Second Reading SpeechMs O'Dwyer (Minister for Revenue and Financial Services)
That this bill be now read a second time.
Today I introduce a bill that will amend the Corporations Act. It will raise the education, training and ethical standards of financial advisers by requiring financial advisers to hold a degree, undertake a professional year, pass an exam, undertake continuous professional development and comply with a code of ethics.
In introducing this bill today, we are implementing our commitment set out in the government's response to the Financial System Inquiry (FSI). With its introduction, we are also responding to recommendations made by the Parliamentary Joint Committee (PJC) on Corporations and Financial Services inquiry into proposals to lift the professional, ethical and education standards in the financial services industry.
This government is committed to ensuring Australia has a financial services regulatory regime that enhances confidence and trust by fostering an environment in which financial firms treat customers fairly.
Creating a holistic professional standards framework to raise the competency and professionalism of financial advisers is an important part of our commitment.
Raising the professional standards of financial advisers will play a significant role in improving consumer trust in the financial advice industry, which has had repeated instances of inappropriate behaviour.
Reduced trust acts as a barrier to consumers seeking financial advice, which is an extremely poor outcome for both consumers and industry.
We probably should not be surprised then, that right now only one in every five Australians seeks financial advice.
Appropriate financial advice can significantly improve people's financial wellbeing. That is why we simply must improve trust in the industry so that consumers can have confidence in the advice they are seeking-so that they can have recourse to the kind of strategic advice, expertise and knowledge that most everyday people do not normally hold.
Equally important is the sustainable future of the financial advice industry, which is integral to our economy.
I note that the proposed reforms follow important steps already taken by the government to improve the transparency and accountability of financial advice.
We have already established a register of financial advisers that allows consumers to verify the credentials of financial advisers and be confident that they are appropriately qualified and experienced.
We are also progressing reforms to life insurance advice remuneration structures. These reforms are an important step in addressing concerns that remuneration incentives are affecting the quality of advice provided to consumers and encouraging the unnecessary turnover of policies.
The government has consulted extensively on the measures in this bill, which build on the model proposed by the PJC on Corporations and Financial Services, chaired by my colleague Senator David Fawcett, and the recommendations of the FSI. This is an excellent example of different segments of industry working together to build a workable model.
I note that both the FSI and PJC reviews identified that the existing professional standards for financial advisers are too low and do not ensure that all financial advisers have the necessary skills to provide high-quality advice to consumers.
These reviews recognise that the current regulatory framework was not enough to build professionalism in the financial advice industry and has not encouraged this industry to take a greater lead in setting standards.
It is clear that the current framework lacks the incentives to encourage industry to go above and beyond the minimum.
For example, under the current law, advisers can become qualified to provide financial advice after just four days of training, and there are no specific ongoing training requirements beyond that.
There is now widespread support among industry, consumer groups, the government and parliament to raise education, training and ethical standards of financial advisers.
It is clear that the time is right and we must take advantage of this momentum.
The establishment of the standards body will be the first important step on the road to professionalism.
Under this proposed legislation, we will establish a standards body, as a Commonwealth company limited guarantee, to set education standards, professional year and continuing professional development requirements.
The body will also develop an exam and a comprehensive code of ethics for all financial advisers.
Establishing the standards body as a Commonwealth company will balance the body's independence with industry and consumer engagement.
It will also minimise the government's footprint and allow for the possibility of easily transferring the standards body back to industry once trust and confidence in the sector is restored.
The government will have no direct control over the entity's day-to-day operations, but, should the body not comply with its obligations, the responsible minister may give the body a written direction.
Such a direction would only occur in very exceptional circumstances.
The government will be responsible for all appointments to the board, which will comprise an independent chair, three industry representatives, three consumer representatives, an academic and an ethicist.
Industry will have a key role in the proposed model and will be consulted extensively as the body sets standards.
This is critical because industry must have a stake in the standards-making process if it is to be truly professional and to develop standards above the minimum.
Under the reforms, financial advisers who provide personal advice to retail clients on more complex products will need to meet these new standards.
Financial advisers who are only authorised to provide general advice or personal advice on less complex financial products, such as general insurance, will not be required to comply with the new standards.
The Australian Securities and Investments Commission will continue to set education and training standards for advisers who are only authorised to provide general advice or advice on less complex products.
New financial advisers will require a degree, while existing advisers will need to meet a standard equivalent to a degree set by the standards body.
While the detail will ultimately be set by the new standards body, it is important to note that not all existing advisers will have to return to university and complete a three-year degree program.
Some may not, but a majority are likely to receive credit for the education or training that they have already completed and will need only to gap-fill or undertake bridging courses to meet the standard required.
Existing advisers have from 1 January 2019 to 1 January 2024 to meet the new education standards.
While I commend the actions of some licensees who have already introduced a degree requirement for their financial advisers, government action is necessary in this space to ensure minimum standards apply across the whole industry.
The FSI found that low adviser competence was a factor in many of the recent high-profile instances of consumers receiving inappropriate financial advice and contributed to the low demand for financial advice.
The fact that an adviser could reach accreditation in four days has given the industry a bad image.
That is obviously not good enough and there is clearly room to do better if the industry is to reach its true potential.
A core feature of these reforms is the requirement that all advisers complete an exam set by the new standards body.
Such a requirement already exists in the United States, Britain, Canada, Singapore and Hong Kong.
New advisers will need to complete the exam from 1 January 2019. Existing advisers will have from this date until 1 January 2021 to pass the exam.
Collectively with the other measures in this bill, the exam will play a significant role in improving professional standards of financial advisers.
It will objectively test and strengthen the practical and ethical knowledge of existing advisers with immediate effect and will help renew confidence in the industry without significant lag times.
From 1 January 2019, all new entrants will need to undertake a professional year set by the new standards body.
This will involve at least one year of work and training to ensure that new entrants are mentored and assessed before they are fully authorised to provide unsupervised advice to clients.
Under the reforms, new entrants who have completed their degree and passed the exam will be able to provide advice on a supervised basis during the professional year.
The professional year trainee will be required to disclose to clients that they are completing the professional year and that they are not permitted to give advice unsupervised.
The Register of Financial Advisers will clearly show that the person is completing their professional year and only authorised to give advice under strict supervision.
A supervising adviser will need to ensure that the new financial adviser is appropriately supervised and take responsibility for all advice given by the new financial adviser during the professional year.
The standards body will develop guidelines on what constitutes 'appropriate supervision'.
Existing advisers will not need to undertake a professional year.
All advisers, both new and existing, will be required to undertake continuing professional development.
The new standards body will determine the requirements for continuing professional development, including the number of hours that advisers need to complete and which courses satisfy the requirements.
This requirement will ensure financial advisers are keeping up to date with relevant training, information, skills and knowledge to make sure that they remain competent in providing advice to consumers.
Roy Morgan reported in its 2014 State of the nation report that only 25 per cent of Australians rate financial planners' standards of ethics and honesty as 'very high' or 'high'.
This percentage must improve if the financial services industry is to meet the expectations of consumers.
In a more recent survey, up to 85 per cent of practicing financial advisers indicated that they support the introduction of a single unified code of ethics.
It is clear that financial advisers are hearing these concerns.
On the back of these concerns and the recommendations by the PJC, the government is requiring all financial advisers to subscribe to a code of ethics by 1 January 2020.
The new standards body will establish a single uniform code of ethics that will set out principles designed to help financial advisers conduct business honestly and with integrity.
All financial advisers will need to be covered by an ASIC approved compliance scheme, which will set out how the code will be monitored and enforced.
The compliance scheme will set out the arrangements for monitoring compliance, the sanctions for breaching the code, the process for consumers to make complaints, and the process for resolving disputes between the monitoring body and the financial adviser.
The compliance scheme will specify which 'monitoring body' is responsible for enforcing compliance-this could be either a professional association or a third party who is independent of the licensee.
It is important to note the significant role that professional associations, independent third parties and licensees will play in implementing these reforms.
These institutions will be directly responsible for ensuring financial advisers comply with the new standards.
Professional associations are likely to offer training and education services to their members, to assist them to prepare and to meet the new standards.
I note that many of these associations, particularly those in the Industry Consensus Group, have been instrumental in the development of these reforms.
I would like to thank Senator David Fawcett and the members of the PJC for their important contributions and I also wish to acknowledge the work of my predecessors.
It is anticipated that the new standards body will be established by mid-2017.
The new education, exam, professional year and continuing professional development requirements apply from 1 January 2019.
Existing advisers will have until 1 January 2021 to pass the exam and 1 January 2024 to meet the degree-equivalent requirement.
The provisions relating to the code of ethics take effect from 1 January 2020.
In closing, I note that these reforms represent a necessary and valuable change to the current regulatory environment for financial advisers, and are important steps in professionalising the industry.
Not only will they deliver significant benefits to consumers, they will also help maintain trust and confidence in the financial system. I commend the bill to the House.