Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014

Second Reading Speech

Senator Ronaldson (Minister for Veterans' Affairs, Minister Assisting the Prime Minister for the Centenary of ANZAC and Special Minister of State)

I table a revised explanatory memorandum relating to Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 and I move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.


This Bill delivers on the Government's election commitments to improve the former Government's Future of Financial Advice legislation and also implements the agreement reached by the Government on further improvements with the Palmer United Party and the Australian Motoring Enthusiasts Party.

The improvements in this Bill will deliver more affordable access to high quality financial advice by removing unnecessary and costly red tape, while maintaining all the important consumer protections that matter for consumers.

Importantly, consistent with the Government's commitments made before the last election, the statutory requirement for financial advisers to act in the best interest of their clients remains in place, as does the ban on conflicted remuneration, including in relation to general advice.

It was always clear that Labor's Future of Financial Advice laws needed improving.

Indeed, Allens Linklaters, a leading international law firm, recently described the former Labor government's FOFA laws as:

"Some of the poorest quality legislative provisions we have ever seen".

They went further to say that FOFA, as legislated by Labor:

"...adds considerably to the regulatory burden for industry participants and regulators".

When the previous government announced the detail of its FOFA law changes back in April 2011 the Coalition's position was very clear.

We expressed our concern that investors receiving financial advice would face more red tape, increased costs and reduced choice if those laws were passed in full.

Our fundamental concern was and remains that over time fewer Australians would be able to access or afford high quality financial advice under Labor's FOFA.

We made it clear that we supported sensible financial advice reforms which increase access to affordable, high quality advice as well as transparency, consumer choice and competition.

We explicitly supported the introduction of a statutory best interest duty for financial advisers and the ban on conflicted remuneration or commissions which distort investment advice.

However, we also pointed out that any reform in this area needed to strike the right balance between appropriate levels of consumer protection and ensuring the availability, accessibility and affordability of high quality financial advice.

We remain concerned that FOFA, as previously legislated, reduces affordability and accessibility of financial advice in Australia.

Labor's FOFA changes did not strike the right balance. As the then Minister, Bill Shorten must have known they did not, given he refused to put those FOFA changes through the former government's own required regulatory impact and cost-benefit assessment.

After those FOFA changes were passed by the House of Representatives in March 2012, the Coalition formally announced the policy which we took to the last election, including:

the complete removal of the requirement for an investor to keep re-signing contracts with their advisers on a regular basis (Opt-In);
the simplification and streamlining of the additional annual fee disclosure requirements;
improving the Best Interest Duty test; and
providing certainty around the provision and availability of scaled advice.
This Bill delivers on those commitments.

It is designed to improve FOFA by clarifying its operation and to more effectively align it with what was envisaged by the original Parliamentary Joint Committee inquiry into financial products and services in Australia - the genesis of the original legislation.

This Bill also takes into account the relevant recommendations of the recent Senate Economics Legislation Committee inquiry into the Bill and makes further improvements to the Statement of Advice provisions, consistent with an agreement reached between the Government, the Palmer United Party and the Australian Motoring Enthusiasts Party.

There has been a lot of misinformation from the Opposition, and others, that the Government's amendments will weaken the consumer protections currently afforded under FOFA.

This is not the case.

In fact, the ABC's Fact-Check described Opposition claims that the Government was re-introducing commissions for financial advisers as inaccurate and "scaremongering".

As consistently indicated by the Government all of the key consumer protections of FOFA will stay.

For instance, the requirement that advisers must act in the best interests of their client will remain.

Advisers will also need to provide appropriate advice ...warn the client if advice is based on incomplete or inaccurate information ...and prioritise the client's interest ahead of their own.

A ban on conflicted remuneration for benefits received in relation to personal advice will remain whilst allowing those advisers not providing personal advice to a client to more efficiently provide general advice.

Let me be clear, the general advice provision in this Bill does not re-introduce commissions.

In this Bill we have put this completely beyond doubt, by expressly providing that payments commonly known as commissions are not permitted.

Clients will also continue to receive information about the fees they are paying, including fee disclosure statements for clients who entered into arrangements post the 1 July 2013 FOFA start date.

The Government has consulted extensively on this package of amendments.

The Department of the Treasury, in its Regulation Impact Statement, estimated that the amendments would result in ongoing cost savings of approximately $190 million per year, with one-off implementation cost savings of around $90 million.

The Government believes that high quality, affordable financial advice should be within reach of all Australians, and that a strong financial services industry, unburdened by excessive and inefficient regulation, is essential to ensuring that Australians have access to affordable high quality advice.

This package of amendments delivers these outcomes.


The Government has made it clear for a number of years that we support sensible financial advice reforms that increase access to affordable, high quality advice as well as reduce the regulatory burden on industry and investors.

In February 2012, Coalition members recommended 16 changes to FOFA in their Dissenting Report of the Parliamentary Joint Committee on Corporations and Financial Services' inquiry into the original FOFA Bills.

The Coalition then re-affirmed its commitment to make these changes in its July 2013 pre-election Policy to Boost Productivity and Reduce Regulation.

Since the 2013 election, the Government has publicly canvassed these reforms on numerous occasions.

The Government has conducted extensive consultation with a range of stakeholders, including financial advisers, industry associations, consumer advocacy groups, training and consultant businesses, academics, law firms and individuals.


Best Interests Duty Test

One change which has attracted substantial attention is the amendment to the Best Interests Duty Test.

Under the current law, advisers are required to act in the best interests of their clients. This requirement is enshrined in subsection 961B(1) of the Corporations Act.

This requirement remains in place, unchanged; there is no amendment to this requirement at all.

The current subsection 961B(2) outlines the steps an adviser may go through to show that he or she has satisfied the duty to act in the best interest of his or her client.

The first six steps of this subsection remain effectively unchanged and are a comprehensive set of steps that provide certainty about the application of the best interests duty to both financial advisers and investors seeking financial advice.

The change to the best interests duty in the Bill is to remove the seventh step in section 961B(2), which is an open-ended, 'catch-all' requirement.

In the Government's judgement, this catch-all provision creates too much complexity and and uncertainty for advisers and consumers.

The Government's change to remove this step will provide certainty to industry regarding their obligations under the duty.

The Government has been open to suggestions on other specific requirements that could be included to improve the operation of the best interest duty.

However, when asked, even the most vocal critics of the change have not been able to point to another specific requirement a financial adviser should be asked to comply with in order to satisfy the best interest duty.

As such, the Government will proceed with removing the uncertainty caused by the catch-all provision.

Scaled advice

Another important change the Government is making relates to better facilitating scaled advice.

Scaled advice refers to the provision of advice which is limited in scope to some extent; for example, advice on superannuation products rather than a holistic financial plan.

This Bill will explicitly permit scaled advice; this will help advisers provide low cost advice services and - importantly -enable more consumers to access advice.

All the best interest protections continue to apply to scaled advice.

Removal of the Opt-in requirement

FOFA currently requires all clients to re-sign their contract with their financial adviser every two years or it lapses - also called the 'opt-in' requirement.

This requirement adds an unnecessary layer of red tape.

It offers very little consumer protection beyond that already afforded to clients by open and transparent advice about fees charged combined with the clients' ongoing ability to opt-out of their financial advice arrangements at any time.

Removing the opt-in requirement is an important step in winding back some of the unnecessary regulatory burden imposed on advisers and their clients by the previous Government.

Removal of retrospective additional annual Fee Disclosure Statements

Imposing a retrospective additional annual fee disclosure requirement is another change made by the previous government which did not properly balance the significant additional costs it imposed on advisers and their clients with the marginal additional benefit.

The Government has acted to remove that retrospective requirement imposed by the previous government to provide a yearly fee disclosure statement to clients who entered into their ongoing arrangement prior to 1 July 2013.

The requirement to prepare a fee disclosure statement for pre1 July 2013 clients is expensive, given that the age of many legacy systems often requires advisers to manually collate and review data.

Indeed, industry has estimated that it costs around twice as much to provide a fee disclosure statement to a pre-1 July 2013 client as it costs to provide one for a new client.

In removing this costly obligation, the Government notes that these clients will continue to receive disclosure statements directly from superannuation trustees and product manufacturers that identify the fees paid to an adviser.

Of course, today's computer systems are specifically developed to prepare fee disclosure statements and can do so cost-effectively. As such, industry will continue to be required to provide post-1 July 2013clients with a fee disclosure statement.

Over time, an increasing portion of clients will receive such an additional annual fee disclosure statement.

General advice

The current ban on conflicted remuneration captures a far wider range of circumstances than was originally intended, and has resulted in significant compliance costs for industry.

For example, the ban captures employees involved in preparing and providing general advice (such as website designers or general information seminar providers) who are not in a product sales related area.

The Government initially proposed to exempt all general advice from the ban on conflicted remuneration.

During the consultation process, stakeholders raised concerns that consumers may not appreciate the difference between general and personal advice and that a broad exemption may create opportunities for regulatory arbitrage.

The Government has listened to these concerns.

It is important to note that it was never the Government's intention to allow the payment of commissions on general advice.

To this end, the Government is introducing a targeted general advice provision.

There are five limbs to this provision, and all of the limbs must be satisfied to ensure a particular benefit is not conflicted remuneration.

Importantly, there is a specific limb that clarifies - beyond a doubt - that payments known as commissions - upfront or trailing commissions - cannot be paid.

To prove how serious the Government's intentions are, the FOFA Bill includes regulation-making powers that may prescribe circumstances in which all or part of a benefit is to be treated as conflicted remuneration.

Therefore, if - contrary to our clear expectation and intention not to bring back conflicted remuneration - developments warrant our intervention, we could address any issues very quickly through regulations. We do not believe this will be necessary.

Statements of Advice

The Government is introducing additional improvements agreed with the Palmer United Party and the Australian Motoring Enthusiasts Party.

These further improvements will ensure that all the essential protections of FOFA are front-of-mind for clients as they will be explicitly listed on the Statement of Advice an adviser provides to their clients.

The amendments will also require any instructions a client seeks for further or varied advice to be in writing, signed by the client, and acknowledge by the adviser.

Statements of Advice will also need to be signed by the adviser and the client.

Specifically, in this Bill, the Government is implementing its agreement with the Palmer United Party and the Australian Motoring Enthusiasts Party that the following requirements in the Corporations Act 2001 have to be explicitly listed in the Statement of Advice provided by financial advisers to their clients and signed off by both:

That the adviser is required to act in the best interest of their client and to prioritise their client's interests ahead of their own, consistent with the requirements in subsection 961B and 961J of the Corporations Act 2001;
That any fees are disclosed and that the adviser will provide a fee disclosure statement annually, if the client enters into, or has entered into, an ongoing fee arrangement after 1 July 2013;
That a client has the right to return financial products under a 14-day cooling-off period in accordance with the requirements currently provided under Division 5 of Part 7.9 of the Corporations Act 2001; and
That the client has the right to change his or her instructions to their adviser, if for example they experience a change in their circumstances.
Any instructions to alter or review instructions must be in writing, signed by the client, and acknowledged by the adviser.
The requirement for an explicit statement by the financial adviser that he or she genuinely believes that the advice provided to the client is in the client's best interests, given the client's relevant circumstances.

As well as implementing those changes to the Statement of Advice provisions the Government is also progressing implementation of the agreement with the Palmer United Party and the Australian Motoring Enthusiasts Party to establish an enhanced public register of financial advisers.

A dedicated industry working group has consulted with all relevant stakeholders to develop the best way of setting up this public register of financial advisers.

The industry working group has recently reported to the Minister about:

The scope and content of such a register (including a record of each adviser's credentials and status in the industry);
Reporting obligations for licensees and/or advisers;
Responsibility for providing information and input of data; and
Potential privacy issues.

As well as delivering on a specific commitment in the Government's agreement with the Palmer United Party and the Australian Motoring Enthusiasts Party on further improvements to our financial advice laws the establishment of an enhanced public register of financial advisers also deals with recommendation 44 of the recent Senate Economics References Committee inquiry into the Performance of the Australian Securities and Investment Commission.


The majority of these FOFA changes have been in place through regulation since 1 July 2014.

By adopting this approach, the Government has provided certainty for all stakeholders on the timing of these amendments, thereby reducing regulatory costs and encouraging more affordable financial advice.

The interim regulations (those made redundant by the legislative amendments) will be repealed following passage of the legislative amendments.


I talked earlier about the extensive consultation undertaken by the Coalition in the development of these amendments.

Whether it was through the initial deliberations of the Parliamentary Joint Committee inquiry in 2009, the debate on the original FOFA bills in 2012, campaigning during the 2013 election period or the more recent consultation on the draft amendments, as well as through the inquiry undertaken by the Senate Economics Legislation Committee, the Government appreciates the input of all stakeholders.

The views received from all stakeholders have informed and shaped the final form of this Bill.

I would like to thank all stakeholders for their valuable contribution into this process.


In conclusion, this Bill fulfils the Government's election commitment to keep the important consumer protections in our financial advice laws that matter, while removing unnecessary and costly red tape pushing up the cost of advice for financial advisers and their clients.

Australia needs a robust but efficient regulatory system, which is competitively neutral so that people saving for their retirement or managing financial risks and opportunities through life can access affordable high quality advice.

The improvements in this Bill help deliver such a system.

Advice will continue to be in the best interests of the client, ... conflicted remuneration which could distort the advice given will continue to be banned ... while unnecessary red tape which only serves to increase the costs faced by consumers will be removed.

Consumers will continue to have access to high quality financial advice which over time should become more affordable instead of less affordable.

The Government also understands that not everything that needs to be done in this space can be achieved through more legislation or regulation.

More needs to be done by the financial services industry itself to keep lifting professional, ethical and educational standards across the financial advice industry.

The Government appreciates and supports the significant efforts that have been made across the Australian financial advice industry in recent years to lift professional, ethical and educational standards.

We will continue to work with all stakeholders on initiatives to further lift professional, ethical and educational standards into the future.

In this context, the Government will continue to progress the implementation of the enhanced Public Register of Financial Advisers announced on 17 July 2014.

Ultimately what we all want to achieve is that Australians saving for their retirement, or managing their retirement, have access to high quality advice they can trust and which is affordable. This Bill and various related initiatives help deliver on that objective.

1 Trade Practices (Industry Codes-Franchising) Regulations 1998, Schedule (Franchising Code of Conduct), clause 2.

2 See Discussion Paper: Review of the Franchising Code of Conduct, Mr Alan Wein, January 2013, pp. 9-10,

3 Franchising Australia 2012, Griffith University, 2012, p. 2.