Key Points |
Government’s focus: has shifted from improving the country’s “hard infrastructure” to our “soft infrastructure” — the regulatory framework. |
Financial services industry: is far more harmonised than it was a decade ago. In the next ten years, I envisage an industry with world class professional standards serving financially literate consumers. |
A Simpler Regulatory System: aims to reduce the regulatory burden in providing advice to consumers, without undermining the consumer protections which have been built into the FSR regime. |
Good morning.
I’d like to thank the Financial Planning Association for the opportunity to speak at this conference today.
I trust that you are all looking forward to having a productive time at the conference and I hope that the interstate delegates are enjoying their time in my home town of Melbourne.
Ladies and gentlemen, financial planners are on the cusp of an exciting era in financial advice.
I say this because, increasingly, consumers are seeking professional advice to help them make wise and fruitful investment decisions.
They have a high and growing accumulation of wealth to invest and they are discerning — they want quality advice.
As well, Government initiatives are encouraging Australians to plan for their financial futures. Through initiatives like Simpler Super and the Understanding Money campaign, we are encouraging consumers to maximise their wealth.
So it is heartening to see the financial planning industry rising to the challenge.
It’s clear that the future of the financial planning industry lies in the value of the advice you provide — and how you communicate that advice to consumers.
I’d like to take a moment to reflect on how the Government has arrived at our current position in regard to regulation. Also I would like to examine how we have moved to focusing on the value of advice in wealth accumulation by looking at the regulation of financial services in the broader context of Australia’s economy.
For some time, I have been working on what I call A Simpler Regulatory System. I will talk about this in a few minutes. But for the moment, I want to give you a sense of why this is an important issue in the economic landscape of today.
My viewpoint is that of a so-called ‘classic liberal’.
People are sometimes confused about what this means, but — in a nutshell — a classic liberal believes that the market operates best when it is allowed to operate freely.
This is why the classic liberal view places great importance on empowering individuals to make decisions with flexibility and freedom. I believe that this is the most effective way to promote welfare and equality.
And this is where I find my role most useful — by providing the right foundations for markets within the corporate and financial service sectors to operate as effectively as possible.
Ladies and gentlemen, as you all know, the Australian economy is in the enviable position of strong and sustained growth — at or near full capacity without any significant downside.
Much of Australia’s economic success has been underpinned by sound microeconomic reforms, particularly in the corporate and financial services sectors.
These reforms have been based on the principles of facilitating business growth and innovation while maintaining important consumer protections to ensure market efficiency, participation and confidence.
When an economy is operating at or near full capacity — as ours is — only minimal Government intervention is necessary.
In fact, inappropriate or heavy-handed Government intervention can have serious and often detrimental consequences as it trades off winners with losers.
We have laid the foundations of a prosperous economy and our economic conditions are strong. This is why our focus has now shifted from improving the country’s “hard infrastructure” to a more refined focus on the “soft infrastructure” — that is, the regulatory framework.
The Government is now focusing on ensuring that regulation works as it was intended. And that it does not adversely affect the natural operation of the market.
This is very much my focus.
My goal is to ensure that the regulatory system continues to produce efficient and optimal outcomes to sustain growth, and further advance our prosperity well into the future.
Snapshot of the Financial Services Industry
From the Government’s viewpoint, we are on a quest for continuous improvement.
Sometimes in the drive for achievement, it’s easy to forget just how far we’ve come.
Let me turn the clock back for a moment to look at the progress the financial services industry has made over the past decade.
And where we are headed in the next ten years…
Ten years ago
Ten years ago, the regulation of financial services was a patchwork of complex and inconsistent laws.
To some extent, our regulatory frameworks actually hampered the efficiency of our financial markets. In turn, this restricted our potential for growth.
To put it another way, our regulatory frameworks did not reflect the market realities of the time.
In particular, they did not keep up with the pace of technological innovation… increases in competition… or changes in consumer needs and profiles.
In 1997, a report from the Financial System Inquiry, the Wallis Report, provided a stocktake of the results of the financial deregulation of the Australian financial system since the early 1980s.
The Inquiry found that the financial landscape had changed due to forces such as an increasing business focus on efficiency and competition… increasing globalisation of markets… and innovation in product design and distribution.
In line with the classic liberal philosophy, the Inquiry acknowledged that the private sector is best placed to determine the future shape of the financial system — provided that its processes are genuinely competitive.
So the Inquiry, in its own words, focused on:
“the need to ensure that change can be accommodated within responsive and flexible regulatory arrangements, and that regulation encourages innovation and competition so that the most efficient players and processes prevail”.
As a result, the Wallis Report recommended several steps to enhance competition and efficiency in the financial sector.
At the same time, these processes were designed to avoid the earlier problems of regulation constraining developments and limiting Australia’s potential to take part in the global financial market.
As you would know, the Government’s key responses were the introduction of financial services reforms and other Corporate Law Economic Reform Programs — better known as CLERP — to improve corporate and financial services regulation.
In particular, financial services reform provided a uniform framework for the regulation of financial services that is consistent, flexible and more cost-effective for consumers.
Today
Today, our financial services industry is far more coherent and harmonised than it was ten years ago.
The International Monetary Fund recently assessed our regulatory system as being comprehensive and robust.
The IMF praised Australia’s financial sector as being:
“mature and large with assets of more than $3 trillion; that the financial industry is sound and healthy having benefited from sustained and favourable macroeconomic conditions.”
The IMF also recognised that these strong conditions over the past decade reflect the benefits of wide-ranging structural reforms and sound economic policies.
In particular, this is due to the significant reforms introduced by this Government, including the reforms to financial services laws which rationalised the regulation of financial services and provided for consistent standards across the industry.
Overall, I think our financial services regulatory regime is working well.
It is achieving its objective of efficiency and competitive neutrality, while providing a consistent framework for consumer protection.
The work of the Financial Literacy Foundation is a significant part of the Government’s reform agenda in the financial services field. We established the Foundation in June 2005 to give all Australians the opportunity to better manage their money.
The Foundation is delivering on our commitment to financial literacy by building the capacity of Australians to better understand and manage financial risk… deal effectively with market complexity… and take advantage of increased competition and choice in Australia’s finance sector.
Thanks to these efforts, together with the work of the Financial Planning Association and other professional bodies, consumers are increasingly aware of the need to plan for their financial futures.
Consumers are also becoming more sophisticated, seeking out financial advisers who offer valuable advice, not just product sales.
I am encouraged by reports that financial planning practices are continuing to expand in response to this demand. I believe that this demonstrates that financial planning is a growth area responsive to market demands.
Ten years in the future
So I guess the question arises of - where will these developments take the industry in the next ten years?
Looking ahead, I envisage a financial services industry with world class professional standards serving more and more financially literate consumers.
Within the next decade, I believe we will have unprecedented widespread community awareness of the importance of financial literacy and its benefits.
We will have a generation of Australians who acquired financial literacy skills while they were still at school.
We will have informed and confident consumers who are able to manage their money well.
We will also have consumers who engage effectively in the market and take advantage of the choices on offer.
And ultimately, consumers who drive market efficiencies by making well-informed decisions.
With the fundamental soundness of our FSR framework already established, and the refinements that are being done to ensure that the law operates as effectively as possible, I expect that, by the end of the next decade, FSR will have stood the test of time.
I envisage an efficient financial services industry that helps consumers to make informed investment decisions to grow their wealth.
Role of Industry
At this point, I would like to acknowledge the contribution the industry itself is making to improve standards in the financial planning sector.
The FPA has made a significant contribution to enhancing the professionalism of the sector.
Some examples are the Association’s Principles for Managing Conflicts of Interest, and their work in raising the bar for financial planner education and qualifications.
I would also like to congratulate the FPA for its efforts to improve consumer understanding of the importance of good financial advice. Some examples are the “Value of Advice” campaign and the brochure Money Well Spent: Key facts about financial advice.
Initiatives like these are helping to empower consumers to take charge of their finances… to plan their financial futures with confidence… and to recognise the value of sound financial advice.
As I mentioned earlier, the future of the financial planning industry lies in the value of the professional advice you provide to your clients and a large part of that is how you communicate the value of your advice to consumers.
A Simpler Regulatory System
Ladies and gentlemen, it’s been just over two years since I was appointed to the Treasury portfolio. In that time, I have worked to ensure that the “soft infrastructure” framework for financial services is operating as effectively as possible.
As you would be aware, last year I implemented a suite of refinements to financial services regulation.
These refinements were well received and they are helping to promote effective communication with consumers, as well as reducing the regulatory burden.
Primarily, the refinements enable financial service providers, such as you, to communicate more effectively with clients by providing them with information that is appropriate and relevant to their needs.
These refinements are part of my endeavours to achieve A Simpler Regulatory System.
Last week, I released a paper containing 35 detailed proposals to implement more reforms and reduce the regulatory burden on business.
The paper contains measures to improve regulation in the areas of financial services… company reporting obligations… auditor independence… corporate governance… takeovers… and general compliance.
Of particular importance to financial planners are the measures to further refine Financial Services Regulation.
Primarily and most importantly, the proposals aim to reduce the regulatory burden in providing advice to consumers, without undermining the important consumer protections that have been built into the FSR regime.
As part of the extensive consultations on these issues, I have heard a number of complaints about consumers being unable to obtain good financial advice, particularly if they are relatively small investors.
I have also heard from industry that a contributing factor limiting access to advice is the perceived cost of providing the advice, relative to the adviser’s ability to recover that cost.
This is why one of the proposals in my paper is to reduce the disclosure obligations for financial advisers who provide advice to clients on relatively small investment amounts.
By reducing the costs associated with preparing a Statement of Advice, my proposal encourages advisers to offer advice to small scale investors.
Let me now to turn to a specific issue that has been commented on by the FPA regarding the exclusion of superannuation from this particular proposal.
The proposal is to set a $10,000 investment threshold for when a Statement of Advice needs to be provided excluding superannuation advice.
I considered this proposal in the context of the significant public education campaign that was carried out last year by the Government with the introduction of Super Choice – a campaign that I am sure you would agree was important for consumers.
In this campaign, the Government outlined to employees the importance of getting financial advice if they were confused or needed a better understanding of a very important investment decision.
The choice of a superannuation fund can, and does, have very significant long term financial consequences even from the time when the first contributions are made.
People seeking advice were encouraged, indeed implored, to ask their adviser to set out clearly answers to their questions in the Statement of Advice.
The Government continues to provide this message in its education campaign on superannuation and in doing so, places confidence in the important role that financial advisers play in providing quality, considered advice.
It is because of the approach we have taken, that is, strongly encouraging people to obtain professional advice on superannuation that we feel this should continue.
Having said that, I am listening carefully to all comments received on the proposals and I retain an open mind to compelling arguments that demonstrate a clear benefit to consumers on this issue, as I do on all others.
The focus on providing high quality, yet affordable, advice is particularly important in today’s environment.
The increasing emphasis on high quality advice is driving a demand for high quality advisers. This can only enhance the professionalism and reputation of the financial planning industry.
There has been concern recently about the value of advice. I’m thinking here of the debate surrounding commissions and conflicts of interest.
Taking these concerns into account, the proposals paper I released last week includes an initiative to help differentiate financial advice from “pure” product sales activities.
While I don’t expect this proposal to directly affect financial planners, it will indirectly enhance their professional reputation.
It will do this because it differentiates between the pure sales activities undertaken by agents and employees of financial product providers from the important and value-added advice that you, planners provide.
Measures such as these provide solutions to some of the problems that have been raised with me and I believe they will give consumers greater confidence to seek out financial advice.
Other measures in the proposals paper include those to improve the law relating to training and reporting activities administered by ASIC.
I strongly encourage everyone here to comment on the proposals paper, which is available on the Treasury website and to put forward your suggestions on how we, together can continue to improve regulation in this critical area for the benefit of all consumers.
In undertaking these further refinements I am striving, as always, to achieve the right balance.
The balance between protecting consumers on the one-hand and providing business with flexibility in order to grow on the other.
Conclusion
Ladies and gentlemen, the Australian economy and our financial services industry are, in the main, running smoothly.
We, all of us here in one way or another, have done the hard yards. We have implemented necessary reforms.
Our job now is to refine the soft infrastructure to facilitate efficiency… improve the productive capacity of the economy… and allow the market to operate without the need for heavy-handed regulation or Government intervention.
My vision for the next decade sees financial planners providing a wide range of professional advice to a financially literate Australia.
Once again, I trust that you will have an enjoyable and productive time during the conference and I look forward to working with you and your Association into the future.
Thank you.