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Chapter 6
Suggestions for regulatory reform
6.1
This chapter examines a number of suggestions for rectifying the
regulatory deficiencies that are claimed to impede protecting investors from
poor advice. In broad terms, the changes suggested relate to:
-
raising standards of advice;
-
making disclosure more effective;
-
removing conflicted remuneration practices;
-
ensuring better transparency, competency and accountability through
the licensing system;
-
reforming lending practices;
-
limiting access to complex and/or risky investment products; and
-
introducing a last resort statutory compensation scheme for
investors.
Standards of advice
6.2
The previous chapter outlined concerns about the effect of conflicts of
interest on the quality of advice provided by financial advisers. The committee
heard a number of proposals to raise standards in this area, which fall within
three categories:
-
imposing a higher legislative standard through a fiduciary duty for
financial advisers to place clients' interests first;
-
providing consumers a distinction between sales-based advice and
independent advice;
-
improving enforcement of current advice standards through annual
reports to ASIC and/or risk-based auditing.
Fiduciary duty
6.3
A number of witnesses appearing before the committee supported the
imposition of an explicit fiduciary duty on financial advisers, requiring them
to give priority to their clients' interests ahead of their own. Australian
Securities and Investments Commission (ASIC) was amongst its proponents,
claiming that a legislative fiduciary duty would overcome the inadequacy of
disclosing conflicts:
An additional legislative requirement to put the interests of
clients first where there is a conflict would lead to a higher quality of
advice and the emergence of a professional advice industry.
It would mean that where there is a conflict between the
interests of the client and the interests of the adviser, the adviser must give
priority to the interests of their client. For example, under the current test,
an adviser may have a reasonable basis to recommend a client invest in any of
three different products. Of the three products, the adviser could recommend
the product that delivers the adviser the greatest fee revenue, provided that
this conflict of interest and the amount of the fee is clearly disclosed to the
client. However, under the higher standard proposed above, they would be
required to recommend the lower fee product because the adviser is required to
prioritise the interests of their client (i.e. in paying the lowest fees
possible) before their own interest in receiving higher remuneration.[1]
6.4
ASIC said that the imposition of a legislative fiduciary duty would
likely change remunerative practices, even without a ban on commissions:
...once you are in a fiduciary relationship, if you are going
to take commissions or some other benefit, that benefit belongs to your client.
It is not yours; it is your client’s, unless your client through disclosure but
more importantly through informed consent allows you to keep it. The standard
and the way you discharge that duty is that, if you are running a large
organisation, for practical purposes you would be hard pressed to say, ‘Yes,
you can still have commissions,’ because in each individual case you run a
risk. So the change we would see to industry practice would be that a lot of
the front-end, trail and ongoing commissions would probably not sit well with a
clarification of that duty.[2]
6.5
ASIC noted that the higher standard would not require advisers to
provide the 'best advice' to clients, or that every product available in the
market would need to be considered.[3]
6.6
Professional Investment Services did not oppose the introduction of a
statutory fiduciary duty, indicating that such a duty already exists.[4]
Trustee Corporations Association of Australia argued that advisers should
always place their clients' interests first:
...it is just unthinkable to me that you can give advice to a
client without giving it in the client’s best interest and preferring your own
interest over theirs. It is implicit in an advisory role.[5]
6.7
Industry Super Network recommended that section 945A be replaced by a
requirement to act in clients' best interests:
The key elements which this obligation will be:
-
It will be owed by an individual planner to his or her client.
Licensees would also continue to hold responsibility for advisers operating
under their licence.
-
The best interests obligation would require the planner to give
clients their undivided loyalty, which means the financial planner must strive
to avoid any actual or perceived conflict of interest.
-
The method of payment for financial advice must reflect the
planner’s undivided loyalty to their client. An individual adviser or a
licensee cannot receive any payments from product providers or fund managers.
Payment for advice must be made by the client and would ideally be based on the
amount of time or advice provided. Up front commissions or fees would not be
permitted.[6]
6.8
Industry Super Network stated that this requirement would force
licensees to include a variety of product types on its approved product list
and would preclude volume based payments.[7]
They clarified that this requirement would require advisers to put their
clients' interests ahead of their own, rather than selecting the best
investment products:
In order to satisfy the ‘best interests’ obligation, an
adviser’s work would be measured against a standard of reasonable skill, care
and diligence to be expected of an ordinary prudent person acting in the
capacity of a qualified adviser. However, the obligation to act in the client’s
best interests would not require financial advisers to predict the best or
highest performing products. Superannuation trustees are subject to a ‘best
interests’ obligation which does not expose them to liability for failing to
pick the best performing investment managers for their fund in any year. The
best interests obligation is not retrospectively evaluated based solely upon
the performance results of the superannuation fund, but rather by examining
whether the trustees exercised a reasonable standard of skill, care and
diligence in selecting and monitoring investment managers.[8]
6.9
Australasian Compliance Institute (ACI) supported a fiduciary duty being
imposed on individual advisers.[9]
FPA commented:
ASIC has talked about attributing a fiduciary responsibility
to the function of advice, and we think that that is going to be quite hard to
monitor and manage. We would prefer that the role of fiduciary were attached to
a person, not to a function or interaction. We believe the person should have
that responsibility...[10]
6.10
Association of Financial Advisers (AFA) told the committee that the
category 'financial adviser' should be legislatively defined before a fiduciary
duty could be imposed by legislation.[11]
Dual standards of advice
6.11
Another possible reform involves applying different standards to
advisers claiming to offer unbiased financial advice, as opposed to those whose
primary objective is selling financial products. The notion of imposing
different standards depending on how advisers identified themselves has been
suggested previously. In 2006, the government floated a proposal to separate
sales and advice by exempting those offering straight product
recommendations/sales from the Chapter 7 requirements on financial product
advice in the Corporations Act 2001 (Corporations Act), subject to clear
disclosure requirements.
6.12
Treasury explained to the committee that there were concerns about that
proposal that meant it was not pursued further:
One [issue] was that consumers may not necessarily appreciate
the difference between the advice stream and the sales stream, and you would
need to have very, very clear warnings or some kind of communication tool so
that everybody would know precisely what it was that they were doing. And there
was not confidence that we could come up with that.
The second big issue was that, if that kind of structure were
adopted, one outcome might be that the number of participants in the market
going for the full advice model would decline significantly and that a lot
would shift into the sales stream, because the sales stream would not be
accompanied by the kinds of regulatory requirements in terms of training,
competence and so forth. So there was a concern that an outcome that might
occur is that there might be plenty of sales people out there but not many
people who were offering the genuine advice. The concern that was mentioned
earlier about real, genuine advice only being available to affluent clients was
another issue.[12]
6.13
ASIC also outlined this latter concern:
Those who opposed this proposal suggested that most investors
would use the ‘sales’ part of the industry (given the high concentration of
advice businesses that are tied to product manufacturers) and therefore would
receive lower quality ‘advice’.[13]
6.14
The United Kingdom's regulator, the Financial Services Authority (FSA),
has proposed that financial services firms be required to identify whether
their services are either 'independent advice' or 'restricted advice'. Treasury
explained this approach to differentiating different types of advice:
The UK ... decided to focus on separating out independent
advice and restricted advice. Independent advice means that you have to look
completely across the market. So it is very broad. You have to give
unrestricted advice. You have to basically have knowledge of all of the
products that might provide suitable outcomes for your clients. The restricted
advice model is where you are clearly stating that you are offering a lesser
range of products, and you have to clearly articulate that upfront to the
consumer.[14]
6.15
However, officials stressed that it was not easily transferable to
Australia:
Looking at the UK model, you cannot adapt it straight across
to the Australian model because, for example, in the appropriate advice regime
we do not require that every single product in the market be considered. So
there is not an exact or straight translation.[15]
6.16
The Institute of Chartered Accountants in Australia (ICAA) commented
that 'the introduction of a two-tiered model would just add further complexity
and confusion for the consumer'.[16]
6.17
A number of proposals aired during the inquiry proposed imposing dual
standards within the broader framework of a dual licensing system. These
suggestions are discussed later in the report, starting at paragraph 6.105.
Risk-based audits
6.18
The previous chapter outlined the views of those who believed that
problems with the quality of financial advice are mainly due to inadequate
enforcement of the existing regulations, particularly section 945A of the
Corporations Act requiring advice to be appropriate to the client. To improve
enforcement in this area, some have suggested that ASIC take a more rigorous
and targeted approach through risk-based surveillance activities. For example, AMP
recommended that:
...an appropriately resourced ASIC adopt a risk based
approach to monitoring and supervision to more effectively monitor and assess
management of conflicts by Licensees.[17]
6.19
Similarly, the Investment and Financial Services Association (IFSA)
recommended that ASIC:
...adopt a risk-weighted approach to monitoring and
supervision based on improved benchmarking of industry practice to more
effectively monitor and assess management of conflicts of interest by Licensees
and Licence applicants.[18]
6.20
They suggested that the following factors be considered as part of a 'risk-weighted
approach to monitoring and surveillance using its existing powers':
...in relation to Licensees that provide financial advisory
services, the type of information which ASIC could consider to better assess
this risk includes:
-
Extent to which ASIC has had prior constructive dealings
with the Licensee
-
Prevalence of leverage across clients
-
Membership of professional or industry associations and
their compliance history with such bodies
-
Details of management qualifications/experience
-
List of approved products and the basis for approval
-
Products most frequently recommended
-
Internal processes for the delivery of complex or high-risk
advice strategies
-
Number of complaints lodged against the Licensee and their
type
-
Number of advisers/authorised representatives
-
Number of Certified Financial Planners
-
Number of SoAs produced
-
Amount of funds under advice.[19]
6.21
AXA suggested that ASIC's monitoring activity was tilted too much
towards larger licensees, and more attention should be given to 'other risk
indicators such as complaints, the complexity of products being recommended and
reports from industry participants'.[20]
6.22
CPA Australia stated that: 'ASIC currently appears to employ a reactive
rather than a proactive approach to enforcing the regulation'.[21]
They recommended that ASIC use the information provided by applicants to target
their enforcement:
Whilst it is not ASIC’s role or responsibility to approve a
business model in order to approve an application for an AFSL, ASIC could use
the Business Description core proof to evaluate the risk that an applicant may
breach their obligations once licensed. Any applicant who was deemed to be at
risk could be reviewed by ASIC within a 12 month period of being granted an
AFSL. The review should include ensuring all relevant processes and licence
requirements are still in place and a review of random selection of Statements
of Advice (SOA). This will aid in identifying if the providing entity is making
reasonable client inquires, if they are considering and investigating the
subject matter of the advice as is reasonable in all the circumstances and if
the advice is ‘appropriate’ for the client.[22]
6.23
CPA Australia further recommended that licensees be required to submit
an annual return outlining information about their clients, recommended
products and fees charged. The document could be lodged as part of existing
AFSL reporting processes.[23]
Noting that the one-size-fits-all strategy needed to be eliminated by enforcing
section 945A, their submission stated:
It is of concern that there is anecdotal evidence that many
licensees who have been in practice for many years have had little or not
contact with ASIC since being granted an AFSL. It is unrealistic for ASIC to
audit each AFSL on an annual basis, however CPA Australia believe that there is
still a need for ASIC to have regular contact with all AFS licensees.
A more efficient and far-reaching solution would be for every
licensee to complete an AFSL annual return. The annual return should cover key
information and statistics, which ASIC would review and use to compare against
industry averages and best practice. It would be an efficient method to
identify an AFSL who may be at risk of breaching their obligations due to their
business practices. For example, if there was a disproportionately high number
of clients in one product type, this could be seen as a result to investigate
further.[24]
6.24
In evidence to the committee they said that problems such as Storm
Financial could have been identified earlier using these strategies:
If ASIC had the information and you could see a licence
holder was recommending a lot of margin loan products and it just turned out
that a large proportion of their client base was retired, then that would
warrant grounds to go in and have a closer look, look at the basis for advice
and whether it is appropriate or not.[25]
6.25
Commonwealth Bank of Australia's (CBA) submission also recommended that
licensees be required to periodically report to ASIC standard information about
their business models, with particular emphasis on the nature of advice given
to clients.[26]
6.26
ICAA also suggested more extensive auditing of advice:
A consideration could be to include an “advice audit” as a
component of the compliance audit. This is not a preferred solution, as it
would result in increased compliance costs. However it would provide a solution
to monitoring the practical application of the compliance processes within the
AFSL. In addition, it may well remove any real or perceived conflicts of
interest that may occur within an AFSL operation between the compliance
function and other divisions of the business.[27]
6.27
Australasian Compliance Institute (ACI) suggested that licensees be required
to submit to an independent review of a proportion of advice cases annually,
undertaken by a person accredited by a professional body. ACI also suggested
that ASIC or a professional body 'engage in proactive activities like shadow
shopping'.[28]
Committee view
6.28
The committee supports the proposal for the introduction of an explicit
legislative fiduciary duty on financial advisers requiring them to place their
clients' interests ahead of their own. There is no reason why advisers should
not be required to meet this professional standard, nor is there any
justification for the current arrangement whereby advisers can provide advice
not in their clients' best interests, yet comply with section 945A of the
Corporations Act. A legislative fiduciary duty would address this deficiency.
Recommendation 1
6.29
The committee recommends that the Corporations Act be amended to explicitly
include a fiduciary duty for financial advisers operating under an AFSL,
requiring them to place their clients' interests ahead of their own.
6.30
The committee draws no conclusion about whether such a duty would
automatically preclude the payment of commissions to financial advisers. A
recommendation on payments from product manufacturers to financial advisers is
made at paragraph 6.101.
6.31
For reasons of complexity outlined in further detail below at paragraph
6.149 in the context of licensing, the committee does not support proposals to
impose different standards of advice depending on whether someone is performing
a sales function or offering 'independent' advice. The committee also
recognises that a similar proposal has been previously discarded after concerns
that the industry would become dominated by sales-based advisers.
6.32
The committee is firmly of the opinion that ASIC needs to undertake the
enforcement of legislative standards of advice with a more rigorous and
targeted approach. ASIC should perform effective risk-based surveillance on the
advice provided by licensees and their authorised representatives, focussing
particularly on licensees that have come to the attention of the regulator
previously; recommend a high proportion of high risk products; have limited
products on their approved product list; disproportionately recommend one type
of product; or have limited experience or qualifications. The committee
considers it important that ASIC establishes robust audit processes to be
undertaken by suitably qualified field staff. The committee is also of the view
that more regular, preferably annual, shadow shopping exercises should be
conducted to identify breaches of the legislative standard and provide an
important deterrent for licensees.
6.33
If additional funding is required to undertake these activities then it
should be provided, particularly recognising the additional credit and market
regulatory responsibilities ASIC will soon be required to perform.
6.34
The committee is not of the opinion that the benefits of receiving annual
returns from licensees outlining advice practices would justify the
administrative burden this would create for ASIC. There are more efficient ways
of taking a risk‑weighted approach to surveillance than receiving
information from every licensee in Australia.
Recommendation 2
6.35
The committee recommends that the government ensure ASIC is appropriately
resourced to perform effective risk-based surveillance of the advice provided
by licensees and their authorised representatives. ASIC should also conduct
financial advice shadow shopping exercises annually.
6.36
The committee also notes that the monitoring and enforcement of
standards can be improved through the oversight of a professional standards
body, which is the subject of a recommendation at paragraph 6.160.
Disclosure
6.37
Although there was a broadly held view that disclosure had been
ineffective in managing conflicts of interest, necessitating other more robust
measures, the committee did receive suggestions about what the purpose of
disclosure should be and how it might be improved.
6.38
MLC was of the view that disclosure should complement the overriding
requirement to act in the client's interests, rather than providing a cure-all
solution. MLC summed up the opinion of many with the following comment:
Acting in the client’s interests has got to be the first and
foremost driver of the client’s outcomes, and disclosure needs to support that.
The idea that we can find a 70-page document disclosing enough information to protect
everybody’s interests and give the client meaningful information is flawed.
...
Clients get confused [by disclosure] ... at the end of the
day what we have to be doing, as an industry and as an organisation, is acting
in the client’s interests. If you can combine that premise with disclosure that
allows the client to make decisions or at least find more information if they
want to, then you have a better regime than one that simply says, ‘I’ve
disclosed it so therefore the job is done.’[29]
6.39
Mr Peter Worcester of Worcester Consulting Group commented that
disclosure documents could be simpler:
I would like to use the idea of when you go to your doctor
and he is going to operate on you. He gives you a two-page informed consent. He
says what it is going to cost, what the procedure is, what might go wrong and
what is the probability of it going wrong. I tend to believe that we should
chuck out those 50-page statements of advice and have a two-page document.[30]
6.40
Boutique Financial Planning Principals Group (BFPPG) suggested that full
disclosure should be replaced:
There is a simpler approach that will provide the consumer
with a better outcome:
-
Replace the requirement for full disclosure of the basis of
advice with the requirement that the advice must be defensible. There must be a
reasonable basis for the advice, and the financial planner must be able to
defend the advice if required by the client, ASIC or FOS.
-
The advisor can then provide the consumer with documentation on
the basis for the advice at a level that is suitable to the client’s needs.[31]
6.41
The Commercial Law Association of Australia recommended that a mandatory
one page disclosure document be required, containing information on product
risk, the effect of major market fluctuations and fee costs.[32]
ICAA suggested that consideration be given 'to ensure common fee terminology is
used to assist comparability'.[33]
6.42
The committee is aware that the Financial Services Working Group (FSWG),
comprised of Department of Finance, Treasury, and ASIC officers working with other
industry stakeholders, is developing 'simple, standard and readable product
disclosure for specific financial products'.[34]
ASIC informed the committee that:
The FSWG is now working towards achieving simplified,
mandatory disclosure ... it is devising:
-
short and simplified PDS disclosure requirements for
margin loan products, superannuation and ‘simple’ managed investment scheme
products. This simplified form of disclosure will include:
-
prescribed content
requirements;
-
a maximum page limit (4 pages
for margin loans; 10-12 pages for superannuation and ‘simple’ managed
investment scheme products);
-
a new incorporation by
reference regime identifying what information, when incorporated by reference,
may be considered as part of the PDS; and
-
sample PDS documents as a guide for industry on the type
of content and level of detail that would be expected in a shorter, simpler
PDS.[35]
6.43
Treasury told the committee that the work of the Financial Services
Working Group on disclosure was an alternative approach to the problematic task
of separating sales from advice:
That is one of the reasons that we turned to the concept of
the Financial Services Working Group looking at the actual disclosure
documents. It is taking it from a different direction. First, we were trying to
separate them and then we said, ‘If we can’t separate, let’s make sure the
consumer understands what they are getting into and understands what this is.’
If the documents are easy for them to read and they understand that a person is
getting all these commissions and they will only offer you products of this
sort and they understand exactly what they are getting into, at least we are
one step closer to where we are trying to get to.[36]
6.44
Aside from the work of the FSWG, ASIC proposed that advisers be required
to disclose more prominently restrictions on the advice they are able to
provide consumers—in particular, the limited range of products an adviser tied
to a product issuer is able to advise on. The submission stated:
Currently disclosure about relationships with product issuers
tends to be buried in the fine print of a licensee’s FSG and there is no
legislative requirement for a financial adviser’s marketing material (as
distinct from FSGs and Statements of Advice (SOAs)) to disclose the association
with a product issuer. Many advisers do not disclose this relationship on their
website. By the time a potential client receives an FSG or SOA, they may have
already gone a long way down the path to making a decision to use the services
of the adviser.
In order to bring the potential conflict to the attention of
the client before they make a purchasing decision about the adviser’s services
or a particular product, prominent disclosure in marketing material could be
required, for example, on advertisements, shopfronts, letterhead, websites etc.
Advertising and marketing material could also state that the
adviser can advise on a limited range of products and a list of these products
is available on the adviser firm’s website or on request.[37]
6.45
This proposal would seek to address ownership-based conflicts of interest
by further clarifying for consumers the extent and effect of that relationship
on the products able to be recommended by their adviser. It would also flag
situations where advisers are permitted to recommend single products only (such
as agribusiness MIS) as a licensing condition.
6.46
Another suggestion was for advisers to be required to conduct a personal
stress test on clients to more effectively disclose product risk. Institute of
Actuaries of Australia recommended:
Many financial planners already adopt a process of scenario
analysis or stress testing when advising individual clients. The Institute’s
proposal is that this current “best practice” be required as mandatory practice
for all financial planners.
A prescribed Personal Stress Test would provide customers
with a simple objective measure of adverse outcomes as relevant to their
individual circumstances. The adoption of standard assumptions and trigger
events will ensure that the test will not be onerous for advisers.
The Institute believes that a Personal Stress Test would be a
more effective means of communicating the risk associated with significant
adverse outcomes.[38]
6.47
This suggestion was supported by Worcester and Resnik:
We believe that an appropriate way for a financial planner to
ensure that a (gearing) investment strategy is appropriate is to apply a stress
test to both:
-
The client’s assets and liabilities, including their home,
and home mortgage, and
-
The client’s income and expenditure, both at the
consumption level (salary and living expenses, including mortgage payments) and
at the investment portfolio level (dividend income and margin loan costs).[39]
6.48
IFSA was of the view that undertaking a risk assessment was an inherent part
of providing appropriate advice to clients:
The central objective of conducting a risk assessment is
reaching a clear understanding about how much risk of financial loss a client
is willing to accept to achieve their financial goals.
Appropriate advice therefore involves calibrating an
individual’s financial goals against their risk profile.[40]
6.49
Australasian Compliance Institute called for the implementation of a
risk rating system for financial products, applied consistently across the
industry.[41]
Committee view
6.50
The committee suggests that the Corporations Act be amended to require advisers
to disclose prominently in marketing material the restrictions on the advice
they are able to provide consumers and any potential conflicts of interest.
This is particularly important in the case of advice from vertically integrated
financial institutions, where conflicts of interest attributable to the
ownership structure will exist even if commission payments to advisers are
eliminated as a form of remuneration.
Recommendation 3
6.51
The committee recommends that the Corporations Act be amended to require
advisers to disclose prominently in marketing material restrictions on the
advice they are able to provide consumers and any potential conflicts of
interest.
6.52
Although disclosure is somewhat limited in the extent to which it can
protect consumers from poor financial advice, clear and concise disclosure is
still an important tool to assist consumers to recognise conflicts of interest
and understand the cost of advice. The committee supports the current efforts
of the Financial Services Working Group to reduce the length and complexity of
disclosure material. The committee understands the high cost of compliance and
is of the view that, along with other measures recommended in this report, the
government should direct the Financial Services Working Group to develop
mechanisms to reduce compliance costs over time.
6.53
The committee rejects proposals suggesting that financial products should
be given a 'risk rating' by ASIC or any other government-authorised entity. It
would be inappropriate for ASIC to be assessing and labelling the risk of
financial products, not to mention a serious drain on resources.
Remuneration
6.54
The inquiry attracted considerable debate about whether banning commission‑based
remuneration is required to overcome the conflicts of interests it creates. Some
argued that disclosure and conduct requirements have failed to adequately
manage conflicts and a ban is now warranted, while others claimed that removing
these payment methods would increase the cost and accessibility of advice for
consumers. There was also discussion about whether enabling payments to be made
as a percentage of funds under management represented an effective compromise
between removing conflicts and maintaining affordability.
6.55
A number of contributors also proposed making the cost of financial
advice tax deductible for consumers to make fee-for-service charging more
appealing.
Bans on commissions
6.56
The committee received considerable evidence suggesting that the most
effective way to improve the quality of financial advice for consumers is to
remove conflicts of interest altogether by banning commissions and other
conflicted remunerative practices. The regulation of remuneration practices was
consistently raised during the inquiry.
6.57
ASIC submitted that commissions create conflicts of interest that are
inadequately managed by disclosure, and suggested that the committee consider
recommending a ban on a range of remunerative practices:
While the reforms to clarify the fiduciary-style duty of
advisers will have a significant impact on the ability to use commission
remuneration, the Government should still assess changing the policy settings
of the FSR regime so that advisers cannot be remunerated in a way that has the
potential to distort the quality of advice given.
This would mean that the following forms of remuneration
would not be permitted, particularly in relation to personal advice:
-
up-front commissions;
-
trail commissions;
-
soft-dollar incentives;
-
volume bonuses;
-
rewards for achieving sales targets; and
-
fees based on a percentage of funds under advice.[42]
6.58
ASIC proposed that people who do not hold themselves out to be advisers,
or those providing execution-only services, be able to continue to receive
commissions. ASIC also indicated that the government would need to consider
whether to ban advisers receiving commission payments altogether, or permit
them to return them to clients in full.[43]
6.59
This proposal was supported by a number of other submitters.[44]
CHOICE supported a ban on 'remuneration incentives that are inconsistent with
fiduciary duties an adviser owes a client'.[45]
6.60
Quantum Financial Services called for the 'rivers of gold' to be turned
off:
It is a sad fact that, in financial planning, he who pays me
is my boss. No-one would consider allowing lobby groups to pay fees to
politicians, yet we allow product manufacturers to pay financial planners and
dealer groups. By ‘rivers of gold’, we mean commissions and any other type of
financial arrangement between product providers, platform and dealer groups and
advisers. The only parties who resist this reform are those who financially
benefit from the rivers of gold.[46]
6.61
Other evidence to the committee suggested variations on the proposal to
ban commission payments entirely. MLC supported banning volume based
arrangements; Axiom Wealth proposed that rebates from platform providers and
volume-based rebates be banned, or refunded to clients in their entirety; Australasian
Compliance Institute told the committee that it is essential that clients be
given the ability to stop trail commissions; and Australasian Compliance
Institute also recommended that product manufacturers not be able to advise on
their own products.[47]
6.62
ICAA argued that the attachment between manufacturers and advisers needs
to be removed:
...it is important that the remuneration models are based on
the payment from the client and not from the product manufacturer. It is important
that the linkage between the product manufacturer and the adviser is removed.[48]
6.63
However, they stated that the issue should be resolved by the industry,
rather than banned by legislative action. ICAA claimed that commissions would
simply continue under another guise were this to occur.[49]
6.64
Treasury supported a shift away from commissions, indicating a
preference for a self-regulatory approach but noting the possible drawbacks:
...we are certainly in favour of moving away from that area.
But the question is: what is the best way of doing it? We are quite encouraged
by the fact that the industry has already started to do that in its own right.
But I note that, for example, what the FPA and IFSA are doing is not quite
exactly the same. Obviously you would need a single system for that to work.
Then the question would be: if they cannot cover the whole of the industry, and
I think it would be necessary to cover the whole of the industry, what can the
government do to assist to ensure that that is across the whole industry? If
the government makes an assessment that the industry based system will not be
effective then you have to move further down that regulatory line to make it
more effective.[50]
6.65
BFBPG advocated that incentive-based commission payments be phased out
gradually:
BFPPG accepts that making a rapid change from a
commission–based model to a fee–basis model could be detrimental to clients and
the process should be managed over a short but definite time and, with all
stakeholders involved, through the development of improved fee and remuneration
models that drive down costs and improve transparency.
There has been recent argument that commissions should be
banned immediately rather than eliminated over a period. There are still many
financial practices that rely on commissions for their income. It is reasonable
to accept that banning commissions within a short time frame would jeopardise
the continued viability of those businesses. The real risk, however, is that
the clients of those practices would suffer as their financial planners
struggled to replace their remunerations models.[51]
6.66
MLC noted that even if commissions are banned, they would continue to be
embedded in existing investment products:
The challenge in many legacy products and in history is that
there are a lot of payments still being made from products and we cannot change
the past. All we have tried to do is put a line in the sand and take a view
that we can change going forward.[52]
6.67
In contrast, the committee was also warned of the potential negative
consequences from removing commission-based payments for advisers. In
particular, it was suggested that mandating up front fee-for-service payments
by banning commissions will make the cost of advice prohibitive to many. IFSA
was one organisation that argued that removing existing fee structures would
increase the cost to consumers:
There are a number of subsidised arrangements that exist in
the value chain of a financial product. Some of those have been widely
criticised by some of the submissions here. But the reality is that if you
begin to strip out some of the fees, such as volume based fees— which we
support—you push more and more down directly to the consumer and you make it
very expensive for them; you make it frighteningly expensive for them. That
means that they simply will not seek the advice.[53]
6.68
Professional Investment Services emphasised the problems a sudden
upheaval of remuneration structures could create:
...if you go and completely change the economics of the
industry overnight it causes upheaval to many trusted relationships with those
who are being charged correctly and whose interests are being looked after by
their advisers.[54]
6.69
They also noted that a vertically integrated business supposedly removing
commissions does not mean conflicts have also been removed:
...conflict also exists where advice is provided ‘free’ with
no direct cost to the client, such as through a product provider, institution
or industry fund. In these instances the cost of advice is subsidised by the
product provider, institution or industry fund, which generates fees through
the distribution of aligned products, or within the management fee for
institutionally owned products. The conflict is not direct payment by the
product provider, but indirect through employee remuneration (wage or bonuses)
or through product placement restrictions, whereby the adviser can only
recommend products included in the APL which may be restricted to
institutionally aligned products. This indirect conflict operates in a similar
fashion to those inherent in commission arrangements.[55]
6.70
The inference that may be drawn from this argument is that removing
commissions would favour vertically integrated advisory firms over those that are
not tied to a single product manufacturer but receive remuneration via
commissions from various providers.
6.71
Guardian Financial Planning observed that banning commissions would not
necessarily prevent inappropriate advice:
...Storm was charging a percentage amount, which was a fee on
the amount of advice. They were not receiving a product commission of seven per
cent ... the debate at the moment is about commissions or fees. That is
actually not going to prevent that sort of behaviour in future. It is possible
to be charged a fixed flat dollar fee independent of a product and still,
through the unethical actions of an adviser, be ripped off or cause people to
suffer a loss. Our concern would be that the focus on fees and commissions is
not going to prevent this. We could outlaw commissions tomorrow and have
everything as a flat dollar fee. Will that prevent another Storm occurring? No
it will not.[56]
6.72
ING Australia supported the notion that consumers 'should be able to
determine remuneration arrangements that suit them best, which are based on
their circumstances and ability to afford the advice'.[57]
AFA commented that 'banning commissions will take away a consumer's fundamental
right to choose' and make advice less affordable:
...banning commissions may make comprehensive financial
advice unaffordable for consumers at the very time they need it most, and that
the fees versus commissions debate is fixated on price when it should be
focussed on value and the quality of the advice provided. It is important that
in considering the remuneration structures of advisers, recognition is given to
the contribution the existing structures have made to facilitating access to
advice.[58]
6.73
AFA also contended that perceived conflicts of interest are 'evident in
both remuneration structures'.[59]
Similarly, Axiom Wealth indicated that a pure fee-for-service model would
discourage people from seeking advice, fearing their adviser would simply
maximise the time they spend on the client. They cited practices in the
accounting, legal and medical professions as examples of over-servicing
encouraged by fee-for-service remuneration.[60]
Financial planner Mr Dean Glyn-Evans explained some of the practical problems
with fee-for-service:
You run the risk of ending up in the unenviable position of
many accounting and legal practices today. They have to regularly increase
their fees to help cover the interest charged on the bank overdraft they are
forced to take out in order to keep their business afloat, until clients
eventually get around to paying their fees. This is not smart business and I am
afraid that many financial planners who resort to fee-only advice, will
eventually find themselves in a similar black hole.[61]
6.74
He also suggested that over-servicing would occur, mainly through
frequent and unnecessary reviews of client portfolios.[62]
6.75
Alternatively, Mr Robert Brown acknowledged the problem of
over-servicing, but considered it preferable to the alternatives:
Some accountants and lawyers do pad timesheets, proving that
conflicts of interest exist in all commercial transactions. The trouble with
conventional financial planning is that complex and confusing conflicts exist
on several levels, not just one. While time-related charging has its problems,
at least the client is assured that the adviser is selling advice, not
products, and that a third party is not in the mix influencing the outcome.[63]
6.76
The Institute of Actuaries of Australia also rejected complaints about
expensive commission-free advice:
...the whole issue around those who are less affluent is a
bit of a furphy. Who are we talking about for starters? We are talking about 90
per cent of people whose best investment advice is to pay off the mortgage or
put money into super—none of which would give any sort of commission or trail
to an adviser. So we are talking about that 10 per cent who are left—in which
case they are more sophisticated and in which case people should know how much
they are paying for advice. Advice is expensive. For a financial planner the
hourly rates might look high, because there are overheads, research and that
sort of thing. But I think people have to see what that advice is. The
profession has to stand on its own two feet. People need to understand that
this is the cost of that advice.[64]
6.77
They added that:
Long term it is highly unlikely it would cost them more
upfront. Asset fees are insidious. As actuaries we live on compound interest.
If you look at the effect of a small asset fee on an asset over a long period
of time then you will see that it is an enormous amount of money. Once it is in
an investment there is a certain inertia and it will stay there. People will
not know how much they are paying. It is an insidious way of pulling out fees.[65]
6.78
CHOICE acknowledged that up-front fees might discourage consumers, but
stated that this problem could be overcome:
[We] simply do not accept that the overall cost of advice
will go up if we move to a fee-for-service arrangement. That does not mean that
there is not this sort of ‘money illusion’ to overcome—this sense that people
do not want to pay big lump sums for advice up-front. Again, I think this is
part of the structural change in the industry. Through this process we will be
holding the hands of consumers as well as holding the hands of financial
advisers. Just because you are charging, for example, a lump sum fee for advice
does not mean that a customer is in effect paying that all in one hit. You
could easily have an arrangement where the payment is made over a period of
time, as happens in other industries quite regularly. So there is the issue of
the total cost of the advice, which I simply do not accept would go up, and
then there is the issue of how it would be paid. I think there are all sorts of
ways to accommodate the needs of both consumers and advisers.[66]
6.79
ASIC also downplayed the effect on the cost of advice:
The exact impact of the proposal is difficult to predict
without further regulatory impact analysis. However, at this stage, ASIC
considers that it would probably cause some consolidation within the advice
industry but that it is unlikely to increase the actual cost of advice (as
opposed to the perceived cost of advice).[67]
6.80
The affordability of advice for the looming influx of people retiring
with substantial superannuation lump sump payments has been of concern.
Treasury informed the committee that efforts have been made to improve access
to limited, affordable advice for retirees:
...[the] move we made to allow superannuation trustees to
offer limited advice is specifically designed to target those kinds of
investors who are often also older investors. Suddenly at age 55 they find
themselves with a lump of money which they need to invest somehow, and they may
not be well equipped to make the relevant decisions. So through the working
group we have given that relief to superannuation trustees to provide certain
categories of advice easily and cheaply to these investors.[68]
6.81
Citing the expense of providing compliant full personal advice, MLC
urged the government to 'examine limited advice models, beyond superannuation,
in consultation with the industry'. They added:
Further, MLC recommends greater regulatory clarity around
limited advice models in order to better facilitate the provision of low cost,
effective advice to customers for whom this is the best solution.[69]
6.82
Finally, the committee received evidence about whether insurance
products should be exempted from any ban on commissions (and other additional
regulatory obligations), on the basis that insurance products are not
responsible for catastrophic investor losses. National Insurance Brokers
Association of Australia suggested that regulatory changes should not apply to
their industry:
Insurance brokers have a good track record in relation to
regulatory compliance and there is little evidence of consumers being adversely
affected by insurance broker negligence, poor advice, fraud or bankruptcy.
Insurance broker effectiveness is evident by the relatively few claims that are
considered by their external dispute resolution (EDR) scheme IBD Limited (which
became part of Financial Ombudsman Service, FOS, on 1 January 2009) and from
the size of those claims.[70]
6.83
AFA also argued that life insurance should be excluded:
One of the unique aspect’s of
Life Insurance is that it is not guaranteed that every person will be offered
cover under the policy of their choice, if at all. Under non-commission based
arrangements, the customer would be required to pay a significant upfront fee
to the adviser for advice on their insurance. If the customer was subsequently
declined cover by the insurance company, they would have incurred significant
expense and arguably received no benefit in that they were declined cover. This
is clearly an undesirable outcome for both the consumer and for the advice
industry.
The substantial increase in up-front costs that would result
if commissions were prohibited will result in considerably less insurance being
sold through advisers and a significant reduction in the number of people
receiving advice on their insurance needs. The result will be a widening of the
already significant protection gap in Australia.[71]
6.84
This argument was rejected by Quantum Financial Services:
Historically insurance products have been sold via the
commission model and many financial planning practices and insurance broking
business are dependent on the continual flow of commissions to sustain the
value of their businesses.
In our opinion, this is not sufficient reason to exclude
insurance products as supposedly a special case.
We frequently hear the excuse that Australians are
‘underinsured’ as the reason for insurance products to be excluded for any
proposed industry changes. We do not accept this argument. Insurance is a
product like any other – it is subject to the same forces of demand and supply.[72]
Consumer choice and asset-based
fees
6.85
Other recommendations made during the inquiry sought to balance these
considerations by proposing payment structures that are affordable, while also
meeting the objective of being explicitly set and agreed to between client and
adviser. FPA told the committee that it is guided by the principle that clients
should control the fees they pay for advice:
...payment for advice should come from the client and that
that is the most important thing you could possibly do, and not only that
payment must come from the client, that it must be aligned with a service and
you should be able to switch that payment off if you are no longer getting that
service. We have moved the debate to direct negotiation between client and
adviser, which is where all our efforts are focused.[73]
6.86
A number of submitters indicated that asset-based fees could enable
this. FPA commented:
The reason we wish to preserve the role of an asset based
fee, so long as it meets the premise that the client pays for it, the client
negotiates, it is fully transparent and so forth, is that we are very concerned
that middle Australia, the large bulk of the population who could very well do
with advice or want advice, will not be able to afford advice if it is purely
delivered on an hourly basis ... We need some flexibility for people to choose
how they pay for the advice and to choose how they can access that advice and
therefore be able to afford advice.
6.87
They added:
...if we are forced into an hourly basis, as in the legal and
accounting professions, which are different from financial planning in terms of
the work transacted, then indeed we will find it very difficult to deliver that
advice to a vast number of Australians who will be priced entirely out of the
market.[74]
6.88
MLC explained to the committee that there is a clear difference between
a fee agreed to by the client and a commission built in to the investment
product:
The client can simply decide to stop paying the fee. They can
contact the institution and the fee will stop being paid, whereas the only way
to stop the commission being paid in many products is to remove yourself from
the product altogether.
With a one per cent fee and a one per cent commission people
say to me that it is just a commission by another term. It is not, because the
one per cent fee is agreed, but the one per cent commission is not necessarily.
The one per cent fee is seen by the client, but the one per cent commission is
not necessarily. The one per cent fee can be stopped by the client, but the
commission cannot necessarily; and if the relationships falls away the fees
stop as well, which is not the case with the commission. It is actually putting
the client in much more control.[75]
6.89
Axiom Wealth also favoured this method:
Where a client has chosen to have an on-going advice
relationship with a planner, we believe advice fees based on funds under
management (FUM) represent the most equitable arrangements for clients and
advisers. We would argue that fees charged on this basis provide the best
alignment of client and adviser interests, and remunerate adviser
"proactivity" – which clients rate as a highly valued service.[76]
6.90
They added that FUM-based fees can be terminated 'without upsetting any
of the underlying investment arrangements that might be in place'.[77]
6.91
However, ASIC did not support this approach:
Remuneration based on the amount of funds under advice can
also create conflicts of interest. Advisers who are remunerated by reference to
funds under advice have an interest in selling investment products to their
clients and encouraging their clients to borrow to invest.[78]
6.92
CHOICE did not support the argument for asset-based fees either:
The problem with any asset based charge is that it carries
the same taint of conflict as commissions. There are incentives on advisers to
favour strategies that involve debt in gearing to build assets that generate
fees for advisers. If the industry transitions from asset based commissions to
asset based fees, the disclosure may be better and consumers should have the
ability to turn off those fees, but the market distortions arising from asset
based charges will remain.[79]
6.93
Mr Robert Brown also described the potential problems created by
asset-based fees:
Asset-based percentage fees for service remove the temptation
to sell high commission products, but they still require a planner to sell a
product or accumulate funds under management (whether or not the client needs
this). In addition, asset-based fees for service give the appearance of
independence, without actually being so. Therefore, in some circumstances they
can be more dangerous than commissions, and can even can lead to the derivation
of higher levels of remuneration than would be possible via a commission model.[80]
6.94
Q Invest considered it inequitable:
We do not consider it appropriate for financial planners to base
their remuneration on a percentage of assets as this necessarily results in
different clients being charged differently for substantially the same level of
service. This inequitable practice dilutes the value of advice by perpetuating
the notion that financial planners are product distributors and it should be
avoided.[81]
6.95
Industry Super Network also opposed asset-based fees, stating that
conflicts of interest remain and such fees still encourage product sales ahead
of strategic advice. They suggested that they would only be appropriate in the
following circumstances:
Where the client and adviser agree on an asset based fee,
this must be agreed and approved by the client at least annually. ISN proposes
that clients should opt-in, on an annual basis and in writing, to receive and
pay for financial advice. This is typical in client-professional adviser
relationships and ensures that consumers are only paying for advice that they
desire and receive.
Therefore, while a product provider can facilitate payment of
the advice fee directly from the client’s account; this must be based on a
written authority from the client, with an annual renewal.[82]
Tax deductibility
6.96
There was also considerable support for fee-for-service advice payments
to be made tax deductible. The committee heard that this would not only make
this form of remuneration more affordable, but would provide equitable
treatment to that applying to commission payments, which may be claimed as a
business deduction presently. ICAA stated:
...it will introduce consistency and equity. In some cases
the commission and the commission payments are actually deductible. You have a
conflict there between deductibility of a commission remuneration versus fee
for service. Also, from an administrative perspective, if you have a
fee-for-service model then if I am providing advice I need to, as currently,
put down the advice that I am actually providing and see what is tax advice and
what is not tax advice and then I develop my invoice. So you have got some
administrative issues there in terms of delivery of the service and, again,
that adds to the costs associated with it.[83]
6.97
BFPPG commented:
In the continuing argument about commissions v fees it makes
little sense for an upfront commission paid to a financial planner to be tax
deductible to the product manufacturer but an upfront fee paid to a financial
planner not to be tax deductible to the client.[84]
6.98
Q Invest supported the proposal:
There is a clear public policy benefit to be gained by
encouraging consumers to seek professional advice to prudently plan their
financial future – and financial independence. Secondly, many remuneration structures
which operate on a commission model effectively enable a tax deduction to be
claimed for the commission payment, thereby providing an incentive to pursue
the type of remuneration model associated with some of the recent collapses.[85]
6.99
The committee also heard support for this proposal from CHOICE, Axiom
Wealth, AXA, Industry Super Network, Strategy First Financial Planning and MLC.[86]
Committee view
6.100
The committee notes that remuneration structures that are incompatible
with a financial adviser’s proposed fiduciary duty (Recommendation 1) should be
removed. The committee acknowledges that some in the industry have already
indicated a willingness to move away from commission-based remuneration
practices. The committee welcomes this and recommends that government consult
with and support industry in effecting this transition.
Recommendation 4
6.101
The committee recommends that government consult with and support
industry in developing the most appropriate mechanism by which to cease
payments from financial product manufacturers to financial advisers.
6.102
The committee is of the view that the proposal to make the cost of
financial advice tax deductible for consumers has merit. It could potentially
encourage more people to seek financial advice and would match the
deductibility presently afforded to manufacturers paying commissions to
advisory firms. However, the committee also recognises that tax deductions
could represent a subsidy for financial advisers, with the market willing to
bear higher costs knowing that a proportion will be returned at the end of the
financial year. Nonetheless, the committee recommends that the government
consider the implications of this proposal as part of its response to the Treasury
review (the Henry review) into the tax system.
Recommendation 5
6.103
The committee recommends that the government consider the implications
of making the cost of financial advice tax deductible for consumers as part of its
response to the Treasury review into the tax system.
Licensing
6.104
The committee received a number of suggestions to vary the current
licensing arrangements for financial advisers. They included:
-
more clearly conveying the conflicts and competencies of advisers
through separate licensing arrangements;
-
raising industry standards by increasing competency requirements,
particularly the minimum educational qualifications for advisers;
-
increasing licensees' capital adequacy requirements;
-
licensing individual planners;
-
introducing an industry-based professional standards body to
establish, monitor and enforce standards for financial advisers; and
-
enabling accountants to provide some limited advisory services
restricted to licensees.
Separate licence categories
6.105
Recommendations for separate licence categories depending on the
characteristics of the advisory business are closely related to proposals for a
dual standard of advice discussed earlier at paragraph 6.11. The basis for this
idea is that there would be one category of licensee where advisers working
under that licence identify themselves as a product salesman if they receive
payments from product manufacturers, and a higher category for those providing
independent advice free from such a conflict of interest. The licence category
would more transparently convey to consumers the nature of the advice they are
receiving.
6.106
Suggesting that removing product alignment from the financial planning
industry is impractical in the immediate term, Strategy First Financial
Planning proposed that a clear distinction be created between 'financial
product advisers' and 'financial advisers', accompanied by a public education
campaign.[87]
6.107
MLC provided a specific legislative proposal for the committee's
consideration. They recommended that the regulatory regime provide for two
separate models for financial advisory firms, either 'affiliated' or 'independent'.
These would be 'categorised to reflect their operating structure and providing
a meaningful descriptor for investors'. Individual advisers would also be
required to identify as an 'affiliated financial planner' or 'independent
financial planner'. These terms would be defined under the Corporations Act and
regulated by ASIC.[88]
In evidence to the committee MLC explained that under this model an
'independent' advisory firm and its authorised representatives would only be
able to receive fees from clients. Those accepting payments from product
manufacturers would be classed as 'affiliated'.[89]
6.108
MLC suggested that their suggested model could overcome the reason why
many Australians do not seek financial advice:
...they find it difficult to understand the system and trust
it. One of the reasons why they do not trust it is that there are confusing
payments going on between different parts of the value chain, and it is hard
for them to understand what influence that might have on the advice that they
are getting. By clearly identifying the two different models the client can
walk in the door with a NAB/MLC affiliated financial planner and they should
not be surprised if they end up with some services from that group. It is also
much easier to have the conversation: what does that mean; how does that impact
on the advice that I am getting; am I happy with the advice that I am getting:
I know that there is an association there. Right now the client has little
chance of understanding the relationships that exist between the licensees, the
advisers and the manufacturers in the current model.[90]
6.109
CPA Australia suggested that any distinction should occur on the basis
that independent advisers may only be so-called if they have complete control
over the products they can recommend, unrestricted by an approved product list
determined by someone else.[91]
However, CPA Australia speculated that independent advisers 'may very well
become quite a niche market' and questioned whether they would provide
affordable advice to the broader public.[92]
Raising competency standards
6.110
A considerable amount of evidence to the committee contended that the
minimum training and qualifications for advisers should be raised, while many
others warned about the increased costs for consumers if higher standards were
to be imposed.
6.111
ICAA advocated a minimum undergraduate degree level qualification
including a practical and experience component.[93]
MLC told the committee that new people entering the industry should be required
to hold an undergraduate degree, with some financial planning qualification in
addition to that.[94]
Professional Investment Services suggested increasing both educational and
training requirements:
PIS supports increasing the minimum training and
qualification requirements of those providing advice to include an
undergraduate or postgraduate degree in a financial services related field,
such as a Bachelor of Commerce or Business (financial planning) or Master of
Financial Planning through tertiary education. Furthermore, a practical training
and development year (akin to the practical legal training year completed by
the legal profession or the professional year completed by chartered
accountants) following tertiary education, involving continued training,
mentoring and reflective supervision, during the first year of advising would
also serve to increase professional competence and promote consumer confidence
in the financial services industry.[95]
6.112
Argyle Lawyers recommended that mandatory ethics training be introduced
for financial advisers, responsible managers and new entrants to the industry
as part of ASIC's RG 146 requirements.[96]
6.113
There was some opposition to these proposals, though. Guardian Financial
Planning argued that the current licensing arrangements already require that
advisers be adequately qualified for their role:
...the legislation currently encourages a licensee ... to
make sure that advisers are not authorised to advise on things that they are
not competent to advise on, that their qualifications back that up and that
their continuing professional development is targeted towards the competencies
they need to discharge their duties to their client base. I would suggest most
licensees probably operate in a very similar fashion, because the personal
liability that one takes as being a responsible manager and an office holder of
the licensee is fairly significant. I think most people take that very
seriously.[97]
6.114
IFSA warned of restricting financial planner numbers when seeking to
raise qualification standards:
...we need to take a view about appropriate transition
periods to get there so that ... we do not compound this issue of availability
of advisers in the market.[98]
6.115
ICAA suggested that increasing educational standards for advisers would
require a three to five year transition period.[99]
Professional Investment Services contended that improved standards 'must be
balanced against the existing regime', suggesting:
Where the committee supports further education, it is
recommended that the committee consult with the industry and industry bodies to
assess the barriers, overall impact and benefit of increasing education
requirements. This may require allowing for a ‘grandfathering’ process to
promote smooth transition from the existing to the new regime.[100]
6.116
However, FPA challenged the notion that lifting standards would increase
costs across the industry:
From our point of view, our 9,000 practitioner members would
probably meet all those requirements already. I am not sure that if you are
talking about genuine financial planners you are asking them necessarily to
increase their costs or commitments.[101]
6.117
IFSA also warned that:
Any minimum entry level should not be set so high that it
dramatically impacts on the cost of advice or the number of individuals that
are able to provide financial advice – especially where the majority of advisers
are trained to an appropriate level and operate within a robust structure that supports
the advice they provide.[102]
6.118
Treasury told the committee that attaining the right balance between
adequate training and affordable advice is difficult:
...we are hearing complaints that advice is too expensive, particularly
for the mum and dad type investor with smaller amounts to invest and that for
them it is too expensive getting access to advice. On the other hand, of
course, we want to ensure that advisers are properly trained and know what they
are talking about. That is the fundamental bind we, the policy and the law, are
caught in here: striking that balance between making advice affordable and on
the other hand ensuring that the advice is competent.[103]
6.119
ASIC informed the committee that they are reviewing RG146, 'with a view
to improving training standards and will put forward proposals for change in
consultation with industry and stakeholders'.[104]
In evidence ASIC also indicated that there would need to be consultation with
the industry about how the transition to higher standards could be managed,
particularly for existing advisers.[105]
6.120
At the licensee level, IFSA recommended that change should be
considered:
Given the nature of some of the product and service provider
collapses which have occurred, IFSA believes that it may be appropriate for
ASIC to consider enhancing the financial services licensing process to ensure
that Licensees and their Authorised Representatives are appropriately resourced
and sufficiently competent to offer the range of financial services and
products for which they have, or wish to obtain, a licence.[106]
6.121
AXA claimed that it was too easy for AFSL applicants to demonstrate that
they can meet their obligations, without necessarily having the skills or
resources to do so. They recommended:
The process for obtaining an AFSL should be enhanced to
require applicants to provide further detail and commitments regarding the
establishment of governance processes and the systems and resources necessary
to meet its responsibilities as a registered licensee.[107]
6.122
AXA also suggested that responsible managers be given greater authority
and be held accountable for failures of the licensee to meet its obligations.[108]
6.123
ASIC recommended that legislative changes be considered to empower ASIC
to deny an application, or suspend or cancel a licence, where there is a
reasonable belief that the licensee 'may not comply' with their obligations in
the future. This is a lower threshold than the current 'will not comply' and
would allow ASIC to take a more proactive approach to prevent likely breaches
of licence conditions before they occur.[109]
Capital adequacy requirements
6.124
Another proposal for protecting investors is to raise capital adequacy
requirements for licensees. In their submission MLC indicated that adequate
capital backing is the best protection for consumers where compensation is
being sought for 'inappropriate adviser activity'.[110]
AMP recommended that financial requirements be increased:
If all licensed entities were required to maintain a minimum
level of Net Tangible Assets, a greater level of security could be achieved for
all consumers.[111]
6.125
AXA supported increased capital adequacy requirements:
The Government and ASIC should consult with the industry to
identify a more appropriate level of capital adequacy for licensees which would
afford greater comfort that the risk management, compliance, and adviser
training and supervision functions are fully resourced to the standard
necessary to meet these enhanced obligations.
AXA considers the current capital adequacy requirements are
too low, resulting in some licensees not having access to adequate resources to
be able to discharge their duties.[112]
6.126
BFPPG argued against this proposal:
The way capital is employed is far more important than the
size of the capital and we all know from experience that those with lesser
capital tend to be better at managing their capital and spending their money.
There is not much point in having sufficient capital to take clients on a
Mediterranean cruise when, a short time later, the business collapses and those
clients lose their wealth.[113]
6.127
ASIC told the committee that it is exploring options for reform, though
they may be limited:
...ASIC is currently reviewing the financial resource
requirements for non-APRA regulated AFS licensees, with a view to improving
investor and systemic protection. However, ASIC is not a prudential regulator
and ASIC is not able to set prudential requirements for AFS licensees. This
will limit the type and nature of the financial resource requirements we can
impose. At this stage of the project, it is too early to tell whether this
limitation will prevent ASIC imposing appropriately rigorous resource
requirements on some or all AFS licensees.[114]
6.128
In its previous inquiry into agribusiness MIS, the committee received
evidence that prudential oversight of these schemes was needed to ensure they
held sufficient working capital to meet existing commitments, without relying
on new sales for that purpose. ASIC noted that the committee may consider
extending prudential regulation to these entities, while Macquarie Agricultural
Funds Management suggested that licensees be required to demonstrate they can
meet current obligations without relying on new sales, as part of their licence
conditions.[115]
6.129
The committee noted in its agribusiness MIS inquiry report that it would
reserve recommended legislative changes until it had considered the product
safety issues relevant to this inquiry.[116]
The committee makes a recommendation in relation to agribusiness MIS at
paragraph 6.154.
Licensing individual planners
6.130
One area of concern raised during the inquiry was the effectiveness of
licensees being responsible for the actions of their authorised
representatives. The committee heard that deficiencies in the oversight of
individuals' conduct could be overcome via individual licensing for financial
advisers.
6.131
Financial adviser Mr Benjamin Hancock expressed firm views on this
issue:
I believe that the legislative framework whereby financial
advisers are nothing but representatives of corporate licensees impedes the
elevation of the profession beyond that of the insurance salesmen of old.
This is true regardless of the morality and ethical awareness
of the financial advisers operating within this system, where the licencee
itself sets the parameters and entrenches bias into the practices of their
representatives.
As with the accounting industry, I strongly believe that
financial advisers should be individually licensed in much the same way as the
Tax Agents’ Board registers those accountants adequately qualified and
experienced to act in that capacity.[117]
6.132
He noted that this arrangement would leave financial advisers
responsible for their own ethical behaviour.[118]
6.133
Mr Ian Bailey also supported licensing individuals, stating that it
would compel a more professional approach from advisers needing to demonstrate
they are a suitable risk for PI insurers.[119]
Mr Bruce Baker told the committee that individual licensing would provide a
higher prevalence of 'real financial advisers'.[120]
6.134
FOS was of the view that individual licensing would not represent good
value for money:
That is a huge undertaking and I wonder whether that would
have significant benefits. You might be better off putting the resources
somewhere else, because you can set up licences until the cows come home. Maybe
putting the resources into being able to follow up more of the issues they
identify through their information that comes into them, and also it might be
cheaper for you to put the resources into something like a last resort
compensation scheme and say, ‘We’re going to do the best we can on licensing.
Most of the time it works pretty well, but when someone falls through all the
cracks there will be a bit of a safety net there at the bottom.’[121]
6.135
Argyle Lawyers also noted that 'individual licensing of each and every
financial adviser in Australia is impractical'.[122]
6.136
Instead of focussing on licensing all advisers, ASIC proposed that it be
given extended powers to take action against individuals they deem to be
operating at or near the fringes of the industry. ASIC sought the following
'negative licensing' powers:
ASIC believes the Government should consider the merits of
enhancing ASIC’s power to act against individuals by amending the banning power
in s920A as follows:
-
clarify that ASIC is able to ban an individual (after a
hearing) where a person is ‘involved’ in a contravention of a financial
services law by another person i.e. its authorising licensee or another person;
-
enable ASIC to ban an individual (after a hearing) where
ASIC has reason to believe that the person is not a ‘fit and proper’ person to
engage in financial services; and
-
replace the existing grounds for banning a person where
ASIC has reason to believe that the person ‘will not comply’ with s 912A or a
financial services law with the slightly lower standard of ‘may not comply’ or
‘is likely not to comply’.[123]
6.137
Securities and Derivatives Industry Association argued that 'bad apples'
reporting should be facilitated to protect both consumers and licensees:
Unlike other countries, like the US and the UK, Australia has
no proper regime for the reporting of misconduct by individuals on leaving a
firm so that future employees and consumers can be protected from these
individuals. SDIA has for years advocated a system of compulsory reporting of
specified matters on termination and the protection for licensees in making and
having access to those reports.[124]
Professional Standards Board
6.138
A more widely held view was that improved accountability for licensees
could be achieved via the establishment of an industry-based professional
standards body, also frequently referred to in evidence as a professional
standards board (PSB). This entity would share responsibility with ASIC for
establishing, monitoring and enforcing competency and conduct standards for
financial advisers. Such an arrangement could also enable the use of terms such
as 'financial adviser' and 'financial planner' to be restricted to those qualifying
as members and prepared to comply with the conditions imposed by the PSB.
6.139
Tying a number of aspects of the debate together, FPA recommended that
financial planners be defined in legislation and subject to higher standards
through licence and professional oversight:
We believe that the term ‘financial planner’ or ‘financial
adviser’—they are interchangeable—should be defined. There should be a
fiduciary responsibility attached to that person. There should be a competency
level that is higher than Regulatory Guide 146 attached to that person. And
there should be a professional obligation attached to that person through
membership of a professional body—in other words, they have to meet with
requirements over and above the law.[125]
6.140
Australasian Compliance Institute proposed that individual advisers be
supervised by a professional body, or bodies, approved by ASIC. They suggested
that these bodies be given following responsibilities:
-
Maintenance of a register of advisers including details of
qualifications and disciplinary actions taken against them by the professional
body.
-
Setting (with ASIC input) the standards for qualifications,
skills and knowledge for advisers with the possibility of the establishment of
“tiers” of skills/knowledge that correlated to levels of complexity and risk in
financial products they are permitted to advise on.
-
Supervision of training diaries/records.
-
Requirement for adherence to a “Code of Conduct” with appropriate
powers of disciplinary actions against advisers including those that may
preclude them being able to continue to give advice.
-
Accrediting.[126]
6.141
AXA also advocated the benefits of such oversight:
Professional bodies exist in financial services, but
membership by licensees and advisers is not mandated. This could hamper the
evolution of the industry towards becoming a profession, with more uniform
standards and codes of conduct which would benefit consumers by improving the
quality and consistency of financial advice. AXA submits that the current
environment would be enhanced by requiring licensees to adopt a common
framework on issues which go to the heart of professionalism, and by requiring
advisers to belong to a recognised professional body.[127]
6.142
ING Australia also argued that a professional standards body was the
appropriate mechanism for improving competence and standards in the industry:
We believe that current adviser training requirements are too
low and that standards could be raised via the establishment of a professional
financial advice body recognised by the government. While the terms and
conditions of membership would be a matter for the professional body, it should
ensure that advisers are properly accredited and their professional standards
monitored and elevated on an ongoing basis...
Significantly, such a professional body would be empowered to
expel members who do not meet its benchmarks for competence and code of
conduct. Moreover, only planners that are members of the professional body
should be able to call themselves a “financial adviser” or a “financial
planner”.[128]
6.143
BFPPG suggested that only members of a professional standards board be
permitted to call themselves financial planners.[129]
They argued that a professional standards board would provide more effective
oversight than ASIC:
The PSB would be more capable of managing the quality of
advice and the standards of the profession than ASIC or such other organisation
that can only administer the law. A professional body is not restricted to
enforcing the law but can act in advance of problems whether they involve
“legal” behaviour or not. A PSB can also receive intelligence from its members,
develop meaningful standards, counsel members and use the threat of expulsion
if members are in a position where they may bring the profession into
disrepute.[130]
6.144
Quantum Financial Services recommended that an independent PSB be
established 'to oversee the development of professional standards and act as a
guardian of the public interest'.[131]
It would introduce a compulsory code of ethics and only members would be
permitted to call themselves 'financial adviser' or 'financial planner'.[132]
6.145
Mr Bruce Baker proposed two professional standards bodies:
There is probably merit in having a Professional Standards
Board for product sales people and a Professional Standards Board for
independent advice providers, in recognition that these are two very different
roles AND to help minimise the risk of the Professional Standards Board for
independent advice providers becoming a captive of product providers.[133]
6.146
Treasury suggested that a professional standards body may have merit,
subject to its relationship with ASIC:
...a major consideration we would have to take into account
is how it would work in conjunction with the role of ASIC. You could see an
overlay in roles; you could see confusion for industry and investors; and
obviously it would occur additional costs. You also have to ask yourself: do
you put it within ASIC or do you have it as a separate body, which means that
ASIC and the body have to work closely together to try to avoid duplication?
The fundamental question [is] are the additional costs of that warranted; will
it particularly address the issues that are being raised?[134]
6.147
Officers also stated that such a body would need to build acceptance:
...any new organisation will have to build that confidence.
They will not necessarily have the confidence from day one, and there is always
a question mark as to whether they will build it. It depends on whether the
industry, consumers and investors actually accept what they come up with.[135]
Accountants
6.148
Evidence to the inquiry also included a proposal to provide a licensing exemption
for accountants providing limited advice. The Accounting Professional and
Ethical Standards Board suggested that unlicensed accountants be able to
provide 'incidental investment advice' to their clients as part of their
broader service, in order to 'break the grip of the product providers over the
financial services industry'.[136]
They indicated that the current restrictions applying to accountants are
impractical:
...accountants have drilled into them that you cannot give
investment advice otherwise you have no PI cover or anything else, particularly
at the lower level. Certainly when you get into a more trusted adviser
relationship I think a lot of people end up giving advice even though they are
not supposed to. It is very hard to have a relationship with someone for 30
years where you know more about their affairs than they do and then tell them,
‘Sorry, I can’t give you advice on that.’ Effectively a lot of advice gets
given.[137]
Committee view
6.149
The committee does not support creating separate licensing categories to
distinguish between advisers operating in a sales capacity or those offering
'independent' advice. This would create an added layer of complexity to the
licensing system, would require an extensive public education campaign, and
would potentially be confusing. The committee is of the view that bringing
additional professionalism and transparency to the industry can be achieved
more effectively through alternative recommendations contained in this report.
6.150
The committee is also of the view that licensing individual planners
would be far too costly to justify any regulatory improvements that may result.
However, the committee supports ASIC's recommendation (outlined at paragraph 6.136)
that it be easier for the regulator to ban individuals operating at the fringes
of the financial services industry, by bolstering ASIC's banning powers under
section 920A of the Corporations Act.
Recommendation 6
6.151
The committee recommends that section 920A of the Corporations Act be
amended to provide extended powers for ASIC to ban individuals from the
financial services industry.
6.152
With regard to capital adequacy requirements, the committee is
unconvinced that increased capital adequacy requirements for licensees would be
of overall benefit to consumers. Although there may be some consumer protection
advantages, with large entities potentially having better capacity to discharge
their licensing duties and meet any compensation claims, any consolidation of
the industry away from smaller boutique advisory firms would not necessarily be
in consumers' interests. Further, ASIC is not a prudential regulator and the
committee does not consider that the cost of AFSL holders being brought under
APRA's regulatory jurisdiction is warranted.
6.153
The committee also noted that it would discuss any need for additional capital
adequacy oversight of agribusiness MIS in this report, having wanted to see if
similar product safety issues emerged during this inquiry that might influence
the committee's recommendation. Ultimately, the committee has concluded that
improving the regulation of financial advice in relation to financial products
is more effective than regulators attempting to ensure, through additional
regulation, that products are 'safe' for investors. Notwithstanding this and
the fact that ASIC is not a prudential regulator, the committee is of the view
that the unique nature of agribusiness MIS warrant some regulatory intervention
to ensure that these schemes do not, over time, develop a ponzi-like character
by relying on new product sales to prop up existing schemes. Accordingly, the
committee recommends that, as part of their licence conditions, ASIC require
agribusiness MIS licensees to demonstrate they have sufficient working capital
to meet current obligations.
Recommendation 7
6.154
The committee recommends that, as part of their licence conditions, ASIC
require agribusiness MIS licensees to demonstrate they have sufficient working
capital to meet current obligations.
6.155
A licensing exemption for accountants was also raised with the
committee. While the committee understands that there are grey areas for
accountants when interpreting and complying with the financial services carve-out,
which limits the nature of the advice they are able to provide clients, the committee
is of the view that accountants wishing to provide financial product advice as
defined under the Corporations Act should obtain an AFSL to do so.
6.156
The committee recognises extensive support throughout this inquiry for
increasing the minimum training and qualification standards for financial
advisers, but also acknowledges that such a measure would potentially have
implications for the cost of advice, and would need to overcome difficult
transition issues with respect of people already established in the industry.
The committee supports ASIC's consultation with industry over the most sensible
way to raise training and qualification standards set by Regulatory Guide 146, in
conjunction with the committee's recommendation on a professional standards
board at paragraph 6.160. With respect to licensee standards, the committee
also supports ASIC's recommendation that it be able to deny an application, or suspend
or cancel a licence, where there is a reasonable belief that the licensee 'may
not comply' with their obligations in the future, rather than the current
legislative standard of 'will not comply'. The committee is of the view that
this is an important measure to allow ASIC to be more proactive in preventing
likely breaches of licence conditions before they occur.
Recommendation 8
6.157
The committee recommends that sections 913B and 915C of the Corporations
Act be amended to allow ASIC to deny an application, or suspend or cancel a
licence, where there is a reasonable belief that the licensee 'may not comply'
with their obligations under the licence.
6.158
Finally, the committee is of the opinion that a professional standards
board (PSB) overseeing conduct standards for financial advisers should be
established. This reform would increase professionalism within the industry by
ensuring that those wishing to call themselves 'financial advisers' or
'financial planners' would be required to obtain PSB membership and adhere to
its standards. An industry-based, independent PSB, working in conjunction with
ASIC, would establish, monitor and enforce competency and conduct standards
amongst members and have the power to sanction or remove those who do not comply.
The committee considers that such an entity would be more effective at identifying
and addressing problems early, receiving better intelligence at industry level
and not being constrained by meeting high legislative thresholds before taking
action.
6.159
ASIC would need to work in conjunction with a PSB to avoid duplication
and overlap of their respective oversight functions.
Recommendation 9
6.160
The committee recommends that ASIC immediately begin consultation with
the financial services industry on the establishment of an independent,
industry-based professional standards board to oversee nomenclature, and competency
and conduct standards for financial advisers.
Lending practices
6.161
The committee's examination of the Storm Financial and Opes Prime collapses
raised a number of issues concerning the lending practices of some
institutions, particularly margin lending and securities lending for
unsophisticated retail investors. The previous chapter noted a lack of
regulatory control over margin lending and loose practices by some lending
institutions.
6.162
In June 2009 the government introduced a bill into parliament to amend
the Corporations Act so that margin loans are regulated as financial products under
the Act.[138]
The bill was passed by the parliament on 26 October 2009. Accordingly, anyone
providing or advising on margin loans will be required to be licensed to do so,
either by applying for an AFSL or varying their existing one. The bill also
introduced certain additional obligations on margin lenders. One is a
responsible lending requirement:
A new responsible lending requirement that applies
specifically to margin loan lenders is imposed seeking to ensure that clients
are not given loans which they are unable to service. Lenders will be required
to assess whether a proposed loan is unsuitable for the client, such that in
the event of a margin call the client would not be able to service the loan or
would only be able to do so with substantial hardship. If a loan is assessed as
unsuitable, it must not be provided to the client.[139]
6.163
The amendments also require margin call arrangements to be clarified,
stipulating that 'lenders must notify clients when a margin call is made,
unless clients explicitly agree to notifications being provided through their
planner'.[140]
6.164
In their submission to the inquiry ASIC commented that margin lenders
will be able to rely on information about borrowers' suitability that has been
passed on from financial advisers.[141]
CBA also raised concerns about the provision relating to the clarification of
margin calls, suggesting that the amendments should simply have required
lenders to directly notify borrowers of margin calls in all instances.[142]
Committee view
6.165
The government's margin lending reforms, in conjunction with a fiduciary
duty for financial advisers and improved enforcement by ASIC, will assist in minimising
the types of conduct that led to the catastrophic investment losses examined
during this inquiry. The committee does acknowledge, though, that further improvements
may be required should problems arise from the continuing role of financial
adviser intermediaries in the margin lending process. Of particular concern is
their role in passing on information about borrowers to the relevant lending
institution, as well as being able to be granted responsibility by clients for
informing them of margin calls on behalf of the lender. The committee expects
the government to pursue necessary further amendments should these issues remain
problematic.
Product limitation
6.166
Rather than bolstering the conduct and disclosure requirements for the
provision of risky investment products such as margin loans, a contrary view
was that they should not be available at all to unsophisticated investors. For
example, Mr Peter Worcester of Worcester Consulting Group told the committee
that margin loans are unsuitable for retail clients. He said:
...margin lending is the last resort when all else fails
because it is the dumbest thing to do. It is the dumbest thing to do. Why? It
is a high interest rate with no long-term horizon that you can control, for not
necessarily the appropriate level of diversification. It is the last resort of
good advice. It is certainly where you get the maximum amount of commission,
though.[143]
6.167
The Institute of Actuaries in Australia indicated that some limitations
should be considered:
...there are certain products that are complex, that are very
difficult to communicate and that have certain risks in them that are outside
the norm. One of the learnings out of this last period is that we need to think
very carefully about which of those products should and should not be used and
in what circumstances.[144]
6.168
The Commercial Law Association of Australia made the following comment:
It may well be that some products should not be available to
retail products no matter what the disclosure and advice given. We note that
ASIC has indicated that it is considering whether the sale of some managed
investment schemes should be restricted. We would support the examination of
products generally to consider whether there are any which should be placed in
a restricted sale category. We do however see the need to reconcile the
requirement that ASIC be a registration body only on the one hand, with the
concept that it be a ‘gatekeeper’ on the other.[145]
6.169
ASIC did not consider greater restrictions on margin lending products to
be necessary:
We note that the new margin lending regime is likely to be
more liberal than that in some other jurisdictions. Some jurisdictions
(including the US, Singapore, Hong Kong and Canada) impose specific
restrictions on retail investor margin lending, such as limits on leverage.
Other jurisdictions, such as the UK, do not have specific regulation, but general
obligations mean that retail investors are not generally offered margin loans.
At this stage, ASIC does not believe that these sorts of limitations, which are
inconsistent with the fundamental settings of the FSR regime, are necessary in
Australia.[146]
Committee view
6.170
The committee is of the opinion that it is not for the parliament or the
government to determine for whom particular investment products are
appropriate. This is a decision for individual investors, in consultation with
a financial adviser bound by a fiduciary duty to put their clients' interests
ahead of their own.
Investor compensation
6.171
The problems with PI insurance as a compensation mechanism, discussed in
the previous chapter from paragraph 5.93, elicited a number of recommendations
to establish a statutory compensation scheme for investors. Other suggestions
for improving access to compensation are included below.
6.172
The committee notes that the UK has established a statutory compensation
scheme. ASIC reported:
...the UK Financial Services Compensation Scheme
(Compensation Scheme) was set up to assist retail clients who had suffered loss
from bad investment advice, misrepresentation, or where a firm has gone out of
business and cannot repay money owed to retail clients. The scheme covers
transactions in relation to deposit-taking, investments, insurance and
mortgages.[147]
6.173
The UK scheme investigates and determines eligibility for investors and
is funded by levies that reflect the riskiness of their activities.
Compensation is capped to leave investors with some exposure and encourage
prudent investing.[148]
6.174
CHOICE supported a similar regime for Australia, stating that:
A last resort compensation scheme is an essential element of
the compensation regime. It would provide compensation where licensees have
breached their licence conditions and are otherwise unable to compensate
consumers—for example, due to liquidation. The scheme would bring Australia’s
financial services compensation arrangements into line with those of other
international financial services hubs such as the United Kingdom and with other
sectors of the Australian economy that already have schemes in place—for
example, the Australian Stock Exchange.[149]
6.175
The FOS also argued in favour of a safety net of last resort
compensation scheme, with establishment costs funded by government and
operating using industry levies. They indicated that large events could provide
compensation using borrowed money recuperated using post-event levies.[150]
The committee received a detailed proposal for the establishment of a financial
services compensation scheme, conducted by Professional Financial Solutions on
behalf of FOS. It recommends the scheme be industry-based and approved by ASIC,
funded by levying AFSL holders and backed by legislation requiring licensees to
be members of the scheme. Additional funding after large compensation claims
would be raised through special levies. Consumers would receive compensation from
the scheme if they have received a determination against a licensee in their
favour and that licensee is unable to meet the claim. To mitigate moral hazard
issues, payments would be limited to a proportion of the compensation claim,
decreasing as the claim rises beyond certain thresholds.[151]
6.176
Treasury outlined the costs and benefits of the proposal:
...there are obviously clear benefits for the
consumer-investor. The question is: how expensive would that be? How expensive
would it be to the industry? Therefore, how much extra cost would go onto the
person receiving the advice? Therefore, would that cut back on the amount of
advice that could be received? Again, it is a very major balancing decision.[152]
6.177
Securities and Derivatives Industry Association opposed such a scheme:
Professional indemnity insurance is the best and most
equitable method of ensuring consumers are adequately compensated. A
centralised compensation fund would present the danger of moral hazard, where
those guilty of misconduct are able to escape responsibility for compensating
those affected by their actions.[153]
6.178
Insurance Council of Australia cautioned that a statutory compensation
scheme would need to be designed carefully:
It is important to identify the scope of the problem—for
example, the actual number of consumers being left uncompensated—so that a
compensation fund can be designed appropriately ... a fund based on
overestimates of the problem to be addressed would be a burden for the
government to administer and for the industry to fund, with consumers
ultimately paying the cost.[154]
6.179
Alternatively, Professional Investment Services proposed that advisers
be able to take action against failed product manufacturers on behalf of their
clients:
Licensees should be given the capacity to act on behalf of
their clients and investors to undertake proceedings against financial services
product providers for the recovery of damages for corporate misconduct and
product failures, similar to ASIC’s powers. At the moment, we have to wait for
people to come to sue us before we can join a product provider who has actually
failed in their duty. We do not have the authority to take them on ourselves.[155]
6.180
Maurice Blackburn Lawyers proposed the following measures to improve the
efficacy of PI insurance:
-
Consider making legislative provision for disclosure of
details of PI insurance cover or extending the current regulatory provisions in
respect of preliminary discovery to include third party discovery to enable the
production of any relevant insurance policies held by defendants or proposed
defendants at an early stage in litigation;
-
Consider legislating to make remedies available to third
parties against insurers who fund unmeritorious defences, particularly where
limits on liability exist in the insurance policies, to enable plaintiffs to
have a right of recourse against such insurers;
-
Consider establishing a compensation fund from which
compensation to consumers could be made;
-
Consider amending legislation to ensure regulation of
requirements on licensed financial service providers and other professionals to
have adequate insurance policies which do not contain exclusion clauses that
exclude them from the provision of services which they are licensed to provide;
and
-
Improve and enhance monitoring of compliance with
regulatory procedures.[156]
Committee view
6.181
The committee recognises that the deficiencies of PI insurance make a last
resort statutory compensation fund covering licensee wrongdoing appealing.
There are, however, a number of significant issues that would need to be
overcome in any scheme's design. Capping payments would largely address moral
hazard issues, but of particular concern is the very difficult task of
formulating an equitable levy system that does not compel licensees with a
cautious approach to cross-subsidise riskier activity. There must also be
concerns about the cost that would ultimately be passed on to consumers, and
whether it would be justified by the protection it offers.
6.182
The committee is of the opinion that more work is needed to determine
whether a tailored statutory compensation scheme would be desirable and cost
effective in Australia. This should include consultation with industry about
how levy arrangements might be designed to ensure they are fair and equitable
across the industry.
Recommendation 10
6.183
The committee recommends that the government investigate the costs and
benefits of different models of a statutory last resort compensation fund for
investors.
Financial literacy
6.184
In paragraph 5.133, the committee noted its view that ASIC could be
doing more to educate key, higher risk, older demographic groups—such as retirees—by
promoting sensible investment messages.
Recommendation 11
6.185
The committee recommends that ASIC develop and deliver more effective
education activities targeted to groups in the community who are likely to be
seeking financial advice for the first time.
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