This is an edited version of a speech given by the Assistant Treasurer, Josh Frydenberg, to a Financial Services Council/BT Financial Group breakfast in Sydney on April 15, 2015.
Read Professional Planner’s report: Government is cautious on Trowbridge report, cagey on PJC
Financial advice
Let me say at the outset that financial advisers play a very important role in Australia. They help consumers to plan for their retirement, and manage the financial risks and opportunities of life. But public confidence in the financial advice sector has been shaken – and understandably so, after the number of high-profile advice and product failures we have seen in recent years.
We have also seen a bruising battle in the parliament on the FOFA reforms. But for a few technical amendments that we are working through in a bipartisan basis with the opposition, the reforms are settled and we are not seeking to re-litigate previous differences of opinion.
Professional standards
Two important recent inquiries – the Financial System Inquiry, and an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services – found that the current regulatory arrangements on professional standards are not sufficient, and recommended reform in this area. We need to make sure that consumers receive high quality outcomes. And we need to maintain public confidence in the financial services industry.
It’s time to put in place an enduring framework that raises the professional, ethical and educational standards of advisers. So I am very pleased to see that a number of major financial institutions have recently voluntarily announced that they have, or intend to, significantly raise standards for their advisers. The Government is seeking to build on this momentum.
We will develop a model to increase the professional, ethical and education standards applied to financial advisers. If we get this model right, improvements in the qualifications, competence and ethics of the financial advice industry will benefit everyone. The community will benefit from increased transparency, accountability and adviser confidence. Industry will benefit from their recognition as a profession and improved consumer confidence. And hopefully a few less reviews in the future!
As you know, we have developed a consultation paper based on the recommendations of the Parliamentary Joint Committee, or PJC.
The PJC recommended a co-regulatory model, where Government, professional associations, industry and academia work together. The core elements of the PJC model apply to personal advice on Tier 1 financial products, like shares, superannuation, life insurance and managed investments. I’ve been meeting with key stakeholders and will shortly be holding a roundtable to further progress these recommendations. I look forward to working with you all on these critical reforms.
Register of financial advisers
The Government, with your assistance, has already taken a significant first step in restoring consumer trust in financial advisers, through the establishment of an industry-wide register of financial advisers. The adviser register is now in operation, and allows consumers, employers and the Australian Securities and Investments Commission (ASIC) to verify the credentials of over 20,000 people offering financial advice.
As I said recently, having the ability to go to a single register of financial advisers to check a particular individual will give consumers greater confidence in the adviser they choose, and improve transparency and accountability in the finance sector.
And on this point, I would like to thank the Financial Services Council for the constructive role they played in the development of the register. And I would also like to acknowledge the work of many of you in the room for providing a large volume of relevant adviser details to ASIC in such a timely fashion.
Life insurance
Together with the Association of Financial Advisers, the Financial Services Council commissioned the Review of Retail Life Insurance Advice, chaired by John Trowbridge.
I would like to recognise the Financial Services Council’s role in commissioning this important independent study. This follows the ASIC Review of Retail Life Insurance Advice of October 2014, which criticised the quality of advice and the remuneration structures of advisers. Through the commissioning of the Trowbridge report, it is encouraging to see industry taking responsibility for these issues and acknowledging that the status quo is no longer viable.
Appropriate reform, made as soon as possible, must be led by the industry itself. Industry should not force the heavy hand of government to act. Trowbridge’s recommendations around commission structures, ensuring approved product lists cover at least half of all providers, a re-examination of the culture, behaviours and practices of advisers and a Life Insurance Code of Practice are all deserving of consideration.
In the case of Government, while David Murray’s Financial System Inquiry and the Trowbridge report provide us with a number of options for reform – the extent to which we intervene will ultimately depend on the industry’s own actions.
The Government will be a willing reform partner with the industry provided the industry is prepared to adopt genuine solutions to the issues identified in ASIC’s report.
Financial System Inquiry
As I mentioned earlier, the Government has been carefully considering the final report of the Financial System Inquiry and we are now turning our minds to the near 180 submissions which were received by 31 March when the date for submissions closed. I recently chaired two roundtables dealing with super and consumer outcomes and was encouraged by the degree of good will and in principle support for many of the recommendations.
The Inquiry found that the Australian financial system had performed well since the Wallis Inquiry which reported in 1997. But there is room for improvement. The Financial System Inquiry outlined a blueprint for an ‘efficient, resilient and fair’ financial system over the next 10 to 20 years.
The Inquiry considered that more could be done to improve outcomes for consumers. So, the consumer recommendations aim to strengthen the current framework, to promote consumer trust in the system and the fair treatment of consumers. The Inquiry also notes some misalignment between consumer interests and the governance and culture of financial firms and their representatives.
The Inquiry makes recommendations that aim to address this. It considers the alignment between consumer outcomes and the corporate culture of financial firms should begin when a product is designed. So, it has recommended the introduction of a product manufacturer obligation and a product intervention power for ASIC.
I appreciate that these proposals represent a substantial change from our current arrangements, and that some may view them as potentially giving rise to a range of unintended consequences.
While consumer protection is a goal no-one would argue with, the benefits, potential costs and possible unintended consequences of regulatory interventions must always be carefully considered. Your views will help us better understand these issues.
The Government genuinely appreciates the effort and time industry has put into this process and as I said earlier is carefully considering the submissions carefully. Ultimately, we all want Australia’s financial system to be world-class on every front.