly as consumers are
generally not fully aware of the impact of trailing commissions.[23]
Superannuation
3.23
The inclusion of superannuation in the exemption regime, where no new
product is being canvassed by the client and adviser, is another issue that was
raised in evidence. The Institute of Chartered Accountants in Australia, ASFA
and IFSA supported the inclusion of super in the exemption provisions, with the
latter calling for the exemption to be available for all superannuation
accounts and advice which fall under the threshold, on the basis that:
... there does not appear to be any justification for denying low
cost and simple retirement planning advice to persons looking at opening a
superannuation account ... there is little to differentiate advice needed for the
choice of the consolidated account, to the opening and consolidation in a new
account ... clients will continue to receive appropriate advice and the provision
of a RoA will ensure remuneration [is] disclosed.[24]
3.24
Choice opposed the inclusion of superannuation::
Compulsory superannuation is deferred earnings designed to fund
future retirement. It is a long-term public policy measure and the potential
for inappropriate advice or mis-selling is obvious. [25]
3.25
However, it was AIST who argued most strongly against the inclusion of
superannuation in the legislation, arguing:
The decision as to which fund is the correct one into which the
consolidation should take place is not necessarily a simple one. Matters like
the existence of severe penalties to withdraw from many of the funds provided
by financial institutions, the availability and value of life/total and
permanent disablement/income continuance insurance arrangements, and the
willingness of a current employer to contribute to the selected fund, can all
influence a decision that would otherwise be made on the basis of fees or
investment returns alone.[26]
3.26
AIST set out its reasons at length. Not least of these was the utility
of the provisions as they related to superannuation. To the argument that the
provisions would be useful for clients seeking to consolidate accounts, AIST
responded:
Given the average size of lost accounts is in the hundreds of
dollars, I cannot imagine that financial planners are going to spend their time
trying to consolidate those amounts. It would be only in relation to clients
who have got very substantial sums elsewhere that they would get involved in
providing advice. I think the whole question of addressing the consolidation of
lost accounts of that size has got to be addressed in a totally different
fashion.[27]
3.27
More broadly, AIST put forward the compulsory nature of superannuation
as a good reason to implement the maximum possible safeguards against uninformed
decision making, submitting that:
Diminishing disclosure requirements and creating loopholes for
the minority of financial advisers who are acting unscrupulously, or in bad
faith, doers not provide a confident investment environment for consumers to
feel that their retirement savings are safe and secure.[28]
3.28
AIST went on to argue that more analysis and broader understanding is
required and that at the very least the inclusion of superannuation be deferred
until matters are more deeply assessed. [29]
Our primary position is that in the time since super appeared on
the scene in this bill, there has not been enough time for people to think
through—certainly for us to think through—all of the implications of including
it. We would like to see its inclusion either not take place or to be deferred
until that proper consideration can be given.[30]
3.29
As alluded to by AIST, considerable consternation arose as a result of
superannuation's late inclusion in the bill. Several witnesses testified that
they were led to believe that it would not appear, and that they were surprised
when the bill was made public.[31]
The lack of consultation was confirmed by Treasury officials when they appeared
before the committee.[32]
Insurance advice
3.30
The evidence revealed some disappointment with the exclusion of certain
forms of insurance from being subject to the relief provisions in the bills. The
exemption from the requirement to provide a SoA does not apply to a general or
life insurance product, except insofar as advice relating to a superannuation
product relates to a life risk product.
3.31
The ABA commented:
It is our view that excluding general insurance products is not
scaleable and proportionate to the risk profile of the product and at odds with
previous FSR requirements. It is our view that the exclusion should not apply
to life risk insurance products ... [E]xclusions would create additional
complexities for representatives and consumers and sensibly these exclusions
should be removed.[33]
3.32
The FPA agreed:
It is our position that [the exclusion of life risk insurance]
would create a bias towards advice on life insurance attached to
superannuation, and anecdotal evidence from members suggests that many
consumers mistakenly believe that insurance attached to superannuation is
adequate.[34]
'In product' advice
3.33
Some submitters expressed the view that 'in product' advice should be
included in the exemption regime. This relates to advice which is given in
relation to a product with which the client is already involved. The ISN's
argument was typical in this regard:
If the aim of this reform is to make advice more accessible to
consumers, then enabling funds to provide within-product advice would be a more
cost effective way of enhancing the coverage of advice without compromising the
quality of advice or consumer protection. The advice needs of many consumers,
particularly low-income earners, are largely limited to simple issues related
to their superannuation – voluntary contributions, salary sacrifice, investment
allocation and insurance provided within the product.[35]
3.34
ASFA agreed, observing in relation to 'in product' advice that:
Appropriately crafted provisions could provide some immediate
and meaningful relief to superannuation funds addressing the advice needs of
their membership. If these changes are to be about improving cost and access to
advice for income earners, then any such changes would be a step in the right
direction.[36]
Sophisticated investors
3.35
The amendment provides for an adviser to certify that the client has
sufficient experience to be treated as a wholesale investor, enabling
expeditious disclosure for the adviser and a larger range of financial products
for the client. Existing tests relate to assets and income as the primary
indicator of financial sophistication, whereas the new measure will allow
certification based on reasonable grounds that sufficient experience is held by
the client so as to be treated as a wholesale investor. As is the case
currently, general insurance, superannuation and savings account products will
not be subject to the provisions, nor any product in connection with a
business.
3.36
The ABA's concerns, primarily in respect of the exclusion of small
business from the provisions, were serious enough for it to oppose the measure
in its current form. The Australian Financial Markets Association (AFMA) also
considered this a serious problem.[37]
The ABA queried whether the provisions applied to those managing risk, as
opposed to investors. They also expressed curiosity as to the longevity of a
certification, and whether it applied uniformly across product classes, and
suggested that:
[T]he written statement should be defined to cover a class or
sub-class of financial products for which the retail investor shall be treated
as wholesale for the ongoing provision of financial services for that class or
sub-class of financial products by that financial service provider.[38]
3.37
This was said to be particularly relevant where the client is involved
in fast-moving foreign exchange markets.[39]
3.38
Other concerns were more general. Choice expressed the view that the
proposal:
... may ultimately blur an important distinction between retail
and wholesale investors, and will expose consumers to unacceptable risks of
fraud or deceptive conduct. By reclassifying the consumer as a wholesale
investor the consumer foregoes a broad range of rights and protections,
including their right to
- financial service product
disclosure;
- receipt of a financial services
guide;
- the benefit of a suitability
analysis by their adviser;
- the benefit of mechanisms designed
to deter pressure selling; and
- the benefit of compensation
arrangements for fraud or negligence.[40]
3.39
Choice went on to observe that advisers are not ideally positioned to
make disinterested and independent judgement of their client's sophistication.[41]
The ISN questioned whether the new method of judging client sophistication
might pose a particular hazard to operators of self-managed superannuation
funds (SMSFs), many of whom it considered to be in danger of being mistakenly
identified as wholesale investors even though their experience with managing
large sums may be limited. [42]
Both Choice and the ISN declined to support the measure.[43]
3.40
The ABA and others expressed their confusion at provision 761GA(f)(ii), which
proposes to require the client, as a prerequisite to achieving sophisticated
investor status, to acknowledge that they have not been provided with a PDS, or
'any other document' that would otherwise be required to be given to the
client. The ABA submitted that:
The amendment excludes financial service providers from giving
their clients documents that can be provided to a retail client. This is
nonsensical as it discourages financial service providers giving information to
their clients. The written acknowledgement ensures that the client is aware of
the consequences of being treated as wholesale. We suggest the amendment be
changed to indicate that a licensee 'does not have an obligation' or 'is not
required' to provide the client such information.[44]
3.41
As it stands, the amendment would appear to bar sophisticated clients
from receiving information regarding investment products from the adviser, even
where they request them. The Committee queries the justification for such a
measure.
Other measures
3.42
Much of the remaining commentary was in broad support of other measures
contained in the bills. Two areas, company reporting and executive
remuneration, elicited the majority of the remaining commentary.
Company Reporting Obligations
3.43
This measure achieved broad support, with ASFA expressing disappointment
that it did not extent to the distribution of annual reports of superannuation
funds. ASFA observed that:
ASFA believes that superannuation funds must provide their
members with relevant information so that the member is made aware, and remains
aware, of their benefits and rights as members. This information needs to be
provided in a way that is relevant and useful to members, so that members can
make informed decisions. We would support superannuation funds having the
option to make their annual reports available electronically with members then
having the right to request, at no cost to themselves, a hard copy of the
report.[45]
3.44
IFSA went further, calling for the ability to distribute fund
information and significant event notices electronically:
There is no compelling reason why fund information and significant
even notices cannot be distributed via the published content of a website ...
[L]ike annual reports, fund information and significant event notices are by
and large generally available. The information is not specific to a particular
holder. There are no overarching dissimilarities in consumer protection terms
affecting the distribution of either document...[46]
3.45
The ABA and IFSA questioned whether investors who have already opted out
of receiving paper reports will be covered by the provision in the bill, or
whether permission to send documents electronically will need to be re-sought.
They call for transition arrangements to be clarified in this respect.[47]
Executive remuneration
3.46
The Australian Shareholders' Association was disappointed that the
amendments do not require companies to report the market value of outstanding
executive options, but was supportive of the introduction of reporting
requirements for hedging of remuneration.[48]
3.47
The ABA considered that the amendments as they are worded place an
inappropriate responsibility on auditors to comment on the narrative contained
in the remuneration report, and recommended that that provision be clarified to
require auditors to comment on the accounting information within the report.[49]
Conclusion
3.48
This package of amendments has as its primary aim the simplification and
facilitation of access to affordable financial advice for consumers. Although
the committee heard no firm evidence that the price of financial advice would
drop as a result of these measures, the committee believes they will succeed in
their objective, and that there is no evidence that consumer protections will
be adversely affected.
3.49
The committee is mindful that stakeholders took different views on a
number of proposed measures and identified specific areas that might need
further refinement. One area relates to product disclosure documents. The
committee notes that witnesses who appeared before it did not explain how the
bills would reduce the size and complexity of disclosure documents that are
currently issued. This is why the committee strongly urges the government and
industry stakeholders to continue to work to reduce the length and complexity
of disclosure documents and make them more readable. However, suggested
changes, where they were offered, were relatively minor and do not in any way
challenge the substance of the bills. In noting the broad and consistent
support for the bills, the committee does not believe that concerns raised are
serious enough to warrant delay in their consideration and passage through the
Parliament in their current form.
3.50
The committee reminds all stakeholders that the bills, while an
important step forward, represent only one part of the government's financial
services reform agenda, and that further opportunities to fine-tune the
operation of these and other measures will most likely be forthcoming. The
committee, therefore, encourages the government to consult further with
industry stakeholders over a number of practical and technical issues raised in
evidence to this inquiry.
Recommendation 1
3.51 The committee recommends that the government and industry
stakeholders consult further and devise ways to reduce the length and
complexity of Statements of Advice and Product Disclosure Statements, and make
them more readable.
Recommendation 2
3.52
The committee recommends that the bills be passed.
Senator Grant Chapman
Chairman
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