Chapter 4: Consumer outcomes

The financial system plays a vital role in meeting the financial needs of individual Australians. To fulfil this role effectively, consumers should be treated fairly and financial products and services should perform in the way consumers are led to believe they will. Consumers have a responsibility to accept their financial decisions, including market losses, when they have been treated fairly. However, financial system participants, in dealing with consumers, should have regard to consumer behavioural biases and information imbalances. Recent consumer experiences reveal poor industry standards of conduct and areas for enhancement in the current framework.

The current regulatory framework focuses on disclosure, financial advice and financial literacy, supported by low-cost dispute resolution arrangements. Product disclosure plays an important part in establishing the contract between issuers and consumers. However, in itself, mandated disclosure is not sufficient to allow consumers to make informed financial decisions. As the Interim Report noted, affordable, quality financial advice can bring significant benefits to consumers, especially where they may not be equipped to make complex financial decisions.

The framework needs to more effectively align the governance and corporate culture of financial firms, employees and other representatives. Currently, in seeking to align commercial incentives with consumer outcomes, the regulatory framework is focused on point of sale. Recent examples of poor conduct suggest the alignment needs to start at the point of product design, and then be strengthened through distribution and advice.

Improved financial literacy enables consumers to be more engaged and to make more informed decisions about their finances. The Inquiry notes support from submissions on the importance of financial literacy for consumers. There are numerous examples of financial industry and Government programs that aim to educate consumers and raise their awareness of financial management issues, and the Inquiry encourages continuation of these efforts. However, in the Inquiry’s view, increasing financial literacy is not a panacea. Further measures are needed to support the fair treatment of consumers.

The Inquiry also supports continuing industry and Government efforts to increase financial inclusion. Reviews and proposed changes to the financial services framework should involve consumer organisations in policy development, alongside industry, regulators and other stakeholders.

In making its recommendations, the Inquiry has deliberately focused on the issues of most concern and has not suggested changes to current arrangements that are generally working well, such as alternative dispute resolution systems. The Inquiry recognises the importance of continuing to have an adequate consumer dispute resolution system.

The Inquiry also considered the scope for self-regulation. Industry self-regulatory approaches are often more successful in setting governance, customer service or technical standards that supplement the law, than in addressing sector-wide conduct issues, particularly where there are commercial pressures that may undermine standards. In some cases, there may also be a first-mover disadvantage. In these cases, government regulation may be required. On this basis, the Inquiry looks to firms and industry to take forward initiatives for a number of the recommendations in this chapter. These include raising industry standards and levels of professionalism, more effectively disclosing risk and fees, and improving guidance and disclosure for general insurance.

This Inquiry’s recommendations focusing on consumer outcomes, in this and related chapters, combine deregulatory elements, self-regulation and new regulation. They build on recent changes, such as the Future of Financial Advice (FOFA) and product disclosure reforms, accommodate and promote market discipline and aim to reduce calls for future significant changes to the regulatory framework.

A number of recommendations focus on increasing accountability of issuers and distributors. In the Inquiry’s view, firms that already invest in customer-focused business practices and procedures would not be required to change their operations significantly. The Inquiry’s expectation is that costs involved in changing practices should be low. In addition, the Inquiry believes that, in complying with these recommendations, firms would also be likely to benefit from long-term savings through increased customer retention and avoid further regulatory costs.

In the Inquiry’s view, these recommendations should also have limited effect on incentives for product innovation. To the extent that there is a change in the design or distribution of certain products, the Inquiry considers that this is appropriate to promote consumers buying products that meet their needs.

Underlying a regulatory framework is the essential requirement that regulators are strong, independent, accountable and focused on enforcing the existing framework in a timely and proactive way. This chapter should therefore be read together with Chapter 5: Regulatory system, which makes recommendations to strengthen the Australian Securities and Investments Commission (ASIC).