Mr KELVIN THOMSON (11:20 PM)—In commencing my speech on the Financial Services Reform Bill 2001 and related bills, I indicate that I have received a great deal of assistance from Senator Stephen Conroy and his office, in particular Diane Brown, in preparing the opposition response in the House of Representatives to this legislation. Labor support the objectives behind the Financial Services Reform Bill. We were keen to see the detail, and now that the bill has been introduced we are doing our best to assist the minister as much as we can in having this bill debated. We are not slowing down this bill—there has been a bit of scuttlebutt about from the government to that effect—rather, we have assisted wherever we could. We stated early our intention to have a parliamentary committee inquire into this bill. The joint parliamentary committee resolved to inquire into the bill and placed an advertisem*nt calling for submissions almost immediately upon the bill being introduced. They have since held a number of meetings and are moving at a quite rapid pace through that process. That process will, of course, help Labor and the broader community to develop their position and form their views on the bill.
Our task is not made any easier by the fact that the bill keeps evolving. We see today a number of substantial policy amendments by the government. ASIC is issuing policy proposal papers as quickly as it can and has, since the introduction of the bill, issued two sets of policy papers, and nine policy papers overall. It is suggested that another three sets of policy proposal papers are still to come. Also, we are yet to see the regulations. This is not a minor point because the structure of the bill, the philosophy of the bill, is to include only the principles in the bill and include all the details in the regulations. Industry and consumer groups are also seeking confirmation of what is going to be in the regulations.
Industry is asking for time to consider the bill, and there have been quite a few submissions to the joint parliamentary committee to that effect. This is understandable, given the size of the bill, the great change that it is intending to make to the financial services industry, the absence of detail from Treasury, the changes in the legislation coming from the minister and the quantity of material coming from ASIC. I urge the minister to provide draft regulations so that industry and others can gather and develop confidence in the bill. On the substantive issues, Labor welcomes the improvements that this bill promises to bring in the level of disclosure to consumers and the maintenance of competence and expertise in the financial services industry. If consumers are to be provided with extra information that will enable them to make better financial decisions or to obtain better financial advice, these reforms are to be welcomed.
I mention two areas of concern. The first is the question of the recording of telephone conversations in relation to takeovers. We would be interested in some advice from the government at some point about the origin of this proposal. No-one, including the Australian Shareholders Association, has indicated to the parliamentary committee that there is a problem which requires such an expensive solution; and a number of business organisations—the SIA, the IBSA, the Law Council and so on—believe that it is unnecessary and will inhibit takeover activity in Australia. The proposal appears to have been made without any consultation—not unusual from the Minister for Financial Services and Regulation. But this proposal does look suspiciously like a minister for financial services special—no-one is owning up to having suggested or supported it at any stage.
The second concern is the one I want to spend a bit of time on. Having opposition responsibility for superannuation I know a bit about this area and it is something which relevant groups have expressed some real concerns about, and that is the issue of superannuation and the possible impact of this bill on trustees. Most members of the House will be aware that superannuation is regulated under the Superannuation Industry (Supervision) Act, which recognises a system of superannuation with trustee representation. I want to stress the importance and relevance of that system to workers, and the job that it does in lowering costs to superannuation fund members. I want to bring to the attention of the minister the concerns of organisations such as the Corporate Superannuation Association that the Financial Services Reform Bill may damage and could even ultimately destroy corporate superannuation, and to express my own view that that would not be a good thing.
There has been a submission from Freehills on behalf of the Corporate Superannuation Association suggesting a partial carve-out of not-for-profit superannuation from the Financial Services Reform Bill. The basis on which they make that proposition is, firstly, that not-for-profit superannuation is different from other financial products. And by `not-for-profit' superannuation we are talking about corporate funds operated solely for the employees of a particular employer. We are also talking about industry funds operated for the employees of employers within a given industry and those funds which are not public offer superannuation funds within the meaning of the Superannuation Industry (Supervision) Act.
The things about those funds that differentiate them from other financial products are that they are subject to equal representation requirements—that is, half of the trustees are appointed by the employer and half are elected or appointed on behalf of members; they have voluntary trustees; the funds are run by members for the members, with no profit motive; the costs are low; and either their operation is subsidised by the employer or they have alliances and can use their collective bargaining power to keep costs down. They exist primarily to receive the mandated employer contributions to superannuation guarantee or contributions coming under an industrial award or agreement. In this sense, they are instruments of the government's retirement incomes policy. The point is made by Freehills that uniform regulation is only appropriate for products with similar underlying characteristics and that not-for-profit superannuation is functionally different from other financial products and is best regulated under tailored legislation like the Superannuation Industry (Supervision) Act. The Financial Services Reform Bill regime, with its Corporations Law focus, represents a significant regulatory shift for these funds. The issue here is: is there a coherent, proper policy rationale for such a change?
On the other hand, for-profit superannuation is readily compatible with other financial products. We would include public offer superannuation funds within that kind of assessment category. Public offer funds must have an APRA approved trustee; hence they are already subject to indirect licensing under the Superannuation Industry (Supervision) Act by virtue of the APRA approval processes and the stringent terms of those instruments of approval. The SIS legislation, with its tiered approach to regulation, already imposes quite onerous disclosure and conduct requirements on public offer funds. So public offer funds are more functionally similar to other financial products and, hence, there is a more compelling argument for uniform Corporations Law regulation in their case. For these funds, the regime does not represent a particularly radical change in regulatory focus.
The next point that is made in relation to the not-for-profit superannuation funds is that the recommendations in the Wallis report simply do not apply to them. The bill that we have before the House is based on the financial system inquiry report, but the recommendations in the report for uniform regulation of the financial sector do not appear to contemplate not-for-profit superannuation. The references in paragraph 2.7 of the explanatory memorandum talk about the report having recommended a single set of conduct requirements for investment sales and advice, a single licensing regime for all advisers providing investment advice, laws covering financial markets and so on. The trustees of not-for-profit superannuation funds do not fall within those sorts of recommendations and that structure.
It is also noted that the functions represented in the concept of financial products are not performed by not-for-profit superannuation and that the trustees of not-for-profit superannuation funds do not carry on a business for profit. It is noted that the licensing regime being proposed here is a substantive change in regulatory focus for not-for-profit superannuation and it is argued that the Financial Services Reform Bill licensing regime unnecessarily increases costs of not-for-profit superannuation funds and negatively impacts on their members. It is a matter of some concern that, in the case of not-for-profit superannuation, there would be substantial costs in moving to the FSRB licensing regime, mainly because the licensing requirements will be completely new. The additional costs are almost certainly to be borne by fund members.
It is suggested and argued that the licensing regime could have such an impact on not-for-profit superannuation as to lead to its demise. It is noted that applicants for a licence under the bill must have adequate financial resources, relevant competence, skills and experience and adequate systems for training and supervision of representatives. It is likely that many trustees of not-for-profit superannuation funds would be unable to meet those requirements. It should be remembered that the Financial Services Reform Bill requirements are based on the current Corporations Law regime designed for the regulation of agents, intermediaries and advisers. Therefore, they do not readily translate to the administration of superannuation funds by elected trustee representatives who rely heavily on outsourcing specific functions to qualified service providers in order to meet their responsibilities. The SIS legislation endorses a trust law model of delegation to carefully selected agents with adequate supervision and ultimate control by the trustee. Replacing that sort of model with the Corporations Law model could have a very adverse effect on not-for-profit superannuation which, I would argue, is unwarranted.
Is also argued that the licensing regime over-regulates not-for-profit superannuation, that many of the disclosure obligations attached to FSRB licences are irrelevant to not-for-profit superannuation and that licensing of not-for-profit superannuation has adverse consequences for employers. To give the House a bit more detail on that concern, because of the broad definition of `dealing', it is possible that employers would need to become authorised representatives of the trustee in order to enrol employees in their own employer sponsored fund. In such a situation, the trustee might require an indemnity from the employer. These are a series of quite serious concerns which have been expressed on behalf of the Corporate Superannuation Association regarding the impact of this bill on not-for-profit superannuation and we would certainly urge the government's further attention to, and consideration of, these issues as the bill is developed.
Let me now turn to some of the detail of the bill. The bill deals, amongst other things, with the authorisation of financial market operators and clearing and settlement facilities. It introduces a harmonised regulatory regime across the financial services industry. By adopting a functional definition of `financial product' and `financial advice', the bill introduces a single licensing framework for all financial service providers, replacing the differing licensing requirements currently imposed for dealers and advisers in securities, futures, banking products, managed funds, superannuation and insurance. It introduces minimum standards of conduct for financial service providers and enhanced disclosure of financial service products when dealing with retail clients and it introduces various other amendments to the Corporations Law, including amendments to the market misconduct provisions and amendments to the continuous disclosure provisions. There is also the introduction, as I mentioned before, of the recording of telephone conversations during takeovers.
The bill will replace chapters 7 and 8 of the Corporations Law, repeal the Insurance (Agents and Brokers) Act, repeal provisions in the Insurance Act and Retirement Savings Accounts Act and amend the Life Insurance Act, the Insurance Contracts Act, among other acts. It is quite a substantial piece of legislation by any yardstick. It is currently being inquired into by the Joint Parliamentary Committee on Corporations and Securities and, as a result of some of the evidence received, we have seen quite a few changes being made to the legislation on the way through. I want to comment on some of the specific provisions and the stage that they are up to.
First, there is the authorisation of financial market operators and clearing and settlement facilities. For financial market operators, a person or corporation must be licensed to operate a financial market. For example, the ASX and SFE—the Sydney Futures Exchange—are currently licensed to operate a securities market and futures market, respectively. There are number of changes to occur in this respect and the more significant ones are as follows. A licensee will be licensed to operate a financial market, removing the current distinction between securities markets and futures markets, subject to any conditions on the licence. A licensee may list on its own market if it has entered into such arrangements as ASIC requires for dealing with possible conflicts of interest and for the purpose of ensuring the integrity of trading in the licensee's financial products. So ASIC's role in relation to the ASX will now be explicitly set out in legislation. Licensed markets through which participants provide services for retail clients must have compensation arrangements where the participants hold property on behalf of those clients.
The current Corporations Law does not distinguish between retail clients and wholesale clients. The compensation arrangements can be provided through the National Guarantee Fund—that is, the existing scheme; or, in a change to the existing law, the licensee may make their own compensation arrangements, for example, a fidelity fund, an insurance arrangement or an irrevocable letter of credit. The obligations of licensees are still to be fully examined. The regulations, which have not yet been released, will have to contain a lot of the obligations currently specified in the Corporations Law.
There are also provisions concerning clearing and settlement facilities. Currently, there are only two approved clearing houses: the SCH, which is associated with the ASX, and the SFE clearing house. Competition in relation to the clearing and settlement facilities is discouraged at present by significant advantages conferred on the SCH under the existing provisions, such as its unique access to provisions which facilitate electronic transfer of legal title. The bill attempts to enhance competition in respect of clearing and settlement facilities by extending the ability to carry out electronic transfers of trades to all prescribed facilities, ending the SCH competitive advantage in this regard.
There is next the question of limits on involvement with licensees. The FSRB introduces a 15 per cent limit, or such higher limit set by the minister if it is considered to be in the national interest, on any person's voting power in a market licensee, a clearing and settlement facilities licensee or a holding company of such a licensee. Presently, the ASX is subject to a five per cent shareholder limitation, so a move to a 15 per cent limit would be clearly a substantial change in terms of the likely ownership structure of the ASX. This bill gives ASIC the power to disqualify someone involved in a market or clearing and settlement facility—a director or an executive officer or similar—if they are an `unfit person', having regard to the fame, character and integrity of that person. A licence will not be granted where a disqualified person is involved, and a licensee has an obligation to ensure that no disqualified person becomes involved in the licence.
There are also some new provisions concerning the licensing of financial service providers. Any person who deals in a `financial product' or gives `financial product advice' will now be required to be licensed. Currently, only dealers in securities, derivatives and managed investment funds and persons who provide advice in relation to those products have to be licensed. Under the SI(S) Act, certain superannuation trustees must be `approved trustees'. There are going to be some substantial changes in this area. A licensee will be required to satisfy a number of obligations in order to be licensed. People who are currently licensed will be largely unaffected, but people who have indicated that they might be affected by the changes include the trustees of not-for-profit superannuation funds—and I have discussed their case earlier—lawyers and accountants, media, and multi life and investment advisers.
Lawyers and accountants are currently exempted from the requirement to be licensed where the provision of investment advice is merely incidental to the practice of their profession. This exemption has been removed in this bill. There are lawyers and accountants arguing that the broad definition of `financial advice' will curtail their ability to give commercial advice. For example, in the context of a construction contract, it would be financial product advice for a lawyer to warn a client about the need to insure. Lawyers have been given a partial exemption such that advice given by a lawyer in his or her professional capacity about matters of law, legal interpretation or the application of the law to any facts is not financial product advice. Lawyers have, however, stated that this does not solve their problem. Advice by accountants is not addressed by this partial exemption either. So those issues have been raised.
In addition, the media is currently exempted from the requirement to be licensed where the advice is published in a newspaper that is generally available to the public other than only on subscription and whose sole or principal purpose is not to advise other persons about securities or to publish securities reports. That exemption has been removed, so journalists reporting corporate affairs on that basis would arguably be required to be licensed. ASIC has proposed to grant an exemption for newspapers and other media on a journalist-by-journalist basis and article-by-article basis. It does strike media groups, and me as well, that this is unworkable, that it interferes with freedom of the press and will curtail information available to the public. I would have thought that more information generally available is a desirable thing.
Multi-agents and single agents currently are not licensed but are appointed representatives of licensees. The problem that has been identified for agents is that their approval as representatives will be revoked upon commencement of the bill, and they will be no longer able to operate their business. Their options then are to either obtain a licence or seek appointment as an authorised representative of a licensee under the act. The government believes that a previously approved representative seeking reappoint-ment as an authorised representative should not be problematic. We are going to watch this more closely and see whether this issue can be resolved following further consideration.
There are some other issues in relation to licensing that I want to briefly touch on. The first is the question of `efficiently, honestly and fairly'. Currently, the Corporations Law provides that a licence will only be granted if ASIC has no reason to believe that the applicant will not perform `efficiently, honestly and fairly' the duties of a licensee. The bill replaces this requirement with an obligation on the licensee `to the extent that is reasonably practicable do all things necessary to ensure that the financial services covered by the licence are provided competently and honestly'. That is something that we certainly intend to have a closer look at.
There is also the question of limits on ASIC's powers. Generally, ASIC acting alone can impose conditions on a licence and vary or cancel a licence. But, if a licensee or a related body corporate is a body regulated by APRA, ASIC must consult with APRA before imposing a condition, varying or revoking a condition on the licence, or cancelling, suspending or revoking a licence. This potentially raises some issues as well.
With regard to disclosure and conduct requirements, the bill will introduce uniform disclosure requirements, which will involve the provision of up to three documents to retail clients. These documents are a financial services guide, which will include key information about the types of services being provided by the financial service provider; a statement of advice, which will include the advice, the basis on which that advice was given, and any commissions and other benefits received that might reasonably be expected to be capable of influencing the provision of that advice; and also a product disclosure statement.
In the area of disclosure of commission, one issue which arises is whether the disclosure should be as a dollar amount or as a percentage. It is Labor's view that dollar disclosure is more meaningful to consumers. There is plenty of information to suggest that disclosure by way of percentages is often not understood. We are not all mathematicians, and it is better to provide this sort of disclosure on a dollar basis. There are also issues in relation to the disclosure of commission on risk products, cold calling, basic bank deposits, work ordinarily done by cashiers and clerks, and some issues involving other amendments to the Corporations Law, market misconduct provisions, continuous disclosure provisions and so on.
As I indicated at the outset of my remarks, we are not opposing this legislation. There are quite a number of features in it that we see as desirable in improving disclosure, transparency and consumer protection arrangements. We are certainly not in the business of delaying or holding up the legislation in any way. We have in place the parliamentary Joint Statutory Committee on Corporations and Securities doing work on the legislation. The government has continued to amend the legislation on the way through. We look forward to it providing more details in terms of the regulations as soon as it possibly can, to provide both the opposition and the wider community with a better opportunity to understand exactly what the impact of the legislation will be. We are happy to speed the passage of this legislation through and into the Senate, with a view to having these provisions put into place as soon as is reasonably practicable.
