SUBJECTS: Rudd Government's Future of Financial Advice reforms
HOST:
Now Financial Services Minister, Minister Chris Bowen says outlawing kick-backs for planners will help protect the lifesavings of us, the consumer, and bring back some community trust to an industry that's really been rocked by some spectacular failures; principle amongst them, Storm Financial last year and Opes Prime the previous year.
A parliamentary inquiry recommended some major changes to this important sector, now the Government's responded. Chris Bowen, good afternoon.
BOWEN:
Good afternoon Murrays, how are you?
HOST:
Very well sir, thanks so much. Now listen, what's the Government done? Pretty key changes yeah?
BOWEN:
I've announced a suite a changes today; a number of changes but the big ones are, as you say: abolishing commissions - outlawing commissions in the Act - from any financial services provider to an adviser, to give an incentive to recommend their product. So if you go and see a financial planner, you'd like to think that that financial planner is recommending what they think is best for you, not the one that they're getting a commission or a kick-back on; and so there's only one way to really do that and that's to ban commissions.
And secondly, we're introducing a duty on financial planners to put the best interests of the client first; so to act in the best interest of their client and if there is any conflict between the best interest of the client and the adviser, to put the client's best interest first. They're the two big reforms; I've announced a number of them today, but they're the two stand-out reforms in the changes we're making.
HOST:
Chris, now is this retrospective?
BOWEN:
No, it won't be for two reasons: one, a retrospective act will probably be in breach of the Constitution.
HOST:
Right.
BOWEN:
Secondly, it would be very hard to unravel all those contracts all around the country; so it'll be going forward.
HOST:
Fair enough. How are you going to be policing this, because you know these financial planners aren't going to want you to snip their income? I just wonder, how's it going to be policed?
BOWEN:
ASIC will be the enforcer; they'll have the powers of enforcement; and of course the penalties for breaching this will be the loss of your licence – that is, the loss of your livelihood as a financial planner. I think, in fairness, financial planners want to do the right thing; but it only takes a few to cause a trail of destruction as we see across the country, with, as you say, Storm and Westpoint and some others.
We really need to clean this up; because if we want people getting financial advice – which, I think, is in most people's best interests – you've got to give them trust in their financial planner, and we can't do that under the current arrangements. We really need to professionalise this industry, lift the standards, get all the conflicts of interest out so that people know if I might go and get some financial advice, I've got a bit of confidence that this advice is in my best interests.
HOST:
Chris, look I think it's a wonderful idea, and I think it's probably well overdue because people are getting ripped-off left, right and centre. One question I will ask you, and I'm sure some people will see this, is what do I do now? In the past, I've been able to get financial advice because my financial adviser has said 'we don't charge fees'; so they haven't had to pay any money for the service and they've indirectly paid it through the trailing commissions.
BOWEN:
Exactly; they've indirectly paid it. Nothing's free; financial advice has never been free; we've all paid but in ways that haven't really been very clear about and that's been through a reduced pension of lump sum when we retire because our savings have been eaten away that way.
Now what we're introducing is called 'adviser charging', so that means the adviser and the client will need to agree upfront, how it's going to be paid for; and the adviser and the client will have separate options. They might agree on an hourly fee upfront; or they might say let's have a percentage fee of the assets under management, so if you go to an adviser and say 'I've got $40,000 or $100,000, you might have a percentage of that over time'. Now we're only making that on the amount that you bring to the table; not on any money that you borrow, because I don't want incentives for advisers to recommend too much borrowing – which is what we saw in Storm.
HOST:
Yep.
BOWEN:
Also, you might want to pay that off over time; you might want to pay it out of your investment; so there'll be a number of options available, which we're trying to minimise the cost of.
Also we're freeing up low cost, simple advice. At the moment, it's very hard to get very low cost simple advice. Not everybody wants a very sophisticated financial plan done for them. Some people just want a bit of advice here and there; so we're making that easier by freeing up the way you can get that: some people want to get that through their superannuation fund, other people will be happy just with going to their financial planners; so we need to free that up.
HOST:
Chris, just very quickly, what about mortgage brokers; because they rely on commissions?
BOWEN:
No, that's separate; they're under our credit reforms.
HOST:
Righto, okay. Thank you very much for joining us today, Chris. It's been good to talk.
BOWEN:
Pleasure Murrays. Thanks for your comments on that, because it's an important issue.
HOST:
Well if affects a lot of people and a lot of people got terrified out of the market when Storm went under – that was the savings of tens of thousands of people.
BOWEN:
Yes, indeed.
HOST:
So Chris Bowen, more power to you. Thank you very much for joining us.
BOWEN:
Thank you. Thanks very much Murrays.
HOST:
This is wonderful!
BOWEN:
Cheers.