The Abbott Government has fought off an attempt by Labor and Green senators to scuttle its controversial financial advice reforms after it secured another dramatic deal with Clive Palmer on Tuesday.
Under the changes – confirmed by a majority vote in the Senate on Tuesday afternoon – the Abbott government is allowing sellers of financial products, such as financial planners, to receive incentive payments from fund managers so long as they are not a described as “commissions”.
The reforms overturn laws passed by the previous Labor government that imposed a blanket ban on incentive payments to planners when they give general advice to clients.
While finance minister Matthias Cormann told the Senate that the deal with the Palmer United Party was “very good news for consumers”, the government’s efforts to restore conflicted remuneration in the financial planning industry drew indirect criticism from the Financial System Inquiry.
In its interim report released on Tuesday, the nine-member panel chaired by former Commonwealth Bank boss, David Murray, raised concerns about conflicts of interest and sales-based payments to financial advisers.
“There does appear to be a difference between the way the committee views the financial advice industry and the way the government is seeing things.’’
The committee warned that conflicted remuneration structures, such as incentive payments to advisers, may be undermining the quality of service delivered to consumers.
“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,” the committee stated in the report.
The committee’s observations about pay conflicts in the financial advice industry not only came at a sensitive political moment for the government, but also indicate that its thinking and rhetoric may not be in line with the government’s reforms.
This raises the prospect of the Murray Inquiry recommending the abolition of Abbott government’s financial advice reforms in its final report in November.
Consumer groups swooped on the committee’s comments, saying they showed inquiry members were concerned about the adequacy of existing consumer protection measures.
“There does appear to be a difference between the way the committee views the financial advice industry and the way the government is seeing things,’’ said Choice spokesperson, Erin Turner.
“We were disappointed that a consumer representative was not appointed to the inquiry but it was great to see that the initial report has addressed a number of important consumer issues very carefully.”
Choice and other consumer advocates have been lobbying against the government’s financial advice changes, arguing that that they will create incentives for financial planners to push inappropriate investments products on consumers.
The Murray committee’s interim report asserts that disclosure rules in the financial advice industry have failed consumers and that current legislation may need to be overhauled to recognise sales practices that pervade the industry.
In a speech to the National Press Club yesterday, Mr Murray said:
“We have set down a principle that rejects the notion that disclosure and literacy, while important, are sufficient to deal with the knowledge gap between buyer and seller,” Mr Murray said.
“We observe in the interim report that the current disclosure-based framework has failed to adequately safeguard consumer interests while imposing significant costs on industry.”
Mr Murray’s committee is conducting a wide-ranging inquiry into the Australian financial system.
While the interim report did not contain any concrete recommendations, the committee also raised concerns about conflicts of interest in the mortgage broking industry.
Although many Australians believe that mortgage brokers are independent, many, in fact, are tied to networks owned by major banks, NAB and Commonwealth Bank.
Commonwealth Bank, for example, owns Aussie Home Loans.
The Murray committee is concerned that links between these banks and mortgage brokers have the potential to distort the ways in which brokers direct borrowers to lenders.
The committee reaffirmed support for Australia’s “four pillars policy” which imposes a ban on mergers between the four major banks – NAB, ANZ, Commonwealth and Westpac.