Thanks very much to Jo-Anne for that introduction.
I'm delighted to be here at the FPA's 2009 national conference.
Introduction
I appreciate the engagement I've had with the FPA, both in my current portfolio and my last one. We don't always agree but we have a very good dialogue and the FPA's position on issues is always well thought out and argued.
I note also that a report of the United Kingdom's Financial Services Authority specifically used the FPA as a case study to emphasise the importance of strong professional bodies in achieving higher standards of competence and behaviour in financial planning.
I would like to echo the FSA's sentiments and compliment the work done by Jo-Anne and others at the FPA in responding proactively to the challenges faced by your industry at the moment.
The Times They are a Changin'
This is a time of change and challenge for the financial advice industry.
During times like this, professional organisations have a clear choice: you can accept that some change will happen – or you can resist change. You can stand inside the tent and be involved in discussions about changes being made in the sector. Or you can ferociously resist change, refuse to be involved in the discussion and watch as decisions are made on your behalf.
The FPA has chosen the former path – which means that the FPA is a valuable contributor to the discussion about changes in the way the financial advice industry works.
I have several times previously recognised the work of both the FPA and IFSA in preparing for a new adviser remuneration system and I'm happy to do so here again today.
Let me be very clear about the Government's position in all this. The Government is not out to get financial advisers. I recognise financial advice can play a valuable role in assisting people in planning their future.
I believe as many Australians as possible should have access to financial advice – but a necessary pre-condition has to be that that advice is of a high quality.
So, from my perspective, any regulatory changes to the industry will be guided by two overriding principles:
- firstly, the financial advice that people get must be in their best interests – distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised; and
- secondly, in minimising these distortions, we need to ensure that we don't put financial advice out of reach of those who would benefit from it.
Fees and Commissions
As you would all be aware, the Parliamentary Joint Committee on Corporations and Financial Services is looking into the reasons behind some of the recent high-profile collapses, such as Storm Financial.
The PJC is scheduled to issue its report on Monday and I see you have Bernie Ripoll talking to some of you tomorrow. We'll be working through the recommendations of both the Ripoll and Cooper Reviews and judging their recommendations against those two policy principles: ensuring that advice is in their clients' best interests and not discouraging people getting financial advice.
I know the PJC has obviously been looking closely at current remuneration structures, such as fees and commissions, and the best ways to ensure proper consumer protection without stifling the industry.
We'll be looking at the PJC's recommendations and considering them in the light of recommendations from the Cooper and Henry Reviews as well.
The events that led to the discussion about change in the financial advice sector are well known.
These issues have shown up the real issues that need to be fixed in terms of conflicts of interest.
Regardless, of whether commissions create genuine conflicts of interest – which they can do – they invariably create an overwhelming perception of conflict, a perception that financial advice may be self-serving or not in the best interests of the client.
Here, in my view, there are some parallels between the financial planning sector and the political realm.
I've been involved in politics for 22 years. I've never seen, on either side, a policy decision changed by a political donation. That, however, is not the perception. A small number of acts by corrupt politicians has led to a different perception. You would have seen politicians around the country move to deal with this perception.
Similarly, the majority of planners give advice they believe to be in the best interest of their client. But the events of the last year have heightened the perception that conflicts of interest lead to inferior financial advice and, therefore, have made it harder to convince Australians that getting financial advice is in their best interests.
Commissions paid to financial advisers have the potential to create real, potential or perceived conflicts of interest. Such a perception justifiably puts doubt in the minds of many consumers, ultimately to the detriment of the industry.
This perception of conflicts of interest isn't helped by the fact that high-profile firms – such as Westpoint, Timbercorp and Great Southern, which collapsed leaving some "mum and dad" investors with significant losses – all paid commissions to financial advisers.
If you don't agree that commissions create a conflict of interest, I hope you will agree that we need to deal with the perception of conflicts if we are to promote confidence in the financial advice sector.
For that reason, I would like to congratulate the FPA on your recent decision to move away from commission-based fees for financial advice.
I was particularly interested to see the seminar topics on your conference program include a session on "transitioning to a fee-based business".
The move away from commissions will improve transparency for consumers and will help to ensure that your clients receive advice which is free from any conflict of interest, whether real or perceived.
Crucially, it will also boost the longer-term image of the financial planning industry.
Overseas agencies are also taking steps to increase transparency in fees and charges and remove or minimise conflicts of interest.
In June this year, the FSA set out a proposal to end the current commission-driven system for financial advisers. Under the proposed arrangements, to apply from the 2012, adviser firms must set their own charges.
Also in June, the United States' Department of Treasury proposed that the Securities and Exchange Commission be given the power to examine and ban forms of compensation that encourage intermediaries to recommend products that are profitable to the intermediary but are not in the best interests of investors.
Financial Services Hub
As you many of you know, we are committed to entrenching Australia's place as a financial services hub.
Last September, I announced the establishment of the Australian Financial Centre Forum, headed up by former Macquarie deputy chairman Mark Johnson.
The central purpose of the Forum is to ensure that our policy settings allow the financial sector to take full advantage of business opportunities in the region.
In terms of financial planning, getting the structure of our industry right means opening up opportunities for our considerable skills and expertise to be offered to overseas investors.
A number of Australian financial planning organisations are already either servicing offshore clients from here in Australia or have established outposts in the region, some via acquisitions of overseas businesses.
The recognised strengths of Australian planners – including high levels of professionalism and technological advantages – mean we have the potential to make further inroads into offshore markets, where significant pools of funds are looking for places to invest.
The realisation of such opportunities is dependent on the strong reputation and integrity of Australia's financial advisory sector.
I saw a recent Roy Morgan survey on the image of professions, measuring the public's perception of their honesty and ethical standards. Financial planners were about the middle of the pack – just above politicians, funnily enough – but below accountants, lawyers and bank managers.
So, when people ask me what the industry needs to achieve from the changes ahead, I think a fundamental goal needs to be the restoration of trust in the financial planning profession.
Recent controversies, such as the Storm Financial collapse, have dented confidence in the industry – both here and overseas.
I have had a deluge of letters in my office from Storm clients, who have lost their life savings and who write to me in absolute despair. I can't tell you how moving their stories are. These people have worked their whole lives, only for their savings to evaporate on the back of poor advice and decisions.
Of course, Storm is the exception, not the rule, and it precipitated the PJC inquiry, the results of which we will see next week.
I am looking forward to seeing the report and to getting your views on the recommendations contained in it.
Cooper Review
At the same time, the Cooper Review — formally known as the review into the governance, efficiency, structure and operation of Australia's superannuation system — is also looking into the issues of fees, commissions and conflicts of interest.
The review has been asked to recommend ways to ensure that the superannuation system operates in the most cost-effective manner, and in the best interests of all its members.
Specifically, the review will consider increasing efficiencies, reducing costs and fees, and lifting long‑term rates of return.
The Cooper Review will give us a better understanding of the drivers of superannuation costs and explore options for improving the performance of the sector. It will examine a range of issues, including how fees compare internationally, whether people understand them, and how they can be reduced.
The Cooper Review is considering a range of superannuation issues in three phases: governance; operation and efficiency; and structure. Each phase is being treated as a separate consultation and the final report is due to come to the Government by 30 June next year.
The review has now moved into the second stage of its investigations. On 16 October, the team released its second issues paper, which canvassed fees, among other issues.
Because fees directly affect the final retirement income of superannuants, the Government wants to ensure fees are kept at efficient levels.
By getting our super system running as efficiently as possible, the Cooper Review will play a key role in making that happen.
The Government will carefully consider the recommendations of both the PJC inquiry and the Cooper Review, together with the views of stakeholders, before we decide on any changes to the regulatory framework.
We are committed to working with you in the industry to ensure we can promote sustainable growth for the financial services sector generally, while protecting the interests of consumers.
Financial Services Working Group
One important area where the Government is moving to shore up consumer protection and to enable investors make better-informed decisions is through the development of simplified product disclosure documents.
We have established a Financial Services Working Group, with representatives from ASIC, Treasury and the Department of Finance and Deregulation, and given it the task of developing short, simple and readable disclosure documents for financial services products.
The Group is working on simpler disclosure documents for one product at a time. It started with the First Home Saver Accounts, moved on to margin lending, and is now developing product disclosure statements for superannuation and managed investment products.
Extensive audience-testing is helping to ensure that the new disclosure documents will be genuinely helpful to consumers.
This is groundbreaking work will save industry time and money in developing and distributing product disclosure documents. And it will help consumers to make better-informed decisions.
Conclusion
Ladies and gentlemen, your conference comes on the cusp of a time of undoubted change for the financial planning industry.
I understand many of you would feel nervous about the prospect of significant structural changes to your way of doing business – the way you earn a crust and the way you have always done things.
I want to reassure you that the Government is very conscious of the importance of a strong and vibrant financial planning industry.
With the assistance of the reviews already underway, the Government is determined to put in place a regulatory framework for the industry to ensure that the system operates as efficiently as possible.
We'll be working through the recommendations of both the Ripoll and Cooper Reviews over coming months, in consultation with the FPA and other industry and consumer groups.
As I said in my opening remarks, we'll be judging their recommendations against those two principles – trying to strike the right balance between ensuring financial advice is attractive and ensuring it is in the best interests of clients.
It is, of course, not only about remuneration.
Professional standards, education and the role of professional associations will also be matters we will consider.
All things which can improve the standing of the industry should be – and are – on the table.
I would again like to thank the FPA for your positive contribution to this process. I look forward to having ongoing and regular dialogue with you about the future of your industry.
Thank you.