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
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
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
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
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
(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
(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
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
The Committee did not address the following key submissions in
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
"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.
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
What will the scope of the "fiduciary duty"
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
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
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?
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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