It’s good to be here with you today.
I’ve been invited to give you a ‘report card’ on financial services reform (FSR) and talk about the way forward for financial services.
Okay, if I was writing a report card to send home to the parents of the student named ‘FSR’, I think my comments would go something like this:
“Shows great promise, but lacks a little in application.”
“Has many good ideas, but sometimes is unable to convey them clearly”.
Or maybe I might write this:
“With a little improvement, could be top of the class”.
I know what you’re thinking. The Government is the parent of the student, FSR – so how come I get to write the report card?
Fair question. But the comments I have made encapsulate the kind of feedback I’ve been getting. And all of those observations are true.
So, you have every right to ask, what are the parents going to do about this child?
Well, I think the last comment – the one about improvement – is worth concentrating on. Because, with the right kind of improvements, all of the other issues will disappear.
To my mind, FSR is a basically sound framework. But, I believe that it can be even better if some of the rough edges are smoothed off.
That’s why I’m looking forward to working with industry and consumer representatives in the coming months to achieve that refinement in the performance of FSR.
As you would know, earlier this month I released a paper putting forward proposals for refinements to FSR.
I do not intend to go through the contents of that paper in detail today, as I’m sure all of you will have studied it closely.
In that regard, there will be time for questions when I finish speaking to you today – that is, I’ll be asking questions to see whether you’ve read the proposals paper.
Seriously, I would like to mention the broad themes in the proposals paper.
I want to discuss how I believe they will improve the operation of the FSR framework so that it truly delivers the benefits, to consumers and to industry, which were originally promised.
In discussing the broad proposals outlined in the refinements paper, I want to take a brief moment to reflect on the place of FSR in the context of the Australian Government’s overall economic policy.
Context of FSR
Australia’s economic performance over the past decade has been among the best in the world.
These have delivered a low inflation, low interest rate environment.
A key focus of microeconomic reform has been the regulatory framework governing Australian corporations and the Australian financial system.
Financial markets perform a fundamental economic function by facilitating the allocation of savings and resources to their most productive uses.
It is therefore important to ensure that the regulation of the financial system is consistent with the government’s broader economic objectives.
The quality of the regulatory framework also has important implications for Australian households.
Participation in the financial services industry allows them to build wealth, save for retirement and manage risks through insurance.
In 1996, the incoming Coalition Government commissioned a fundamental review of Australia’s financial system under the leadership of Stan Wallis.
The Wallis Report, which was completed in 1997, set out a detailed agenda to improve the regulation of Australia’s financial system.
It sought to ensure that Australia’s regulatory framework could meet the challenges of globalisation, convergence and technological change.
At the same time, the Government also announced the establishment of CLERP - the Corporate Law Economic Reform Program.
FSR represented the third and final stage of the implementation of the Wallis Report as well as the sixth instalment of the CLERP process.
FSR – An Overview
The FSR legislation was developed over a four year period between 1997 and 2001.
It commenced in 2002 and came into full effect in March 2004, nearly seven years after the release of the initial proposal paper.
It is important to understand that FSR had a number of different objectives.
First, it aimed to provide the financial services industry with a uniform and consistent regulatory framework in place of the different rules which previously applied to different industry sectors.
This was a response to developments identified in the Wallis Report, which was presented to the Treasurer in April 1997.
In his report, Wallis identified two factors as the major challenges to effective regulation:
One: The emergence of conglomerates providing a full range of financial services, and
Two: the blurring of distinctions between financial products.
Secondly, FSR aimed to provide industry participants with greater flexibility through the adoption of a more principle-based approach to regulation across services and products.
It was intended that the legislation would spell out general principles.
To “fill in the details”, greater use would be made of regulations and ASIC guidance.
As an important aside, I want to remind you that we as a Government remain committed to principle-based regulation, focusing on outcomes, rather than processes.
We are committed to this view despite calls from many – including those on the other side of politics – to adopt a more prescriptive, Sarbanes-Oxley approach.
Such an approach, in my view, would be counter-productive, and would encourage corporate ‘ticking of boxes’ exercises, rather than focusing on complying with the spirit and intent of the law.
In addition to the two objectives I’ve already mentioned, FSR was intended to enhance consumer protection by improving standards of conduct and disclosure across the financial services industry.
It was intended to facilitate confident consumer participation in the financial services industry.
Finally, FSR was intended to encourage competition between financial institutions by enhancing the capacity of consumers to understand and compare different financial services and products.
I believe – as I mentioned above – that the FSR legislation has been a significant force for positive change. It has, by and large, achieved the Government’s aims.
However, I would be the first to acknowledge that there are parts of the framework that all stakeholders have identified – and we have accepted – as needing refinement. The first of these is, of course, disclosure.
Disclosure
It will come as no surprise to you that, since the implementation of the FSR legislation, it is the disclosure requirements that have generated the most debate.
The rationale behind the requirements is simple enough.
It is to ensure that consumers receive clear and adequate information about financial service providers, and about the services and products they offer.
This information will enable consumers to make informed investment decisions.
However, as with many seemingly simple concepts, the ‘devil’ is in the detail.
How much information is adequate? What level of detail should be required? How ‘clear, concise and effective’, does the information need to be?
Obviously, the amount and clarity of information required by a particular individual consumer will vary.
Experiences with financial services will vary from person to person. Each will have their own degree of knowledge and understanding of the services and products.
The legislation cannot contain a tailored disclosure requirement for each individual consumer.
At the other end of the spectrum, the view has been expressed by some that the FSR legislation is a ‘one size fits all’ regime which doesn’t take into account differences between financial service providers, financial products, or consumers.
I think that criticism is somewhat unfair.
Yes, the legislation does have certain ‘standard’ or ‘minimum’ requirements in relation to disclosure and other matters.
The Government makes no apology for that.
The previous piecemeal regulatory approach to financial services is exactly what the FSR framework was designed to overcome.
However, the regulatory framework does have to incorporate some flexibility to take account of differences not only between service providers and the products they issue, but also differences in the way financial services are delivered, and the types of consumers who receive them.
Improving the flexibility of the disclosure requirements of the legislation is the direction in which the proposed refinements are heading.
For example, consumers who are interested in only a limited range of products or services should not have to wade through a Financial Services Guide that sets out all of the products and services that a particular provider has on offer.
It should be possible to tailor the guide to suit better the information requirements of consumers.
This will allow providers to also issue shorter, more focused Financial Services Guides.
Similarly, where a financial adviser has an ongoing relationship with a client, and provides personal advice over time as part of an overall investment strategy, it is of little value to require the adviser to continually repeat in written Statements of Advice information that has already been supplied to the client.
What is of more use to the client in such situations is a short statement focusing on the additional advice he or she has received.
Ideally, this would be provided with an explanation as to how the additional advice fits in with the original strategy.
With Product Disclosure Statements, we need to promote the delivery of information that is relevant and concise.
What is relevant for one consumer may not be for another.
In this instance, what the proposals paper suggests is a ‘short form’ PDS, containing core information that all consumers should receive.
Other product information would still need to be available to consumers – for example, on a website – but it should not be necessary to provide this to each and every consumer unless they have requested it.
What constitutes ‘core’ product information is something that may vary between different classes of products. These sorts of technical considerations will need to be addressed once draft regulations have been prepared.
Verbal disclosure has also been a topic of some debate since the FSR Act took effect.
In this area it appears that some industry participants have, perhaps understandably, chosen to adopt a cautious approach.
They have stuck fairly rigidly to the wording contained in the legislation which – unless you are a lawyer – is not always easy to understand, particularly over the telephone.
What we are proposing in the area of verbal disclosure of product information is to minimise the ‘scripted’ nature of telephone conversations (for example, in call centres).
The crucial issue will be that the consumer is made fully aware that he or she has the benefit of a cooling-off period, and will receive written product disclosure information which should be considered.
I am confident that the proposals on disclosure put forward in the paper will go a long way to ensure that we get more effective and meaningful disclosure for consumers.
Importantly, it will also reduce the paperwork for service providers and product issuers.
Retail/wholesale client distinction
Now let’s turn to another issue covered in the proposals paper. It involves modifications to the criteria that determine whether a client is ‘retail’ or ‘wholesale’.
This also has implications for the issue of disclosure, given that the disclosure requirements are relevant only to retail clients.
And it also affects how we determine which clients must have access to dispute resolution and compensation arrangements.
As indicated in the proposals paper, the ‘tests’ set out in the legislation to differentiate between retail and wholesale clients will never be perfect.
Instead, the legislation sets out objective criteria which are essentially ‘proxy’ assessments of a consumer’s financial sophistication.
In the case of businesses, these criteria include their size in assets and numbers of employees.
In the case of individuals, the criteria include wealth and income.
Many of these tests pre-date the introduction of the FSR Act. This does not mean however that they should not evolve over time to provide the best possible determinant of consumers’ financial sophistication, subject to the constraints outlined above.
I’m sure many of you could think of examples where you consider that the legislation treats as ‘retail’ a person who clearly does not require the type of protection offered to retail clients. Perhaps many could also call to mind instances when the opposite occurs.
The proposals paper sets out a few examples of situations where the current criteria may not operate appropriately.
One of which is where, say, a high net worth individual who qualifies as a wholesale investor, chooses to structure his or her investment activities using a trust or company.
Currently, it is likely that such a trust or company would be considered a small business under the legislation, and thereby be treated as a retail client.
Clearly, that is an inconsistent situation.
The legislation should generally not dictate how a person goes about making investments.
However, we do need to exercise some caution here. There will be cases where there may be others involved in the trust or company.
These sorts of ‘grey’ areas will benefit substantially from the consultation process.
The way forward
Mention of the word ‘consultation’ takes me to the next question – and that is – how are the proposals for refinement going to proceed?
Throughout the development and implementation of the FSR legislation the Government has gone to great lengths to consult as widely as possible.
We have tried very hard to give a broad cross-section of industry participants – including IFSA and consumer representatives – the opportunity to have their say.
The same thorough consultation process will apply in respect of the refinements put forward in the proposals paper.
To that end, a number of consultation meetings are planned in the coming weeks to discuss in more detail the refinement proposals.
I will attend the consultation meetings, where possible, together with the officers from the Treasury and ASIC, who will play a large part in taking the refinement process forward.
Both Treasury and ASIC have also indicated a willingness to hold follow-up meetings with particular industry groupings to discuss matters which may be of particular relevance to them.
The ultimate result, of course, will be the production of draft regulations or, where appropriate, ASIC relief or guidance.
I cannot be definitive about how long the overall process will take.
It will depend to a degree on how many issues are raised in the various consultations and how readily the proposals can be translated into draft legislation.
On the one hand, I do not want to rush the process and risk an outcome that does not achieve all the objectives.
On the other, I firmly recognise that both industry and consumers would like certainty sooner rather than later.
With these considerations in mind, and subject to the consultation process, Iwould hope that amending regulations would be in place before the end of the year.
Conclusion
Finally, I’d like to reaffirm my commitment to you to improve and refine the FSR regime.
Given the importance of the regulatory framework to the operation of Australia’s financial services industry, and the importance of this industry to the economy as a whole, it is vital that we as a nation get financial services regulation right.
This can only be achieved however with the guidance and support of industry.
I’d like to express my appreciation for the constructive role that IFSA members have played throughout the development and implementation of the FSR legislation.
In particular, I believe that Richard Gilbert and the IFSA board provide members with an excellent level of representation. Submissions from IFSA on financial services issues are always articulate and persuasively reasoned.
By all of us – government, industry and consumers – working together to refine the FSR framework, we will achieve even greater consumer confidence and participation and more informed investment.
That will secure and further enhance the reputation and integrity of our already world-class financial system.
Thank you.