SUBJECTS: Future of Financial Advice reforms.
ALAN KOHLER:
Well, minister, who will the ban on commissions apply to?
CHRIS BOWEN:
Well, it will apply to every financial product provider, with the exception of insurance, risk insurance and credit, and it will prohibit payments from them to advisors to recommend their product. It will include a ban on any payment which incentivises advisors to recommend their particular product.
KOHLER:
Well, can they, can the product providers, employ salespeople who aren't advisors, who get a commission?
BOWEN:
No.
KOHLER:
So no sales commissions, whatsoever, to anybody?
BOWEN:
That's correct. That's an important point, Alan, because 85 per cent of financial advisors actually are attached, affiliated, to one of the major financial services providers. So it's important we have a level playing field.
So whether it’s external commissions or internal incentive payments to sell more products, they will not be legal under the new regime.
KOHLER:
Because there had been an expectation that they'd have to choose, all the advisors would have to choose, between being an independent advisor who couldn't get a commission and being a sales person or a broker of financial products who does get a commission. Because mortgage brokers still get commissions, obviously.
BOWEN:
If you are a licensed financial advisor, then you will not be able to receive a commission or an incentive payment.
KOHLER:
Oh, so you could give up your licence perhaps?
BOWEN:
Well, but then you wouldn't be able to give financial advice.
KOHLER:
Right, but you could give, presumably, advice about products, the product you're selling, in the way perhaps that when you go to a TV store the person who's selling the TV will give you advice about whether you should buy a Sony or a Panasonic?
BOWEN:
There's a long-standing and appropriate regime of licensing financial advisors and of course the model under which financial providers operate is that they have financial-advice arms to which people go. Sometimes they realise that they are affiliated with a financial services provider, sometimes they don't. It's always obliged to be disclosed but I would argue strongly that there are different levels of understanding in the community about whom they're talking to so this ban will be comprehensive. It will apply across the board to financial advisors.
KOHLER:
One of the elements of the current systems with commissions is that there's an element of cross subsidy to those who have small amounts and therefore can't really afford large sums of money for advice, or don't want to, so how are you going to overcome that?
BOWEN:
Well, a number of mechanisms, and this is something that we spent a lot of time thinking about. Firstly, there are a number of payment options open to the advisor and the client to agree upon. That might be an hourly upfront fee; it might be a percentage of funds under management, disregarding the leverage component; it might be payment upfront; it might be payment out of the investment return, direct from the client to the advisor, but payment out of the investment return over time. So that's the first point.
Secondly, we've also taken steps to expand the amount that can be advised upon under the intra-fund advice regime, so if people just simply want simple advice, not sophisticated financial plans but simple advice on their options, they can use what is quite a low-cost mechanism through the intra-fund advice so that's basically people getting advice direct from their super fund, primarily.
KOHLER:
It seems to me that your new regime is going to actually add compliance and add complexity and therefore possibly cost.
BOWEN:
I don't think it necessarily adds complexity. You are right to say it's already a complex system and that's the system that's been in place for some time, and that necessary consumer protection does come with some complexity, I accept that. But we have focussed on as part of this package, as I say, giving advisors and clients options as to how to pay and opening up other options for financial advice so that people who are interested in getting that sort of advice have those options.
KOHLER:
But it's still going to be expensive isn't it? So how does that co-exist with the fiduciary duty that you are saying you are now going to impose on advisors. I mean, that's going to add risk which presumably will also add costs.
BOWEN:
Well, you are right to say that financial advice is not cheap. It's never been cheap and it won't be cheap under this regime. I don't think the fiduciary duty in itself adds an enormous amount of complexity. I make this point Alan; if the financial planning industry wants to be seen as a profession, which I think it should be and by and large is, then it needs to meet certain standards and a fiduciary duty is one of those standards.
KOHLER:
And do you think in that context that financial advisors can be attached to product providers in the way that they are now?
BOWEN:
Ah, yes I do providing the ban on commissions is enforced, which it will be, providing there's a strong fiduciary duty, which there will be. I’m not interested in breaking up large companies in terms of these reforms.
What I want is a situation where, across the board, high professional standards apply, whether it is an independent boutique financial advisory firm or a large conglomerate attached to a financial services product provider. And I think these reforms deliver that.
KOHLER:
Well the big companies, like the banks and AMP, their network of financial planners, and they've got thousands of them, are actually their distribution network, their sales and distribution division. So you say you don't want to break them up but you want them actually to stop being sales and distribution, don't you?
BOWEN:
I want them to be proper financial, professional financial advisors - that means advising people on different options. That means, as I said when I launched this product, it will mean from time to time that financial advisors, if they are attached to a particular firm that does not properly cater for the needs of that client, will need to advise them to go somewhere else.
They will need to be able to satisfy their client, ASIC and the courts that they have met their fiduciary responsibility to act in the best interest of the client and if there is any conflict between the client and advisor to put the client first.
KOHLER:
So why are you leaving it for two years?
BOWEN:
Well, two reasons primarily, Alan.
Firstly, this is a major change which will require significant modifications to systems and it would cause significant disruptions if we were to try to do it earlier than first of July 2012.
Secondly, to be frank, the legislation will be substantial, it needs to be drafted, the final details need to be consulted upon, and then it needs to go through the parliament. The Liberal Party have indicated they will oppose most of the package, so therefore getting it through the parliament will be a time-consuming exercise.
My final point, Alan, would be that the United Kingdom is going down a similar route to the one I’ve announced and their reforms will be implemented six months after the reforms I’ve announced here in Australia.
KOHLER:
A lot of stock brokers have become financial advisors. There's been a bit of coagulation in that area, so presumably the stock brokers - or is it the case - that the stockbrokers who are licensed financial advisors will have to have a fiduciary duty towards their stockbroking clients as well?
BOWEN:
Well, if they're acting as financial advisor and they're working in that field in conjunction with being a stock broker, then the answer is yes.
KOHLER:
Thanks for joining us minister.
BOWEN:
Great pleasure, Alan.