Labor has always been the party of consumer protection. Labor has always been the party saying: 'There are plenty of interests in our community; how about the interests of consumers when it comes to weighing the protections that can be offered?'
Speech made 27 August 2014
Ms BUTLER (Griffith) (18:50): In 1969 Gough Whitlam, in his pitch to the electors of Australia, talked about the importance of consumer protection as being central to part of Labor's platform and Labor's program. Again, in the lead-up to the election at which he was elected, he talked about consumer protection. As a consequence, we have the Trade Practices Act 1974. I make those comments because it is important to remember that Labor has always been the party of consumer protection. Labor has always been the party saying: 'There are plenty of interests in our community; how about the interests of consumers when it comes to weighing the protections that can be offered?'
What do you see many years later? Labor's FoFA reforms—the Future of Financial Advice reforms—were introduced to again protect consumers—consumers like mums and dads who do not necessarily have a lot of power. They do not necessarily have a lot of opportunities to understand sophisticated financial issues, not because of any lack of capability of understanding but simply because in a busy life, with lots of other pressures—kids, grandkids, jobs, family commitments and community commitments—we all have to rely on the expertise of advisers when it comes to planning for our futures and our families' futures. That is why it is so important that, when it comes to financial advice, there are protections in place for consumers.
Our FoFA reforms, as you know, Mr Deputy Speaker, were introduced in the wake of the collapses of Storm Financial and others and the subsequent parliamentary inquiry into financial advice, products and services. These were the most significant financial services reforms for a generation and they included several measures that were designed to protect investors and help the industry to professionalise. They included the best-interest duty, requiring advisers to act in their clients' best interest, a paramount obligation given the position of trust in which the adviser is placed; and an opt-in obligation that required advisers to get their clients to opt in to receiving ongoing service every two years—in other words, you do not just sign up once and then continue to take fees forever and a day; the client gets the opportunity every two years to think about whether or not they want to continue with the arrangements in place. Another reform was annual disclosure. Statements were to be sent to clients annually disclosing fees and details of services performed, again a very obvious requirement. If you are charging someone for your professional financial services, they ought to know how much they have been charged and what they are getting for their money. Then, of course, there was the conflicted remuneration provision, which imposed a ban on conflicted remuneration—for example, commissions paid by financial product providers to financial advisers.
In introducing these changes, Labor wanted to help consumers, and we also wanted, for the good of the nation, to restore community confidence in the sector, which had been, as you know, Mr Deputy Speaker, rocked by high-profile collapses, with a poor culture of product sales over advice. Of course Labor is interested not just in individual consumers being protected but in everybody in our community having faith in the financial services sector. The reform process involved significant consultation with industry and with the public. That consultation identified a path to achieve growth, protect consumers and restore trust by changing culture, by lifting standards, by professionalising and by acting in clients' best interests.
Unfortunately, through this bill, the government has sought to amend the FoFA reforms by removing the catch-all provision in the best-interest duty, the provision that provides not just tick-a-box, checklist style compliance with the best-interest duty but a genuine, quantitative duty to think about what is really needed to act in the best interests of the client and to undertake that. The government is scrapping the opt-in provision that I talked about, allowing that ongoing charging without, every two years—not a particularly onerous provision—asking the client, 'Do you still want to be in?' Annual disclosure is to be amended so that advisers only have to provide annual disclosure to clients who commence with them after 1 July 2013. The ban on conflicted remuneration will be lifted so that it will only apply to personal advice and not general advice, and there will also be an exemption for personal advice as part of a 'balanced scorecard' approach. We are obviously really concerned about whether that opens the door to go back to that culture of sales, rather than advice, being what is really important. The reason you have to think about those two things, of course, is that, if I am placing my trust in you as a financial adviser to do the right thing by me, I need to have confidence that you are not going to sell me a product to benefit yourself when you should be looking after my interests first.
Those are the reasons why Labor is very concerned about the changes. They are not just minor technical changes; they are an unwinding of the Future of Financial Advice reforms and we are very concerned—and we are not the only ones, Mr Deputy Speaker, as you know. The consumer group CHOICE has not supported the repeal of elements of FoFA. I will read what CHOICE has said:
… the proposed changes will lead to costs to consumers as they reintroduce measures that encourage sales-driven practices in financial advice. With financial advisers working in boiler-room style sales cultures, consumers are highly likely to lose significant funds through further major market failures like Storm Financial. While no legislation can fully prevent a market failure, the original FoFA reforms aimed to curb the worst practices in the financial advice industry. The effects of recent major financial advice scandals have been catastrophic, resulting in consumers losing $5.7 billion in funds as well as their homes and certainty about retirement.
That was from consumer group CHOICE. So, as I say, we are not the only ones concerned about winding back FoFA. We are very concerned about consumer protection generally but also about protecting people who are in that vulnerable position of placing their trust, their faith and their confidence in someone who is supposedly acting in their best interests to help them to plan and to save, including for retirement.
We are very disappointed that this is a huge step backwards for the sector. It is undermining the move towards professionalism and is not a step that will favour the interests of consumers. The removal of the catch-all clause in the best-interest obligations changes the definition of best interest to those tick-a-box checklists, determined by the sector. Of course, going backwards on conflicted remuneration is a great shame. Conflicted remuneration is part of the sales culture that the consumer group CHOICE was talking about.
The reported savings from these measures is $190 million. Our concern is that the regulatory analysis that has been done takes into account the effect on the sector but not the cost to the consumer of having these protections removed. While the sector might stand to save $190 million in compliance costs, the consumer will have to bear the weight of extra fees and charges, not to mention the risks that are inherent in having lesser consumer protection. We are of course gravely concerned that those costs to consumers will be much greater than any savings to the sector. In any event, these changes certainly will not help consumers. They are aimed at making consumers less protected.
Of course, we know that the government knows that it has a problem with this legislation in the public eye because of the way that the changes were snuck in via regulation prior to the proposed start date. That was done because the government knew that it was really going to struggle to get this legislation to pass the parliament. So the original changes were made by regulation, which, of course, bypassed parliamentary scrutiny at the time.
There are opportunities for disallowance after the fact, but that is really inconsistent with major changes.
What ought to have been done is for the legislation to have been introduced in the parliament and dealt with in the Senate early enough for the legislation's changes, if they were going to pass, to take effect by legislation, not by regulation. So it has been really disappointing. We know that the former Assistant Treasurer released the draft changes just days before Christmas and then had submissions close in late January, so it was a very sly process. The obvious difficulty with that process is that, if you release the draft before Christmas, you say to people, 'While you're on your Christmas holidays at Caloundra, the Whitsundays or down in Hobart having a nice break, could you write us a bit of a submission in respect of our future of financial advice changes that we propose to make?'
Mr Husic: What about a postcard?
Ms BUTLER: Or the back of a postcard. Send it in by postcard. Why not send it in by postcard? Why not just make a submission? 'Wish you were here. Beautiful sunshine on the front. My serious concerns about watering down consumer protections on the back. My serious concerns about the fact that you are going to make it easier for me to have a financial advice service provided to me that does not protect my best interests on the back.' That was of course a terrible process, and it was aimed at preventing people having the opportunity to be consulted about these future of financial advice wind backs. Popping it through by regulation was, as I said, not appropriate in the circumstances. Really, if the government is not confident in its ability to negotiate with crossbenchers, perhaps the thing to do would be to learn to negotiate with crossbenchers, not sneak important changes through in regulations.
We know that the government has long been opposed to protecting consumers, because they are much more interested in backing the interests of the top end of town. That is just what a Liberal government is really for. If we consider their record, as I said at the commencement of my remarks, it took Labor to introduce comprehensive consumer protection laws in the form of the Trade Practices Act 1974. We have always had consumer protection front and centre in our concerns about what government can do.
Of course, the lessons learned from the global financial crisis would not be lost on anyone here. It is not appropriate to throw up your hands and say, 'Let the financial services sector regulate itself.' That is not the appropriate approach. Of course there should be appropriate, measured regulation to protect the interests of consumers and to protect the interests of all of us in having a functioning financial sector that the community, the sector and industry can all have confidence in. That is what the future of financial advice laws were all about. They were all about opportunities for building confidence in our financial services sector and ensuring that those mums and dads, those grandparents who are relying on the financial advice they are seeking from professional advisers, could rest assured that those advisers were acting squarely in their best interests, to avoid conflict, to avoid the possibility that the adviser's interests or the adviser's employer's interests would be put ahead of the consumer's. These protections are all about ensuring that consumers could have that confidence in making sure that an adviser would always be acting in their best interest.