Better Regulating Financial Advice

A bill regulating financial advice passed the House of Representatives today. Due to a bit of a fillibuster by the Coalition, I ended up not speaking in the debate, but I thought I'd post my speech here.
Corporations Amendment (Future of Financial Advice) Bill 2011

The collapse of Opes Prime and Storm Financial affected thousands of Australians, each one a story of betrayal and loss.  I want to share just two.

In February 2008, Tracey Richards went to see her Storm Financial planner. Instead of withdrawing money to buy a motorhome, she was persuaded to borrow another $200,000 and invest more deeply in the share market. For the Brisbane receptionist, this was her third big margin loan investment through Storm. The first investment in 2001 was her life savings of $250,000, with another $400,000 later added from the sale of her home.

Now all is gone.

In its place was a debt of $300,000 Tracey could not repay. A mother of three, Tracey wondered how on a salary of $45,000 she received a $1.48 million margin loan from Macquarie Bank with an annual interest bill of $115,000. She became suicidal.

Eileen Miller was another victim of the Storm collapse. In 2006, Eileen and her daughter visited a financial advisor hoping to invest the nest egg left by her husband, who died of cancer in 2005. Having left her the house, two thirds of a boat and $300,000 in cash, Eileen’s daughter made it clear, ''The house was not to be at risk under any circumstances”.

In time, documents were put in front of Eileen to sign.

Eileen remembers receiving no explanation of what she was signing, and as a result, she ended up borrowing $750,000 secured against the house. Most of this went into a margin loan with Macquarie Bank, with the financial advisor was paid an unknown portion as commission.

When the financial crisis struck, the advisor called Eileen and her daughter in for a meeting. He told them “the stock market has gone down; I thought it would come back but everything's gone”. The cash was gone, the boat was gone and she was in danger of losing the last substantial thing she owned. Her house - a comfortable but modest weatherboard cottage.

Eileen, Tracey and the thousands of others who were ‘Stormified’ show us financial advisors have a responsibility to their clients. If financial advisors are charging on-going fees for their advice it is only reasonable and fair they remain in regular contact with their clients.

A person’s lifetime savings are too important. They are about securing dignity in retirement.  Ensuring Australians are able to enjoy their retirement and live comfortably without having to worry about being able to pay the bills.

The Labor Party has a proud tradition of being the workers party. We are the party that looks after consumers. Labor introduced the Prices Justification Act in 1973, the Trade Practices Act in 1974, the National Competition Policy on 29 March 1995, and has a tradition of looking after consumers to protect Australians from unconscionable business practices.

This Bill is part of that tradition because good government involves the economic and the social. They are not mutually exclusive and the Labor Party understands this. This is why we introduced the Superannuation Guarantee in 1992. Addressing the Australian Graduate School of Management in 1991, Paul Keating outlined his vision for a national, privately based superannuation scheme.

He said:

“Unless we can move we will put the Commonwealth Government aged pension scheme under unbearable stress and condemn an entire generation of elderly people to an unsatisfactory and poor provided retirement. A system of more adequate private provision of retirement income sympathetically interfaced with the public pensions system will not only better provide for the aged, but is more likely to preserve the dignity and independence each has enjoyed in their pre-retirement years.

It will make Australia a more equal place, a more egalitarian place, and, hence, a more cohesive and happier place. It is the safety net most Australians will need when they retire”.

Those opposite have always stood against superannuation reforms. The Liberal and National parties opposed the first 3 per cent of award based superannuation and then went on to opposed the second 3 per cent. When Prime Minister Keating moved to introduce a superannuation guarantee levy Wilson Tuckey drew on his ‘long history in the racing industry’ to compare the legislation to the ‘worst type of jockey … both stupid and dishonest.’

Mr Tuckey continued: ‘When the poor old employer levy gets to 12 per cent, what will it deliver? Luckily, it might deliver an overseas holiday and a few presents for the kids, but it will not deliver a retirement income at the inflated costs of those days.’

Minister Shorten has demonstrated a 12 per cent superannuation guarantee will provide a worker now aged 30 on average full-time wages with a real retirement benefit of over $553,000 at age pension age. That should leave some change after the ‘overseas holiday and a few presents for the kids.’

Today the Association of Superannuation Funds of Australia calculates $1.3 trillion of assets are in superannuation funds. Treasury forecasts estimate this will grow to between $3-5 trillion by 2025.

More than tripling today’s funds. To boost superannuation savings for low-income earners we have also introduced the Low Income Superannuation Contribution.

For Australians earning less than $37,000 a year, this will help ensure they effectively pay no tax on their superannuation. This will benefit up to 3.6million low-income earners. This alone will boost the superannuation savings of over 2.1 million women by $500 million in 2013-14 alone.

Roy Morgan estimates 2.2 million fund members pay commissions or ongoing fees for financial advice they do not receive. The opt-in provisions in this Bill prevent superannuation savings from erosion by paying ongoing fees without a person’s consent. This Bill ensures that financial advisors do not charge ongoing, open-ended fees where a client is receiving little or no service.

It is about instilling greater confidence and trust in financial services.  It is about providing greater consumer protection. It is about improving professional standards, transparency for clients and the regulatory powers of the Australian Securities and Investments Commission.

The opt-in provisions will only apply to new clients from 1 July 2012. Even then, only if an advisor is intending to charge ongoing advice fees will they need to provide notice. One-off transaction fees and ongoing payments for advice already provided do not apply to this Bill. If an advisor is already seeing a client at least every two years, the opt-in provisions will not be a cost burden.

However, the Financial Planning Association of Australia opposes the opt-in provisions. They talk of their administrative burdens and costs. But what about Australians who are burdened with fees for administration they don’t use, advice they don’t receive and ongoing costs that negatively impact on their retirement savings? It is a simple matter of priorities with a simple answer. The retirement savings of Australians come first.

The Industry Super Network agrees. They understand the opt-in provisions protect against replicating trail commissions. In their words, ‘it is inconceivable an advisor does not have to provide any disclosure of ongoing fees beyond the initial engagement’. Australians should be aware of the fees paid from of their superannuation investments.

Good advice and knowledge regarding superannuation is highly valued by the community. A campaign I ran in my electorate addressed the issue of lost superannuation. Together with Chris Bourke MLA, the campaign let Canberrans know how to find their lost superannuation. Lost superannuation is a particular problem in postcode 2615.  In suburbs like Dunlop, Holt, Flynn, Melba, Spence and Macgregor – there is $45 million in lost superannuation.  We launched the campaign to let Canberrans know about the ATO SuperSeeker website and the hotline number (13 28 65).

In Civic, we chatted to a part-time actor, who had recently found $6,000 in lost superannuation from a previous job. In Kippax, we met Kevin Rourke, who had read about our campaign in the Northside Chronicle. Kevin logged on to our laptop on Saturday and found lost superannuation for a job he had as a panel beater in the mid-1980s. The employer had died and Kevin had not known which superannuation fund he had put the money in. However, thanks to the ATO’s SuperSeeker website, Kevin has been reunited with his retirement savings from a quarter of a century ago.

Every Australian who receives financial advice should be able to trust that advice with confidence. Improving professional standards and increased transparency provide greater protection of a precious investment grown over a lifetime. This Government does not think it is OK for Tracey Richards to be told by her former adviser, “Ignore the margin calls; don't even talk to the bank; I'm your financial adviser, I'm taking care of it."

Or that Eileen Miller with, by her own admission, little financial literacy was left to trust her financial advisor would look after her.

The Leader of the Opposition once called Labor’s superannuation guarantee ‘a con job’.  Those opposite have been fundamentally uninterested in superannuation.  In not supporting this Bill, they again show they are fundamentally uninterested in the Australian people.

When Bob Hawke took office in 1983, just 40 per cent of the workforce had superannuation cover. By 1991, it was 72 per cent. In 2007, it was 94 per cent. Australians have more money invested in managed funds per capita than any other economy. Upfront fee agreements are standard business practice.

When you pay a plumber; electrician; your accountant; even your gym membership the fee is disclosed up front - you receive a quote. If additional fees are to be charged, they let you know why and what for. Typically, consent is given by a person’s signature. It is remarkable this practice has met such resistance by some in the finance services sector and the Opposition.

This Bill empowers Australians to act in their financial best interests.  It is wrong that 2.2 million Australians pay commissions and fees for advice they never receive. Retiring with dignity after a lifetime’s effort and contribution is not a luxury for the few. Thanks to vision and courage of Labor governments, it is the entitlement of many.

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8/1 Torrens Street, Braddon ACT 2612 | 02 6247 4396 | Andrew.Leigh.MP@aph.gov.au