Financial advice that puts investors first

27 August 2014

Labor has a proud tradition of standing up for the interests of consumer's. The Government's Future of Financial Advice reforms weaken protections for those who receive financial advice. Here is my speech to Parliament about why is vital we offer adequate consumer protection when it comes to financial advice and people's life savings.

In 2009, Cecily and Robin Herd had their life savings destroyed in the collapse of Storm Financial, a Townsville based financial adviser. The Herds, both in their 70s, had borrowed against their home to invest in Storm's equity products, thinking it was a safe investment in their future. After the Commonwealth Bank forced Storm into administration, Robin said:

… we sold our house and everything else to pay back our margin loan.

The couple now live, according to a report in The Australian Financial Review, in a flat in Caboolture. Robin said:

We only wanted a comfortable retirement. We had no idea about the size of commissions and risk to everything we had. The nightmare is still with us.

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. She was a receptionist in Brisbane and 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 added from the sale of her home. All of it is gone and in its place was a debt of $300,000 that Tracy could not repay. She is a mother of three and wondered how, on a salary of $45,000, she received a $1.5 million margin loan from Macquarie Bank with an annual interest bill of $115,000.

In 2006, Eileen Miller and her daughter visited a financial adviser 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 put at risk under any circumstances. Documents were put in front of Eileen to sign and she remembers receiving no explanation of what she was signing. As a result, she ended up borrowing $750,000 secured against the house. Most of this went to a margin loan with Macquarie Bank, with the financial adviser paid an unknown portion of the commission. When the global financial crisis struck, the adviser 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 Eileen was in danger of losing the last substantial thing she owned, a comfortable but modest weatherboard cottage.

Noel Stevens, a scaffolder, had a long-term life insurance policy with Westpac which was always guaranteed to pay him out if he ever got sick. He also had a bank account with the Commonwealth Bank, and he was convinced to switch to CBA life insurance after being called up by a teller and advised by a CBA financial planner that he would be better off. Mr Stevens did not know that the teller and the planner earned a kickback if he switched his life insurance policy to the Commonwealth Bank. A year later, he was diagnosed with terminal cancer, and the bank refused to pay him. Noel Stevens spent his final months battling the Commonwealth Bank in court. He won the case three days before he died, and the Commonwealth Bank appealed. Mr Stevens's daughter took on the fight and eventually won the appeal in December of last year.

These stories must weigh deeply upon the shoulders of all members of this House when we vote on a bill to weaken financial protections. For those of us on this side of the House, we sit in the proud history of reforms to protect consumers. It was a Labor government that introduced the Trade Practices Act in 1974, the National Competition Policy in 1995 and the superannuation guarantee in 1992. It was a Labor government that recognised that regulation must help the most vulnerable, not assist the most powerful.

As a result of the Storm Financial collapse, many lost their entire life savings, but other collapses were worse still. With Trio, many lost their homes. With Timbercorp, people not only lost their assets but were left with debts afterwards. Modelling that was commissioned by Industry Super has estimated that the government's proposed changes, winding back consumer protections, will hurt consumers to the tune of around half a billion dollars a year, with some $313 million a year of that being due to the removal of the opt-in provisions and the extension of grandfathering for existing commission arrangements. That modelling by Industry Super indicates very clearly which powerful groups in society this government is interested in protecting. This is a reform which is good for bankers and bad for pensioners. Maybe we should not be so surprised after a budget that has been brought down that is worse for pensioners than any other budget in the past generation.

This government is hitting some of the most vulnerable Australians by taking away financial protections. As Alan Kohler has pointed out:

All the big financial operations that have collapsed over the years, costing Australians billions of dollars, were based on commissions paid to financial planners. Westpoint, Timbercorp and Great Southern paid 10 per cent upfront commissions, Storm paid 6-7 per cent upfront plus a trailing commission, Opes Prime paid a trail of 0.75 per cent, Trio paid 4 per cent upfront and 1.1 per cent trail.

As he argues, the government ought to be sending a message to financial planners that they are not salespeople; they are pure advisers.

I agree with others in this debate who have pointed out that there are many good financial planners in Australia who work hard in the best interests of their clients. We do want more Australians to be seeking financial advice, but we do not want them, as a consequence of doing that, to be paying large hidden commissions.

There have been a plethora of Australians who have spoken out against the government's attempts to water down financial advice protections. The government claims that at no point has it sought to introduce commissions or conflicted remuneration, but page 28 of the explanatory memorandum proves that reintroducing conflicted remuneration is exactly what the government has sought to do.

A partner at Slater & Gordon was quoted in The Age as saying that the government's changes to financial advice protections would precipitate a new generation of scams and legal claims. The Age report went on:

Others say they will bring back the "boiler rooms". Hidden commissions remunerations will flourish like never before.

The potential losses that the Industry Super Australia modelling points to come off the back of very real losses which Australians have endured. Bianca Hall has written of Industry Super's reference to the potential for:

… financial collapses similar to those that occurred in 2006-10, which wiped $6 billion in savings from more than 120,000 investors …

That number of investors exceeds the population of a single federal electorate in this place. That is one in 150 Australian adults that have suffered a loss as a result of financial collapses. This government is pushing through a weakening of financial protections off the back of crises that have cost consumers $6 billion and in the face of modelling that shows that such a weakening will cost Australians half a billion dollars a year.

The Council on the Ageing are among the many groups that have argued against these changes, Ms Josephine Root arguing:

We believe the cumulative effect of these changes is to seriously weaken the reforms, giving less consumer protections and ultimately undermining confidence in the financial advice sector.

Christopher Joye in the Financial Review has argued cogently that 'permitting sales based compensation when individuals are offered independent financial advice will almost certainly lead to serious conflicts'. He has also made the point that 'few contest the conclusion that institutions, not consumers, stand to be the main beneficiaries'.

When asked about these changes on ABC Lateline on 18 March 2014, the chair of the Financial Planning Association, Matthew Rowe, was asked by Emma Alberici:

Reintroducing the ability for planners to accept commissions, is that in consumers' best interests? We've talked about the interests of you and businesses like yours, is that change in the best interests of consumers?

Matthew Rowe responded:

I don't believe it's in the best interests of consumers. I think it's a retrograde step.

So the head of the Financial Planning Association believes that the government's attempts are 'a retrograde step'. He is quoted as having said:

The FPA has written formally to the government voicing its strong opposition to commissions being paid under what is being called the 'general advice' exemption. We do not believe this proposed change is in the public interest.

Peter Collins, a former Liberal Treasurer, described to The Australian Financial Review's Jennifer Hewett that the government's weakening of financial advice protections is:

… fundamentally "bad policy" which will leave millions of Australian's vulnerable to financial losses and unscrupulous practices.

This is not tweaking or removing a bit of red tape. This is about fundamental and deleterious change which the government will come to regret.

It is a leap backwards into a murky past where there have been casualties before and will again if this proceeds.

To suggest there is sufficient financial literacy is fantasy land.

This is a warning from a former state Liberal Treasurer that, if these changes go ahead, then the losses from the next financial collapse will be on the shoulders of Liberal and National members in this House. KPMG Chairman, Peter Nash, has added his voice to concerns that the federal government has gone too far. He said:

Good elements of FOFA are at risk if the government pushes too hard in winding back.

The Australian Shareholders' Association have called on the government not make any rushed or inappropriate changes to existing legislation. Their Chairman, Ian Curry, has called on the coalition:

… to delay any changes to the FOFA reforms until after the completion of the financial systems inquiry.

An anonymous industry insider observed to Sally Patten in The Australian Financial Review:

There is strong incentive to reward people for selling more stuff. It is fanciful to think you can conquer it.

John Collett, writing in The Sydney Morning Herald, said:

The Coalition government's proposed amendments to the former Labor government's laws governing financial advice will result in less protection for investors.

Matt Levey, director of campaigns at consumer group Choice, said:

It is a sales pitch driven by a commission with no relevance to the person's financial circumstances.

Peter Martin, writing in The Sydney Morning Herald, has pointed out that the removal of a requirement for anyone paying an ongoing fee to opt in every two years is an arrangement that people in many industries would love because the simple requirement to opt in to pay commissions will be gone. Writing in the Fairfax press, renowned economics commentator, Ross Gittins, has summed the reforms up as:

The financial fat cats live to rip us off another day.

It is pretty clear, from those who are cheering these reforms, who will be the beneficiaries of these changes. Peter Johnston from the Association of Independently Owned Financial Professionals has been quoted as saying:

How can institutions say they are acting in the best interests of clients if they are only selling their own products?

Roy Morgan has estimated that 2.2 million superannuation fund members pay commissions or ongoing fees for financial advice they do not receive. As a result of the opt-in provisions superannuation savings will not be eroded by paying ongoing fees without a person's consent.

Frankly, these changes are no different from what we expect when we deal with other professionals. The member for Bowman spoke about his experiences as an ophthalmologist, but an ophthalmologist would not sneak in a fee without explaining what that fee was for. They would clearly state the fees at the outset of the consultation. That is what is reasonable to ask of financial planners by getting consent through a person's signature and by clearly explaining what you will get and what you will pay for it.

The sneakiness that has surrounded the government's attempt to repeal financial protections ought also give us an indication of who they are trying to help. If the government were proud of these changes, they would not have been pushing them through via regulation. They would not have been attempting to sneak through these changes. They would not have been encouraging ASIC not to enforce the existing law before their changes came in. These are retrograde changes, and I greatly fear that they will exacerbate the next financial collapse in Australia and hurt the most vulnerable while benefiting the most affluent.

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