SUBJECTS: Rudd Government's Future of Financial Advice reforms
CHRIS BOWEN:
Well good morning and thank you for coming.
Today I'm announcing a series of measures to improve the confidence and trust of Australians in the financial planning industry.
Over the years, thousands of Australians have had their lifesavings wiped out, through inappropriate financial advice. They have the right to be angry. We have an obligation to act.
In recent years, confidence in financial planning in Australia has been dented with commissions leading to inappropriate advice being given to advice to invest in products such as Westpoint and various managed investment schemes and other investments. This has given the ethical and professional majority of planners a bad name.
We want more Australians getting financial advice but that advice must clearly be in the best interests of Australians. If the financial planning industry is to grow, Australians need to have confidence that the advice they're receiving is in their best interests.
Today I'm announcing a suite of measures to improve the confidence and trust of Australians in financial planning, to improve the professionalism of the industry and to increase transparency. And in doing so, I announce the Government's response to the Ripoll Inquiry into Financial Services in Australia.
If I could just deal with some of the key reforms that we're announcing today. Firstly, I'm announcing the Government's intention to introduce a statutory ban on commissions being paid from financial product providers to advisers in order to get them to recommend those products. As ASIC found in 2006, poor financial advice is six times more likely where commissions are paid in order to get various recommendations made. Poor advice is six times more likely where commissions are paid.
The ban on commissions will apply from the 1 July 2012. This will give the industry plenty of time to prepare and adjust. It will also give time for the legislation to be prepared, drafted, the details to be consulted on, and passed through the Parliament. I also note that this is six months before similar reforms are introduced in the United Kingdom.
Also, today I'm announcing that the Government will introduce a statutory fiduciary responsibility for financial planners. Australians expect that when they receive advice from a financial planner that advice is in their best interest. Up until now that has not necessarily been the case. We will make it the law that financial planners must act in the best interests of their client and if there is any conflict between the best interest of the client and the adviser, the client must be put first.
In order to introduce more transparency into the remuneration of financial planners, we'll be introducing an adviser charging regime. This will need to be agreed between the client and the adviser upfront. They will have various options; the adviser and the client will have various options to negotiate. For example, it will be open to the adviser and the client to agree on either hourly fees or fees as a percentage of funds under management. Fees as a percentage of funds under management can improve the alignment of the interests between the advisers and their clients, giving both the adviser and the client an incentive to grow the wealth of the client.
In order to avoid any incentives for over-leverage, the percentage of funds under management can only apply to the non-leveraged part of the investment.
I'm announcing a number of other initiatives today but I won't detain you by going through those in detail. They're all in the packs that have been provided, but I'm more than happy to answer your questions on them now or later.
I might just respond to some of the comments from the Opposition today. I note that the Opposition have indicated that they will oppose a ban on commissions. It seems that in their rush to avoid offending the financial planning industry, the Opposition doesn't care about providing basic protection to Australian consumers and investors.
The Opposition have said they're concerned about low income earners. Does the Opposition really believe it's appropriate for low income earners to be receiving poor and conflicted financial advice?
I note that they're talking about improved disclosure. Improved disclosure's been tried in the past; it doesn't work. We need to send a very clear and strong message through our laws that Australians deserve first-class financial advice; advice which isn't tainted by commissions or 'kick backs', advice which is clearly in their best interests and nobody else's. That is what these reforms will deliver.
The reforms that I'm announcing today will restore confidence and trust in Australia's financial planning industry. They will also put ordinary investors in charge. Ordinary investors will be able to decide how much they pay for financial advice, how they pay, and when they pay; all things that don't happen at the moment.
I recognise that some people won't be happy with these reforms. I accept that some people will leave the financial planning industry as a result of these reforms. But in the long run, these reforms are in the best interests, not only of Australian consumers and investors, but also in the best interests of the Australian financial planning industry; to restore trust and confidence, and to allow that industry to grow into the future.
I'm more than happy to take your questions.
JOURNALIST:
(inaudible) …these measures will increase the accessibility of low cost and simpler advice. How do you expect that to happen when increasing regulations through a fiduciary responsibility always increases the cost? How are you going to ensure that the cost does not increase? Also, forcing advisers out of the industry when we've only got 16,000 advisers in the industry already, how's limiting the supply going to increase the availability of low cost advice?
BOWEN:
I'll make a few responses to that. Firstly, I don't necessarily accept that a fiduciary duty will increase costs. A fiduciary duty means that financial planners must put the interests of their clients first. That does not necessarily increase costs. In addition, as part of the reforms that I'm announcing today, we're improving and increasing the access for people to simple financial advice through their superannuation fund; what's called 'intra-fund advice'. Expanding the range of circumstances where people can get that simple advice.
Not everybody wants a sophisticated financial plan developed for them. Not everybody wants to spend hours with a financial planner; some people want basic, simple financial advice from their superannuation fund. We'll make that easier and cheaper through these reforms.
In relation to your comment about the number of financial planners in Australia; of course we're not capping the number of financial planners, but as I said, some people are used to the old ways, used to commissions, comfortable with the old ways of doing things; won't be comfortable with these reforms; I accept that.
There'll be other people, who are encouraged by these reforms; encouraged by the fact that there's more transparency in the industry; that'll be encouraged by the fact that the industry is more professional and who will therefore decide to get in to financial planning. So there'll be a range of impacts of this; I accept that; and I accept that some people already in the industry won't like it but the industry will be improved; its transparency, professionalism and trust will be improved.
JOURNALIST:
For those people who do still want to see a financial adviser and they are faced with upfront fees; what measures can you put in place to ensure that they still do have access to that sort of service?
BOWEN:
The first point to make is, of course, that financial advice never has been and never will be free or cheap. People pay for financial advice already, through a range of circumstances. Some people pay without knowing it; through a reduced pension or a reduced lump-sum in their superannuation; and over a long period of time, over your working life that can have a very significant effect on your retirement incomes.
In relation to the upfront fees; as I said in my remarks, there'll be a range of options available to people; whether it's hourly fees or a percentage of funds under management. Some of those fees will be able to be taken out of the investment over the longer term - not superannuation investments but other investments - so it can be taken out over a long period of time; it can be taken out of the returns, not necessarily all up front payments from the client to the adviser. And of course the client will be given the option of turning off the fees into the future. At the moment that's not something that exists; people sign up and find themselves signed up for a long period of time, whether or not they're continuing to receive value for money. That's a very important reform and introducing more transparency and putting clients in charge of how much they pay and when they pay it.
JOURNALIST:
So you don't think it'll put it out of reach of anybody really?
BOWEN:
No. At the moment, about 24 per cent of Australians get financial advice. If the trust and professionalism of the industry is improved, and there are a range of options for people as to how they pay, I think financial advice could become more popular not less.
JOURNALIST:
(inaudible)but what's wrong with having just a fiduciary duty? Why do we need to ban commissions as well? Why not just give people who prefer to do it through a commissions system, with the opportunity to do that?
BOWEN:
Because commissions in and of themselves are wrong. Commissions in and of themselves misalign the incentives for the adviser and the planner; and I do not hold the view that any fiduciary duty could be strong enough to deal with the distortions of the market that commissions provide. Now we're putting people in charge of how they pay, but commissions misalign the interests of advisers and their clients; and therefore they're inappropriate. A lot of the industry has already recognised that; IFSA and the Financial Planning Association have already recognised that, in the long term, commissions distort the market and need to go; we're enshrining that in legislation.
JOURNALIST:
Have you worked out how much this is going to cost the Government, given that commissions are not tax-deductible and yet fees are tax-deductible?
BOWEN:
Well financial planning fees aren't tax-deductible.
JOURNALIST:
They're not tax-deductible?
BOWEN:
No. Fees of financial planners are not tax-deductible.
JOURNALIST:
And they will continue not to be tax-deductible in the way that accountant's fees and lawyer's fees are tax-deductible?
BOWEN:
Well, the recommendation from the Ripoll Inquiry was that that be considered by the Henry Review. Of course the Henry Review is being released next Sunday; all taxation matters were being considered by the Henry Review.
I have been very upfront with the industry though, and pointed out that the tax-deductibility of financial advice fees would be very expensive for the Government and would need to be justified against that.
JOURNALIST:
So you personally don't favour that (inaudible)?
BOWEN:
I've made it very clear that I think that would be difficult to justify.
JOURNALIST:
Minister, you talked about the restoration of confidence and these measures will bring confidence back into the industry. Surely, the measures need to be bedded down and over a course of time they need to take some sort of place in the broader community for people to say yes they have confidence once again. Quite frankly too many have been burned over the course of time and this won't automatically do it.
BOWEN:
I don't disagree with that Frank; it will take time for that confidence to be restored. But what we're outlining today is the plan for that to occur; for people to have their trust restored in the financial planning industry, because financial planning, as I say, is and should be a good thing but Australians deserve to know it's in their best interests and that's not a guarantee I can give them today.
JOURNALIST:
Minister, do these sorts of measures already apply to the mortgage industry, the broking industry?
BOWEN:
There's a different regime that applies to mortgage broking and that applies through our national credit reforms. Mortgage broking is quite different to the issues that we're talking about here today but they are regulated through the national credit reforms.
JOURNALIST:
But some mortgage brokers get commissions by preferring certain institutions to their clients and isn't that a similar situation (inaudible)?
BOWEN:
And we consider that as part of our national credit reforms and Phase Two of that is coming.
JOURNALIST:
It's suggested that perhaps the financial advisers are the fall guys for many of the collapsed schemes that have taken place. What about the actual manufacturers of many of these schemes, that actually created them; which in many cases are in fact the banks and life insurance companies?
BOWEN:
Well, you're right Ross to identify the intersection. Some of the collapses we've seen; whether it be Storm, Westpoint, various managed investment schemes, have been because of poor business models. That is true, but that is a separate matter. But we've seen an interaction: we've seen investments in poor business models which could never have withstood a contraction in the global economy, which were always doomed to fail in that respect, being recommended by financial planners because in some cases they provided very substantial commissions; in some cases up to 12 per cent of the investment being a commission. So clearly that's distorted the advice given, in relation to some of those investments.
So the reforms I'm announcing today are not designed to stop any financial collapse in the future. What they're designed to stop is financial planners advising investments in poor products which have poor business models and are not in the best interests of the client, but after all commissions are in the best interests of the planner.
JOURNALIST:
(inaudible) …advisers may be required to search beyond their approved product list. Given that all, as far as I know, professional indemnity policies of financial advisers do not include, they have an exclusion for products that are off the approved product list, how do you expect advisers to follow that, for one thing? And if they do follow that, won't that put them in breach of their Australian Financial Services Licence because they won't be covered by their PI [professional indemnity] policy?
BOWEN:
Well, that's one of the reasons we've allowed a long lead time for these reforms; to allow insurance industry to take those matters into account. You'll note there that it says 'may be obliged to look beyond their preferred product list or advise the client to see another adviser'. If they don't feel the preferred product list is suitable for that client their duty may be to advise them to see another adviser. I would expect that you would see financial planning companies looking very closely at their preferred product list and expanding it, where possible, to ensure they can give advice that is in line with their fiduciary duty.
JOURNALIST:
Were you always going to ban commissions before the (Ripoll) Inquiry actually started, because you seem to have exceeded what the Inquiry came up with?
BOWEN:
No, the Inquiry recommended – and I might note it was the unanimous recommendation – that the Government work with the industry to move away from commissions, so clearly the Inquiry showed that they didn't feel that commissions were appropriate.
Now this is something I and the Government have given a lot of thought to, and did not come to with a preconceived notion; and you can talk to the people in the financial planning industry and financial providers, and they will tell you that I've been very consultative with them, about the various options available to the Government.
JOURNALIST:
It did stop short of banning commissions though, didn't it?
BOWEN:
Well, it recommended that commissions be done away with, through some form or other; it left it open to the Government to decide the best way forward and that's what we've done.
JOURNALIST:
Minister is this designed to force out some so-called 'undesirables', in terms of the financial advisers out there?
BOWEN:
I wouldn't necessarily describe it in those exact terms; I would describe it in the terms of improving the professionalism of the industry. I hope that people don't leave; I hope they lift their standards. If they don't feel that they can lift their standards and they feel they need to leave, that's a matter for them.
JOURNALIST:
Minister, obviously the Inquiry would've dealt with this, but what are some of the examples that you've had – through your office – of people who have lost their lifesavings.
BOWEN:
Well, they'll be well known to many of you: victims to the Storm collapse, victims to the Westpoint collapse, slightly different but victims of Opes Prime, and victims of the various managed investment schemes whether they be forestry or agricultural or some of the others; people who've in some cases invested a lot of money - in some cases their lifesavings - in these investments; and those people have a right, as I say, to ask that this not happen again to others. And by these reforms, we're ensuring that the advice that's given is in the best interests of Australian consumers.
Anybody else? Okay, thank you. Cheers.