Senator the Hon Mathias Cormann
Minister for Finance
Date: Friday, 20 June 2014
JOHN MCGLUE: Now this issue has been around for a while, but confirmation today from the Federal Finance Minister Mathias Cormann that the proposed changes to financial advice will go ahead largely as planned and the Minister has today sought to put some clarifications out there around certain issues, including commissions for financial or the sale of financial products. But it’s unclear at this point if it’s going to be enough to satisfy consumer groups who are concerned about protections for ordinary investors and concerned they might be being wound back and especially at a time when, with so much volatility in financial markets, a time when the need for those protections has rarely been higher. The Finance Minister Mathias Cormann joins me as my guest on Drive. Senator welcome.
MATHIAS CORMANN: Good afternoon.
JOHN MCGLUE: You set out these changes originally as part of the reduction of red tape, that drive that the Government announced, you wanted to get greater efficiencies into the economy and financial services was one of those areas, but you’ve ended up raising widespread concern that you’ll actually expose mums and dads to aggressive financial advice that maybe is not in their best interest. Now you’re saying that’s not correct, but can you explain to me why so many people out there do think that is correct?
MATHIAS CORMANN: Firstly it is not correct. The policy that we took to the last election was first announced more than two years ago and it was based on extensive consultation at the time. The consumer interest is both in making sure that our regulatory arrangements are appropriately robust to protect the consumer interest, but also to ensure that our regulatory arrangements are as efficient as possible so that they don’t unnecessarily push up the cost of advice. By global standards, the cost of financial advice in Australia is very high, on the back of us being quasi the world champions in financial services red tape. Some of the changes that Labor introduced in the previous period of Government were sensible and we supported them such as the introduction of the statutory requirement for advisers to act in the best interest of their client and also the ban on conflicted remuneration, remuneration which conflicts the advice given. We supported all of that when that was introduced and we’re still supporting it, we’re keeping it. But a whole range of changes that Labor introduced went too far, imposed too much costly and unnecessary red tape. When you do that uncorrected, it keeps pushing up the cost of advice, putting access to high quality advice that people can trust beyond the reach of too many people that need that advice.
JOHN MCGLUE: But the issue Senator is that the flipside of great efficiencies and reducing red tape is that you are potentially exposing a lot of mums and dads, ordinary investors, to a financial services sector where you don’t have the same kind of protections for ordinary investors that have been there in the past…interrupted
MATHIAS CORMANN: Well I don’t accept that. At the end of the day, whenever you impose an additional regulatory requirement, whenever you impose an additional bit of red tape, it does come with a cost. You’ve got to ask yourself the question whether the additional cost is proportionate to the additional level of consumer protection that it provides. When the cost that is imposed on consumers for an additional bit of paperwork becomes disproportionate, that’s when you really have to ask yourself the question, well is that sensible. What we’ve sought to do is to ensure that we’ve got a better balance, where we’ve got the important consumer protection arrangements like the requirement for advisers to act in the best interest of their clients and the ban of conflicted remuneration remaining in place, but while making sure that some of the less sensible changes that Labor made, egged on by quite frankly, a segment in the financial services market that had a vested commercial interest in Labor making it more difficult for their competitors to provide services to people across Australia, then we can quite safely say it is in the national interest, it is in the public interest for us to rebalance that.
JOHN MCGLUE: Senator Cormann can I ask you about the issue of these commissions or these payments which people have traditionally received for selling financial products or giving financial advice. Now you were saying that in relation to specific financial advice, those conflict rules don’t change. Will it be possible for anybody in financial services to sell products of any nature, offering general advice to somebody, a pensioner or a mum or a dad, across the counter at a bank for example, will that be allowed to happen under these rules?
MATHIAS CORMANN: There is a carve-out for very simple and basic banking products. I think that nobody would expect when you go into a bank and get advice about a basic banking product, opening an account or taking out a mortgage, I think that people are pretty clear on what the arrangements are there. In terms of general advice on anything related to superannuation or these sorts of issues, life insurance and the like, nobody providing that general advice can receive either an upfront or a trailing commission. What we have said today, we have put that absolutely beyond doubt, we have completely banned that type of commission, that type of conflicted remuneration. As far as we are concerned, whether it is personal advice or general advice, no remuneration arrangement should be structured such that it would conflict the advice that is given. We have been supportive of that ever since it was initially legislated, we remain supportive of that. The suggestions in the past by the Labor Party and others that we were re-introducing commissions were always false. Even the ABC Fact Check corrected Labor’s assertions, in fact they described Chris Bowen’s claim that somehow we were bringing commissions back as ‘scaremongering’ and pointed out that his claims were inaccurate.
JOHN MCGLUE: Can I ask you about the so called ‘opt-in’ rule which was brought in some time ago where the…
MATHIAS CORMANN: Not some time ago, two years ago.
JOHN MCGLUE: Okay, but it has been in place, whereby if I’m the client of a financial adviser I have to go back and formally give my consent on a regular basis to continue to be a client and to continue to receive advice on a certain basis. What changes are happening to that particular rule under these current changes?
MATHIAS CORMANN: We have said for a very long time that we did not agree that that was a necessary consumer protection arrangement. What it is really saying is that as a consumer I am not free to enter into an ongoing contractual relationship with my financial advisor. It is none of the Government’s business to tell me how long I can or cannot enter into a contractual relationship with my financial advisor. If I want to sign up for 1 year, 5 years, 10 years, ongoing that is a matter for me.
JOHN MCGLUE: But you know that the rule was there Senator to try and guard people against arrangements where a financial advisor simply set a relationship with a client, the client might be elderly, not sophisticated financially and it was just going to set and forget and would continue on forever and under the new rules people have to actively opt-out.
MATHIAS CORMANN: That is actually inaccurate because under the new rules we have got a best interest duty and the advisor is required to act in the best interest of his or her client. If an advisor were to do what you have just suggested, he would manifestly not be acting in the best interest of his or her client and so he would be breaking the law.
JOHN MCGLUE: Okay, Senator it is good to talk to you this afternoon. Thank you so much for your time. These are complicated and complex issues and no doubt the debate will go on for some time.
MATHIAS CORMANN: No doubt.
JOHN MCGLUE: We are very thankful for you giving your time on Drive this afternoon.
MATHIAS CORMANN: Always good to talk to you.