25 Nov 2009

Parliamentary committee's recommendations will impact financial services industry

The Parliamentary Joint Committee on Corporations and Financial Services' long-awaited report into Australia's financial services sector has made 11 recommendations which will have an impact (either directly or indirectly) on distributors, platform providers and product manufacturers, as well as the financial services industry generally.

The Government has indicated that it will wait for the Cooper review of the superannuation industry expected in June of next year before making a decision on the Committee's recommendations.

It should be noted though that it is possible that ASIC may implement those of the Committee's recommendations which concern it prior to any response from the Government or indeed ASIC may seek to put in place the recommendations that it made to the Committee but which were not accepted (for example, suitability requirements for high risk products or increasing the capital requirements for a holder of an Australian financial services licence (AFSL)).

What has been recommended?

The Committee's recommendations were (grouped according to significance and type):

1. While the Committee has not recommended an outright ban on commissions, the Committee has recommended that the Government consult with industry about ceasing payments from product providers to advisers. It appears that an outright ban was seen as so significant that it would have to be done with industry consultation.

2. Amendments to the Corporations Act to explicitly include a "fiduciary duty" for advisers requiring them to place their clients' interests ahead of their own. The report has stopped short of outlining how it sees this fiduciary duty impacting the remuneration structures adopted by advisers but has noted that wherever the Government and industry get to must be consistent with this duty.

3. Amendments to the Corporations Act which expand ASIC's powers:

(a) to require advisers to disclose restrictions on the advice they are able to provide consumers and any potential conflicts of interest more prominently in marketing material;

(b) to ban individuals from the financial services industry; and

(c) to deny an application, or suspend or cancel a licence, where there is a reasonable belief that the licensee "may not comply" with their obligations under the licence. This should give jurisdiction to ASIC in relation to an applicant's business model.

4. The Government to consider the implications of making payments for financial advice tax-deductible for consumers.

5. ASIC to be appropriately resourced to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. ASIC should also conduct financial advice shadow shopping exercises annually.

6. As part of the Australian financial services licensing process, agribusiness managed investments scheme licensees to demonstrate that they have sufficient working capital to meet current obligations.

7. ASIC to immediately begin consultation with the financial services industry on the establishment of an independent industry-based Professional Standards Board to oversee competency / standards of financial advisers.

8. The Government to investigate the costs and benefits of the establishment of a "last resort compensation fund".

9. ASIC to lift financial literacy through increased education programs targeted particularly to groups in the community who are likely to be seeking financial advice for the first time.

Submissions not picked up by the Committee

The Committee did not address the following key submissions in its recommendations:

  • prudential regulation and capital adequacy requirements: calls for the prudential regulation of particular financial products (including debentures) and the imposition of capital adequacy requirements for the holders of AFSLs. However, it has recommended the establishment of a "last resort compensation fund" which could be viewed as a back stop in this context.
  • product suitability requirements: calls for product manufacturers to be required to consider the suitability of their products for investors (particularly in relation to high risk products).
  • "Independent" vs "Restricted advice": calls for a two tier system such as that adopted by the UK FSA where advisers must make clear whether they are providing independent or restricted (or sales) advice.

Unanswered questions

Of the 11 recommendations made by the report, there are a few which will significantly impact on the financial services industry and which raise a number of fundamental unanswered questions including:

  • What will the scope of the "fiduciary duty" be?

For example, will financial advisers have a fiduciary duty to clients when they provide general advice or other financial services (or only where they provide personal advice) and will a distinction be drawn as between "retail" and "wholesale" clients?

As it is described in the report, the proposed duty requires an adviser prefer the interests of its clients. How this ties into remuneration structures will be interesting to see. The report however recognised that "remuneration structures that are incompatible with a financial advisers' proposed fiduciary duty should be removed". This raises the question as to whether other forms of remuneration aside from commissions (eg. all forms of hard and soft dollar remuneration) will be targeted by the Government as part of the industry consultation process.

Also, the general law fiduciary duty imposes a negative duty (not a positive duty), whereas the Committee's recommendation suggests that the proposed Corporations Act fiduciary duty will require the adviser to place their client's interest ahead of their own.

Indeed, how the Government seeks to define and implement the fiduciary duty recommended by the Committee will determine the extent of the structural change in the industry required to accommodate the change.

  • Will the "fiduciary duty" in the Corporations Act countenance any exceptions similar to the general law?

An adviser could, today, on the facts of a particular case, be in a fiduciary relationship with their client. There are exceptions at general law to the normal incidents of a fiduciary relationship such as modification in the client agreement or obtaining the fully informed consent of the client. Will exceptions be countenanced in respect of the proposed statutory "fiduciary duty"?

  • What will the role of the professional standards board be regarding the weeding out of bad apples in the industry?

Relevant to this is the Committee's recommendation asking for ASIC's banning powers to be amended and that ASIC should be focused on individuals operating on the fringes of the industry. The Committee has also recommended that the professional standards board have a role in identifying and addressing problems early and receiving better intelligence at industry level early.

In addition, will the professional standards board be adopting the Australasian Compliance Institute's recommendation of maintaining a publicly available adviser register which will include details of their qualifications and disciplinary action taken against them?

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.