The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Chris Bowen

Chris Bowen

Minister for Financial Services, Superannuation and Corporate Law

9 June 2009 - 14 September 2010

Speech of 23/06/2010


The Future of Financial Advice

Statement by the Minister for Financial Services, Superannuation and Corporate Law,
the Hon Chris Bowen MP

23 June 2010

Mr Speaker, the Government is committed to ensuring that the financial advice Australians receive is in their best interests.

On 26 April this year, I announced the Rudd Government's Future of Financial Advice reform package, which contained significant policy measures that improve the quality of financial advice, enhance retail investor protection and improve trust and confidence in the financial planning industry.

These reforms represent a comprehensive Government response to the Parliamentary Joint Committee on Corporations and Financial Services' Inquiry into financial products and services in Australia, which investigated issues associated with recent financial product and service provider collapses, such as Storm Financial and Opes Prime.

The need for quality advice

The Government recognises the important role played by financial advisers in assisting Australians to plan for their future.

By 2050, one in four Australians will be over 65. Longer-term challenges such as the ageing of the population, as well as recent events such as the global financial crisis, underscore the need for quality advice.

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 – then it must abide by a fundamental ethical principle. That principle is that the financial advice given to Australian investors should be in their best interests.

This issue is also very much about the future professionalism of the industry. Good financial planners should not have their reputation affected by some in the industry who do the wrong thing. It has also been put to me that raising the professional standing of the industry will encourage more people to become advisers.

The Future of Financial Advice contains three key reforms, which will apply from 1 July 2012:

  • A ban on conflicted remuneration structures, such as commissions and volume-based payments. Percentage-based fees (also known as "assets under management" fees) can only be charged on ungeared products or investment amounts;
  • The introduction of a statutory fiduciary duty for financial advisers requiring them to act in the best interests of their clients, subject to a 'reasonable steps' qualification; and
  • A new 'product neutral' adviser charging regime which is all about ensuring that advisers and clients agree to the fees and services provided, and that those fees are clear, while retaining flexible options for consumers to pay for advice. This includes a requirement for retail clients to agree to the fees and to annually renew (by opting in) to an adviser's continued services.

There are a number of other important measures contained in the package which will assist in facilitating simple and more affordable advice, provide enhanced investor protection and increase the professionalism of the financial advice industry in general.

There will be an expansion of the availability of low-cost simple advice to provide access to financial advice. The existing package which provides for simple advice within a superannuation fund (known as intra-fund advice) will be extended to new topics to facilitate simple, single issue, personal advice in a compliant matter. There will also be a review of whether simple advice can be provided in a compliant matter outside intra-fund advice.

The accountants' licensing exemption will be removed, with consultation on an appropriate replacement.

ASIC's powers to act against unscrupulous operators will be enhanced, professional standards for advisers will be reviewed by an expert advisory panel, the classification of sophisticated and unsophisticated investors will be reviewed and the option of introducing a statutory compensation scheme will be examined by an expert in the corporate law field.

In total the package represents a very significant reform for financial services and will greatly improve the quality and availability of financial advice in Australia.

I would now like to briefly touch on some matters that have been raised in relation to these measures.


One key issue surrounds how the reforms, particularly 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.

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. I have looked at this question very 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.

Adviser Charging

While there will be a ban on conflicted payments, I am 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. It is open to advisers to devise a charging structure that suits them and their clients. That structure could include hourly fees and percentage fees – subject, of course, to the guiding principles of the reforms. I anticipate the changes will encourage innovation in adviser charging, for the benefit of both advisers and clients.

Through the annual renewal process (by requiring customers to opt-in), financial advisers will engage with their customers and assist them to see the value in the advice provided, with the fees being directly related to the services provided.

The opt-in provision is an important measure. As I stated when the reforms were announced, the Government will consult with industry about the form of the annual renewal notice and the period after which the initial advice is given that it will first apply. I was very clear about this when the reforms where announced, including explicitly outlining this in the Information Pack we released when we announced the reforms.

Simple advice

Most surveys show that about one in five Australians receive financial 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. If we want more Australians to receive advice, I believe we need to try and find a way to deliver more affordable advice (including so called intra-fund advice) and increase its use.

It is interesting to note that intra-fund advice has already been very successful, with some funds reporting interest from their members well above their expectations. The introduction of intra-fund advice has also enabled smaller financial planning firms to generate new business by providing intra-fund advice services to superfund members.

Feedback on the reforms

Major reform is difficult and requires a mature and measured approach from industry. To respond to change in any other way diminishes an industry's standing in the eyes of the community.

I welcome the positive response from a range stakeholders including many in the industry, to the Government's financial advice reforms.

The Financial Planning Association and the Investment and Financial Services Association have agreed that the broad thrust of our reform package is sensible and much-needed. I have been particularly pleased by the number of emails and letters of support I have received from individual planners and smaller planning practices who understand how beneficial these reforms are for their customers and therefore, how beneficial they are for the industry.

The financial advice industry both large and small is working positively and effectively with the Government on these reforms - reforms that do fundamentally change the way the industry will operate. There are times when we disagree, but the industry has shown it is willing to undertake difficult reform that is the community's interest and work constructively with Government on its implementation.

Coalition position

Banning conflicted remuneration structures, such as commissions, will greatly reduce the incidence of investors being recommended financial products as a result of sales incentives offered to advisers.

An ASIC shadow shopping survey found that unreasonable advice was about six times more common if the adviser had an actual conflict from remuneration.

The Government was hoping for bi-partisan support for these sensible but difficult reforms. Instead, the Coalition has been critical of the Government's Future of Financial Advice reforms despite the overwhelming majority of industry and consumer stakeholder groups supporting it.

The Coalition's position can be summarised very simply – they are the only ones still backing sales commissions.

The Coalition's position on sales commissions is code for supporting investors receiving financial advice that may not be in their best interests; the sort of advice that we have seen in recent corporate history has led to investors losing their life savings.

So inexplicable is the Coalition's position that JP Morgan described it in the following terms in a 15 June research note to clients

They also appear rather perplexingly to be against the banning of commissions (conflicted remuneration structures) something the industry as a whole appears to have decided to move away from1.

What we have here is a Coalition so intent on opposing Government policy that they are opposing important reform that industry is willing to undertake and consumer groups have welcomed.

Consultation process

I look forward to working with stakeholders across the industry and consumer groups, as we move to implement this important reform package. Although I have set out the broad policy direction, I expect that there will be a significant amount of consultation in relation to the finer implementation details of the package. There will also be a public exposure of draft legislation in due course.

I understand and appreciate that some stakeholders are keen to know further details about the reforms – such as the timing, consultation processes, and the detail of how certain policies will be determined. This is why, on 17 May, I announced the commencement of consultation including the establishment of a website – the Future of Financial Advice website – which communicates important information about the reforms, including a 'Questions and Answers' section, as well as providing ongoing updates about upcoming consultation with stakeholders.

Public information sessions will be held in Adelaide, Brisbane, Melbourne, Perth and Sydney in late June and early July of this year. The public information sessions are designed to provide an overview of the reforms and give stakeholders an opportunity to ask questions and raise issues. Details of the public consultations, including how to register, are now available on the Future of Financial Advice website.

Benefits of the reforms

While the reforms seek to improve the quality of advice, which is in the client's best interests, they will also carry important benefits for the financial advice industry.

I see the reforms to financial advice 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"2.

To this end, their report argued that resolving conflicts of interest in the financial planning industry was "a prerequisite for greater international engagement"3.

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 Australians 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 opportunities that opens up.

The Government's reforms will enhance the professional standing of the industry and ultimately encourage more investors to seek advice, something that is in all our interests.

1 J.P Morgan "Election Direction 2010" Australian Equity Research 15 June 2010

2 Australia as a Financial Centre - Building on Our Strengths – November 2009 p30

3 Ibid