BILLS Corporations Amendment (Future of Financial Advice) Bill 2011, Corporations Amendment

Mr HUSIC (Chifley—Government Whip) (19:22): I rise to speak in favour of the Corporations Amendment (Future of Financial Advice) Bill 2011 and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. It is important to remember how we got here. A lot of the time, events occur out in the community—particularly in relation to people's financial situation—and there is rightfully a call for something to be done to protect people from these problems. The problem that one encounters is that there is a distance between the event and the response, naturally enough, because you need to consult and frame the legislation. By the time you get to the point of putting the legislation before the parliament, memories are not as clear as to how we got to the point of needing to put in new legislation and regulations.

Let us remember the collapse of Storm Financial and the impact that that had on people across the country. Storm had more than 14,000 clients with about $5 billion in funds under management when they went under. Around 3,000 of those investors were left owing hundreds of thousands of dollars to banks when their portfolios had borrowings placed against them. In many cases, investors had to sell their homes to repay these margin calls. We are not talking about high rollers making risky investment decisions; we are talking about ordinary mums and dads, grandparents and workers.

I want to go through some of the cases. The Courier Mail in 2009 outlined how a Sunshine Coast police officer by the name of Sean McArdle was burdened with a $1 million debt from his Storm investment. Then there is the story of a former TAFE teacher from Lane Cove, Brian Taylor, who lost close to $200,000 on his Storm investment. He was fortunate enough to keep his home. The Sydney Morning Herald reported later that year the story of Shayne and Tracey Bonnie, who lost at least $226,000 when Trio Capital, another firm, went under. And pharmacist Ian Hogg, who had planned to retire last year, had to continue working after losing $300,000. These are real life examples of people who have been hurt because the system has failed to protect them. Those people's life savings were lost overnight and people were literally impoverished as a result.

At the outset, it is important that we recognise that there were two people in particular who played a big part in bringing about these reforms. Firstly, the now Parliamentary Secretary to the Treasurer, the member for Oxley, as chair of the Parliamentary Joint Committee on Corporations and Financial Services, made a number of important recommendations in the committee's report entitled Inquiry into financial products and services in Australia. They are included in this bill. Secondly, it is important to commend the efforts of the Minister for Financial Services and Superannuation for his efforts in bringing the financial services sector on board with these reforms and achieving an equitable outcome for outcomes as well as those who provide these services.

This is not, as the member for Forde indicated in his contribution to the debate, regulation for the sake of regulation. This legislation is the result of some of those stories that I mentioned earlier. We had to respond. Unfortunately, it is never the case that anything in the financial services sector is straightforward. It is going to be complex. While the member for Forde made the point that we are putting in place complex regulations, it is worthwhile noting that in this sector that is just a fact of life. It is a sector that moves quickly and that has changing products and sometimes you need to not just operate within Australia's borders but be mindful of what is happening outside. This is not an easy path to tread. The contributions made by the member for Oxley and the minister should be recognised.

This legislation is within the framework of what the government is committed to: ensuring that Australians have the means and the incentives to save for their retirements. Australians today are living considerably longer, as is well documented, than they were at the time that the Keating Labor government introduced the superannuation guarantee way back in 1992. This is why the government's policy to share the wealth that is generated from our booming mining sector among all Australians is vital. Boosting compulsory superannuation from nine per cent to 12 per cent will increase the retirement savings of 8.4 million workers by $500 billion by the year 2035. It would be difficult for this government to reconcile placing so much emphasis on retirement savings only to allow those savings to be eroded by bad financial advice and unjustifiable fees.

These bills will make significant changes to the sector that Australians rely upon for financial advice and to take care of their retirement savings. This reform is to a large extent, as I indicated earlier in my contribution, a response to the collapse in recent years of major investment providers. I have mentioned Storm Financial and Trio Capital. But there was also Opes Prime and Westpoint. People were financial casualties of the collapse of those providers. These bills will strengthen the financial advice sector by growing consumer confidence in the services that they provide. But it will also give certainty to Australians who make use of these services and give them confidence that they will be protected from unscrupulous operators.

At this point it is worth nothing that sometimes when regulations are proposed people who are doing the right thing feel that in some way, shape or form they have been targeted because of the bad judgment calls of others. I can certainly appreciate that a view in that vein may exist. However, at the same time, given the large amounts of money involved—and again I go back to the cases that I highlighted earlier, in which ordinary mum and dad investors lost so much money—there is a requirement for us to act in their interests. That is why we have had to make these types of moves. Through the course of the consultation that has been undertaken to refine what was planned, industry comment has been taken into account to build a much more solid and rigorous sector.

This legislation will require financial advisers to obtain agreement from retail customers every two years in order to charge them an ongoing fee for financial advice. Presently, consumers who seek one-off financial advice may continue to be charged a fee for the initial advice many years after despite no ongoing service. This perhaps would not occur where investors were well engaged in the investments, but consider how many of us know exactly where our superannuation is invested and what fees are charged. The truth is that many of us are disengaged from time to time in matters pertaining to investments.

This new requirement will not just include direct payments from the retail client to the adviser, it will also capture third-party product commissions which effectively eat into investment returns. In future, financial advisers will be required to ask retail clients to renew or end the ongoing-fee arrangement. If the client does not respond to the renewal notice they are assumed to have terminated the advice relationship and no further fees can be deducted. However, I imagine one consequence of these reforms will be that it will obviously require a much more engaged relationship between advisers and clients. That in itself, one would imagine, would have the potential to improve financial literacy and ensure that people will not only be aware of their investments and the performance of those investments, but have a much more solid feel for the advice that is being provided.

The bills have measures to accommodate clients who inadvertently opt out of a relationship. They improve the capacity of the Australian Securities and Investments Commission as regulator to take action against persons it considers to be unsatisfactory because they have provided unscrupulous advice. In a measure that will further increase consumer confidence, the bills will impose a statutory best-interest duty on financial advisers. This would require advisers to place the best interest of the client ahead of their own commercial interest. Again, there would be a lot of advisers who would operate in this way but there are those who would take the occasion to act in their own interest rather than their client's. This in no way places a burden on advisers to provide flawless financial advice; nor does it guarantee the sorts of returns that might be discussed when providing advice. Rather, it regulates how advisers must deal with conflicts. For instance, a ban will be put in place to prevent advisers accepting conflicted remuneration, including commissions, from product issuers. This measure alone will help to beef up the integrity of the advice industry, thereby providing greater consumer confidence and helping to grow the industry. Knowing that advisers are receiving income only from clients and not from product issuers gives people confidence that their best interest is foremost in their adviser's mind.

The industry has accepted that a fee-for-service model is best practice, and many have begun to move away from a product commission model. These bills will ban advisers' receiving non-monetary benefits over $300, with some exceptions around education and professional development. I would like to remind the House that a lot of these reforms come about as a result of the impact of some of the major collapses of various investment houses. I would hate to think that constituents of mine could be faced with some of the losses that have been incurred by some consumers in the past few years. A practice in which financial advisers encourage investors to borrow against their investment, known as gearing, is responsible for a lot of the grief that others have experienced. Townsville Vietnam war veteran Steve Reynolds was, according to the Australian, one of the first victims of the Storm Financial collapse. Mr Reynolds, who was receiving a disability pension of $850 a fortnight, was given a loan of $1.2 million.

Mr Stephen Jones: That's outrageous!

Mr HUSIC: It is outrageous, as the member for Throsby indicates. He received a loan of $1.2 million despite having no capacity to repay the loan. Another affected investor, retiree Ian Jones, is reported to have asked his lender for a copy of his home loan application. He discovered that his income had been hugely overstated in order to secure margin loans of $700,000. These bills will now ban advisers charging a fee based on the percentage of client funds which are borrowed. This will discourage advisers recklessly advising clients to borrow against their investment in the manner of the types of cases I have just related to the House.

While much emphasis has been placed on the consumer protection measures, these bills have many other elements that are designed to give certainty to the industry and to minimise the financial impact of these new laws. The renewal obligation will apply only to new arrangements after 1 July this year and will not include existing relationships. Again, it is trying to balance out those clients who are already in the system against the new relationships that will be set up. I am assured that these bills will have minimal financial impact on financial advisers. Of course, where an adviser has no ongoing contact with the client there will be a small administrative cost to have the client renew their arrangement with the adviser. There is obviously no way you can get around that.

I should note that the collapse of Storm Financial affected not only investors but also people who owned and operated Storm Financial franchises. One such franchisee, Wally Fullerton-Smith, lost $1.8 million he had invested in his Storm franchise on the Gold Coast in Queensland, the state of the member for Ryan, who is in the chamber. Proof of debts submitted to Storm liquidator Worrells reveals that 12 franchisees owed $23.2 million when Storm collapsed. The Corporations Amendment (Future of Financial Advice) Bill 2011 is a win-win for advisers and consumers. Certainly, not every single person will agree with every single aspect of the reforms we are putting forward. But what everyone will agree on is that mum and dad investors should not lose to the tune of millions of dollars and that small businesses that have invested in good faith, thinking that they would be able to enhance and grow the business and provide a future for themselves, should not see their future disappear before their eyes because of the type of collapse that we have experienced previously. As I said at the start of my contribution: we need always to remember what events brought us to this point and that we are trying to minimise the chance of this occurring again and impacting on families in the devastating way it has in years past.

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Ed Husic MP
Federal Labor Member for Chifley


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