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:
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?
- Will the "fiduciary duty" in the Corporations Act countenance any exceptions similar to the general law?
- What will the role of the professional standards board be regarding the weeding out of bad apples in the industry?
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