Allens

Funds Management

Focus: Parliamentary committee recommends financial services reform

25 November 2009

In brief: Commission-based remuneration for financial planners would be phased out and ASIC would be given new powers to ban incompetent or unlawful financial advisers under recommendations contained in a Parliamentary Joint Committee report released this week. The recommendations aim to enhance both the professionalism of the financial advice sector and consumer confidence and protection, as Partner Anna Lenahan and Senior Associate Marc Kemp report. 

How does it affect you?

  • The Parliamentary Joint Committee on Corporations and Financial Services (PJC) made 11 recommendations to Government, including that:
    • financial advisers be required to place their clients' interests before their own;
    • government and industry consult with a view ultimately to phasing out commission-based remuneration for financial planners;
    • the powers of the Australian Securities and Investments Commission (ASIC) to ban individuals be extended by granting so-called 'negative licensing' powers;
    • ASIC perform risk-based surveillance of the holders of an Australian financial services licence (AFSL); and
    • ASIC consult with industry to establish a professional standards board to oversee competency and conduct standards for financial advisers.
  • We await the Government's response to the recommendations. A response can be expected during 2010.

Background

In February 2009, the PJC began an inquiry into the issues associated with recent financial product and services provider collapses, such as those of Storm Financial and Opes Prime, with particular reference to the following items listed in the published terms of reference:

  • the role of financial advisers;
  • the general regulatory environment for financial products and services;
  • commission arrangements relating to product sales and advice, including the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers;
  • marketing and advertising campaigns;
  • the adequacy of licensing arrangements for those who sell financial products and services;
  • the appropriateness of information and advice provided to investors, and how the interests of investors can best be served;
  • consumer education and understanding of financial products and services;
  • the adequacy of professional indemnity insurance arrangements for those who sell financial products and services; and
  • the need for any legislative or regulatory change.

The PJC excluded superannuation products and services from the inquiry. The governance, efficiency, structure and operation of Australia's superannuation system is presently under separate review by a committee set up by the Federal Government in May 2009.

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Recommendations of the PJC

The PJC received extensive submissions from interested parties, including ASIC, the Investment and Financial Services Association, the Financial Planning Association of Australia, and investors affected by the Storm and Opes Prime collapses.

In its report, released on 23 November, the PJC made 11 recommendations aimed at enhancing both professionalism in the financial advice sector, and consumer confidence and protection. The PJC has reserved the right to revisit the matters it considered during the inquiry, and to make further recommendations, once it has had an opportunity to consider the effect of changes in Australia's financial regulatory regime made since February 2009 (such as the introduction of regulations dealing with margin loans), or which are expected to be made (such as the introduction of a national consumer credit protection regime).

The PJC has taken the view that the isolated corporate failures of the past 18 months (such as those of Storm and Opes Prime) do not necessarily indicate regulatory failure. Accordingly, it has not recommended wholesale changes to the existing regulatory regime. It has sought instead to limit the conflicts of interest between financial planners and their clients; to improve investor education and access to sound financial advice; and to increase ASIC's oversight and enforcement capability.

The PJC recommends the following:

  • That the Corporations Act 2001 (Cth) impose a duty on financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own. This important recommendation will, if implemented, have far-reaching implications for the way in which financial planners advise their clients.
  • That the Government consult industry with a view to ending payments from product issuers to financial advisers. This recommendation contemplates a phased abolition of commission-based remuneration, which many regard as placing financial planners in a position of conflict with their clients.
  • 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 and any potential conflicts of interest.
  • That the Government gives ASIC the necessary resources to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. As part of its surveillance activities, ASIC should conduct annual financial advice shadow-shopping exercises.
  • 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.
  • That section 920A of the Corporations Act (which empowers ASIC to make banning orders against individuals in certain circumstances) be amended to enable ASIC to ban individuals who are involved in a contravention of a financial services law by another person, or who ASIC has reason to believe are not fit and proper to provide financial services, or who ASIC has reason to believe are unlikely to comply with a financial services law.
  • That, as part of their licence conditions, ASIC require agribusiness MIS licensees to demonstrate they have sufficient working capital to meet current obligations. This is a response to the Great Southern and Timbercorp collapses.
  • That sections 913B and 915C of the Corporations Act (which stipulate respectively when an AFSL may be granted, and when ASIC may suspend or cancel an AFSL) be amended to allow ASIC to deny an application, or suspend or cancel an AFSL, where there is a reasonable belief that the licensee 'may not comply' with their obligations under the AFSL.
  • That ASIC consult with the financial services industry to establish an independent, industry-based professional standards board to oversee competency and conduct standards for financial advisers.
  • That the Government investigate the costs and benefits of different models of a statutory last resort compensation fund for investors. This recommendation is in response to submissions (including from ASIC) that requiring holders of AFSLs to maintain professional indemnity insurance cover often does not benefit investors, due to the claims-based nature of such cover, and the fact that this insurance is often subject to extensive exclusions.
  • That ASIC deliver more effective education programmes to groups in the community who are likely to seek financial advice for the first time.

It remains to be seen how the Government will respond to these recommendations.

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