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Legislative Council - Fifty-Second Parliament, First Session (52-1)
2011-11-09 Daily Xml
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FINANCIAL ADVICE CHANGES

The Hon. D.W. RIDGWAY (Leader of the Opposition) (16:41): I move:

That this council notes the future of financial advice proposed by federal minister Bill Shorten.

Many fine things have come out of Canberra, but Bill Shorten's future of financial advice bill is not one of them. What happens in Canberra and the effects of the flawed future of financial advice bill will have dire consequences for small, family-owned businesses here in South Australia. It is on their behalf that I raise this issue in the South Australian parliament today.

I met recently with a number of people from the financial planning industry, and they are very concerned that the legislative changes at the federal level will have a significant effect on their businesses, jobs and families.

Let me start at the beginning. In 2009, the Ripoll inquiry made findings into the collapse of Storm Financial, most of which were considered fair and reasonable. Most people in the industry welcomed the abolition of product commissions and a fiduciary duty. Next, Chris Bowen and then, to a greater degree, Bill Shorten, expanded the Ripoll recommendations. They now include proposals that threaten the jobs of some 20,000 small business people and will strip over $2 billion of revenue from the sector and diminish competition in favour of the industry fund sector.

I am convinced that the industry fund sector, and specifically the Industry Super Network (ISN), has had a significant influence on the minister's actions. Mr Shorten is a former union official, director of leading industry fund Australian Super and a close friend of ISN founder, Mr Garry Weaven. The ISN refuses to acknowledge the retail industry's considerable self-regulation over the past five years, such as lower administration and funds management costs. The vast majority of advisers now charge clients directly and do not take product commissions.

The minister's recent actions in parliament have confirmed that the past 15 months of industry consultation wasted everyone's time. Shorten's agenda is the ISN's agenda. Thankfully, FOFA's short-term future now rests with a parliamentary joint committee. The industry has lost confidence in the minister's delivering fair industry outcomes and protecting consumers from product failure.

Minister Shorten's additions to the FOFA agenda included the introduction of an opt-in, a ban on risk insurance commissions and the inclusion of administration or platform rebates into a conflicted remuneration classification. Opt-in is a legal obligation to have a contract with your client, where you must agree annually on fees or the adviser faces major monetary penalties.

Besides being the first time in modern history that a government will force a contract between consumers and business, it will add additional and unwanted compliance costs to an industry already overburdened with regulation. It is also unnecessary in an environment where advisers are charging clients directly. They will naturally meet on a regular basis to justify costs and outcomes. Opt-in was a response to the past industry culture of 'set and forget' clients, where advisers received a trailing commission from the client's invested moneys, regardless of whether or not they saw the client. With the abolition of product commissions by the industry on 1 July 2012, this eliminates the practice and the necessity for opt-in provisions.

Minister Shorten blindsided the industry by proposing the abolition of risk insurance commissions in superannuation. Considered a stunt at the time to grab headlines and create a bargaining chip, he backed out of it when it was pointed out that Australia had massive under-insurance problems and, within a commission environment, it would only get worse if it proceeded. It was also pointed out that during the Victorian bushfires a large insurance company paid out $68 million in claims, but only $600,000 of that was for death. The minister's conduct over this issue planted the seeds of mistrust that he was not acting in the best interests of consumers and the industry in general.

The minister's insistence to classify platform rebates with investment product commissions as conflicted remuneration is his most blatant anti-small business attack. Platforms are an administration service that reports to members of a superannuation fund; they are not investment products. Industry funds are platforms. Retail funds, like Westpac's Asgard, are platforms; even the parliamentary super fund is a platform. Platforms administer around $1 trillion of superannuation industry money, and the SMSF the balance.

Industry funds and institutions cannot make their own internal financial planning practices profitable. Both have adopted the same business model, where the advice practice is operated as a loss leader to attract inflows into their own platform. In other words, platform profits cross-subsidise their advice practice. The same subsidy model exists with the independent practices, but the revenue comes from an external platform.

Both the retail and industry fund platforms pay independent advisers a share of their platform profits based on the adviser's use of their platform. In essence, both industry funds and institutions allocate profits from their platforms to either cross-subsidise their advice practices or pay a platform rebate to independent advisers if the adviser uses their platform for clients.

It is widely believed that the industry funds have influenced the minister to disregard the discriminatory nature of his attack on independent business by allowing the industry funds and institutions to subsidise advice but ban independent advisers from receiving platform rebates, essentially an identical practice. In fact, independent advisers have a choice of what platform they will use for the client. Industry funds are only offering their own internal product.

The following is an extract from a letter written by Treasurer Wayne Swan during July 2011 to a Brisbane adviser clearly demonstrating the government's knowledge of the circumstances and bluntly refusing to do anything about it. It supports its ongoing existence and literally condones discrimination against small business. I quote:

The government has decided not to go as far as proposing a law against product issuers cross-subsidising the advice aspect of their business...

The recent purchase of the fiercely listed independent advisory practices—Count and DKN by the CBA and IOOF respectively—at a fraction of their true worth has demonstrated how anti-competitive this proposal is. Both their share prices were decimated by the market upon speculation that the ban on platform rebates for independent business would come into legal existence. Their bankers became nervous about their financial sustainability going forward and the institutions moved in. This loss of 1,500 advisers to the institutions now places the independent sector at 15 per cent of the advice market, and the remaining 85 per cent are aligned or wholly owned by the industry funds and institutions selling their own products.

Being a former lawyer, the minister must be aware of the legal obligations under the Competition and Consumer Act with discriminative behaviour that diminishes competition. We can only come to the conclusion that the minister has preferred to deliver outcomes to his political allies and not act in the best interests of consumers and the industry in general.

The majority of the financial services industry has lost faith and respect for minister Shorten. He has proven to be heavily biased towards the wishes of the industry fund sector, disregards the request of the retail sector and is prepared to condone discrimination and anti-competitive behaviour against small business.

Debate adjourned on motion of Hon. J.M. Gazzola.

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