Senator the Hon Mathias Cormann
Minister for Finance
MICHELLE GRATTAN: Welcome to The Conversation’s politics podcast, I am Michelle Grattan. The Government today has announced some revision of its plan to change Labor’s financial advice legislation. The original proposals ran into a storm of protest with seniors and other consumer critics saying the legislation was being weakened in a way that would advantage the banks in particular and disadvantage vulnerable consumers. A Senate Committee proposed the Government’s changes be rewritten to make it clear that commissions should not be allowed when bank employees and others provided general advice to clients but stuck by some of the other controversial changes. Finance Minister Mathias Cormann is with us today to discuss what the Government is doing. Mathias Cormann, can you outline how the Government is going to alter the proposals it had earlier put?
MATHIAS CORMANN: Well the first point to make is that the Coalition has always been supportive of some of the changes that were made to our financial advice laws in the period of the previous government. We have always been supportive of the introduction of a statutory best interest duty, which required financial advisers to act in the best interest of their clients and we have always been supportive of the ban on commissions and conflicted remuneration, which distorted the advice provided to investors. So what we did say in Opposition was that some of the changes that Labor introduced went too far, imposed too much costly red tape and ultimately hurt consumers best interest, by pushing up the cost of advice, by lessening competition and essentially by making high quality advice less available to people who need it the most. We took these policies to the last election. They have been on the table for a very long time. Earlier this year there was a lot of misinformation that was being spread around. I paused the implementation of the regulations in the legislation in order to consult further, which we have now done and what I am doing now, what I am proposing to do in order to put beyond doubt, absolutely beyond doubt any questions that anyone might have about the Government’s commitment not to bring back commissions in relation to financial advisers or those who provide general advice is that we will be explicitly prohibiting any commissions, upfront or trading commissions both in the regulations and in the legislation to amend our financial advice laws.
MICHELLE GRATTAN: And that’s the only change you have made from the proposals that you were advancing before?
MATHIAS CORMANN: What we have done is we have set out very clearly again the reasons for the changes that we are proposing. They really are focused on ensuring that we have the most appropriate balance between important consumer protection mechanisms in our regulations, whilst also making sure that access to high quality trusted advice continues to be available and affordable for consumers across Australia.
MICHELLE GRATTAN: Now you have said there will be no upfront commissions paid when this general advice is given but the changes would still allow the employee of a bank to receive incentives for his or her work generally. Isn’t there a danger of blurring here between commissions and incentives?
MATHIAS CORMANN: Not at all. I mean I don’t think that anybody has ever suggested and indeed Bill Shorten when he was the Minister for this area never suggested that financial product providers should not be able to incentivise their employees in relation to doing their job. And of course you would expect a bank employee to provide general advice to bank customers. You would expect the same as you would expect employees of other businesses to provide general advice to their customers. What we have said is that we want to absolutely ban and put beyond doubt that the ban continues in relation to any incentive payments or any remuneration that would conflict the advice given. We totally are on the same page with the previous government when it comes to the ban on commissions, incentive payments, remuneration of whatever type, which conflicts the advice given. And we have moved, in the changes that we are announcing today, to put that completely beyond doubt.
MICHELLE GRATTAN: Now you are sticking with your proposed removal of Labor’s explicit requirement that an adviser must take all reasonable steps to make sure clients’ best interests are served. Why are you so adamant on this point?
MATHIAS CORMANN: Well that is a little bit misleading I have got to say, the way that question is put. The requirement for a financial adviser to act in the best interest of his or her client is enshrined in subsection 961B(1) of the Corporations Act and that requirement remains in place unchanged. There is absolutely no amendment to that requirement whatsoever. What you are asking about is one aspect of the test that a financial adviser may use in order to prove that they have acted in the best interest of their client and of course if you look at the way that test currently operates. It already requires a financial adviser to indentify the subject matter of the advice sought. To identify the objectives, financial situation and needs of the client that would reasonably be considered to be relevant. It requires you to indentify the objectives, financial situation and needs of the client that are disclosed to the adviser by the client but also where it was reasonably apparent that information wasn’t complete or was inaccurate, that he or she has to make reasonable enquiries to obtain complete and accurate information. Further, the financial adviser has to assess whether he or she has the expertise required to provide the client advice and if they don’t, decline to provide advice in relation to the subject matter of the advice sought and so it goes on. So there are a whole range of steps that are very comprehensive. What Labor did was to add an open ended, catch all provision, which didn’t actually provide for a specific obligation on the financial adviser, but which created uncertainty for both the adviser and the investor, the client, on how the best interest duty would operate. Uncertainty in this business means increased costs, which ultimately would push up the cost of advice for the client. And what I would say, there are different parts of the Corporations Act that impose obligations on financial advisers. So the financial adviser will continue to have to act in the best interest of the client. The advice that is provided must continue to be appropriate. An adviser must continue to provide a warning if there is any incomplete or inaccurate information. An adviser must prioritise their clients’ interests ahead of their own. Conflicted remuneration structures including commissions that have the ability to influence advice will continue to be banned and consumers will continue to have of course, through these mechanisms, access to high quality advice. So the proposition that has been put by some that the Government was moving to abolish or significantly weaken the best interest duty is false. What we are focused on is making sure that the best interest duty can work effectively in practice and that both advisers and their clients can have certainty around how the best interest duty is meant to operate.
MICHELLE GRATTAN: You are also going ahead with measures such as removing a provision that investors have to periodically opt in to continue their arrangements with their financial adviser and that the advisers have to send fee disclosure statements to certain clients. Now you argue that these add to costs, but don’t they also add to safeguards?
MATHIAS CORMANN: Well firstly, in relation to the second part of the question, no we’re not doing that. We are totally supportive and we will continue to be imposing the requirement that annual fee disclosure statements have to be provided to clients. What we are saying is that it is completely inappropriate for a Government to force clients into a situation where they can’t enter into an ongoing contractual relationship with their adviser. It is none of the government’s business to be honest, on how long I as a client of a financial adviser want to enter into that relationship with that adviser. We don’t think that it is appropriate to force clients to re-sign contracts with their advisers on a regular basis. We think it adds unnecessary costs and red tape, again ultimately pushing up the cost of advice. There is no precedent for this sort of measure anywhere around the world. Indeed this particular change, which out of 400 odd submissions to the Ripoll Inquiry that was the start to all of this, only one of them recommended this change and that was the Industry Super Australia Association. We just don’t think that it is appropriate for Australia to become the world champion in financial services red tape, putting access to high quality advice beyond reach of most Australians.
MICHELLE GRATTAN: Next week we’ll see another Senate Report, this time one that is highly critical of the handling by the Commonwealth Bank of clients who essentially were dudded by financial advisers in the company associated with the bank, why didn’t you wait until after that report to announce the Government’s decisions on financial advice?
MATHIAS CORMANN: Firstly, the events that are investigated here by the Senate Committee of course are events that are in the period before some of the recent changes have been made. As I’ve said in the Senate this week, whenever a financial product provider or financial adviser or anyone in this industry does anything wrong, they ought to have the book thrown at them. Financial advisers and anyone who is a professional providing advice to people about their financial health and wellbeing or helping them manage financial risks or maximise financial opportunities ought to act in the best interests of their client. That is of course a requirement that will continue into the future under our corporations laws. But essentially I don’t expect anything out of that report that has a bearing on the changes that we are making. We will continue to require financial advisers and indeed financial product providers to have the appropriate safeguards in place, which have only been in place for a couple of years now, that their employees and their financial advisers act in the best interests of their clients.
MICHELLE GRATTAN: Do you think that you will have satisfied the concerns of seniors and other critics by the limited compromise you’ve made?
MATHIAS CORMANN: Well we have made judgements about what is in the public interest. In our view, it is in the public interest for people saving for their retirement, people managing their retirement, to have access to affordable high quality advice they can trust. We always have to strike the right balance between appropriate levels of consumer protections on one hand, while making sure that access to that high quality advice remains affordable so that people can benefit from that advice when they are making decisions about their retirement plans and so on.
MICHELLE GRATTAN: Now some of these measures are going to be introduced by regulation in the next week or so, right? And others will wait for the legislation, what will come in by regulation?
MATHIAS CORMANN: We’ve laid that out in our statement in some detail. Where ever we have regulation making power under the Corporations Act, in order to provide certainty to industry and to clients of financial advisers across Australia, we have decided to progress those changes through regulation.
MICHELLE GRATTAN: Just the main couple of measures?
MATHIAS CORMANN: Well obviously there are a range of measures that we will be pursuing through changes in regulation. In particular the removal of the costly and ineffective opt-in requirement will be made through regulation initially and then through legislation subject to the processes of Parliament. Of course the removal of the catch-all provision in the best interest duty test will progress that way. The better facilitation of access to scaled advice as well as removing the retrospective requirement for fee disclosure statements in relation to clients from the period pre-1 July 2013.
MICHELLE GRATTAN: And those regulations will start from July 1, is that correct?
MATHIAS CORMANN: Well our intention is for that to start from 1 July 2014 and the regulations in relation to those matters will be in place for a period from 1 July 2014 until 31 December 2015. This will provide certainty to industry and to clients and in the meantime of course the Parliament will consider the substantive legislation over the next few months.
MICHELLE GRATTAN: Do you think there is a danger the Senate will try and disallow those regulations?
MATHIAS CORMANN: Obviously in relation to any regulation, that is an option that is available to the Senate and that will be a matter for the Senate to resolve if that occurs.
MICHELLE GRATTAN: Now [inaudible] the maxim buyer beware applies, but isn’t it a reasonable argument that in something as complicated as financial advice, people really do need quite a lot of protection because they can’t be expected to be as expert as in some areas and that that is an area where considerable regulation is justified.
MATHIAS CORMANN: Well considerable regulation is justified and considerable regulation will continue. But we’ve also got to be very careful not to kid ourselves. We shouldn’t be telling ourselves that we can achieve everything we need to achieve in this space through regulation alone. Financial advisers across Australia do provide a very important service. Good advisers help Australians with their financial health and wellbeing. They help Australians manage financial risks and maximise financial opportunities and of course we do want to have professional, ethical, well-educated advisers providing that sort of support to people across Australia who are saving for their retirement or managing their retirement or dealing with whatever other financial challenge comes our way through life. Whenever you impose an additional level of regulation, it ought to be justified based on an appropriate cost benefit equation. When Bill Shorten imposed some of those FoFA changes that we are saying went too far, he never put those changes through his government’s own regulatory impact assessment processes. He never put those changes through their own required cost benefit assessment processes, because he knew full well that the cost benefit equation did not stack up. Every time you impose an additional bit of regulation, you should be able to justify what additional consumer protection benefit you get. To just impose more red tape and more costs without a proportionate improvement in consumer protection requirements doesn’t help consumers. It just puts access to high quality advice beyond the reach of too many people across Australia.
MICHELLE GRATTAN: Those Labor changes were partly as a response of course to some financial collapses and financial scandals. Do you think that people will be able to feel as safe under your changes as they might now?
MATHIAS CORMANN: Well, and you know what this is a very important point. After for example, the Storm Financial collapse and various other events that happened a few years ago, there was a bipartisan Parliamentary Inquiry which was chaired by Bernie Ripoll, who is now the Shadow Minister for this area. A very good man and I was very supportive of the recommendations that came out of that inquiry. The two key recommendations that came out of the report enquiry was that we must introduce a statutory best interest duty, which we support, which we will keep and that we must ban commissions and conflicted remuneration arrangements which distort the investment advice given to clients of financial advisers and we keep that as well. So the key recommendations that came out of the Ripoll Inquiry we supported then, we supported all the way through. What we are saying is that Labor in the changes they legislated in the last Parliament, partly because they were doing the biding of a particular vested interest in the financial services market, went too far, imposed too much red tape, which ultimately is going to push up the cost of advice for too many people across Australia without providing for proportionate improvements in consumer protections.
MICHELLE GRATTAN: And beyond this, do you think that there will be a need to try and improve professional standards in the industry to get more education in the industry?
MATHIAS CORMANN: I think that this is a very important part of this whole issue. I have got to say over the last three or four or five years a lot of effort has been put in by organisations like the FPA, the AFA, SPAA and a series of others, the FSC, in terms of lifting professional, ethical and educational standards. I don’t think that that journey is finished. I think that there is still a way to go, there are still opportunities for us to achieve further improvements and certainly from the Government’s point of view, we are very keen to work with all stakeholders on sensible initiatives to continue to lift professional, ethical and educational standards across this very important industry.
MICHELLE GRATTAN: Mathias Cormann, thank you very much. It will be interesting to see the reaction to your announcement. That’s all from The Conversation’s politics podcast today.