Chapter 8
Education and culture
...where poor conduct leads to significant losses for
investors, while markets can recover, quite frequently individual investors do
not and do not have the capacity to.[1]
8.1
In many ways, the problems associated with marketing and selling MIS
have been addressed through reforms introduced since 2009. They include the FOFA
legislation, which removed commissions and placed a heavy obligation on
advisers to act in the best interests of their clients. There has also been a
strong push for more professional and better trained and educated financial
advisers.
8.2
In this chapter, the committee considers the importance of these reforms
and, in light of the lessons to be drawn from the collapse of the high-profile
MIS, whether any further measures are required to strengthen consumer
protection. It looks at financial advisers and their qualifications, the
overall culture that pervades the financial services industry and the banning
of unscrupulous advisers. But firstly, the committee considers the investors
themselves and how they can protect their own interests.
Financial literacy
8.3
Investors must take responsibility for the decisions they make. The
committee has considered and made a number of recommendations designed to
improve the reliability and adequacy of information provided to potential
investors. Even so, the committee understands that investors need to have a
certain level of financial literacy to make informed and considered investment
decisions. CPA Australia noted that improving investors' financial literacy was
integral to making better financial decisions. It stated:
Without an appropriate level of financial literacy, an
investor cannot be in a position to make an informed decision even if they are
presented with simple advice and disclosure documents. We acknowledge the work
of ASIC and the industry in this regard, and understand that the value and benefits
of greater consumer understanding is a long term goal to be achieved.[2]
8.4
In this context, the committee's inquiry into rates on credit cards underscored
the importance of having a financially literate population.[3]
Evidence before that inquiry recognised that consumers are pitched against the
resources and ingenuity of people with the knowledge and wherewithal to outwit
them. For example, Mr Paul Clithero, of Money Magazine, noted that the
individual consumer has no power against the behavioural marketing skills of a
huge institution. Agreeing with the need to improve financial literacy, Mr David
Koch, Finance Editor, Seven Network, noted that people are lured into behaviour
by 'millions of dollars of research on how to get around financial literacy'.
In his view, financial literacy has 'got to get aggressive' to combat this
asymmetry of influence and information.[4]
8.5
The same compelling evidence arguing for the need to lift the financial
literacy standards of Australians was presented to the committee's inquiry into
recent land banking schemes. In this case, property spruikers employing
sophisticated marketing techniques (celebrity endorsements, pressure selling)
convinced retail investors, who were prevented from fully understanding what
was being offered, to invest in high risk inappropriate schemes.[5]
8.6
Evidence before this current inquiry into MIS presented example after
example of growers enticed into investing into agribusiness MIS by assurances
that the schemes were practically failsafe and, moreover, under erroneous
impressions about the soundness of their loan arrangements. Further, investors
signed incomplete forms, did not read carefully the disclosure documents or
question their adviser. Some attended promotional marketing events followed by
pressure selling of products, which they understood were government endorsed.
8.7
ASIC provided the committee with examples of its efforts to lift the
standard of financial literacy in Australia. It also highlighted the difficulty
of doing so. In this report, the committee has made recommendations that would
place obligations on product issuers and research houses to act responsibly in
the promotion and marketing of MIS. Much more, however, is required to equip
the investor to protect their own interests. The committee recognises that
improved financial literacy will go some way to help consumers make informed
decisions.
Recommendation 4
8.8
The committee agrees with the view that financial literacy has
'got to get aggressive' and recommends that the Australian Government explore
ways to lift standards. In particular, the government should consider the work of
the Financial Literacy Board in this most important area of financial literacy
to ensure it has adequate resources.
8.9
Drawing on the lessons to be learnt from the evidence on the need to
improve financial literacy in Australia, the committee also recommends that the
Australian Government in consultation with the states and territories review
school curricula to ensure that courses on financial literacy are considered
being made mandatory and designed to enable school leavers to manage their
financial affairs wisely. The course content would include, among other things,
understanding investment risk; appreciating concepts such as compound interest
as friend and foe; having an awareness of what constitutes informed
decision-making; being able to identify and resist hard sell techniques; and
how to access information for consumers such as that found on ASIC's website.
Financial literacy should be a standing item on the Council of Australian
Governments' (COAG) agenda.
8.10
Chartered Accountants Australia and New Zealand (CA) also recognised the
importance of financial literacy but appreciated that improved financial
literacy was only a partial solution. It noted the complexity of agribusiness
MIS and the imbalance in information between consumers and financial system
participants, concluding that consumer education was limited. Furthermore, it
stated:
Similarly consumers' taking a greater responsibility for
their investment decisions is beneficial but in the short term it is again
limited. As a consequence there is greater responsibility and accountability
required by the industry.[6]
8.11
While improved financial literacy is to be encouraged, it would only go
part of the way to protecting consumers from investing unwittingly in risky
products such as agribusiness MIS. One of the disturbing aspects of the
accounts given by investors was the very fact that they realised their own
limitations when it came to financial matters and sought out 'expert' advice.
But, as mentioned above, consumers are pitched against the resources and
ingenuity of people with the knowledge and wherewithal to outwit them and who,
in some cases, hold themselves out as financial advisers: as professionals. Accordingly,
financial advisers must be required to act in the best interests of their
clients and be trained and qualified to do so competently.
Future of Financial Advice Reforms
8.12
In 2011, the parliament passed legislation, which took account of a
variety of issues associated with corporate collapses, including Storm
Financial and Opes Prime, and has direct relevance to the various MIS examined
in this report. The implementation of the FOFA reform package was intended to
improve the professionalism, quality and level of consumer trust and confidence
in financial advice. It was to do so through enhanced standards that aligned
the interests of the adviser with the client and by reducing conflicts of
interest. In particular, it covered the provision of advice to retail clients
of financial products, including agribusiness MIS.[7]
The legislation implementing the reforms—the Corporations Amendment (Future
of Financial Advice) Act 2012 and the Corporations Amendment (Further
Future of Financial Advice Measures) Act 2012—commenced on 1 July 2012 and became
mandatory from 1 July 2013.
8.13
As noted in the previous chapter, recent reforms to Australia's
financial advice regime have tackled one of the main drivers of poor
advice—conflicted remuneration—and hence addressed a major factor that compromised
the provision of advice in respect of MIS. It should be noted, however, that the
2014 final report into Australia's financial system recognised the need to better
align the interests of financial firms with those of consumers by, among other
things:
-
industry raising standards of conduct and levels of
professionalism to build confidence and trust in the financial system; and
-
government amending the law to provide ASIC with an enhanced
power to ban individuals, including officers and those involved in managing
financial firms, from managing a financial firm, which would enhance adviser
and management accountability.[8]
8.14
The evidence from this inquiry into MIS strongly suggested that when it
came to the marketing of agribusiness MIS there was market failure on such a
scale that regulatory intervention is needed to remedy the shortcomings.
Financial advisers—education and training
8.15
Improvement in the quality of financial advice through the requirement
for higher educational standards has been under intense discussion. In June
2014, the committee made a number of recommendations including that:
-
Financial advisers and planners be required to:
-
successfully pass a national examination developed and conducted
by relevant industry associations before being able to give personal advice on
Tier 1 products (which include securities, derivatives, managed investments and
superannuation);[9]
-
hold minimum education standards of a relevant university degree,
and three years' experience over a five year period; and
-
meet minimum continuing professional development requirements.[10]
-
A requirement for mandatory reference checking procedures in the
financial advice/planning industry be introduced.
-
A register of employee representatives providing personal advice
on Tier 1 products be established.[11]
-
The Corporations Act be amended to require:
-
that a person must not use the terms 'financial adviser',
'financial planner' or terms of like import, in relation to a financial
services business or a financial service, unless the person is able under the
licence regime to provide personal financial advice on designated financial
products; and
-
financial advisers and financial planners to adhere to
professional obligations by requiring them to be members of a regulator
prescribed professional association.[12]
-
The government consider whether section 913 of the Corporations
Act 2001 and section 37 of the National Consumer Credit Protection Act
2009 should be amended to ensure that ASIC can take all relevant factors
into account in making a licensing decision.[13]
8.16
The Financial System Inquiry (FSI) report also considered the quality of
financial advice and similarly recommended raising industry standards and the
competency of financial advice as well as introducing an enhanced register of
advisers.[14]
It referred to a number of high-profile cases where consumers had suffered
significant detriment through receiving poor advice and ASIC studies that revealed
issues with the quality of advice. For example, it cited ASIC's report on
retirement advice, which found that only three per cent of SOA were labelled
'good', 39 per cent were 'poor' and the remaining 58 per cent 'adequate'. It
found that:
Although these cases and many of these studies occurred
before the FOFA reforms to improve remuneration structures, this is not the
only issue. Adviser competence has also been a factor in poor consumer
outcomes. ASIC's review of advice on retail structured products found
insufficient evidence of a reasonable basis for the advice in approximately
half of the files.[15]
8.17
The Parliamentary Joint Committee on Corporations and Financial Services
supported these findings and made a number of recommendations designed to raise
the professional, ethical and educational standards of financial advisers.[16]
Its findings add substantial weight to the call to implement without delay the
recommendations intended to lift the quality of financial advice and for ASIC
in particular to monitor and report on progress. ASIC's efforts should be
augmented by the major industry bodies similarly assessing and reporting progress
on the implementation of the reforms and their overall effectiveness.
Government response
8.18
The government responded positively to the FSI's recommendation to raise
the competency of financial advice providers. It agreed:
...to develop legislative amendments to raise the professional,
ethical and educational standards of financial advisers by requiring advisers
to hold a degree, pass an exam, undertake continuous professional development,
subscribe to a code of ethics and undertake a professional year.[17]
8.19
An independent, industry-funded body will set the details of the new
standards, which will be recognised in legislation.
8.20
The government also referred to the recently established register of
financial advisers. It was the government's stated intention to amend the
register to make clear whether an individual meets the new standards and
whether relevant bans, disqualifications or code breaches apply to that
individual. The term 'financial adviser' and 'financial planner' will be
restricted to those listed on the register.[18]
8.21
In 2019, a statutory review is scheduled to consider whether the new
regulatory framework had raised the professional standards of financial
advisers and whether further changes are required. The government indicated
that it would introduce legislation to raise the professional standards of
financial advisers by
mid-2016.[19]
8.22
On 3 December 2015, the government released exposure draft legislation
designed to give effect to the government's undertakings to raise education,
training and ethical standards for financial advisers, and called for
submissions to be lodged by 4 January 2016.[20]
Culture
8.23
Much of the conduct detailed throughout this report, however, goes
beyond competence. In many cases, the financial adviser was acting
unethically—ignoring the client's risk profile, failing to disclose commissions
or underplaying risks attached to the investment strategy. In some of the more
egregious examples, submitters allege that their adviser falsified documents,
withheld documents, and deliberately misled them. The FSI report raised similar
concerns about the integrity of advisers. It drew attention to recent cases of
poor financial services provision, which raised 'serious concerns with the
culture of firms and their apparent lack of customer focus'. It noted that in
2011–12:
...approximately 94 per cent of ASIC's banning orders involved
significant integrity issues, where the alleged conduct would breach
professional and ethical standards and/or the conduct provisions in the Corporations
Act 2001. The remaining 6 per cent of cases involved competency
issues.[21]
8.24
According to research undertaken by Roy Morgan, cited in the FSI report,
'only 28 per cent of participants gave financial planners "high"
or "very high" ratings for ethics and honesty, and trust in bank
managers was held by just 43 per cent of participants'. The FSI report also
referred to an ASIC survey that found 'only 33 per cent of
stakeholders agreed that financial firms operate with integrity'.[22]
8.25
CA recognised that the combination of conflicted remuneration, tax
deductibility and the single licensing regime could be considered drivers of
poor advice. Even so, it suggested that with the removal of commission from the
sales process of agriculture MIS there was a strong need 'to ensure there are
the appropriate behaviours and culture in the advice of agriculture managed
investment schemes'. CA referred to the FSI's finding that the industry more broadly
needs to address the culture and leadership within its industry.[23]
8.26
In this regard, ASIC has made it clear that it is very concerned about
culture and that this matter was 'front and centre these days'. It recognised
that culture was 'a big driver of conduct in the financial industry'...that 'bad
culture often leads to bad conduct', which inevitably may lead to poor outcomes
for consumers. Mr Greg Medcraft, Chair of ASIC, explained:
Given that there is a strong connection between poor culture
and poor conduct, ASIC thinks culture is a major risk to investor trust and
confidence, the cornerstone of our financial system, and to fair, orderly and
transparent operation of our markets.[24]
8.27
The committee notes that subscribing to a code of ethics is one of the
government's measures when developing legislative amendments to raise financial
advisers' standards. In light of the evidence demonstrating that integrity
issues were at the heart of some of the poor financial advice given to MIS
investors, the committee highlights the importance of establishing such a robust
code of ethics and that this measure warrants close and determined attention.
Recommendation 5
8.28
The committee recommends that the government give high priority to
developing and implementing a code of ethics to which all financial advice
providers must subscribe.
Banned advisers continue to operate
in the industry—the 'phoenix phenomenon'
8.29
One way to send a strong message to the financial services industry
about the government's commitment to ensuring that the industry adheres to high
ethical standards is through removing people from the industry who bring the
industry into disrepute. In its 2014 report on the performance of ASIC, the
committee considered the banning of advisers and was particularly concerned
about banned advisers or advisers who had been dismissed from their position
for misbehaviour continuing to be involved in businesses providing financial
advice. For example, Professor Dimity Kingsford Smith noted that even if a
person is banned they may continue to be influential in a licensed firm as a
director, officer or a significant shareholder. In her view:
The tests for bans and director/officer disqualification are
different, and consideration should be given to prohibiting a banned person
acting as a director or officer. Similarly, consideration should be given to
empowering ASIC to exclude from management a shareholder who is banned. ASIC
should have express power to consider the fitness for a license of a firm where
a banned person has a significant shareholding.[25]
8.30
In 2014, the committee asked ASIC whether any impediments existed to
extending the ban on advisers to being a director of, or a person occupying a
position of influence in, a financial services company. ASIC informed the
committee that while it has powers to cancel an AFS licence or credit licence,
or to ban a person from providing financial services or credit services, 'a
missing element was a power to prevent a person from having a role in managing
a financial services business or credit business'.[26]
It explained that the law as currently drafted means that ASIC can have 'difficulty
in removing these managing agents who do not themselves provide a financial
service but are integral to the operation of a financial services business'. ASIC
explained that it had:
...seen instances where we cancel the AFS licence of an
advisory business due to poor practices or other misconduct, but those
responsible for managing the business move to another licensee's business, or
apply for a new licence with new responsible managers.
If such managers are not themselves directly providing
financial services or credit services in that new role, ASIC may not be able to
prevent them from continuing to operate in the industry, even where there were
serious failings in the previous business.[27]
8.31
In its main submission to the committee's 2014 inquiry, ASIC recommended
amending the law to provide ASIC with the power to ban a person from managing a
financial service business or credit business. The FPA advised that it
supported this recommendation, arguing that:
If you have been banned as a financial planner there are
usually very good reasons for it, and if you were then to be supervising and
managing financial planners or a financial planning company we would see it as
inappropriate—depending on the circumstances, of course. Obviously it would
need to be a serious breach, not a minor breach.[28]
8.32
Having considered the evidence, the committee recommended in 2014 that:
...the government consider the banning provisions in the
licence regimes with a view to ensuring that a banned person cannot be a director,
manager or hold a position of influence in a company providing a financial
service or credit business.[29]
8.33
In this regard the committee notes the observations contained in the FSI report.
Consistent with the committee's 2014 findings, the FSI observed:
ASIC can prevent a person from providing financial services,
but cannot prevent them from managing a financial firm. Nor can ASIC remove
individuals involved in managing a firm that may have a culture of
non-compliance.[30]
8.34
The FSI report concluded by recommending stronger powers to ban
individuals from management. It reasoned:
An enhanced banning power should improve professional
behaviour, management accountability and the culture of firms, by removing
certain individuals from the industry and preventing them from managing a
financial firm. This should also include individuals who are licence holders or
authorised representatives, or managers of a credit licensee. It should prevent
those operating under an Australian Financial Services Licence from moving to
operate under a credit licence and vice versa.[31]
8.35
This matter once again came to the fore in this inquiry where evidence
suggested that banned advisers were, under another guise, still operating in
the financial services industry. A number of submitters strongly supported the
findings of the FSI and its advocacy for enhanced banning powers to remove
certain individuals from the industry.[32]
8.36
For example, some investors were concerned that their adviser, who had
profited from the poor advice provided to clients, continued to practice. One
submitter stated that the 'Phoenix Phenomenon' was 'well practiced amongst
shonky advisers'. She explained that her adviser had sold his business
pretending to retire on health problems but re-emerged as an employee in another
financial services business.[33]
8.37
Investors were particularly galled where their adviser, whom they considered
had abused their position for personal gain, was found guilty of misconduct but
promptly declared bankruptcy. The adviser, however, continued to maintain a
life of apparent luxury and, furthermore, to practice in the financial services
industry.[34]
In a few cases, the financial advisers have been called to account for
providing poor or inappropriate advice. One of the most notable advisers was
Mr Peter Holt, who ASIC banned from providing financial services for
three years after he failed to comply with numerous financial services laws.[35]
For example, one couple noted that Mr Holt still enjoyed 'his multi-million
dollar lifestyle with untouchable assets, while his clients suffer mental
torture every day because of his financial misconduct...'[36]
They observed further:
It seems as if Holt's business can be temporarily wound up 'on
paper' and suddenly reopened in a new version of itself, while victims are
permanently shut-down, their lives put on hold, left to unravel in the
aftermath of deceit.[37]
8.38
One grower was particularly distressed to know that her adviser, Mr
Holt, was still working in the financial sector despite being banned.[38]
8.39
Mr Steve Navra was another individual whose name was mentioned in a
number of submissions as an example of a disreputable adviser continuing to
operate in the industry. For example, one investor stated:
I have heard that Mr Navra (who provided the advice to my
family, friends and I) has moved to Victoria and is again providing advice to
unsuspecting investors. I am saddened to hear that this is the case and sincerely
hope that his new clients do not have an experience like mine. I think a centralised
register where potential clients/investors can check the credentials and history
of an advisor would be a prudent mechanism.[39]
8.40
Another investor also observed that Mr Navra was practicing
'wealth education' seminars in Melbourne.[40]
8.41
It should be noted that ASIC's analysis of Navra Group client
files identified clients who may have received inappropriate advice.
Accordingly, ASIC has instructed Navra Group to write to those clients informing
them that the advice provided to them matched some ASIC indicators of
inappropriate advice. Even so, ASIC has not taken any action against Mr Navra,
who is not listed on ASIC's Financial Advisers' Register. The Navra Group went
into liquidation in September 2011.[41]
8.42
Industry Super Australia referred to the FSI's finding that the existing
banning powers were insufficient to stop 'particularly unscrupulous
practitioners'. It suggested that FSI's recommendation to enhance banning
powers, 'if implemented correctly, would have the potential to reduce consumer
detriment in relation to forestry MIS and to ensure that consumers are
adequately protected from poor product design and misleading advice'.[42]
8.43
The evidence produced during this inquiry into MIS adds even greater weight
to the conclusions the committee had already reached in its report into the
performance of ASIC and those of the FSI. In the committee's view, there can be
no excuse for delaying taking stronger action against advisers engaging in
egregious conduct and those banned from providing financial advice.
8.44
In its response to the FSI report, the government indicated its
intention to develop legislation to allow ASIC to ban individuals from
management within financial firms from operating in the industry. The committee
welcomes this move but to underline the importance of removing opportunities
for a banned financial adviser to resurface in the industry, the committee
considers that the term 'management' may be too narrow. Thus, in light of the
findings of this committee in two reports and of the FSI, the committee
reinforces two recommendations it made in June 2014.[43]
Recommendation 6
8.45
The committee recommends that the government consider the banning
provisions in the licence regimes with a view to ensuring that a banned person
cannot be a director, manager or hold a position of influence in a company
providing a financial service or credit business.
Recommendation 7
8.46
The committee recommends that the government consider legislative
amendments that would give ASIC the power to immediately suspend a financial
adviser or planner, subject to the principles of natural justice, when ASIC
suspects that the adviser or planner has engaged in egregious misconduct causing
widespread harm to clients.
8.47
Some banned advisers or advisers with a poor track record and who are no
longer registered, may continue to operate in the industry as 'wealth
educators' but are no longer under the financial services regulatory regime.
The committee considers this matter under the section dealing with general
advice.
8.48
It is important to note that financial advisers are only part of the
prevailing culture in the financial services industry. Product issuers and
gatekeepers such as research houses, have obligations placed on them to act
with integrity and ethically and should be held to account for their conduct.
In the following chapter, the committee looks at product issuers.
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