Assessing the regulatory framework
The regulatory framework relies on effective enforcement by the regulator. In some cases, the current framework may not need substantial change. Instead, consumer outcomes may be improved through better or more intensive supervision or enforcement of existing rules. Enforcement and the adequacy of penalties are discussed in the Regulatory architecture chapter. Further, in some cases, industry may be able to play a greater role in improving consumer outcomes. Greater supervision, more effective enforcement and/or industry self-regulation may be appropriate alternatives to further regulation, which may reduce innovation and competition or result in leave some consumer needs partially or wholly unmet.5
To make decisions about financial products and services, consumers will collect information from many sources and may be influenced by many factors, but they also need access to accurate information from product issuers. The format of information may influence the degree to which consumers can effectively use the information.
The Wallis Inquiry’s approach to consumer regulation was based primarily on disclosure. It did not restrict either the design of financial products or the type of financial products that could be marketed to retail clients. The focus of consumer protection was on regulating disclosure rather than products themselves. The disclosure regime was implemented as a principles-based approach to allow maximum flexibility for product issuers. However, it has subsequently been driven by an industry culture of legal compliance, rather than a focus on how best to inform consumers. This has resulted in lengthy and complex documents, rather than short, targeted documents that highlight product features, risks and rewards.
Although disclosure is an important part of the regulatory regime for providing financial products and services, alone it has not been sufficient to enable consumers to make informed decisions and consistently purchase financial products and services that meet their needs. Consumers are often disengaged and do not invest the time — and some consumers also lack the financial literacy skills — to understand disclosure documents. Disclosure has also been costly for industry. These problems remain despite numerous efforts to improve the regime.
Disclosure for financial products and services is important for a range of participants:
- Consumers — helping them make informed, efficient choices by understanding the features of a product, whether it is suitable for purpose, its terms and conditions, its risk and price, and any conflicts of interest involving the provider. Disclosure is designed to minimise information asymmetry. Informed consumers can also drive competition between providers.
- Intermediaries (financial advisers, analysts, dealers, comparators and mortgage brokers) — helping them understand the detailed features of a product and assess its suitability for particular clients, and enabling comparison between products.
- Financial product and service providers — defining the product or service they are providing or advising on, allocating risk, and defining the legal terms and conditions of the product or service, which can be relied on in case of a dispute.
Although submissions recognise that disclosure has a role to play, many argue that it has not always been effective at informing consumers about the features and risks of financial products. There was no strong proposal for reviewing the prospectus regime in submissions. The Inquiry has therefore focused on the product disclosure statement (PDS) and credit disclosure regimes.
Current disclosure obligations
The current regulatory regime requires all financial services licensees (and their authorised representatives) to give consumers information about their services via a Financial Services Guide (FSG), while personal advice must be documented through a Statement of Advice (SOA).
Financial product issuers are required to prepare a PDS covering the product’s characteristics, risks and fee structure. PDSs were intended to provide concise and directed information to consumers, as compared with the more principles-based, open-ended prospectus requirements that continue to apply to securities and debentures.6 In common with prospectuses, PDSs are not approved by the regulator.7 Investment product issuers are also subject to ongoing disclosure and periodic reporting requirements.
Licensees under the consumer credit framework must give consumers a Credit Guide, setting out their services and costs (similar to an FSG). Licensees have to provide key fact sheets for home loans and credit cards, and for credit products must disclose key information in a financial table in the contract document, with more limited disclosure requirements in relation to consumer leases.
The current disclosure regime produces complex and lengthy documents that often do not enhance consumer understanding of financial products and services, and impose significant costs on industry participants.
Disclosure is important in the financial system; however, it is not always effective in meeting its objectives.
- Although disclosure can be an effective regulatory tool, it is currently applied in many instances where it may not be the best tool to overcome a particular market problem. For example, disclosure has not been effective in addressing conflicts of interest.
- Despite the range of prescribed disclosure documents provided to retail consumers, many do not easily assimilate information about product information, risks, product features or conflicts. A number of research projects into consumer understanding of disclosure documentation have concluded that documents are long and complex and consumer understanding is poor.8 In one study, 50 per cent of consumers found the PDS to be too long and over 50 per cent thought there was too much jargon.9 Effective disclosure documents should enable consumers to easily locate and understand the information they need to make a decision.
Factors that prevent disclosure from enabling informed consumer decision making include:
- Disengagement — many consumers are disengaged from their financial affairs and decisions, due to time or motivation, and do not read disclosure documents.
- Complexity — disclosure documents are typically long and complex for most consumers. They contain large amounts of information that most consumers consider irrelevant. This makes it difficult for consumers to compare products, understand risks and make informed decisions.10 However, attempts to make disclosure documents shorter risk the information becoming oversimplified or generalised, which may make consumers overconfident about their understanding of a product and its risks.
- Consumer behaviour — research in behavioural economics shows consumers have cognitive biases that can lead to poor financial decisions.11
- Supply-side conflicts and other issues — disclosure alone is unlikely to correct the effect of broader market structures and conflicts that drive product development or distribution practices, especially where the interests of issuers and distributors are fundamentally misaligned with those of investors.
- Financial literacy — many consumers lack the literacy to understand disclosure documents. Evidence has emerged showing deep deficiencies in financial literacy.12
Submissions state that disclosure requirements impose significant costs on industry and that industry often takes a compliance mentality to producing disclosure documents. In its submission, Westpac states:
“[T]raditional disclosure regimes are heavily process-based in terms of both the composition of disclosure information and the dissemination of that information to consumers, because each of these features of the regime are subject to relatively inflexible statutory mandates. This can generate a tick-the-box mentality towards compliance with those mandatory requirements on the part of financial products and services providers”.13
In some areas, the regulatory regime has already moved to address some of the issues raised above with shorter and more focused disclosures. For example, the shorter PDS regime mandates tailored, prescriptive disclosure for a limited number of products, including superannuation products, simple managed investment schemes and margin loans.14 Some submissions argue that the new shorter PDS regime has not resulted in significant consumer benefits to date.
In many areas, regulation has moved away from relying on simple disclosure. The Government has also intervened in some areas of product design and marketing. For example, in the area of superannuation, the Government has mandated detailed design requirements for MySuper products. Other examples include the Insurance Contracts Act and the ban on unfair contract terms.
The design of credit products has been regulated for a considerable time. The previous state and territory Uniform Consumer Credit Code (UCCC) contained prescriptive requirements relating to interest charges and early payout amounts. Recent amendments to the National Consumer Credit Protection Act 2009 have further regulated the design of reverse mortgages and small amount credit contracts.
Further attempts can be made to improve the effectiveness of disclosure. Alternatively, it may be possible to remove some disclosure requirements where they have proven ineffective and adopt alternative approaches. Such alternatives could include:
- Regulating product features
- Introducing more default product designs, similar to the MySuper default superannuation funds
- Subjecting product issuers to distribution requirements to promote provision of suitable products to consumers
- Giving ASIC product intervention powers
Policy options for consultation
Submissions suggest that disclosure should only be seen as part of a more flexible framework to inform consumers in their financial decision making.
One approach is to supplement the existing disclosure regime with mechanisms to enhance consumer understanding of product information. Options include:
- Layered disclosure — place less reliance on long hard-copy documents and move to make layers of disclosure available to consumers. This could include taking forward the recent changes to mandate hard-copy key facts documents across all product segments, and providing different information at important points in time. Technology can also be used to provide disclosure more effectively at points in time most relevant to the consumer’s need.
- Better information presentation — improve disclosure through greater use of shorter disclosure documents, plain English and graphics, and by breaking down complex information to improve consumer understanding. In particular, information about fees and charges, risk profiles, term of product, unusual terms, features or exclusions.
- Risk profile disclosure —improve consumers’ ability to understand risk. The recent introduction of the MySuper product dashboard is intended to provide consumers with important information about MySuper products, and for this information to be presented in a standardised manner to allow products to be easily compared, so consumers can make more informed choices.15
- Online comparators and choice engines — place more reliance on making financial product and service information more accessible to consumers, including information brought together by third-party providers through online tools and comparators. The growth of these services will be facilitated by better access to data, both about financial products and about consumers’ behaviour.16 Internationally, governments and regulators are looking at ways that data and choice engines can be used to empower consumer decision making and drive competition.17
- Financial literacy —many stakeholders have expressed the importance of supporting and implementing financial literacy strategies that may assist consumers to make more informed financial decisions using the information available to them.18 However, studies are inconclusive about the extent to which financial literacy strategies have been able to improve consumer decision making in relation to financial services. Although the Inquiry considers that financial literacy strategies are important, alone they are not sufficient to ensure adequate consumer outcomes.
Regulation of financial product features
The alternative to supplementing the current disclosure regime is moving towards a more flexible regulatory toolkit. Strategic, targeted regulation of product features may be appropriate in cases where certain features are clearly detrimental to consumers or frequently abused; for example, features that inhibit demand-side competition. Examples of where this approach has been used are banning early exit fees from home loans and introducing caps on interest rates for credit contracts. However, extending product regulation in this way may have the potential to stifle innovation and limit competition. Another option is to implement further measures that shift responsibility for assessing the suitability of products from the consumer to the product issuer. However, any substantial shift in the regulatory regime would require compelling evidence to support it.
Default product design
Another option is to move towards mandated product design, as has happened with MySuper and with credit products under the NCCP Act. The impact of using default products can be substantial, as eight years after Super Choice came into effect, 69 per cent of members were still in a fund they ‘chose’ by default.19 Superannuation defaults are discussed further in the Retirement income chapter.
Suitability of financial products
Product issuers could be subject to more positive obligations with respect to the suitability of their products for retail clients. Credit providers and credit intermediaries are already subject to an obligation that the product be ‘not unsuitable’ for the consumer. Financial advisers are required to comply with a ‘best interests’ test and comply with related obligations. A product issuer could be required to state the particular classes of consumers for whom the product is suitable and for whom the product is unsuitable, and the potential risks of purchasing/investing in the product. Alternatively the issuer could be required to determine that the product is suitable for a particular individual.20
Product intervention powers
In the United Kingdom, the regulator has been given a number of temporary product intervention powers to address specific issues.21 It will also periodically review financial services industry sectors to examine how products are developed and the governance standards in place to ensure fairness to consumers.
ASIC could be given the ability to prescribe the marketing terminology used for complex or more risky products. For example, 2013 ASIC research indicated that consumers often misunderstand the terms ‘capital protected’ and ‘capital guaranteed’. Given capital protected structured products may involve significant potential for investors to lose money due to failure of the guarantor, this labelling may distract consumers from investigating the underlying risks and risk/return profile of the product.22
ASIC could also be given the power to ban products or product features. However, the challenge with this type of approach is ensuring regulator accountability. It would only be appropriate if the regulator could demonstrate that a significant number of consumers are being caused significant detriment.
The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:
- No change to current arrangements.
- Improve the current disclosure requirements using mechanisms to enhance consumer understanding, including layered disclosure, risk profile disclosure and online comparators.
- Remove disclosure requirements that have proven ineffective and facilitate new ways of providing information to consumers, including using technology and electronic delivery.
- Subject product issuers to a range of product design requirements, such as targeted regulation of product features and distribution requirements to promote provision of suitable products to consumers.
- Provide ASIC with additional powers such as:
- Product intervention powers to prescribe marketing terminology for complex or more risky products.
- A power to temporarily ban products where there is significant likelihood of detriment to consumers.
- Consider a move towards more default products with simple features and fee structures.
The Inquiry seeks further information on the following areas:
- Do similar issues in relation to the PDS disclosure regime apply to prospectuses, and is there a need to review prospectus requirements?
- What evidence is there on the effectiveness of financial literacy strategies in enhancing consumer confidence and decision making at particular points in time, and in achieving increasing literacy over the long term?
Submissions highlight the critical role that financial advice can play for consumers, by providing guidance with financial planning, debt management, insurance and product recommendations. Given mandated superannuation investment, and the fact that increasing numbers of consumers are entering retirement with substantial superannuation investments, as well as the complexity of some financial products, financial advice is becoming increasingly important.
The main issue with financial advice is variability in its quality. In addition, many consumers have difficulty assessing the quality of advice they are receiving and understanding the risks and rewards inherent in particular products. Access to affordable advice for consumers is also an issue, although lower-cost advice still needs to be of reasonable quality to provide a benefit.
Affordable, quality financial advice can bring significant benefits for consumers. Improving standards of adviser competence and removing the impact of conflicted remuneration can improve the quality of advice. Comprehensive financial advice can be costly, and there is consumer demand for lower-cost scaled advice.
Regulation of financial advice
Financial advice is regulated under the Corporations Act.23 Financial advice is defined as a recommendation or statement of opinion intended to influence a consumer’s decision. There are two types of financial advice: general and personal. Personal advice is provided if the adviser has (or could reasonably be expected to have) considered a person’s objectives, financial situation or needs. All other advice is general advice. Factual information about financial products is not defined as advice. The regulation of financial advice and information is described in Figure 6.2.
Licensed financial advisers are subject to an overall obligation to be “efficient, honest and fair” and to manage conflicts of interest. Licensees must ensure representatives are adequately trained and competent. Personal advice, general advice and factual information are subject to generic consumer protection provisions, for example those against misleading or deceptive conduct.
Under the Corporations Act, financial advisers are required to have a reasonable basis for personal advice, which includes the requirement that the advice provided is appropriate; and to warn their client if advice is based on incomplete or inaccurate information. The introduction of Future of Financial Advice (FOFA) in 2012 (with mandatory application from mid-2013) has built on these requirements. In particular, it introduced a ‘best interests’ duty, and a requirement to put the interests of the client ahead of those of the adviser. These provisions have provided greater clarity over the expectations and requirements for financial advisers.
FOFA also introduced a ban on conflicted remuneration for both personal and general advice24 to align better the interests of financial advisers and consumers. The Government has recently announced amendments to FOFA which, while prohibiting the payment of upfront and trailing commissions for general advice,25 would allow incentive payments for general advice in situations where the:
- Payment is not a commission
- Person providing general advice is an employee of the product provider
- Person providing general advice has not provided personal advice to any retail client (other than in relation to a basic banking product, a general insurance product or a consumer credit insurance product)
- Product is issued or sold by the product provider
Conflicts of interest have been a longstanding issue in financial advice. There has been a tension between providing financial advice for the benefit of consumers and the product distribution role played by advisers. Shadow shopping studies carried out by ASIC found a strong relationship between advisers giving non-compliant advice and conflicts of interest in business models.26 ASIC’s submission argues that, in recent cases of substantial consumer loss, conflicts of interest held by financial advisers have often been a driver.27
The Inquiry considers the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice.
Figure 6.2: Regulation of the provision of financial information and financial advice
The quality of personal advice is an ongoing problem. Personal advice is a recommendation that takes into account personal circumstances. Many submissions state that the quality of advice is variable and ASIC shadow shopping exercises indicate that consumers often receive poor-quality advice.28 This poor-quality advice mainly relates to two factors, the:
- Relatively low minimum competence requirements that apply to advisers
- Influence of conflicted remuneration arrangements
The price of personal advice has often been hidden by opaque price structures and indirect payments. FOFA has driven a move to fee-for-service structures; however, some consumers are reluctant or unable to pay for financial advice through upfront fees.
The competence of advisers varies widely. Some advisers are highly qualified and competent, others less so. Consumers find it difficult to know the difference.29 Some submissions propose stronger education requirements for advisers, especially for more complex Tier 1 products30 and for self-managed superannuation funds (SMSFs).31 Submissions raise a range of options for lifting standards for providing advice, including:
- Strengthening education and training requirements for advisers
- Introducing a national exam for advisers
- Introducing a specific training requirement for advisers who advise on SMSFs
- Introducing an enhanced national public register of advisers, including employee advisers
- Enhancing ASIC’s power to include banning individuals from managing a financial services business
Strengthening education and training requirements
ASIC has proposed lifting the current minimum educational requirements set out in ASIC Regulatory Guide 146: Licensing: Training of financial product advisers.32This view has been supported by the Financial Planners Association, which set out a goal of all advisers having tertiary qualifications as part of ongoing efforts to professionalise the industry. Another alternative is to recognise higher educational standards by introducing concepts such as an ‘accredited adviser’.
ASIC has proposed introducing a national exam for financial advisers.33 Many other jurisdictions have national examinations; for example, Canada, Hong Kong SAR, Singapore, the United Kingdom and the United States. The risk of introducing a national exam is that consumers may place too much expectation on the regulator guaranteeing the competence of advisers who have successfully passed the exam.
SMSF training requirement
Stakeholders have raised concerns about the adequacy of advice in relation to SMSFs, in particular that some consumers are advised to establish SMSFs where it is not cost-effective and appropriate for their needs. Financial advice competency standards for SMSFs, and other specialised products, could be lifted by requiring specific training or qualifications for advisers giving advice on particularly complex products or arrangements. SMSFs are discussed in further detail in the Superannuation chapter.
Enhanced national register
Currently, authorised representatives of licensees must be registered with ASIC; however, there is no obligation for employee representatives to be registered. In its submission, ASIC argues that an enhanced register of financial advisers, including their employees, would help raise competence standards in the industry by providing transparency about an adviser’s qualifications and employment history. It may also help address the issue of disreputable advisers moving between firms and increase consumer confidence and trust in the sector.
Banning individuals from management
Currently, ASIC has powers to cancel an AFSL or credit licence and ban persons from providing financial services or engaging in credit activities. However, ASIC cannot prevent a person from managing a financial services or credit business. ASIC submits that the combination of an employee register, together with the power to ban a person from managing a financial services business, would assist it to locate and remove advisers who do not comply with legal requirements.
The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:
- No change to current arrangements.
- Raise minimum education and competency standards for personal advice (including particular standards for more complex products or structures, such as SMSFs) and introduce a national examination for financial advisers providing personal advice.
- Introduce an enhanced public register of financial advisers (including employee advisers) which includes a record of each adviser’s credentials and current status in the industry, managed either by Government or industry.
- Enhance ASIC’s power to include banning individuals from managing a financial services business.
Access to quality financial advice helps consumers make informed financial decisions; however, the cost of personal financial advice may reduce its accessibility. High-income earners or high net worth individuals are more likely to seek personal financial advice.
Less than 42 per cent of adult Australians have ever used a financial adviser.34 Life stage and socioeconomic factors are the most consistent factors determining whether people use financial advisers. Individuals earning over $150,000 per annum are two and a half times more likely to be receiving advice than those earning under this amount.35 ASIC argues a range of reasons for consumers not seeking advice, including financial literacy, perceptions that advice is out of reach, lack of trust in financial advisers, not wanting comprehensive advice and lack of availability of scaled advice, lack of access to general advice and information, and the cost of advice.36
It is challenging to increase the quality of advice and make it more affordable and accessible. The cost of regulation and compliance will ultimately be passed on to consumers. Further, higher education and training requirements may make advice less available, rendering it more expensive and encouraging existing advisers to leave the industry rather than upgrade their qualifications. As a result, some individuals may no longer be able to afford financial advice.
In the absence of quality financial advice, consumers may make inappropriate investment decisions, or fail to make appropriate financial planning decisions. According to Investment Trends, 49 per cent of consumers surveyed say that they have unmet advice needs that they would pay to fill. Of the consumers with unmet advice needs, 42 per cent say they would like advice on retirement planning or transition to retirement.37 However, consumers are also looking for lower-cost options, including limited or scaled advice on particular issues. A third of consumers would prefer to receive scaled advice, either face-to-face, by phone or online, when cost is factored in, as shown in Table 6.1.
|Preferred method of advice (when cost is recognised as a factor)||Cost||Percentage of consumers who prefer this|
|Willing to pay for advice|
|Scaled advice — phone and online||Low||19%|
|Scaled advice — face to face||Medium||14%|
|Comprehensive advice — phone||Medium||11%|
|Comprehensive advice — face to face||High||7%|
|Not willing to pay for advice|
|Can’t afford advice||–||21%|
|Do it myself||–||27%|
Source: Investment Trends September 2013 Advice Report, based on a survey of 5,412 Australian adults.38
To make advice more accessible to consumers, one approach may be for advisers to provide more cost-effective scaled or limited personal advice. Scaled or limited advice is personal advice on a single topic or that is not intended to be comprehensive. This can be provided at lower cost. Many consumers only need personal advice at key stages in their life; in many cases, consumers may prefer scaled or limited advice that deals with particular issues.
However, scaled advice may raise issues about the extent of assessment of an individual’s circumstances required to receive appropriate and quality advice. The FOFA reforms were intended to facilitate access to quality scaled financial advice; in addition, the Government has recently announced changes to enhance this objective.39
Technology, including automation and ‘mass customisation’ techniques, provides an opportunity to offer consumers more cost-effective advice. It may also enable new business models, such as scaled or automated online advice. Although regulations do not impede the provision of online or automated advice, providing personal advice requires a sufficient process to allow the consumer’s relevant circumstances to be taken into account. Otherwise, it may not lead to advice that adequately reflects the consumer’s relevant circumstances.
The Inquiry seeks further information on the following areas:
- What opportunities exist for enhancing consumer access to low-cost, effective advice?
- What opportunities are there for using technology to deliver advice services and what are the regulatory impediments, if any, to those being realised?
- What are the potential costs or risks of this form of financial advice, and what measures could be taken to mitigate any risks?
Some submissions argue that lack of structural independence can impair the quality of advice. Others argue it is not ownership but remuneration that creates conflicts that reduce quality.
Currently, approximately 15 per cent of advisers are fully independent (part of a practice with its own AFSL); 29 per cent of advisers are part of a majority independent dealer group40 (0–49 per cent institutionally owned); whereas, 56 per cent belong to dealer groups that are majority owned by institutions or other wealth managers, or are part of a bank branch network.41
The current framework does not require personal advice to be independent. It simply limits who can call themselves independent. Some submissions argue it can be difficult for consumers to know whether an adviser is aligned or independent, and that consumers may not fully appreciate the potential implications for the range of products they are offered. The United Kingdom has recently gone further than Australia in dealing with conflicts by labelling these advisers as ‘restricted’ rather than ‘independent’, although restricted advisers are subject to the same professional standards as their independent counterparts.
There have been notable instances of losses incurred by the customers of financial advisers from both independent and aligned groups.
The Inquiry seeks further information on the following areas:
- Is there is a case to more clearly distinguish between independent and aligned advisers, and what options exist for doing this?
- Would consumers be likely to understand the difference between aligned and independent advisers and, if so, to what extent would this be likely to factor into a consumer’s decision to take the advice?
- Would consumers be likely to be sensitive to differences in the price of independent or aligned advice?
Some intermediaries only provide general financial advice, some only provide personal financial advice, and others provide both. General advice also covers a broad range of conduct, such as media commentary, analyst reports, internet comparison sites and aggregators, opinions by credit rating agencies and advertising by product issuers. In some cases, the boundary between personal and general advice may be difficult to draw.
One issue with general advice is whether it is properly labelled. Some submissions argue that some of the conduct currently regulated as general advice could more accurately be described as sales information, advertising or guidance. The aim of this relabelling would be to give consumers a clearer indication of what is involved. The general advice model encompasses recommendations made in general terms, but may nonetheless be persuasive to individual consumers, depending on their personal circumstances and the trust they put in the entity providing the recommendation.
Issues around labelling different types of advice were raised in the Senate Economics Legislation Committee’s report on the Government’s Bill to amend FOFA.42 The report recommended that further consideration be given to distinguishing the meaning of terms such as information, general advice and personal advice.
Some submissions question whether general advice is currently over-regulated or appropriately regulated, given the nature of general advice and the approach of many other countries. Other submissions argue that the risks to consumers from poor sales practices for financial products are sufficiently large that all financial product selling should be regulated. Further, consumers place a high degree of reliance on financial product issuers when making decisions. In 2006, the Government considered a proposal to exempt sales conduct from licensing. However, this proposal was rejected due to concerns that consumers may not understand the difference between sales and advice (even with a disclaimer). The Inquiry does not consider there is a case to further pursue options of this nature.
The Inquiry would value views on the costs, benefits and trade-offs of the following policy options:
- No change to current arrangements
- Rename general advice as ‘sales’ or ‘product information’ and mandate that the term ‘advice’ can only be used in relation to personal advice.
5 Following the implementation of the Retail Distribution Review in the UK, a number of major UK banks stopped providing wealth management advice to those with only moderate amounts to invest. See also Cass Consulting, City University, Cass Business School, 2013, The impact of the RDR on the UK’s market for financial advice, challenge and opportunity, London.
6 Which includes shares, company issued options, finance company debentures, bonds, preference shares and convertible securities.
7 Although ASIC can issue a stop order when problems with a proposed financial product have been brought to its attention.
8 O’Shea, P 2010, Simplification of Disclosure Regulation for the Consumer Credit Code: Empirical Research and Redesign — Final Report, Uniquest, Queensland; Wallis Consulting Group 2008, Report of Findings of Qualitative Research into Effective Disclosure (Stage II); Access Economics 2008, Factors Affecting the Drafting of Product Disclosure Statements, Access Economics Pty Limited for the Treasury; Susan Bell Research 2008, The Provision of Consumer Research Regarding Financial Product Disclosure Documents, Financial Services Working Group, Forestville, NSW. Note that significant changes have occurred since some of these reports were prepared. Also refer: Ben-Shahar, O and Schneider, C 2014, More than you wanted to know: The Failure of Mandated Disclosure, Princeton University Press, Princeton.
9 Susan Bell Research 2008, The Provision of Consumer Research Regarding Financial Product Disclosure Documents, Financial Services Working Group, Forestville, NSW. Note that some improvements have been made to disclosure documents since this study. A recent study into the sale of consumer credit insurance found that over half of consumers did not read the policy. The consumers who did not read the policy document cited a number of reasons for not doing so, including literacy issues, language barriers, time demands, and the expectation that the document would be long and complex.
10 Access Economics 2008, Factors Affecting the Drafting of Product Disclosure Statements,Access Economics Pty Limited for the Treasury, Canberra.
11 See Australian Securities and Investments Commission (ASIC) 2011, Report 230: Financial literacy and behavioural change, Sydney; and UK Financial Conduct Authority (FCA) 2013, Applying behavioural change at the Financial Conduct Authority, FCA, London.
12 ANZ 2011, Survey of Adult Financial Literacy in Australia, ANZ, Sydney.
13 Westpac 2014, First round submission to the Financial System Inquiry, page 101.
14 The shorter PDS regime for simple managed investment schemes and superannuation products was introduced in the Corporations Amendment Regulations 2010 (No.5) following the FSR Refinements Process. See Commonwealth of Australia 2005 Refinements to Financial Services Regulation: Proposals Paper, Commonwealth of Australia, Canberra. The margin lending shorter disclosure was introduced as part of the credit reforms in 2010.
15 For MySuper products, the dashboard requirements took effect on 31 December 2013 and for Choice investment options (non-default), the dashboard provisions are scheduled to take effect from 1 July 2014. The product dashboard needs to display the level of risk for each product in accordance with a standard risk measure. Risk must be labelled in terms of the anticipated number of years of negative returns for the product over 20 years, with each number corresponding to a risk description that ranges from very low to very high. See Australian Securities and Investments Commission 2013, Rep 378: Consumer testing of the MySuper product dashboard, ASIC, Sydney.
16 The UK midata project works with businesses to give consumers better access to electronic personal data that companies hold about them. Midata aims to get more private sector businesses to release personal data to consumers electronically, make sure consumers can access their own data securely, and encourage businesses to develop applications that will help consumers make effective use of their data. See also Thaler, R and Tucker, W 2013, ‘Smarter information, smarter consumers’, Harvard Business Review, Jan–Feb, pages 47–54. The trade-off is the risk of imperfect data and embedded assumptions for comparison websites and calculators.
17 The type of data that might be used includes data personal to the consumer (for example, patterns of usage) and data relevant to specific products or providers.
18 In Australia, ASIC shares responsibility for implementing the National Financial Literacy Strategy with the business, community, government and education sectors. ASIC’s financial literacy work includes providing tools and resources to the general public and specific groups in the Australian community. For example, ASIC’s MoneySmart website is an important channel through which ASIC delivers information and tools to consumers. See Australian Securities and Investments Commission 2014, MoneySmart, ASIC, Sydney, viewed 24 June 2014, <www.moneysmart.gov.au>. However, note that the recent Commission of Audit recommended that ASIC’s financial literacy functions should cease.
19 Investment Trends 2013, Member Sentiment and Communications Report, June. Note: Based on a survey of 9,607 Australians with superannuation.
20 European Parliament legislative resolution of 15 April 2014 (EU), No 1093/2010 of the European Parliament and of the Council on Markets in Financial Instruments, Article 25 Paragraph 3, states: “Member States shall ensure that where an investment firm provides investment advice recommending a package of services or products bundled pursuant to Article 24(11), the overall bundled package is suitable”.
21 See Financial Services Authority 2013, The FCA’s use of temporary product intervention rules, Policy Statement PS13/3, FSA, London.
22 Refer Australian Securities and Investments Commission (ASIC) 2013, Report 340: ‘Capital protected’ and ‘capital guaranteed’ retail structured products, ASIC, Sydney and ASIC 2013, Report 341: Retail investor research into structured ‘capital protected and ‘capital guaranteed’ investments, Sydney (which both update and supplement ASIC 2010, Report 201: Review of disclosure for capital protected products and retail structured or derivative products, ASIC, Sydney).
23 Credit assistance (such as mortgage broking/advice) is covered by the National Consumer Credit Protection Act 2009. Responsible lending requires a consideration of the personal circumstances of a borrower to determine the affordability and suitability of a loan. The Inquiry does not propose to discuss credit assistance services such as mortgage broking in this chapter, as submissions have mainly been concerned with issues relating to financial advice.
24 While the ban has technically commenced, a large portion of the benefits currently being paid would be grandfathered. There are exceptions to the ban on conflicted remuneration in certain circumstances, including benefits relating to basic banking products, general insurance and life risk insurance outside superannuation.
25 In addition to explicitly banning commissions, the Government has flagged that it also intends to put in place a regulation-making power that may prescribe circumstances in which all or part of a benefit is to be treated as conflicted remuneration. See Cormann, M (Minister for Finance and Acting Assistant Treasurer) 2014, The Way Forward on Financial Advice Laws, media release MC 61/14, 20 June, Canberra.
26 Australian Securities and Investments Commission (ASIC) 2011, Report 251: Review of financial advice industry practice, ASIC, Sydney, paragraph 43.
27 Australian Securities and Investments Commission 2014, First round submission to the Financial System Inquiry.
28 Australian Securities and Investments Commission (ASIC) 2011, Report 251: Review of financial advice industry practice, Sydney. Australian Securities and Investments Commission 2013, Report 362: Review of financial advice industry practice: Phase 2, ASIC, Sydney. Australian Securities and Investments Commission (ASIC) 2013, Report 337: SMSFs: Improving the quality of advice given to investors, ASIC, Sydney.
29 See Australian Securities and Investments Commission (ASIC) 2012, Report 279: Shadow Shopping Study of Retirement Advice, ASIC, Sydney. Participants in the study rated their advisers and the advice they received highly: 86 per cent of participants felt they had received good-quality advice and 81 per cent said they trusted the advice they received from their adviser ‘a lot’, despite ASIC concluding that 58 per cent of the advice was ‘adequate’, 39 per cent of the advice was ‘poor’ and only 3 per cent was ‘good quality’ advice.
30 Tier 1 products are all financial products except general insurance products, consumer credit insurance, basic deposit products, non-cash payment products and First Home Saver Account deposit accounts. However, personal sickness and accident insurance are also classed as Tier 1 products.
31 In January 2014, the Government announced that it will consider opportunities to work with industry to enhance the professional standards (including education and training requirements) of financial advisers and improve confidence in the financial services sector. See Senator the Hon Arthur Sinodinos 2014, Address to South Australia Liberal Party Luncheon, 31 January, Sydney.
32 See Australian Securities and Investments Commission (ASIC) 2013, Consultation Paper 212: Licensing: Training of financial product advisers — Update to RG 146, ASIC, Sydney.
33 Australian Securities and Investments Commission (ASIC) 2011, Consultation Paper 153: Licensing: Assessment and professional development framework for financial advisers, ASIC, Sydney.
34 Roy Morgan Research 2012, data provided to Financial System Inquiry, 18 June 2014.
35 Blackrock 2013, Investor Pulse Survey, quoted in Industry Super Australia 2014, submission to Senate Economics Legislation Committee, Inquiry into the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, pages 8–9. Further, around 42 per cent of people who contacted a financial adviser/planner in the last 12 months were in the top 20 per cent of people based on the value of wealth management products (including superannuation). (Roy Morgan Research 2014, data provided to Financial System Inquiry, 18 June 2014.)
36 Australian Securities and Investments Commission 2014, First round submission to the Financial System Inquiry, paragraph 720.
37 Investment Trends 2013, Advice Report, September. Note: Based on a survey of 5,412 adults.
38 Investment Trends 2013, Advice Report, September. Note: Based on a survey of 5,412 adults. Participants were asked to state how they would prefer to be advised, recognising that cost was a factor.
39 See Cormann, M (Minister for Finance and Acting Assistant Treasurer) 2014, The Way Forward on Financial Advice Laws, media release MC 61/14, 20 June, Canberra.
40 Use of ‘independent’ in this study does not equate to the definition of independent in the Corporations Act 2001.
41 Investment Trends 2014, Planner Business Model Report, May. Note: Based on a survey of 1,038 financial planners. The survey question asks planners which dealer group they belong to. One of the options is ‘Own AFSL’ — which means they are not part of a dealer group (or their practice is not part of a dealer group).
42 Senate Economics Legislation Committee June 2014, Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 [Provisions], Canberra.