The committee received 16 submissions and evidence through a public hearing. The most important of the common themes presented to the committee were:
there is generally support for the bill and the wind-up of the Financial Adviser Standards and Ethics Authority (FASEA);
the composition of the board, particularly if and when members may have to excuse themselves because of conflict of interest;
the need to triage the cases brought before the Board;
regulation, training, and education of financial advisors;
the need for consumer input; and
access and review of the accompanying regulations.
Views on the bill
Support for the bill
Many submitters and witnesses expressed support for the bill and its aims. There was a general view that FASEA's dissolution and the transfer of its powers to Australian Securities and Investments Commission (ASIC) and the Minister was positive reform.
The Stockbrokers and Financial Advisers Association (SAFAA) commented:
It is important that FASEA be wound up and the standard-setting powers be transferred. We see this initiative as further strengthening the oversight of financial advisers. ASIC has significant experience in monitoring misconduct through its regulatory oversight of licensees, and it makes sense to align the oversight of financial advisers with that of licensees.
Super Consumers Australia supported the bill's enforcement aspect arguing it would lift professionalism:
A core component of professionalisation involves individuals being accountable for their actions. This bill furthers this cause by establishing a single central disciplinary body to provide graduated, efficient and timely responses when individual failure is identified. The Financial Services and Credit Panel perform an important role in this process by driving a compliance culture through resolving complaints efficiently.
The Association of Financial Advisers Ltd (AFA) supported both the dissolution of FASEA and the strengthening of accountability provisions:
The AFA supports the introduction of a pragmatic disciplinary system for financial advisers, including access to a broader range of penalties.
We support the winding down of FASEA at the end of 2021 and the transfer of existing responsibilities to the minister and ASIC.
The Financial Services Council (FSC) also supported FASEA being wound up and the bill's support for the Royal Commission recommendation 2.10 and the recommendation 7.1 of the Tax Practitioners Board (TPB) review:
The FSC supports the bill in its implementation of the royal commission's recommendation 2.10. As with the introduction of the professional standards regime in 2017, establishing a system of individual registration for financial advisers is another important step towards a professional and accountable financial advice profession.
Other features of the bill that we support include the adoption of recommendation 7.1 of the Tax Practitioners Board review, bringing tax financial advisers into a single regulatory regime, the review mechanism available in the legislation to appeal determinations to the Administrative Appeals Tribunal, and clarification of circumstances in which AFCA can refer matters to the Financial Services and Credit Panel.
Finally, the TPB was also supportive of the recommendations already described above:
…we welcome this reform, which implements similar recommendations from two independent reviews: recommendation 2.10 of the financial services royal commission; and recommendation 7.10 of a more specific independent review, the James review of the TPB. The board strongly supports better advice and reducing regulatory burden on tax and financial advisers and, at the same time, we seek consistent standards for all tax advisers regardless of who they are regulated by.
Finally, the Financial Planning Association of Australia (FPA) saw the streamlining of regulators for financial planners as a positive outcome:
Fundamentally, though, the move to reduce the number of regulators regulating financial planners from the current nine and simplifying the disciplinary framework for financial planning is a welcome change. These are critical changes in progressing the work of this parliament to create a professional framework for financial planners. We therefore welcome the consolidation of discipline for financial advice to ASIC through the FSCP, with professional peers sitting in judgement of the conduct of their peers and the ultimate creation of an individual professional-registration obligation.
Composition of the Financial Services and Credit Panel
The composition of the Financial Services and Credit Panel (FSCP) attracted a significant amount of comment, particularly with regard to the potential for conflict of interest and the mechanism employed to manage it.
It was generally felt that FSCP members excusing themselves without replacement was not ideal, and that self-declaration of such a conflict lacked sufficient robustness.
...if someone is disqualified because they have a conflict of interest, which we've said we would like to seek further guidance on, we believe that they should be replaced by someone else so there are always at least three people on that panel.
CPA Australia argued that it is important that the composition of the FSCP reflects the nature of the matters being heard:
For credibility and to engender professionalism within the sector, peer to peer discipline is vitally important.
Where a member of the FSCP is not entitled to be present at a meeting due to a conflict of interest, the remaining members and the panel, including the chair, will constitute a quorum. Depending on the number of industry representatives on the panel, or the situation where more than one member is excused due to conflicts of interest, the end result, in a worst case scenario, may be a panel of just the ASIC chair and one industry representative. Section 151 should therefore be amended to clarify that the minimum quorum should be the ASIC chair and no less than two industry representatives from the FSCP. If this quorum cannot be met, additional industry representatives should be selected for the panel.
The FPA are generally accepting of the FSCP's structure as proposed in the legislation. However, they too, felt that there should always be three members on the panel:
We have always been of a view that the profession and the peers of the profession should sit in judgement over the conduct of their peers, and we think the make-up of the panels makes sense to provide that professional framework for considering whether or not you have upheld the standards of the profession and whether or not you've complied with the laws and regulations of that profession. Professionals are best placed to sit in judgement of other professionals within their own profession. We see that in law and in medicine, and we see that in engineering type fields, so we believe the make-up is right. Our main concern, though, is that, in the bill at the moment, where there's a conflict and one of the panel members has to step aside, you get into a situation where you no longer have a panel of peers, effectively. You just have ASIC making the decision…
We had envisaged, when we were looking at setting up our disciplinary body, that you would have reserve panellists potentially put against cases. That way, if somebody had a conflict that arose as the case was being heard, you could switch them in and out.
Importantly, the Australian Commission for Law Enforcement Integrity (ACLEI) expressed some concern at the conflict of interest provisions:
The draft Explanatory Memorandum and the bill recognise that the primary corruption risk for FSCPs under the proposed arrangement is likely to be conflicts of interest. This may be particularly the case for the industry representatives appointed to the FSCPs.
ACLEI considers this a significant risk to the integrity of the proposed arrangement for FSCPs as the single disciplinary body for financial advisers.
This risk is heightened noting that these members (all except the Chair) may be outside of ACLEI jurisdiction. The risks are noted in paragraph 1.43 of the Draft Explanatory Memorandum and are currently addressed through an ongoing obligation to disclose to ASIC 'any direct or indirect financial or other interests, such as personal or business relationships, that could conflict with the proper performance of their duties as members of a Financial Services and Credit Panel.'
ACLEI notes the bill's proposed conflict of interest declarations as a measure to mitigate this risk, however, we also note that this system relies entirely on self-disclosure by the panel members.
Number and type of cases brought before the Financial Services and Credit Panel
A number of submitters expressed concern at the potential number of cases the FSCP might be required to review. There was general support for a 'triage' process so that the panel be convened only for necessary cases. SAFAA commented:
I'll go back to my example of a financial services guide being sent out three days late. That is a contravention of the financial services law, but you wouldn't want to convene a panel to hear about a financial service guide going out three days late. That would be something that is appropriate for ASIC to look at, to issue a notice of some kind, but it shouldn't be a matter to convene a panel about.
We think it's utterly appropriate that the panel be convened to hear serious matters, but we think the very minor matters could be dealt with without convening a panel.
The Institute of Public Accountants (IPA) had similar views:
IPA fully supports the establishment of a SDB [Single Disciplinary Body] to improve the regulation of financial advisers. In particular, we support the process of a ‘triage’ to ensure that minor matters or breaches do not create bottlenecks in the overall disciplinary process; and having a separate, efficient process to deal with minor matters and breaches. The IPA also has a two-tier process by which administrative breaches can be dealt with expeditiously whilst more serious breaches are channelled through the Disciplinary Tribunal and then the Appeals Tribunal (if applicable).
The AFA also brought to the committee's attention the potential for unnecessary cost to be passed onto consumers if the FSCP becomes inundated with low-level cases:
I would add the impact of cost. You spoke about the industry wearing the brunt of this additional compliance cost if the regime is inundated with minor administrative matters. But, really, I would like to throw a consumer lens on it, because these costs are ultimately borne by the consumer. It is well documented. Your colleagues in the Senate have spoken about the exacerbating crisis in relation to ordinary Australians being able to afford financial advice. We see that as a significant risk as a result of this regime, having to deal with minor administrative issues, and we are extremely concerned about the consumer impact of the rising compliance costs.
Moreover, the AFA argued that there was an apparent contradiction in the Acts governing breaches and that ASIC was, in fact, obligated to investigate even the most minor of matters:
Section 139 of the ASIC Act talks to how ASIC may call a panel. But the complication is section 921S of the Corporations Act, which says where there has been a breach of the law, however minor that may be, and ASIC has not chosen to convene a panel, ASIC must issue a written warning or reprimand. To do that, they must go through the process of investigating even the most minor of matters. Our suggestion is in two ways: firstly, ASIC should have the option to take no further action with a matter that they choose not to refer to a panel; and, secondly, the criteria for matters that can be considered through this should be elevated so that they are more a matter of the significant breaches that would otherwise be reported to ASIC through the significant breach reporting regime.
Regulation, training, and education of financial advisers
A number of submitters raised the question of training and education standards as well as regulation more broadly. There was an emphasis on ensuring that the recognition of education qualifications and processes and were streamlined and simplified without any lowering of standards.
To provide some context, SAFAA described what is currently required for someone to enter their profession and the difficulties they face:
Say you graduated from the University of Sydney with a degree in economics. You'd then have to go off and do a financial planning diploma at a different university. The only universities offering them are ones like Central Queensland University, Griffith University or Western Sydney University. You'd also then have to do a two-year professional year candidacy, where you would not be allowed to give advice yourself—so you couldn't actually earn any revenue for the organisation in that time; you'd have to be supervised. That's very challenging in our industry, because, as you know, clients ring up and want to place trades instantly. Having that ongoing minute-by-minute supervision is very challenging indeed. We're also concerned about the loss of experienced advisers in terms of providing that mentoring and supervisory role.
Eventually, having gone through the professional year candidacy, you can start giving advice. Having said that, no-one comes into the business and starts giving advice instantly anyway; you have to learn too much about the industry and markets. The professional year candidacy is extremely challenging in terms of how it's going to work. It's not like financial planning, where you meet with a client once a year and do an annual review, because, as you know, people are trading daily—so it doesn't quite work like that. Our concern is that graduates don't want to go off and do another unrelated graduate diploma before they can even enter the industry, and then do those two years of professional candidacy. We're not seeing anyone come into the industry. There are very few new professional year candidates coming in.
SAFAA further expressed the view that the existing regime should not be perpetuated:
…we would not want to see a repeat of what the FASEA board has done, which has been to narrow the scope of educational qualifications. We certainly hope that, once this bill has passed and FASEA has been wound up, there will be a much more common-sense approach to the idea of what educational qualifications are required for our industry and that those degrees [sic] will be approved.
The Self-Managed Super Fund Association (SMSFA) noted that:
…current education standards and approved courses and degrees refer to Tax Practitioner Board approved courses in commercial and taxation law. This relationship will cease on the winding up and transfer of FASEA functions and the transfer of tax financial advisers out of the Tax Practitioners Board purview.
The FASEA education standards will over time bring all advisers into the approved tertiary or, diploma or higher award education standard. For most advisers, this aligns with the education standards currently set out in TASR 2009 Schedule 2, Part 3 Division 1 (items 301 and 302).
The current education standards will need to be reviewed and updated post 1 January 2022 as the Tax Practitioners Board will cease to be the standard setting body for taxation education for tax (financial) advisers. Further the FASEA education standard references course and degrees approved by the Tax Practitioners Board. With the transfer of the FASEA and tax (financial) adviser functions to the Minister and ASIC, there is an urgent need for review and updating of this legislative instrument.
In addition to the FASEA education standards is the need for continuing professional development and compliance with the Financial Planners and Advisers Code of Ethics 2019. These address any actual or perceived gaps in the education requirements.
Separate professional development standards are currently prescribed by the Tax Practitioners Board. These need to be met in addition to those prescribed by FASEA.
A review of what is the current FASEA continuing professional development standard will be essential to ensure that taxation is properly and separately considered. A robust CPD standard will ensure that the appropriate standards are upheld.
Certified Practicing Accountants (CPA) Australia felt that there had been insufficient recognition given in the bill to previous reforms regarding educational standards:
The proposed new regime also fails to recognise the significant reforms that have been implemented for the retail financial planning sector since 2014, including:
the lifting of education requirements to a minimum of a bachelor’s degree;
40 hours of professional development that must be completed annually a legislated Code of Ethics implemented by FASEA; and
compulsory education in commercial law and taxation law as part of the approved qualifications for new financial advisers.
Further, existing financial advisers have already had to meet education and/or experience requirements to register as a tax (financial) adviser with the TPB. Yet, it is possible under the proposed reforms that an existing financial adviser who has been registered as a tax (financial) adviser may be required to complete one or more approved bachelor or higher degrees, qualifications or courses to continue providing tax (financial) advice if the Minister determines new requirements by legislative instrument.
Additionally, the SAFAA pointed out the potential risks of experienced professionals leaving the sector:
For our members, I know that the loss of experienced advisers is a top risk on their risk register. Some of them are looking at losing up to 10 per cent of their advisers. It varies across the industry, but, within some of the larger stockbroking firms, they are worried they're going to lose up to 10 per cent of their advisers.
Given that ultimately these reforms are designed to be for the benefit of consumers, there was some support for a consumer voice on the FSCP. Super Consumers Australia commented:
…we think there's value in ensuring the panel has at least one member with consumer experience or equal representation with those with industry experience. As the royal commission showed us, this industry has fallen short of community expectations. Practices common in the sector, such as charging fees for no service, were exposed to public scrutiny and were seen as thoroughly inappropriate.
Introducing consumer experience into the disciplinary panel will help ensure this disconnect does not occur again. People with consumer experience bring a specialist expertise and skill set. Examples of such people can be seen throughout the financial services regulatory system, serving on compliance and complaints handling bodies. They combine intimate knowledge of the law, regulatory guidance and industry practice, and, most importantly, have a determined focus on the impact of misconduct on consumers.
This view was not, however, universally shared. SAFAA argued that the FSCP was a disciplinary body and not a complaints body:
In terms of consumer representation, I come back to my point that it's a professional disciplinary body, which is very, very different from a complaints body. AFCA is the consumer complaints body. The AFCA board consists of an independent chair and an equal number of consumer directors and industry directors, and the AFCA decision panels are made up of an independent ombudsman, a consumer panel member and an industry panel member. That's a complaints body; this is a professional disciplinary body. For example, the Law Society has a professional disciplinary body, and it doesn't have consumer reps sitting on it. That doesn't happen in medicine either. This is not about consumer detriment or complaint, because those matters should get referred to AFCA. It could be, for example, a matter about an adviser not completing a CPD or an educational requirement. That's not a consumer issue; that's a professional disciplinary matter.
So, for us, it's a peer review panel. That's entirely appropriate for a disciplinary body and consistent with other professional bodies, and review of conduct by peers is an important part of professionalism. We think it's important that we understand the difference between that and a complaints body.
As noted in the Scrutiny of Bills report discussed in chapter 1, the accompanying regulations have not been published. Thus, they cannot be considered alongside the bill leaving both the interested parties to the bill and the committee at a disadvantage in terms of assessing the bill's appropriateness and effectiveness.
The following dialogue from the public hearing shows that, due to the lack of regulations, even the regulators are currently unable to assess the full impact the legislation will have:
Senator WALSH: One of the issues that has been raised is a concern around how ASIC and the expanded panel will work to triage minor breaches and allocate more significant breaches. Do you have any advice for us at this stage about how you would intend to approach that?
Ms Bird: As you would be aware, the bill gives ASIC a discretion to refer matters to the panel. It also sets out that ASIC will be compelled to refer matters to the panel in certain circumstances set out in the regulations. Those regulations haven't yet been made or exposed, so at this stage is very challenging to answer that question exactly how we will manage that triage process, because at this stage we are not really aware of what matters we will be compelled to refer to the panel.
Senator WALSH: I understand this is a question for Treasury about where we are at with the regulations, but do I take it that you don't have draft regulations yet?
Ms Bird: No, I haven't seen draft regulations. When we see those regulations we will consider that issue in particular. If it was just an open discretion, so under the first part of that section where we can refer matters, we would obviously take a normal sort of triage process to decide what we would refer on for further action. In doing that, we would take into account the relative harms in the financial advice industry and we would also take into account the clear intention of government and parliament in passing the bill, which is to make sure there is a mechanism for less serious misconduct to be addressed.
At the same hearing, Treasury confirmed that the regulations would not be available prior to tabling of this report:
Senator WALSH: The report for the inquiry we are in at the moment will be done from these hearings in a couple of weeks, and it might be difficult to report without the regulations. Is that a time frame that you think might be met? Can you give us any guidance on whether a fortnight or so or this month is a time frame that might be met?
Ms Zaheed: I wouldn't expect us to have regulations in place. We will be consulting on the provisions that will go into the regulation—so getting the policy calibration quite right to ensure that the right matters are being referred to FSCP and the right matters are being registered on the FAR. So I wouldn't necessarily be expecting regulations to be drafted in the next two weeks.
Support for the bill
The committee notes the support expressed by submitters. The translation of the Royal Commission's outcomes into tangible legislation has been warmly welcomed. While there was overall support, the committee notes the issues raised.
The Financial Services and Credit Panel's composition, role and cost impact
Submitters raised substantive issues about potential cost impacts of legislation and its impacts on the ability of a wide range of Australians to access financial advice. For example, the committee notes the evidence from some witnesses that minor breaches and/or relatively low-level disciplinary issues should not lead to escalation in costs, and that the Financial Services and Credit Panel should focus on matters of serious and/or systemic misconduct.
The committee believes more broadly that it is the responsibility of the regulator to look to reduce regulatory costs across the Financial Advice industry in this transition.
As such, the committee suggests that the government conducts a review of the FSCP and its functions within two years after the legislation comes into effect.
The committee recommends that the government conduct a review of the Financial Services and Credit Panel (FSCP) and its functions two years after the legislation comes into effect.
Training and Education of Financial Advisors
Although not the subject of this legislation, the committee also notes the concerns about the nature of education and training required by financial advisors of all types. The professional and educational standards that current and future advisors are obligated to uphold should be clear and not a discouragement to individuals joining the profession.
The committee notes that the government intends to transfer the existing legislative instruments defining the current standards largely intact when the transition from FASEA to the Minister as standard-setter occurs.
Further, the committee believes that in the transition from FASEA to ASIC, ongoing consideration of the impact on the composition of the industry is essential. Anecdotal evidence that older and more experienced individuals are choosing to leave the industry rather than undertake further training is possibly a source of potential weakness for the sector. The committee would encourage ASIC to actively monitor this issue.
Scrutiny of regulations
The committee again notes that the accompanying regulations for the bill have not been published and this has made assessing the bill more difficult both for interested stakeholders and the committee itself.
However, the committee acknowledges that the regulations will in due course be published and consulted on, and subject to parliamentary scrutiny, including disallowance.
Notwithstanding the areas of concern raised by submitters and by the committee in this report, the committee is of the view that the outcomes of the Royal Commission should be acted upon. Those issues raised can be addressed through the ongoing review of the FSCP and the legislation itself. Accordingly, the committee recommends the bill should be passed.
The committee recommends that the bill be passed.
Senator Slade Brockman
Liberal Senator for Western Australia