Bill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

Today I introduce a bill to amend the Corporations Act 2001 to bring into effect significant reform to the regulation of financial advice, which in turn will enhance trust and confidence in the sector.

Financial planners and those who work in the financial services industry implicitly understand that the brand of financial advice needs renewal following a string of collapses including Storm, Trio and Westpoint. I believe that the vast majority of financial planners do see their role as making their dealings with customers such that, after having dealt with the planner, the customer is better off than if the customer had never sought financial advice to begin with. This is why I am a believer in the importance of financial advice, because we should always endeavour in whatever we do to leave those in our families, in our immediate families, in our streets, in our neighbourhoods, in our towns and in our communities better off than before they had transactions with us. I believe that rule applies in business, in community, in politics and in financial planning.

The initiatives in the bill implement part of the Future of Financial Advice reforms, which form the government's response to the inquiry of the Parliamentary Joint Committee on Corporations and Financial Services into financial products and services in Australia. This bill represents the second of two tranches to implement the FOFA reform package, with the first tranche being introduced into this House last month.

The bill includes two key measures representing integral components of the reforms which go to the heart of boosting professionalism in the financial advice industry.

Firstly, the bill imposes a statutory best interests duty on financial advisers. As its name suggests, the duty requires advisers to act in the best interests of their clients, and to put their client's interests ahead of their own.

The best interests duty is a legislative requirement to ensure the processes and motivations of financial advisers are focused on what is best for their clients. It is true that this will ultimately lead to better advice in many cases, but first and foremost it is about regulating conflicts, not the intrinsic quality of the advice provided.

The best interests duty does not require that advisers give the best advice. It does not invoke punishment if, with the benefit of hindsight, the advice does not prove to be perfect. It is not about guaranteeing clients the best investment returns on products.

In being able to satisfy the duty, the bill strikes a balance between certainty and flexibility for the adviser. The duty requires the provider of the advice to take steps that would be reasonably regarded as being in the best interests of the client, given the client's relevant circumstances.

In other words, discharging the duty will be relatively simple in some situations, and more involved where the circumstances are more complex.

By the same token, for the adviser that wants certainty around compliance above all else, the general obligation is supplemented by a provision setting out steps which, if satisfied, will be deemed sufficient for the adviser to have fulfilled the general obligation.

This is a common-sense proposal which is long overdue. For the majority of advisers, this merely codifies how they already go about their business in dealing with clients. For those advisers that have not always put their client's interests first, this reform will no doubt require them to make changes to the way that they do business. This can only be a good thing, both for the client and for the advice industry generally.

Secondly, the bill implements a key aspect of the government's response to the Ripoll report—a ban on the receipt of conflicted remuneration by financial advisers, including commissions from product issuers.

It is absolutely crucial to the integrity of the advice industry—or any industry involving a high degree of trust and responsibility—that the consumer can be confident that the adviser is working for them.

It is only by ensuring that advisers' only source of income is from their clients that clients can be sure that the adviser is working for the client, rather than a product provider.

For the most part, advisers will not be able to receive remuneration—from product issuers or from anyone else—which could reasonably be expected to influence financial advice provided to a retail client.

If an adviser is confident that a particular stream of income does not conflict advice, then these reforms do not prevent them from receiving that income. For example, in the case of the receipt of income related to volume of product sales or investible funds, there is a presumption that that income would conflict advice. However, this is a presumption only, and if the adviser can demonstrate that the receipt of the income does not conflict advice then such remuneration will be permissible under the bill.

But the message is clear—if in doubt about whether certain remuneration will conflict the advice that they provide to their client—the adviser would be prudent to err on the side of caution.

I should note that, despite this necessary and overdue measure to eradicate conflicted remuneration, I am encouraged to see that a very large proportion of the industry is already moving away from product commissions and moving to a fee-for-service model. This is not only better for the client, but also best professional practice.

Many professional advisers working under a full fee-for-service model, who have already turned off their trail commissions, will not be impacted by these reforms, except that there will now be a level playing field in the industry as far as legitimate remuneration sources is concerned. Increased transparency of fees will also assist consumers in comparing different advice costs, thereby enabling greater competition across the sector.

Also banned is the receipt of 'soft-dollar' or 'non-monetary' benefits over $300, with some exceptions around education and professional development. This creates hard obligations in regard to the practice that industry codes require of their members already.

The bill also contains some additional measures in relation to other forms of remuneration.

Advisers will not be able to charge asset based fees—that is, fees calculated as a percentage of client funds—on client moneys which are borrowed. Under the current law, an adviser can artificially increase the size of their advice fees by 'gearing up' their clients. While most planners advise their clients responsibly in this regard, such a fee model does not engender the right behaviour and is prohibited under the bill.

I should emphasise that there is nothing to prevent advisers under this measure from recommending a gearing or borrowing strategy to their client. To the contrary, if this is in the client's best interests then they should proceed with such a strategy. However, they will need to charge the client for those services in some other way, for example, by charging a flat fee or hourly rate. Advisers can continue to charge asset based fees on client funds that are not borrowed.

The bill also bans volume based shelf-space fees from funds managers to platform operators. In short, product issuers will not be able to purchase 'shelf-space' on a platform menu by paying inflated fees. Platforms should be incentivised to put the most appropriate products on their menus, rather than lease positions to the highest bidder. Payment flows which represent reasonable value for scale will remain permissible.

Finally, while these measures around remuneration are important, they represent a large change to the industry and to individual businesses. It is for this reason that existing trail commission books will be 'grandfathered'. This means that commissions from business entered into prior to the reforms can continue. Of course, commissions on new business and clients after 1 July 2012 will not be allowed.

This is a just outcome, and provides an adequate cushion for the industry to structurally transition once the new laws are in place.

The government's financial advice reforms complement our commitment to progressively increase the superannuation guarantee from nine to 12 per cent. You cannot encourage and compel Australians to save more for their retirement without ensuring the system is operating in their best interests.

In summary, the measures in this bill support the key public policy objectives of the Future of Financial Advice to improve consumer trust and confidence in the financial advice they receive, and improve professional standards.

Debate adjourned.