SUBJECTS: Rudd Government's Future of Financial Advice reforms.
STEVE VIZARD:
Let's speak now to Chris Bowen, the Minister for Financial Services, who's on the line. Chris, thanks for joining us.
CHRIS BOWEN:
Pleasure, Steve. Good morning.
VIZARD:
Could you just give us a brief summary of the reforms that are going to be proposed and when they're going to be implemented?
BOWEN:
Sure. There's a suite of reforms I've announced this morning, Steve, but perhaps the big two I'd refer to are that we're banning commissions. So at the moment, financial product suppliers - banks, insurance companies, you name it - can provide commissions to financial planners to recommend their product. So if you go and see a financial planner, you might think the advice you're getting is in your best interests, but actually the financial planner is potentially receiving a significant commission for giving that advice. So we're going to ban those.
We're also going to introduce what's called a fiduciary duty, so a legal responsibility on the financial planner to put the client's best interest first. So they must act in the best interest of their client and if there's any conflict between the interest of the adviser and the client, then the client's best interests must come first.
[inaudible] pretty substantial reforms - a number of others that we've announced today - but they're the big two and they will come into effect on 1 July 2012. [inaudible] might say, 'Why so long away?' Firstly, these are big changes and the industry does need time to adjust. Secondly, we need to get the legislation drafted and written, and some of the details consulted on, and get it through the Parliament. That's going to take some time, so 1 July 2012 is the first sensible date that these reforms can take place.
VIZARD:
And have you the support of the financial advisers industry? Are they supporting your recommended changes?
BOWEN:
Well, there's a variety of views, as you'd imagine, in the financial planning industry. The Financial Planners' Association have indicated in the past that they accept that commissions need to go, that we need to move away from commissions. And another group, called the Australian Financial Advisers' Association, which has strong views against getting away from commissions, they've been out giving comments today. So there'll be a range of views.
Look, I accept that some financial planners won't like these changes and I accept that some people will leave the industry, will feel they can't adjust to these new arrangements. And in the long run, Steve, if we want to grow the financial planning industry, if we want more people getting financial advice, which I think usually is a good thing, we need to give Australians some confidence that the advice they're getting is in their best interests and that it's not in the best interests of just the planner. If we want to professionalise this industry, if we want to give people some trust and confidence in their financial planners after some pretty shocking examples in the last few years, then these are pretty essential steps.
VIZARD:
The financial research firm Rainmaker has estimated that Australians are paying about $1 billion in ongoing commissions a year. Will that billion continue? What will happen in respect of commissions that have already been paid or these so-called trailing commissions that are being paid on an ongoing basis for financial planning and investment decisions that have already been made?
BOWEN:
Sure. Well, trail commissions, going forward, will be abolished, so it's trail commissions and upfront commissions that we're banning. But for arrangements that have already been entered into, this is not retrospective legislation, so this is for new arrangements.
There's two reasons for that, Steve, to be brutally frank. Firstly, it would be a huge disruption to the industry to unravel all those contracts entered into by millions of Australians over the years and secondly, it would arguably be unconstitutional. I'd have a constitutional challenge on my hands before I went home today, so it would just be too difficult, frankly, to unscramble the egg.
VIZARD:
So at the moment, Chris, those people would go into a product, a super product, and they wouldn't know that they were paying a commission because it would be buried somewhere.
BOWEN:
Yeah, these commissions do have to be disclosed but I would question how many people actually know that they're paying a commission through the back door because, look, financial planning is never going to be free. It's not free now; it won't be free in the future.
But at the moment, people are paying through their retirement incomes so their superannuation fund may be paying commissions - they're not 100 per cent aware of that - and therefore their retirement income is being reduced, their lump sum when they retire or their pension going forward when they retire. And over your working life, these can make a big difference to your take-home retirement income. So it will change the way that people pay for their financial advice, but financial advice isn't free now, it won't be free under these reforms, but it'll be a lot clearer and more transparent.
VIZARD:
So if I pay a commission now, it's going to be clear. I'll make my investment, but I'll, in addition, pay a very clear specified commission to the financial adviser. Do I get any tax breaks or deductions or any sort of tax treatment for that commission component?
BOWEN:
No, financial advice isn't tax deductible, by and large. What we're seeing, Steve, is that people want to be put back in charge so people will have a range of opportunities to pay for their financial advice, and they'll need to be agreed between the financial planner and the client upfront. So they might say, 'Well, let's have an hourly fee', or they might say, 'Let's have a per cent of the fund under management', they might say, 'Let's pay it off over time out of the investment, if it's not superannuation'. There's a range of options available to advisers and their clients to agree but commissions won't be one of those options.
VIZARD:
All right, Chris. Well, look, thanks for your time this morning.
BOWEN:
Pleasure.