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Coalition Members' Dissenting Report

A regulatory framework for tax (financial) advice services (previously Tax Laws Amendment (2013 Measures No. 2) Bill 2013, Schedules 3 and 4)

1.1        Coalition members of the Committee consider that these government proposals—to impose additional regulatory requirements on financial planners and advisers who give tax advice—should not be proceeded with at this point.

1.2        In short, the proposed changes need more work to get them right.

1.3        That's why Coalition members of the Committee strongly recommend that the Parliament insist on proper process before progressing proposals to move financial planners and advisers into the Tax Agent Services Act (TASA) regime.

1.4        There are now less than two weeks to go before the changes proposed by the government which would move financial advisers into the TASA regime would come into effect if this legislation was passed. Yet even strong supporters of the change concede that there are still 'a lot of unanswered' questions.

1.5        That’s just not good enough.

1.6        As a fundamental principle, when the Parliament passes a law, those upon whom duties are imposed under that law should be in a position to know what their duties are and to comply with them, by the time the legislation takes effect.  Government should inform itself of the amount of preparation time required for a citizen to be in a position to comply and factor that time into the implementation period allowed for the legislation. That is particularly the case where compliance is a complex and costly business affecting many thousands of businesses and individuals, and requiring them to incur expenses, change their business practices, print new standard form documents, change IT systems, vary training procedures and go through many other time consuming and resource intensive processes before they can be in a position to meet their new compliance obligations.

1.7        It is not satisfactory to pass legislation which imposes duties on citizens which take effect within a matter of weeks of the legislation being passed, allowing affected citizens inadequate time for preparation, and to state that regulatory authorities will not enforce compliance strictly from day one.  Regrettably, however, this is the course of action the government proposes with this legislation—and it is not a course of action which the Coalition considers to be acceptable.

1.8        The Coalition recognises that the financial services and advice industry provide Australians with a very important service—helping them with their financial health and wellbeing. 

1.9        The Coalition also recognises the significant value of the very important services provided by accountants to their clients.

1.10      We appreciate the need for a consistent approach to the regulation of genuine tax advice whether it is provided by accountants or financial advisers.

1.11      However, it is our view that the current changes to the Tax Agent Services Act 2009 (TASA) before the Parliament are incomplete, have not been properly assessed and raise serious questions about their interaction with other recent regulatory changes impacting on the financial services and advice industry.

1.12      More specifically, the government has already legislated wide-ranging changes to the financial services and advice industry which includes the introduction of a best interests duty for financial advisers and expanded ASIC powers.  Provision has also been made for increased adviser competency standards – although these are yet to be finalised.

1.13      The Coalition recognises therefore that in so far as they apply to the financial services and advice industry, these two substantive regimes must work together effectively in a manner which does not create uncertainty or unnecessarily increase compliance costs for no consumer benefit. 

1.14      Unfortunately, notwithstanding a 1 July 2013 'hard' start date for the Future of Financial Advice (FoFA) changes, critical aspects of those reforms also remain outstanding.  Given significant elements of the TASA regime also remain incomplete, Coalition members of this committee believe it is not possible for the Parliament to properly consider the application of these measures at this time.

1.15      Evidence provided to the committee demonstrated that the TASA regime in its current form is:

• complex and substantially incomplete;
• too broad in its application, capturing providers the regime is not intended to regulate;
• potentially inconsistent with FoFA;
• likely to impact the ability of the financial services and advice industry to operate with certainty over the next 3 years, particularly in respect of the employment of new advisers (beyond the transition period); and
• likely to impose a significant cost burden on the industry, with some estimates putting the implementation cost as high as $1 billion.

1.16      Based on the evidence provided to the committee, Coalition committee members do not support the passage of these changes in their current form at this time. 

1.17      We are unable to recommend that the changes be passed until there is evidence that the fundamental flaws in the scope of the regime have been addressed; there has been a proper public consultation process on all of the relevant outstanding elements of the regime; and proper consideration of the interaction between these changes and the recently legislated FoFA changes, also due to come into effect on 1 July 2013, has occurred.

1.18      We recommend that the current transitional arrangements, deferring the application of the TASA regime to financial planners and advisers, be extended by another 12 months (to 1 July 2014). 

1.19      This will enable orderly consideration of all the outstanding issues and ensure that all those impacted by the regulation changes have at least the opportunity to comply with them.

1.20      Without such an extension, financial planners will be even worse off: they will face an obligation to be registered as full tax agents from 1 July 2013, with no transition, as the current exemption for planners in the regulations ends on 30 June 2013.

1.21      These schedules are another example of the government following bad process, conducting inadequate consultation, and ending up with law that is:

• poorly drafted with many questions unanswered;
• excessive in its scope (according to industry consensus);
• unclear yet costly to those that will have to comply with it (financial planners); and
• justified as providing better financial advice and consumer protection, but where rigorous demonstration of that claimed benefit has not been provided.

1.22      It also reflects bad timing and indecent haste. It is just not reasonable to foist significant regulatory change on an industry just two weeks before the start date. This is compounded when that same industry has other enormous regulatory changes to grapple with by that same start date, namely the FoFA and MySuper changes.

1.23      Further, it pits (tax) accountants against financial planners. While the former have advocated proceeding with the legislation, its provisions have no practical effect on their businesses while very substantially affecting the businesses of the latter.

Further details

Insufficient consideration and consultation (despite the three-year timeframe)

1.24      The industry bodies representing the financial planners and advisers (Financial Planning Association of Australia (FPA), Association of Financial Advisors (AFA) and the Financial Services Council (FSC)) are unanimous in their view that too little consideration and consultation has occurred with these proposed amendments.

1.25      The timeline provided by the FPA[1] shows that, while it has been three years since the start of TASA (1 March 2010), no consultations occurred in the 2011 or 2012 years – only extensions of the deferral arrangement for financial planners were announced in those years.

1.26      In February 2013, draft legislation was exposed for the first time for consultation. A brief period of further, but limited and confidential, consultation occurred in May 2013 before the schedules were tabled in a bill before Parliament on 29 May 2013.

1.27      According to the FPA:

It was only at the eleventh hour that Treasury was permitted to commence consultation on the draft Bill, resulting in the inappropriate and unworkable legislation that this Bill proposes.[2]

1.28      According to the AFA:

The consultation process has been ineffective and too drawn out.  The industry has actively engaged when something has been put to us.[3]

Poor drafting and unanswered questions need further work

1.29      In the joint media release on 6 June 2013 by CPA Australia and the Institute of Chartered Accountants Australia—after Parliament had decided to excise the TASA schedules from the Bill and send them to the committee for inquiry—Mr Paul Drum (CPA) said that:

This is a missed opportunity to deliver better outcomes and better protections for consumers of financial advice.[4] 

1.30      Yet at the inquiry's hearing, the CPA admitted that many questions or issues around these proposed amendments had not been resolved.

Mr Drum: ... Some of matters raised here quite rightly identify that every issue has not been—

CHAIR: Perfectly resolved.

Mr Drum: Correct. There are still a lot of unanswered questions. I guess our concern is that, if the bill does not proceed in any shape or form now, it may drop off the radar. We may have a change of government later this year and financial planners may not be brought into the regime for some time. We would prefer to see the bill pass and, if there are amendments that need to be done, to look at those amendments later through an ongoing process. We would even be prepared, if the committee saw fit, to grant further extensions. There is already an 18-month extension that financial planners have—18 months plus 18 months.[5] (emphasis added)

No cost-benefit analysis

1.31      Moreover, the FSC and other witnesses confirmed at the hearing that they had not seen any Treasury cost-benefit analysis of the proposed changes nor had they been asked to contribute to such an analysis.

Senator CORMANN: No, but are you aware of a cost-benefit analysis?

Ms Storniolo: No, I am not aware of any, Senator, just what was included in that document.

Senator CORMANN: Has anybody ever asked you how much it would cost across your industry?

Ms Storniolo: No.

Senator CORMANN: So I am the first person to have asked you that question, am I?

Mr Brogden: Yes.

Senator CORMANN: So presumably the government cannot have taken that into account in their considerations.

Mr Brogden: You would have to think so.[6]

1.32      This was similarly the case in FPA testimony.[7]

1.33      While Treasury officials stated that they had conducted a cost-benefit analysis—which oddly they did not produce to the committee, simply referring us to the website of the Department of Finance—it is clear that Treasury's analysis excluded many cost components which the industry has highlighted that it will incur:

Mr FLETCHER: Can I just be clear. If I am hearing you correctly I think what you are saying is in the cost-benefit analysis that was done there was no explicit consideration of the implementation costs in the financial industry.

Mrs Macdonald: This is on the Department of Finance website. We said the main costs will be incurred by financial advisers who provide tax advice. These costs are associated with the inquiry, the appropriate qualifications and registration to be compliant with the act. Some of the costs are the $400 fee.

Mr FLETCHER: Understanding that, it sounds like there is a simple difference of view or indeed of factual difference between Treasury on the one hand which says you do not believe there are going to be any significant implementation costs for industry and industry on the other hand which is saying to the committee this afternoon it believes there will be significant implementation costs.

Mrs Macdonald: Yes, we estimated that if they register under the regime there will be a registration cost. Bear in mind that under the notification period, which is 1 July 2013 to 31 December 2014, and they will register for three years and they have no registration costs for three years. There is a scale in there as well. If you notify, you do not have to pay anything for a minimum of three years.[8]

Extra cost burden at a very bad time

1.34      The FSC's testimony at the hearing made clear the compliance cost implications of FoFA and the added stress that businesses would be under having to comply with TASA also by 1 July 2013.

As we have indicated publicly before, the cost of compliance with FoFA alone by 1 July 2013 is, for the retail sector alone, $1.5 billion. The stress load on the industry to make that date is enormous. That is before you overlay TASA.

Our consultation over the last few days with our industry indicates that the additional cost of compliance for TASA by 1 July is an additional $1 billion—I just had to clarify to make sure that was right. That is an extraordinary figure.[9]

1.35      Other bodies, including the AFA, supported this view:

With companies and employees focused upon FoFA, the introduction of another regulatory regime at the same time is simply not possible.[10]

1.36      These costs particularly arise from the need to amend product disclosure documents and disclaimers.  They are also associated with extra registration fees.

Few consequences to a delay in implementation – questionable benefits of proceeding

1.37      Submissions suggested that any delay in implementation would not likely have significant consequences in terms of lesser professionalism in the industry or lower consumer protection. According to the AFA:

Suggestions that a delay in the commencement will detrimentally impact upon consumer protection, are incorrect. Advisers already have a base level understanding of taxation and dispute resolution services will continue to operate under the AFSL regime, as they have in the past.  There are no dispute resolution services under TASA.[11]

1.38      According to FPA testimony at the hearing, there is no evidence of systemic failures (or trends towards such outcomes):

Mr Rantall: There has been no demonstration of a systemic issue of advice in terms of a lack of competency in tax, and there has been no cost-benefit analysis done on this proposal.

Mr De Gori: If the question is, 'Are the competencies too low?' then the more efficient answer to that question is: 'Raise the education standards under ASIC.'[12]

1.39      When the Institute of Chartered Accountants was asked to explain the damage that would result from delaying implementation, when weighed up against the danger of a rushed implementation which had been highlighted by the peak bodies in the financial planning and advisory sector, the explanation provided was unconvincing and lacking in any evidence of specific harm which would result.

Mr FLETCHER: ... What is the damage we ought to be weighing up as we weigh that up against the implementation risks of going ahead to implement this bill with effect from 1 July?

Mr El-Ansary: My response to that, Mr Fletcher, would be to say that the damage is the integrity of a tax advice regulatory framework which is intended to—and has always been intended to, not just by the current government but by successive governments over the last 20-plus years—ensure the highest levels of competence and standards in the delivery of tax advice to consumers in Australia. In this country over 70 per cent of the working population rely on advice from professionals on their tax obligations and that is not just about getting their tax returns down with the proverbial shoe box of receipts; that is about advice on all manner of issues that you might encounter in your working life or in your business life, everything from superannuation to estate planning and business structures and your own individual financial affairs.

We have to do better in this country. That is what the tax advice framework was all about. That is why the accounting profession were leading advocates of this regulatory change when it was brought in. And guess what? Where were the leading advocates of this regulatory change, yet we were the ones who stood to be impacted the most. We were leading advocates because, as Paul mentioned in his opening statement, we are always interested in and will always be supporters of better outcomes for consumers and outcomes which are in the public interest, even if that means there is a price for us to pay as a profession.[13]

Scope of current definition is too broad

1.40      There is a strong consensus within the financial services industry that the definition of "tax (financial) advice service"—as currently drafted—is too broad and will lead to significant and serious unintended consequences. 

1.41      According to the FPA, as currently drafted, the definition:

... is extremely broad as is captures any tax advice service provided in circumstances in which an entity can reasonably expect to rely on it for tax purposes, where any form of payment has been received for that service. The FPA believes the scope of this definition captures anyone being paid to operate and provide advice under a license. It does not consider who should be captured versus who is captured; and similarly the type of advice that should be captured versus the advice that is captured.[14]

1.42      The question of who and what is to be captured has not been adequately resolved and the following activities/providers have not been consulted yet are captured within the definition:

• Personal financial advice provided by superannuation funds, such as Intra‑fund 'personal' advice;
• Personal financial advice provided to a 'wholesale' and/or 'sophisticated' investor;
• General advice, including that provided by bank tellers;
• Stockbrokers;
• General insurance brokers;
• Life insurance brokers; and
• Authorised credit licensees/representatives such as Mortgage Brokers.[15]

1.43      According to the AFA:

The definition of a tax (financial) adviser is too broad and could unintentionally capture a range of non-financial advice AFSLs (REs, Super Funds, custodians, research companies etc).[16]

1.44      According to the Australian Bankers' Association (ABA), the current definition will capture the activities of bank staff providing factual information and general advice across all business units where they also provide "general tax information". According to its submission, some examples include:

• Information about not providing a Tax File Number (TFN) when opening a bank account (in a basic banking context);
• Information about how different companies or entities are taxed (in a small business context);
• Information about the concessional tax treatment of superannuation funds (in a superannuation context);
• Information about how life risk insurance can be tax deductible (in a wealth management context); and
• Information about how a mortgage offset account (a separate savings account to a borrower’s home loan) can offset interest applied to the savings account to the loan (in a credit and basic banking context).[17]

1.45      It is astonishing that the industry reached its own consensus on the scope and definition of "tax (financial) advice service" after a discussion paper released by the Treasury in February 2013 had a definition of insufficient scope. Rather than the definition then being broadened to reflect this consensus, the one drafted and put before Parliament went broader than this without proper justification.

1.46      According to the FPA, the consensual definition:

... was developed and agreed upon by participants of the financial services industry (including the Financial Services Council (FSC); CPA; The Tax Institute; Australian Superannuation Funds Association (ASFA); Association of Financial Advisers (AFA); SPAA; and the FPA).[18]

1.47      It is rare to get such industry consensus around the scope of a definition in the tax or regulatory domain.  It is even rarer for such a consensus to be in effect ignored and without effective justification, as FPA testimony revealed.

Senator CORMANN: So across the FPA, FSC, AFA there is consensus around what the definition should be?

Mr Rantall: That is correct.

Senator CORMANN: Presumably, you would have put this definition to the government. Why hasn't the government adopted this definition if there is consensus around it? What is the concern with your definition that they have expressed to you?

Mr De Gori: It is a very good question. I am sure you can ask the others as they step up, but we were in a room together and industry was in unison in terms of the definition it would propose to government.

Senator CORMANN: The government started with a narrow definition. From what I understand, what you are proposing is not as broad as what is now in the legislation. On the face of it, should this be straightforward as an amendment to the government to accept?

Mr De Gori: Yes.

Mr Rantall: Yes.[19]

Interplay and potential conflicts with FoFA

1.48      Submissions to the inquiry and/or its hearing by the ABA, FSC, FPA and AFA all described deep concerns with the interplay and potential conflict between the TASA and FoFA regimes, particularly in relation to the "best interest duty" which will apply to advice providers.

1.49      According to the FPA:

Key to this concern is the ability for individual advice providers to rely on the (FoFA) Best Interest Duty safe harbour whilst complying with s961B(2)(d) of the Corporations Act which requires as ASIC Regulatory Guide 175 at paragraph 301 states, that the individual advice provider must have the expertise to provide the advice or refer the client on (decline to advise the client).[20]

1.50      The FPA add that it:

... requests ASIC's guidance on the interplay between FoFA's best interest duty safe harbour and the TASA (specifically advice provided by an unregistered person working under a supervisor).

We seek ASIC's review and amendment of RG175.298-305 (paragraphs 298 and 301 in particular) to capture the TASA concept.

1.51      According to the ABA:

It is important for this legal uncertainty to be resolved prior to the commencement of the TASA regime.[21]

1.52      And that:

Specifically, we note that fundamental aspects of the TASA regime are yet to be settled ahead of its commencement and that the interaction between the TASA regime and the FOFA regime has not been properly worked through with the financial services industry or ASIC.[22]

1.53      The AFA have similar views:

We hold concerns about the interplay between FoFA (Best Interests Duty) and TASA.[23]

1.54      The FSC go further by tabulating eight other duplications and inconsistencies between the two regimes that need redress before financial planners and advisers are also exposed to the TASA regime.[24]

1.55      This makes it clear that these amendments, as currently proposed, need a lot more work before they can be responsibly implemented.

Concluding remarks

1.56      Coalition members of the committee consider that the Parliament should not allow passage of these schedules into law at this time. The government should be forced to do more work and conduct proper consultations on these proposed amendments. As currently drafted, they are not clear to those that must comply with them and, according to industry consensus, their scope is excessive.

1.57      Moreover, they impose significant costs on financial planners without commensurate benefits for consumers in terms of better financial advice and protection.

1.58      As such, Coalition members of the committee make the following recommendations:

Recommendation 1

1.59      That Parliament insist that the government:

• defer the proposed changes to bring financial planners and advisers into the TASA regime by 12 months to 30 June 2014; and
• extend current transitional arrangements exempting financial planners and advisers from the TASA regime by 12 months to 30 June 2014;

so that the government and the Tax Practitioners Board can finalise all of the legislation and associated regulations to enable an orderly transition and implementation period.

 

Senator Sue Boyce Deputy Chair	Senator Mathias Cormann
Paul Fletcher MP	Tony Smith MP

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