Consumer protections front and centre in government’s reforms

By

February 17, 2017

Investing, budgeting and saving are regular parts of most Australians’ lives, but only 1-in-5 seek professional assistance from a qualified financial adviser for managing  finances. We need to
think about why that is the case.

As a government, we would like more Australians to have the confidence to seek financial advice. This means making sure people have access to financial advisers who will put their interests first and who are professionally competent.

The Turnbull Government has an agenda to reform the financial planning industry. This includes raising professional standards for advisers, improving remuneration practices in life insurance advice, and providing the Australian Securities and Investments Commission with tailored product intervention powers, to help reduce the risk of harm to consumers.

Higher standards for ethics and education
Earlier this February, the Turnbull Government passed the Corporations Amendment (Professional
Standards of Financial Advisers) Bill 2016 through both houses of Parliament, after introducing it last year. The new legislation raises the educational and ethical standards of financial advisers, so consumers can have confidence in their adviser’s professionalism. The reforms respond to recommendations of the Parliamentary Joint Committee’s Inquiry into proposals to lift the professional, ethical and education standards in the financial services industry and the Financial System Inquiry (FSI). The final policy was settled following extensive consultation with the industry, consumer groups and ASIC.

In the future, all financial advisers, both new and existing, will be degree or degree-equivalent
qualified, will be required to pass an exam, and will be bound by an industry-wide code of ethics.
The exam will represent a common benchmark across the industry.

The new education and exam requirements will commence on January 1, 2019. Existing advisers will have until January 1, 2024, to reach degree-equivalent status and until January 1, 2021, to pass the exam. The code of ethics will come into effect on January 1, 2020. The transition period recognises that existing advisers may need to complete the education requirements on a part-time basis, while continuing to service their existing clients.

Caps on life insurance commissions

The government has also committed to reforming the remuneration arrangements for the sale of
life-insurance products by financial advisers.

The Corporations Amendment (Life Insurance Remuneration Arrangements), which Parliament also passed in early February,  caps the initial and ongoing commissions that can be paid in relation to the sale of certain life risk insurance products, and bans volume-based payments for the sale of life-risk products. The reforms follow a series of reports and recommendations, including an ASIC review, the industry-commissioned Trowbridge Review and the FSI, all of which identified a need for reform in this area.

Advisers can, and often do, receive initial commissions of between 100 per cent and 130 per cent, on the sale of new life risk products to consumers. The ASIC report identified a strong correlation between the high initial commissions and the practice of churning, in which consumers are regularly sold replacement life insurance policies even though there is little or no benefit to the consumer in changing the policy. ASIC found that across all examples where high initial commissions were paid, 45 per cent resulted in poor consumer outcomes.

Advisers will transition to the new capped remuneration structures from January 1, 2018, with the full reforms coming into effect in 2020. This lead time will ensure that advisers have enough time to adjust their business models in line with the new rules.

The government believes it is critical for the future of the financial advice industry that both the life-insurance framework and the professional standards reforms are implemented as soon as possible.

Following these reforms, consumers will have far greater confidence that their financial adviser is acting in their best interests and providing them with the advice they need on setting financial goals, making the most of their savings, and protecting their assets.

‘Appropriate’ markets for products

Finally, another issue that was identified in the FSI’s final report was the need to strengthen
the accountability of financial firms and their distributors throughout the whole product lifecycle.
To achieve this, the government is in the process of implementing the FSI’s recommendations for the
introduction of design and distribution obligations and product intervention power for ASIC.

As part of these reforms, the government is consulting on ways to require product issuers to identify appropriate target and non-target markets for their products, to select distribution channels for their products that are consistent with those identified markets, and to regularly review the target market and distribution channels to ensure they remain appropriate.

Financial product distributors will be required to put in place reasonable controls to ensure products are appropriately distributed to the identified markets. The government encourages interested stakeholders to provide a submission on the consultation paper released in December 2016. Submissions are due by March 15, 2017.

The Turnbull Government is committed to improving the financial planning industry. It’s an industry that has the potential to add great value to the lives of every Australian, by removing some of the worry that comes from navigating a tricky part of life.

 


TOPICS:  adviser educationCorporations Amendment RegulationFinancial System Inquirylife insurancereformTurnbull Government



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About The Author /

Kelly O'Dwyer is federal minister for revenue and financial services.