Twin Waters Resort, Sunshine Coast 14th November 2003 Thank you for inviting me again to participate in your national conference. As you are probably aware, I have presided over several inquiries conducted by the Parliamentary Joint Committee on Corporations and Financial Services where various changes introduced by the Financial Services Reform Act 2001 have been the subject of discussion. Hence, I well understand the challenges you face, as risk insurance agents and brokers, in meeting the new requirements of the Act. One of the foremost issues we've examined is the new requirement concerning the disclosure of commission on risk insurance products. Before I go any further, I should clarify that the commission disclosure requirements relevant to the risk insurance industry are those incorporated into the Financial Services Guide and Statement of Advice provided to retail clients. As you would all know, for those who have not already opted into the new regime, commission disclosure in the FSG and SOA will be mandatory from 11 March 2004. Earlier this year, the PJC conducted a specific inquiry into the disclosure of commissions on risk products which culminated in the tabling of a report in August, following our earlier investigations of the issue in the context of our overall inquiries on the Financial Services Reform legislation. The Committee's principal recommendation, while not opposing a requirement that the nature of remuneration be disclosed, would nonetheless exempt risk insurance advisers and brokers from having to disclose commission quantums. I hope this quite reasonable proposal will be acceptable to the Government which, to date, has not been at all enthusiastic about granting exemptions from FSR requirements. On this count, I can't tell you what the Government's response to the Committee's recommendations is because we have yet to receive it. It has to be said that the decision of the Labor Opposition members of the Committee to oppose the majority recommendations does not help our cause with the Government. The current provisions of the Act are based on two entirely laudable suppositions. First, that there should be maximum transparency and disclosure Secondly, that uniform legislation - one size fits all - provides the best platform for financial services regulation. However, there are always exceptions to the rule, which do not diminish the rule but which must be accommodated. The overwhelming evidence available to the Committee has been the issue of commission disclosure on risk insurance products is this exception. Although commission disclosure requirements have been the subject of sometimes heated debate at earlier PJC inquiries, this year's inquiry provided the Committee with the opportunity to conduct a more comprehensive examination of the issues raised both for and against commission disclosure. I thought I'd just take a few minutes to run through the issues involved and the Committee's findings. It is clear that the legislation is intended to protect consumers against the possibility that a financial services adviser, acting out of self-interest, might make recommendations to clients that are detrimental to their interests. As an obvious first step, therefore, the Committee thought it would make sense to see if there was any evidence to justify these assumptions about adviser bias and consumer detriment. More particularly, the Committee wanted to know if commission-driven selling was occurring in the risk insurance industry and causing detriment to consumers at such a level to justify disclosure. After all, there is no point in legislating to protect consumers if the status quo delivers the same or a better result. Neither the Department of the Treasury nor ASIC were able to provide evidence to indicate a level of mis-selling in the risk insurance industry to warrant the new commission disclosure requirements. The Financial Planning Association, the Investment & Financial Services Association and, significantly, the Australian Consumers' Association, were likewise unable to point to reliable evidence to justify their vehement opposition to any moves that would exempt risk insurance advisers from commission disclosure requirements. While the Life Advisers' Action Group provided statistics which indicated significant improvements in consumer outcomes in the risk insurance industry, these fell short of establishing a conclusive case that commission-driven bias is not a problem in the risk insurance industry. There is a widely-held perception that remuneration by commission inevitably leads to adviser bias. The Committee thought it was therefore essential that any challenges to this perception should be supported by compelling evidence. In this regard, I have in mind something along the lines of the study commissioned by the Financial Services Authority in the UK to measure the effect of remuneration structures on adviser bias in the packaged investments market. Interestingly-and this is referred to in the Committee's report-the researchers observed that 'previous research has been inconclusive on whether there is [commission] bias, and economic theory is ambiguous about whether bias would necessarily be harmful.' In other words, it is not correct to say that, as a general proposition, consumers will suffer detriment because they visit an adviser who is remunerated by commission. Furthermore, the Trade Practices Commission as it was in 1992, stated in their report, Life insurance and superannuation, that the Commission had decided not to examine the selling practices for risk insurance because they weren't considered to be a major source of consumer detriment. However, this is not enough to establish conclusively that there is no commission bias among risk insurance agents and brokers. The lack of well-designed and reliable research to establish a sufficient absence of commission?driven bias or consumer detriment, makes it harder to convince the Government to exempt the risk insurance industry from commission disclosure requirements. This is notwithstanding the Committee's findings that commission disclosure will have a detrimental impact on the risk insurance industry by driving out smaller, independent agents and brokers while creating favourable conditions for direct sellers, especially those involved in the manufacture and distribution of risk products. On the evidence, the Committee was sceptical that risk insurance advice provided by direct sellers would be any more independent or unbiased than that provided by commissioned advisers. If anything, because direct sellers are often the manufacturers of the products they sell, it could well be the case that direct sellers are less independent than commissioned advisers. Yet the evidence strongly suggested that commission disclosure would work to the advantage of the direct sellers. The Committee identified two main reasons for this:
Many families have endured tremendous and unnecessary hardship because they weren't adequately insured. How does a family manage if its main or only breadwinner dies unexpectedly and there is no insurance in place to cater for this eventuality? Likewise, the plight of those who lost homes and other possessions in the Canberra bush fires would have been intensified many times over if they had not been insured or adequately insured. Because under-insurance costs everyone in society, we need to guard against any possibility that consumers will be inappropriately advised in matters as important as risk insurance. Furthermore, we should be encouraging businesses that offer valuable, often crucial, support and advice at claim time. Many consumers just don't have the resources or the knowledge to safeguard their interests especially when more complex claims are involved. On a broader level, the Committee could not accept that requirements that promote the interests of direct sellers and financial services conglomerates at the expense of smaller, independent operators will benefit consumers. Of particular concern to the Committee is that a small business exodus will deprive the risk insurance industry of specialist knowledge that is not being replaced by the new breed of adviser. This will expose consumers to the danger that they will be inappropriately insured or, if we lose the expertise of non?standard risk advisers which seems very likely, they may not be insured at all. The Committee believes the current restructuring and consolidation occurring in financial markets today is causing anti-competitive and thus anti?consumer outcomes. In my view it is essential for the Government to heed our recommendation to inquire into these market developments with a view to addressing any problems identified. The importance of this is reinforced by advice I have received recently that one financial adviser, who has decided to take the bull by the horns and obtain his own financial services license, has been offered by his principal product provider (financial product manufacturer) a commission rate only two thirds of that which he was offered to relinquish his independence and come under the umbrella of the product provider's own licensed principal as a proper authority holder. In arriving at these conclusions, I should point out that the Committee fully supports measures that will empower consumers to make fully?informed decisions about financial product purchases. Evidence to the commission disclosure inquiry has convinced the Committee that these requirements fail in their very laudable consumer-protection objectives and instead will lead to anti-consumer outcomes. For these reasons, I will continue to work for and hope that the Government will move to exempt risk advisers from the commission disclosure requirements. However, the Minister and the Department of the Treasury presently have their work cut out for them with the CLERP 9 proposals. Some of you may have noticed that the PJC is conducting an inquiry into the proposed legislation for CLERP 9. In these circumstances, I encourage you to maintain your efforts to get the Government on side. It is equally important to win the support of the minor parties and independents in the Senate. If I can offer one piece of advice, I would suggest that if anything is likely to succeed, it is hard evidence that risk advisers remunerated by commission are not more likely to give biased advice than other advisers. When I refer to 'hard evidence', I have in mind independent, targeted research and reliable, comprehensive statistics. As an example of well-designed research, I refer you again to the UK study conducted by Charles River Associates Ltd, Polarisation: research into the effect of commission based remuneration on advice. This is available on the UK Financial Services Authority web site. You can obtain full details from the Committee's report on page 13. I have great confidence in the professionalism of risk advisers and am saddened by developments that place your businesses in jeopardy. These developments are not good for you obviously, but they are also not good for consumers or the broader Australian community. I sincerely hope that you will all overcome the challenges ahead and find further ways to make your voices heard. |
