Mr STEPHEN JONES (Whitlam) (16:24): by leave—I move opposition amendments (1) and (2), as circulated in my name, together:
(1) Clause 2, page 2 (at the end of the table), add:
8. Schedule 4
The day after this Act receives the Royal Assent.
(2) Page 71 (after line 3), at the end of the Bill, add:
Schedule 4—Removing conflicted remuneration exemptions
Corporations Act 2001
1 After subsection 963B(1)
(1A) Despite paragraph (1) (e), regulations made for the purposes of that paragraph have no effect to the extent the regulations prescribe a monetary benefit relating to any of the following:
(a) interests in a managed investment scheme that are, or are proposed to be, quoted on a prescribed financial market;
(b) interests in a listed investment company (within the meaning of section 115-290 of the Income Tax Assessment Act 1997).
2 Application provision
The amendments made by this Schedule apply in relation to monetary benefits given on or after the commencement of this Schedule.
The amendments before the House deal with the issue of conflicted remuneration, specifically conflicted remuneration in respect of listed investment trusts and listed investment companies. Section 963A of the Corporations Act defines 'conflicted remuneration' as:
… any benefit, whether monetary or non-monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
(a) could reasonably be expected to influence the choice of financial product …
In 2012 the FOFA reforms banned this type of remuneration for the sale of future financial products. This was fiercely resisted at the time by many but not all within the industry. Many advisers understood the long-term implications and were aware of reforms occurring in the United Kingdom, Canada and New Zealand and could see the writing on the wall. Regrettably, in 2014 the Abbott government amended the FOFA laws, winding back a number of provisions, including the conflicted remuneration provisions of the FOFA act as they relate to stamping fees. We propose appending a new schedule to this bill that amends the Corporations Act to remove the current legislative exemption from conflicted remuneration rules for financial advisers in relation to the selling of units or shares in listed investment trusts and listed investment companies.
Listed investment trusts and companies are financial entities that are listed on a securities exchange, such as the Australian Securities Exchange. They operate in a similar way to a managed fund except for the fact that they're a listed security. The existence of these funds has almost doubled since the exemptions were put in place as a result of the FOFA reforms. As a result of these changes, lots of mum-and-dad investors have been sold into listed investment companies and trusts, and this has created a significant distortion in the market. As a result of these changes—and we say as a result of the conflicted remuneration—there has been a massive increase in these funds. In fact, The Australian Financial Review reported:
… there has been a tsunami of new listed investment companies (LICs) and listed investment trusts (LITs) launched since 2017, raising more than $6 billion for fund managers who have paid brokers/advisers enormous sales commissions of up to 3 per cent of the value of the capital contributed by mums and dads.
It is creating a distortion in the market. It is also creating an enormous risk for mum-and-dad investors.
We have recently read through documents that were provided to TheAustralian Financial Review as a result of an FOI request that show that the Australian Securities and Investments Commission has significant concerns about this and has advised the government of its significant concerns. It said that 'it is difficult to justify the existing exemption from the FOFA laws for the selling and the stamping fees that are provided through listed investment trusts and companies'.
It is worth noting that the Financial Planning Association of Australia supports the amendments. In a recent survey conducted by Morningstar of over 670 financial planners, over 71 per cent said that they supported an end to the stamping fees for these financial products. ASIC, in its research, showed that the LICs and LITs were significantly underperforming in the market—they were trading at a significant discount—and that there was a correlation between the poor performance of these investment products and the size of the stamping fees or commissions that were being paid.
An amendment was made to the FOFA act back in 2014. It has had adverse consequences. It is creating distortions in the market and significant risks for mum-and-dad investors. We know that the government share some of our concerns. The process they have put in train will not lead to a swift closure of this loophole. We commend the amendments to the House.