Minister for Financial Services, Superannuation and Corporate Law
9 June 2009 - 14 September 2010
The Future of Financial Advice in Australia
and Federal Budget Overview
Address to the Association of Financial Advisers
18 May 2010
Good afternoon and thank you for the opportunity to be here today.
I'm always pleased to speak with members of Australia's financial planning industry and I value the constructive input you provide to the Government.
The Future of Financial Advice
As you know, this has been no ordinary time in the financial planning and superannuation areas.
There are some things the AFA and I disagree on. And I'll say a little more about those in a few moments.
But there is one important thing that I think we do agree on – and that is the importance of financial advice.
I think we agree that it is generally a good thing that people get financial advice – and that it is important for that advice to be good advice, in the best interests of the client.
This is particularly important as our population ages and we need to make our savings last longer. I am very firm in my view that the reforms to financial planning a few weeks ago are not an attack on the financial planning industry – far from it. Rather, I see these reforms as essential steps to restore trust and confidence in the financial planning industry and therefore to facilitate its growth.
At their core, the reforms will address the conflicts of interest that have coloured the perception – and sometimes the reality – of the quality of financial advice provided to Australian investors.
If financial advice is to be an important part of investment decision-making in this country – and I believe it should – it must abide by a fundamental ethical principle; a principle that, as you know, we intend to enshrine in law.
That principle is that the financial advice given to Australian investors should be in their best interests.
AFA position on financial advice
I am pleased that, overall, the AFA considers that the broad thrust of our reform package is sensible.
There have been some differences of view, of course, which I would like to address today, in an open and honest way.
Ban on conflicted remuneration structures
One key issue surrounds how the new adviser charging regime – and the ban on commissions – affects a consumer's right to choose how they pay for advice.
While I support the idea of consumers making their own informed decisions, the reality is that disclosure of commissions does not deal with the fundamental conflict of interest created by the commission.
Mandatory fee disclosure is intended to address information asymmetry and to assist clients to make informed choices.
However, the complexity of commission-based remuneration structures, together with low levels of investor financial literacy, mean that the disclosure approach is not working as intended.
Rather, the most vulnerable investors – those most in need of good financial advice – are also those most at risk of being sold products that are completely inappropriate for their financial needs.
Some say that more simple disclosure is the answer to the current lack of consumer understanding in relation to fees and commissions.
While simple disclosure is almost always better than complicated disclosure, it is not the answer here.
Work done by the Rudd Government's Financial Services Working Group to develop shorter and simpler product disclosure documents found that there are significant challenges in communicating complex fee arrangements in a simple and meaningful manner to consumers.
I have looked at this question carefully and I am convinced that, in this area, we cannot simply rely on disclosure alone.
It is not good enough for an investor – who may have limited understanding of financial markets or may, for example, have English as a second language – to come to an adviser for advice, only to be handed pages of fine print and be expected to fend for themselves.
Instead, the removal of conflicts of interest will lead to better quality of advice for investors, a conclusion supported by the considerable evidence given to the PJC Inquiry.
Remuneration structures that are designed to sell products, rather than provide advice in the best interests of clients, add no real value for the client – and do the financial advice industry no credit.
Consequently, this reform is about improving public trust and confidence in the industry – to its ultimate benefit.
Analogy with Doctors
Of course, yours is not the first profession to have had to face this sort of dilemma.
In the past, there have been concerns about pharmaceutical companies attempting to influence doctors to act as their agent – and dispense their product – instead of putting the patient's needs first.
That is why, in 2000, amendments were made to the NSW Medical Practice Act to deem it to be 'unsatisfactory professional conduct' for a doctor to accept a benefit for recommending a health product to a patient.
These amendments were about minimising the risk of commercial considerations compromising patient care and choice.
I don't think anyone would be comfortable with doctors prescribing medication being influenced by remuneration from the product providers. Likewise, would anyone realistically argue that it would be worth the trade-off to have medical treatment made more affordable to low income earners at the expense of patients receiving treatment affected by a conflict of interest?
Analogies can be drawn with the financial advice profession, where advisers are charged with looking after clients' financial health.
While there will be a ban on conflicted payments, we are not interested in a Government-prescribed one-size-fits-all approach to fees. There will still be flexibility in how advisers can charge clients, and how clients pay for advice.
The reform package does not mandate hourly rates, for example, as the only charging method.
It is open to advisers to devise a charging structure that suits them and their clients.
Advisers could, for example, charge clients an hourly rate, a flat fee per service provided or a fixed annual fee (or retainer).
And, of course, fees as a percentage of funds under management (excluding the leveraged component) are permissible because I think that such fees can be useful in aligning the best interests of advisers and their clients.
I anticipate the changes will encourage innovation in adviser charging, for the benefit of both advisers and clients – subject, of course, to that guiding principle I mentioned earlier.
As I have said before, these reforms are also about building trust in this industry and working towards a more professional industry. I know you support those objectives.
I also note that your organisation has expressed concern about extensions to ASIC's powers.
But I believe the reforms are proportionate and appropriate.
The changes to ASIC's powers were recommended by the PJC.
They are also consistent with ASIC's powers in this area under the Commonwealth's regulation of consumer credit.
And, importantly, we are not changing the right of applicants to access the Administrative Appeals Tribunal to seek a review of ASIC decisions in this area.
If, for a moment, I could take you through one area of change to ASIC's powers.
Currently, ASIC must grant a financial services licence:
- if the application is made properly;
- if ASIC has no reason to believe the person will not comply with its obligations; and
- if ASIC has no reason to believe the person is not of good fame or character.
The change will mean that ASIC must grant a licence unless they have reason to believe the person may notcomply with their obligations – instead of will not comply with their obligations.
On a common view of the 'will not' test, ASIC is required to believe as a matter of certainty that the applicant will contravene their obligations in future.
This is an onerous standard.
The replacement test of 'may not comply' will enable ASIC to consider a wider range of matters than is currently the case – but ASIC must still have reasonable grounds to believe that the applicant may not comply in future.
These changes will have no bearing on ordinary financial advisers doing the right thing. They will, however, enhance ASIC's powers to protect investors in a small but meaningful way.
Finally, I note that there has been some concern about the steps to encourage simple advice in the non-super arena, and that the AFA's view is that most Australians need holistic comprehensive advice.
While I agree that clients benefit from and may often need holistic advice, there are cases where clients have relatively simple financial questions they need answered, and where simple advice will be quite sufficient for that purpose.
I have announced extensions to intra-fund advice, which of course operates in the superannuation context. But the reform package also involves a review of how simple advice can be facilitated.
I encourage the AFA to contribute to the review to ensure we strike the right balance in relation to the provision of simple advice in the non-superannuation context.
Now, of course, our financial advice reforms have been quickly followed by our reforms to strengthen our superannuation policy.
The primary motivator of our superannuation policy is – and must always be – a comfortable retirement income for all Australians.
This has not, of course, meant that improved retirement incomes for Australians have been the only benefit of our superannuation system.
The skills that Australia has built in terms of wealth management, including of course in financial planning, would simply not have been possible without our first-class superannuation system.
And the sheer size of our retirement savings pool means that Australia is regarded as a serious player in the world's wealth management sector.
Growing our pool of funds under management can only have positive implications – very positive implications – for Australia's wealth management industry.
Australia's superannuation pool is projected to grow to $5.3 trillion by 2035. The reforms we announced earlier this month will add another half a trillion to that amount.
As financial advisers, I know you see clients everyday who are simply not financially prepared for retirement.
Financial planners are among the most acutely aware of the retirement income gap facing Australia and facing so many Australians. I suspect I do not need to convince you of the merit of our decision to effectively refund the superannuation contributions tax for low income earners.
I also know that you know the importance of concessional super "top ups" for people nearing retirement with low super balances.
And, as people who advise others on a daily basis about the importance of saving, I don't think I necessarily need to convince you of the merit of putting aside an extra 3 per cent of wages and salaries for retirement savings.
I mentioned that our reforms will add half a trillion dollars to our national savings pool over the next 25 years. Just as important is what it will do to individual retirement incomes of Australians.
A 30 year old today on average weekly earnings will be $108,000 better off when they come to retire. For a 30 year old woman, who has an interrupted work life – possibly to have children – the difference will be an extra $78,000 when she reaches retirement.
For someone just starting out in the workforce, aged 18, our reforms will mean an extra $200,000 at retirement.
I see the reforms to the financial planning industry and our wide-ranging changes to superannuation as inextricably linked.
Put simply, we could not ask Australians to set aside 12 per cent of their income for superannuation, without ensuring that the system was being managed in their best interests.
The reforms will also support our ongoing work to position Australia as a financial services centre in the Asia-Pacific region.
It would be impossible to ask professionals in other countries to place their trust and confidence in our financial planning industry if Australians do not.
This point was emphasised by the Australian Financial Centre Forum, which we commissioned to recommend ways to position Australia as a regional financial services centre.
The Forum observed that realisation of opportunities to attract overseas capital to Australia depends on, "amongst other things, the reputation and integrity of Australia's financial advisory sector being maintained and, where necessary, improved".
To this end, their report argued that resolving conflicts of interest in the financial planning industry was "a prerequisite for greater international engagement".
Now, for all the changes we're making, you should know that I actually have a lot of confidence in the skills and expertise of Australia's financial planners. I have confidence that our financial planners can not only to provide high quality advice to Australian residents but also develop as a significant potential export supplier.
I want the financial advice industry in this country to grow and thrive. The reforms we announced last month are designed to ensure the industry is seen as honest, trustworthy and world's best — with all the export opportunities that opens up.
The two announcements we've made in the last two weeks – the Future of Financial Advice and the reforms to improve the adequacy and equity of our retirement income system – represent two-thirds of the reform agenda for superannuation.
Without pre-empting our response, I can say at this stage that I see the third stage of our superannuation reforms – our response to the Cooper Review of the efficiency of the super system – as the final piece of the superannuation jigsaw.
Once we've settled our pro-efficiency reforms, we will have completed the biggest shake-up of the superannuation system since the introduction of compulsory superannuation in 1992. It will then be appropriate to have a long period of consolidation.
Once we've completed these changes, further ad hoc tinkering should be kept to a minimum. I know that people are wary of ad hoc but regular changes to the rules when it comes to super, and the changes we are in the process of making will mean that super has a sustainable policy footing going forward, and a period of stability will be possible as well as being desirable.
To conclude, it's certainly been a busy few weeks for us economic ministers.
The Treasurer has brought down a Budget that is now projected to return to surplus in 2012-13 — three years ahead of schedule and the first advanced economy in the world to do so.
The Budget deficit for 2010-11, at 2.9 per cent of GDP, is significantly lower than the 9.5 per cent average of the major advanced economies in 2010.
Our Budget bottom line is clear evidence of the strength and resilience of the Australian economy over the last two years.
It is a Budget built on fiscal discipline, with every new spending measure fully offset, and with an additional net save of $544 million over the forward estimates.
This is in line with our commitment to strict fiscal rules as growth returns to trend. And keeping growth in government spending to two per cent in real terms does require fiscal discipline.
To give you some idea of how much of a change this represents, prior to the Global Financial Crisis, real growth in government spending exceeded 2 per cent in eight out of 10 years and averaged 3.7 per cent a year.
Thank you, ladies and gentlemen, for having me here today.
I'm due to fly to Malaysia in a couple of hours to spruik Australia's financial services industry over there.
We have a good story to tell and it's a story I'm sure will be even better with our financial advice reforms – and the improved confidence it will provide to investors large and small, here and abroad.
I look forward to working with the AFA, along with other representatives, as we move to implement our reform package.
I've been clear about the fact that there is a good deal of consultation to occur in relation to the finer implementation details of our Future of Financial Advice package in particular.
Yesterday I announced the commencement of consultation on those details, including in regards to the accountants' exemption, adviser charging and whether to extend the ban on commissions to risk insurance. I also encourage you to engage with Treasury at the information sessions it will be running in coming weeks.
There is a significant amount of work to be done and it can only benefit from a strong partnership between industry and Government.