HOUSE OF REPRESENTATIVES, 11 FEBRUARY 2020
Periodically in this House, we have a serious conversation about who's standing up for consumers and who's standing up for vested interests. We had that conversation in 2012, when Labor moved the future of financial advice reforms, opposed by the coalition. As the Hayne royal commission highlighted:
There must be recognition that conflicts of interests and conflicts between duty and interest should be eliminated rather than 'managed' …
Yet, when it came to office, the coalition set about winding back the future of financial advice reforms, ensuring that no longer did a best interest duty need to be followed. It would seem to be fundamental that a financial advisor needs to act in the best interests of their client, yet the coalition somehow thought that that ought not be the law of the land. Part of this wind-back involved the creation of a loophole affecting units or shares in listed investment trusts and listed investment companies. That has led to a significant increase in the market, with the LIC and LIT market doubling in size to $45 billion since 2015.
ASIC has looked at the performance of these financial vehicles and the picture is not a pretty one. Over the LICs and LITs issued since 2015, they find 42 issued with a stamping fee, or a selling fee, and six without a stamping fee. Overall, their return since inception is minus 6.1 per cent. The returns of those with a stamping fee averaged minus 7.3 per cent, and without a stamping fee, three per cent. This compares to significantly larger returns in the stock market as a whole. The expenses of LICs and LITs are very high and the returns to those who purchase them are very low, but the stamping fees have ensured that many of those advising or broking have garnered significant commissions. These include, according to news reports, advisors and brokers at National Australia Bank, Taylor Collison, Morgans Financial, Crestone Wealth Management, Evans Dixon, Ord Minnett, Bell Potter Securities, Morgan Stanley and Patersons Securities.
A recent survey by Morningstar business surveyed 670 experts, advisors and non-advisors, and asked if they thought stamping fees were appropriate. Some of the comments from advisors included the following: 'Absolutely unethical. No justification for ever accepting such fees.' Another stated: 'It is a clear sales commission to sell a product to clients. I have seen it in operation in many businesses, where they target the selling of these products purely to generate revenue.' Another said, 'We're a 100 per cent fee for service firm,' and another said, 'It is simply a conflict of interest.' Of the advisors in the survey, only 17 per cent said they accepted stamping fees, while 74 per cent said no and nine per cent said it depended. When asked whether the ban on receiving stamping fees should extend to stockbrokers, more than 70 per cent said that they believed stamping fees should be banned completely. One of the strongest advocates on this has been Christopher Joye, who was written repeatedly in the Australian Financial Review about the importance of getting rid of this exemption. He writes, 'I believe any selling fees above, say, 0.25 per cent are large enough to conflict financial advisers to recommend inappropriate products, especially when this selling fee is added to other transaction fees, including arranger fees and manager fees, which can easily push the total commission above one per cent.'
I commend the member for Whitlam, who has worked hard on this to get answers out of a government, which has, at every turn, seemed to want to defend vested interests rather than consumers and which is, even now, pushing back against a sensible proposal to close a loophole which allows selling fees to accompany a product which has been systematically losing money for investors.
Time is of the essence. According to one article, there are another 20 to 30 listed investment trusts purportedly in the pipeline. There is a risk that this continuation of conflicted advice could lead to more investors finding themselves in these underperforming products. This is an exemption which should not have been put in place. We now know that the Australian Securities and Investments Commission privately advised the government that it was, 'Hard to justify,' according to freedom-of-information requests published by the Financial Review and discussed by John Kehoe and Aleks Vickovich. It appears that the coalition ignored the regulator and ignored warnings of detriment to consumers if these products were allowed to be sold.
CHOICE has warned against this product, linking the sale of this product to the findings out of the royal commission. The CHOICE chief executive, Alan Kirkland, said:
The final report of the royal commission said that exceptions to the ban on conflicted remuneration should be eliminated, and this evidence demonstrates how important it will be to do just that when the government reviews the quality of financial advice in two years' time.
As the member for Whitlam has pointed out, the coalition has been on the go-slow when it comes to implementing the recommendations of the Hayne royal commission. And yet again we see, in the case of these stamping fees, the coalition dragging their heels rather than immediately going out and doing what is the right thing by investors.
I commend the work of the member for Whitlam on standing up for consumers and standing up for investors against those who are ripping off the small end of town.
Authorised by Paul Erickson, ALP, Canberra.