Dissenting Report by Labor Senators
Introduction
1.1
The Corporations Amendment (Streamlining of Future of Financial Advice)
Bill 2014 moves to significantly weaken the Future of Financial Advice reforms
put in place by the former government. In this dissenting report, Labor Senators
examine the legislative process to-date and key features of the Government's
legislation including: the best interest's duty, scaled advice, conflicted
remuneration, and opt-in and disclosure requirement provisions, before
considering the merits of the proposed legislation as a whole.
1.2
On Thursday 22 May 2014, the Senate Economics Legislation Committee
conducted a one day hearing into the Government's legislation changes.
1.3
A number of industry and consumer stakeholder groups gave evidence
before this committee, providing various levels of support and opposition to
the bill.
1.4
A snapshot of evidence given during the one day hearing, not necessarily
representative of every stakeholder position, follows:
Mr Mark Rantall, Chief Executive
Officer, Financial Planning Association of Australia:
the FPA strongly opposes any possible reintroduction of
commissions for financial product advice on superannuation or investment
products. There are several risks which are associated with commissions for
general advice. Firstly, we are extremely wary of general advice business
models which encourage a complementary sales model of financial product
issuance and distribution. The conflicted remuneration which drives these
business models poses a real risk of product misselling to retail investors and
was rightly banned by the future of financial advice reforms. Secondly,
commissions incentivise the provision as a general advice as a form of consumer
education or a replacement for personal advice. General advice is inappropriate
for that purpose as it makes it more difficult for consumers to distinguish
personal financial advice from marketing material or product sales. Thirdly,
commission payments have also eroded public confidence in our financial system.
Australians will not have the confidence in our financial system as long as
providers of products or advice are exposed to perverse incentives such as
commissions. Finally, allowing superannuation investment commissions to be paid
on general advice has the potential to shift licensees and representatives away
from the provision of personal advice in order to earn commissions. As long as
the differences between general advice and personal advice are insufficiently
clear to consumers, general advice will be perceived as a less costly form of
personal advice. This perception of general advice influenced by the perverse
incentives created by commissions increases the risk to consumers and being
sold inappropriate high-risk tier one products.[1]
Mr Ian Kirkland, CEO, consumer
group CHOICE:
we are concerned about the watering down of the best-interest
obligation, the changes to rules about conflicted remuneration, the removal of
the requirement that clients opt in to fees and the removal of the requirement
for annual fee disclosure statements for arrangements commenced prior to
1 July 2013. We see these things as pretty basic consumer protections and,
indeed, signs of basic good practice in business that any financial adviser
should be happy to sign up to. We have noted the costs to industry that have
been spoken about. We feel that the costs to consumers also need to be
considered—and these are best demonstrated by some of the significant collapses
and crises that we have seen where consumers have lost millions and millions of
dollars. That is what happens when financial advice goes wrong. In short, we
think FOFA was an important step forward. We would be deeply concerned about
any winding back of the protections that were brought in through FOFA and we
would encourage the committee to recommend that these amendments be abandoned.[2]
Mr Richard Webb, Policy and
Regulatory Analyst, Australian Institute of Superannuation Trustees:
Mums and dads expect advice from advisers and they expect
sales from sales people. Investors have an understanding of the difference
between those two terms. We note that the Cooper review wrestled with this and
concluded that:
... commissions should be banned on all insurance products
in super, including group risk and personal insurance. Trustees will continue
to be able to offer life, TPD and income protection insurance in MySuper and
choice investment options ...
This was on top of the Ripoll report, which recommended
banning commissions on financial products entirely at paragraph 6.56. If it is
still the case that banks wish to provide conflicted remuneration to their
sales staff, the answer is not to allow advice to be carved out.[3]
Ms Robbie Campo, Deputy Chief
Executive, Industry Super Australia:
Industry Super Australia is concerned that the measures
proposed in the bill being considered by this inquiry will significantly dilute
key consumer protections in financial advice law and therefore increase the
likelihood and impact of future financial advice scandals.
The general advice exemption, obviously, has attracted much
criticism. The rhetoric offered in support of creating this exemption talks
about the need
to ensure that people can access assistance and advice, particularly from bank
tellers. But, in our view, this is not really what this exemption is about.
There is already a complete exemption for basic banking products in the FOFA
legislation. Therefore, what we are talking about is allowing commissions and
other forms of conflicted remuneration to be paid on complex products, including
superannuation but also others like managed investment schemes and leveraged
products, which have been the subject of many previous inquiries due to the
consumer losses that have ensued.[4]
Ms Josephine Root, National Policy
Manager, Council of the Ageing Australia:
In our submission, we outline our concerns around the
weakening of the best interest test, the removal of the requirement to have
clients opt in every two years, the allowance of scaled or scoped advice and
the move to allow commissions for more general advice products. No doubt there
will be some questions on our views.
We believe the cumulative effect of these changes is to
seriously weaken the reforms, giving less consumer protections and ultimately
undermining confidence in the financial advice sector. We are concerned that
people will opt out of getting financial advice and, therefore, not get the
maximum benefits that they could and in the long term be a cost on the taxpayer
and government because they will move to not having sufficient funds in
retirement.[5]
1.5
Experienced financial journalist, writer at the Business Spectator, and
ABC Finance Reporter, Mr Alan Kohler, wrote an opinion piece on 26 March
entitled
'Why FoFA should have been only the start of reform' where he said:
Acting Assistant Treasurer Mathias Cormann should do much
more than tweak the amendments to the Future of Financial Advice legislation
after he consults "in good faith"; he needs to rethink the
Government's whole approach to the subject.
Under the cover of streamlining the laws and removing red
tape to lower cost, the Government is proposing eight changes to the law that
will allow banks to once again use licensed financial advisers to sell
investment products while pretending to provide independent advice.[6]
1.6
And:
These amendments add up to the comprehensive return of
disguising sales as independent advice, which the advisers themselves have been
trying to get away from.
Not only does it make them feel grubby and deceptive to
pretend to be advising when they are actually selling stuff on commission, they
know that fewer and fewer people will get advice if they can't trust it.[7]
1.7
In February 2009, the Parliamentary Joint Committee on Corporations and
Financial Services (PJC) resolved to inquire into issues associated with the
provision of financial products and services in Australia. The inquiry was
initiated in response to a string of high profile collapses of financial
product and service providers, such as Storm Financial and Opes Prime.[8]
1.8
The committee's final report in November 2009 (the PJC report) found
that significant changes to the regulatory regime for the financial advice
industry were warranted. It made a series of recommendations designed to
'enhance professionalism within the financial advice sector and enhance consumer
confidence and protection'.[9]
1.9
In response to the PJC report and a comprehensive consultation process
the former Labor government introduced the Corporations Amendment (Future of
Financial Advice) Bill and the Corporations Amendment (Further Future of
Financial Advice Measures) Bill. These bills were subject to a further inquiry
by the PJC and received Royal Assent on 26 June 2012.
The process
1.10
The Government has simply not made the case for changing the Future of
Financial Advice (FOFA) reforms and that is borne out through the evidence
before this committee inquiry.
1.11
The process that culminated in the introduction of the legislation under
review began with the former Assistant Treasurer releasing details for public
consultation days before Christmas. The shambolic and chaotic 'two track'
process, of pursuing regulation mirrored by legislation, has caused
considerable uncertainty for businesses and widespread concern for Australian
investors.
1.12
The methodology and lack of process adopted by the Government to
dismantle the FOFA reforms has created uncertainty and concern resulting in a
broad‑based community coalition against any government changes to these
reforms.
1.13
The proposed Government changes are not minor or technical in nature but
rather a complete undermining of the core principles of best interests duty,
consumer protection and lifting the standards to a professional level.
1.14
In summary, the Government's bungling of the process to put in place
regulations and legislation is such that even moves to make sensible technical
or grandfathering changes are likely to face significant community-led
resistance.
1.15
Labor Senators note the announcement by the acting Assistant Treasurer
of 24 March that the Government has 'paused' the implementation of planned
Regulations, and in the intervening period, there have been discussions with
industry stakeholders on new legislative and regulation changes to the FOFA
laws, independent of this Senate inquiry process.
1.16
The acting Assistant Treasurer committed to 'consult in good faith with
all relevant stakeholders on the Future of Financial Advice Regulations'. But
it is clear to Labor Senators that this engagement has been limited and not
dealt with the substantive concerns of many parts of the financial services
sector.
Best Interests Duty
1.17
The Best Interests Duty is a key element of the original FOFA reforms
aimed at improving the quality of financial advice, this duty provided that
advisers must act in the best interests of the client.
1.18
Labor Senators note the evidence of Mr Paul Drum, CPA Australia, the
best interests duty is the 'cornerstone of the FOFA reforms', with 'the ability
to drive a cultural change within the financial services industry'.[10]
1.19
The bill seeks to remove paragraph (g) in Section 961B(2) of the 'safe harbour'
provisions, known as the 'catch-all' of the Best Interests Duty as well as
section 961E.
1.20
Labor Senators also note that the Safe Harbour provisions through
section 961B are designed to provide security and protection for advisors by
ensuring a proper process including part (g), which is further explained in the
regulations to provide clarity.
1.21
Labor Senators note the concerns of some in regards to 961B(g) however
agree with Professor Paul Latimer that the open-ended nature of 961B(g)
‘removes a static and inflexible advice model (box ticking) that may fail to
take full account of all the client's relevant circumstances'.[11]
1.22
Labor Senators note that concerns raised by the Council Of The Ageing
(COTA) around the removal of 961B(g) that:
If this last step were to be removed the other six steps
become a 'tick a box' checklist and weaken the requirement for advisors to
reflect in an overall sense on the advice they are giving and whether it would
as a whole be considered in the client's best interest. The inclusion of
paragraph (g) provides an extra degree of security for consumers that the
advisor is acting for them.[12]
1.23
It is also clear that no evidence or cases of failure have been found or
presented to this Inquiry in relation to part (g), which has been in operation
since 1 July 2012.
1.24
Labor Senators believe that the best interest duty is driving cultural
change in the industry and that removal of 961B(g) and 961E will reduce
compliance with the best interest duty to little more than 'tick-a-box'
approach and has the potential
to result in the provision of poor advice not in the client's best interests.
Scaled Advice
1.25
A key objective of the FOFA reforms was to facilitate access for retail
clients to financial product advice, including 'scaled' advice, that is,
personal advice that is limited in scope.[13]
1.26
The bill seeks to aid in the provision of 'scaled' advice by the
addition of subsection 961B(4A) and new paragraph 961B(2)(ba).
1.27
Labor Senators agree with the potential of 'scaled' advice to increase
the quantity and reduce the cost of financial advice sought by Australians.
1.28
However Labor Senators are particularly concerned that the proposed
changes in the bill will lead to advice that does not fully take into account
the relevant circumstances of the client and is not in the client's best
interests.
1.29
Particularly, Labor Senators note an ASIC shadow shopping survey that,
ASIC, when reviewing the results, saw some evidence that the scope of advice
was inappropriate. It noted that in several instances, 'particular topics were
excluded from the scope of the advice, to the potential benefit or convenience
of the adviser, and to the significant detriment of the client'.[14]
1.30
Labor Senators also particularly note the concerns of Ms Robbie Campo of
Industry Super Australia (ISA) who cited the Explanatory Memorandum that 'this
mechanism would be able to be used by a client and adviser to agree that only
the products of a particular provider would be considered in the advice'.[15]
1.31
Labor Senators note that changes that would allow an adviser to benefit
from excluding topics from advice, as well as changes that allow that only
products from a particular provider be considered cannot possibly be regarded
as meeting the intention of the best interests duty.
Conflicted Remuneration
1.32
The banning of conflicted remuneration, with some minor exemptions, from
general advice and personal advice was a significant factor in reforming the
culture and public perception of financial advice.
1.33
The bill seeks to lift the ban on conflicted remuneration in prescribed
circumstances for general advice and redefines what is to be considered
conflicted remuneration for personal advice.
1.34
Labor Senators note that concerns raised by stakeholder groups,
including financial planning industry associations, around the reintroduction
of conflicted remuneration structures and the potential for this to lead to
unethical practices.
1.35
Labor Senators also note the evidence of Mr Matthew Linden from Industry
Super Australia who quoted research from Rice Warner on the direct cost to
consumers of the changes, including the return of conflicted remuneration, in
the bill:
On an annual basis, they estimate the costs are more than
half a billion dollars – almost three times the estimated business savings.[16]
1.36
Labor Senators believe it is irresponsible for any government to make
changes that have the potential to cost consumers up to half a billion dollars
annually.
1.37
Labor Senators note the concerns raised about the use of the term
'general advice', particularly the potential for confusion among investors on
the nature of the advice received and recommend that the Government legislate
to change this term to 'general information'.
1.38
Labor Senators agree that consumers may be confused by the persons who
offer financial product information/factual information representing themselves
as financial planners or financial advisers.
1.39
Labor Senators note suggestion of the Financial Planning Association
(FPA) that the term financial planner/adviser should be defined by legislation.
1.40
Labor Senators note that the former Labor government had introduced the
Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013
Schedule 2 of which sought to restrict the use of the term 'financial planner'
and 'financial adviser'. This bill lapsed when the parliament was prorogued.
1.41
Labor Senators recommend the Government reintroduce the measures in
Schedule 2 that will restrict the use of the terms 'financial planner' and
'financial adviser'.
Opt-in and annual disclosure requirements
1.42
A key feature of FOFA was the requirement for industry participants to
seek their clients confirmation to pay for on-going financial advice every two
years also known as opt-in, (or as a substitute to this be required to join an industry
body with an ASIC approved code of conduct), as well as the introduction of a
prospective annual fee disclosure statement for all clients from the
commencement of the Legislation. These features were about promoting a
transparent financial planner-client relationship where the client has a solid
basis for confidence in the quality of advice being provided.
1.43
The bill seeks to remove the opt-in provisions entirely and to restrict
the provision of annual fee disclosure statements only to retail clients who
entered into the arrangement after July 1 2013.
1.44
While noting the concerns of industry about the administrative cost of
opt-in and fee disclosure Labor Senators agree with the belief of Industry
Super Australia that removal of opt-in will mean 'indefinite ongoing advice
fees can be charged, with no ongoing requirement to provide financial advice'.[17]
1.45
Labor Senators agree with National Seniors that opt-in 'sends a message
to financial advisers to refocus on consumer engagement'. National Seniors
regarded the opt-in requirement as essential given Australian consumers' 'low
level of engagement with financial matters', which can result in inadequate
investment decisions. In its view, the original opt-in requirement would 'move
a step closer to increasing consumer understanding and engagement within
financial matters'.[18]
1.46
Further, Labor Senators agree with National Seniors that removing the
opt‑in provision was 'unacceptable and clearly inequitable'.[19]
It was concerned that without this requirement the burden would fall on the
less informed party in the financial advice contract—namely the consumer—and
that most would remain inactive.[20]
It stated:
Removing the opt-in requirement pushes the obligation onto
consumers to externally monitor the performance of their portfolio and the
appropriateness of their current services and fee structure. It is clear that
advisers are far better equipped than consumers are to perform this task ...
It is a bizarre situation that the Government is proposing to
subject the provision of financial advice to less stringent renewal notice
requirements than are applied to general insurance arrangements.[21]
1.47
Labor Senators are also concerned about the proposed change to fee
disclosure statements that would apply for new clients only. The current
legislation is for disclosure to apply in relation to all clients and to
diminish this to only new clients from 1 July 2013 is a retrograde change.
1.48
Labor Senators agree with the statement of the Australian Council of
Trade Unions (ACTU) that 'abolishing the requirement for advisors to provide
pre-1 July 2013 clients with a consolidated annual statement of fees will
entrench already low levels of price-transparency and deprive many clients of
information that may lead them to make better choices about who and how they
pay for advice'.[22]
1.49
Labor Senators also note the extensive removal of disclosure through
paragraph 2.27 of the Explanatory Memorandum that explicitly allows for fees to
be altered without consent:
Generally speaking, alterations in the terms such as a simple
alteration of an existing fee, an alteration in the duration of the
arrangement, or where the fee recipient merged or was taken over by another
company, but the existing arrangement did not otherwise change, would not
constitute a new ongoing fee arrangement.[23]
1.50
Labor Senators believe that the requirement to provide an annual fee
disclosure statement should be maintained for all clients from 1 July 2013
regardless of when their arrangement was entered into as this maintains the
principle of fee disclosure equally and in a fair manner.
Conclusion
1.51
Labor members of the committee note the majority report's recommendations 1
and 2 are little more than a piecemeal attempt to fix structural legislative
gaps and failures using the explanatory memorandum.
1.52
Labor members of the committee believe that the bill in its current form
is beyond repair and should be opposed. Furthermore, the Government should
abandon any attempts to rush in, again, a new set of regulations that in effect
gut the FOFA reforms ahead of introducing new legislative charges. The lesson
for the Government over the last 6 months has been that this flawed approach
will only be met by hostility in the parliament and in the community.
1.53
If the Government wishes to proceed with minor and/or technical changes
that facilitate industry compliance with the original FOFA reforms, then it
should enter into good faith discussions with all stakeholders, including those
who represent investor and consumer interests, and all parliamentary political
parties.
Recommendation 1
1.54
Labor members of the committee recommend that the bill not proceed.
Recommendation 2
1.55
Labor members of the committee recommend the Government legislate to
change the term 'general advice' to 'general information'.
Recommendation 3
1.56
Labor Senators recommend the Government reintroduce the measures in
Schedule 2 of the Corporations Amendment (Simple Corporate Bonds and Other
Measures) Bill 2013, to restrict the use of the terms 'financial planner' and
'financial adviser'.
Senator Mark Bishop
Deputy Chair |
Senator
Louise Pratt
Senator
for Western Australia |
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