An explicit fiduciary duty to clients, the abolition of product commissions, tax-deductibility of financial planning fees and the establishment of an independent professional standards board are among the key recommendations of the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into financial products and services in Australia.
The report, tabled in Parliament last night by the chair of the inquiry, Labor MP Bernie Ripoll, has made 11 recommendations (see below), after gathering evidence at a range of public hearings and from more than 400 submissions to the inquiry.
(To download a copy of the report, click HERE)
While the inquiry focused on the failure and effects of a number of specific collapses – most notably Storm Financial and Opes Prime – Ripoll told Professional Planner that the recommendations of the review were applicable across the sector.
“That’s very much the case,” Ripoll said.
“We were very conscious of that on the way through, that this was about the financial services sector, and while we used Storm as an example, and Opes Prime as an example…to guide us through, these recommendations are not unique to those collapses.”
Ripoll said the inquiry’s aims were to improve consumer protection a to create a better, more efficient and more professional financial planning industry.
“This is about consumer protection. That’s the intent of all of these recommendations,” he said.
“We have dealt with the issues in the sector to help it professionalise. We’re really looking at making it a better sector, one that has a better reputation – as much as anything else, it’s a reputational issue – by tweaking [existing] regulations with what we’ve recommended, providing that consumer protection and by following through on a range of other issues.”
Ripoll said the single most important recommendation in the report was the amendment of the Corporations Law to include an explicit fiduciary duty for financial planners operating under an Australian Financial Services License.
“That’s absolutely the most important, because it ties in all of the others,” he said. Without an explicit fiduciary duty there was less chance of the inquiry’s other recommendations achieving the desired outcomes, he said.
Ripoll said the recommendation to “cease payments from product manufacturers to financial advisers” should be “taken for exactly what it says: we want to consult with the industry and find a way to cease, which means stop, payments from manufacturers to advisers”.
“That’s the whole lot,” Ripoll said, including volume bonuses and shelf-space fees.
“This is where we believe exist and originate the conflicts of interest, and it needs to end,” Ripoll said. “But we understand this is not something you just do overnight; it’s something you do in consultation; and you need to transition.”
An independent professional standards board was another important step which would “help the industry step up and become professional”, Ripoll said.
“It will be the mechanism by which we can tie the whole industry together,” he said. The proposed board would oversee “nomenclature and competency and conduct standards for financial advisers”.
Ripoll said the inquiry was supportive of shadow shopping exercises conducted by the Australian Securities and Investments Commission (ASIC) and had recommended they continue.
Ripoll said it was too easy for individuals “doing the wrong thing to finish [with one employer] on a Friday and remerge on Monday, doing the same thing” the inquiry had recommended that ASIC be given additional powers to stop individuals from conducting business as financial planners.
The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, told the Financial Planning Association of Australia (FPA) 2009 National Conference in Melbourne last week that he would not act on the recommendations of the Ripoll inquiry until the Cooper inquiry into superannuation and the Henry review of the tax system had also reported.
“We’ll be looking at the PJC inquiry recommendations and considering them in light of the recommendations of the Cooper and Henry reviews as well,” Bowen said.
Ripoll told the FPA conference that the PJC inquiry had “run all year; it’s focused on a lot of issues, it’s been sector-wide, it’s been very informative, and I’ve been very appreciative of the interaction that we’ve been able to have with the sector across all levels, and very much enjoyed that process, that consultation”.
“To me, two central issues about measuring the success of the work we’ve done has been the focus on consumer protection, and making sure consumers understand what’s out there in the marketplace; and the other one is about creating a better sector, more effective and efficient,” he said.
“And the two relate to each other in the sense that when the reality is that only about two-and-half out of 10 people actually get advice, you can grow the pie, you can actually make it a bigger pie. That’s been an important consideration, how we do that.
“It’s not about more or less regulation, it’s about the right regulation, it’s about appropriate regulation, it’s making sure, from a Government perspective, we have the framework and the rules and the policy in place to let you do your job. So that’s been a key focus.”
Ripoll said there was “no silver bullet” to address the issues – real or perceived – within the industry.
“But I tell you there’s a range of things we can do,” he said.
“What I would always prefer to do first is self-regulate. I think that’s the most important step first. And when can you begin to do that? Well, you can begin to do that today. But self-regulation is something you do, not something the regulators do, or the legislators. There’s a lot of ways the industry can begin to deal with issues of conflicts of interest.
“Conflicts of interest are real, by the way, they’re not perception. They are real. And sometimes it’s difficult to admit that, or be able to deal with it, when you work in a particular sector.
“So, silver bullets? None. It’s a range of issues. It has to be in co-operation. The approach of just smashing something down and saying this is how it’s going to be doesn’t work for anyone. My feeling is we have to work with the sector, in co-operation, and move to a better place.”
The PJC’s recommendations:
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.
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.
The committee recommends that the Corporations Act be amended to require advisers to disclose more prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest.
The committee recommends that the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.
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.
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.
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.
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.
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.
The committee recommends that the government investigate the costs and benefits of different models of a statutory last resort compensation fund for investors.
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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