27/11/2009

The Parliamentary Joint Committee on Corporations and Financial Services Inquiry Into Financial Products And Services In Australia (aka ‘the Ripoll Inquiry’) has come up with 11 recommendations that raise more questions than they answer.  Here are some examples.

 

Recommendation #1 – Planners should have a fiduciary duty to clients.  The definition of the fiduciary duty to be applied has not been provided and it is difficult to know precisely how much affect this would have on the financial planning industry without that clear definition. Will the definition include just the ‘Client First’ principle or will it also require the planner to act in the best interests of the client?  Will it result in making it easier for clients to make a claim?  Will that lead to higher PI costs and therefore higher costs of getting financial planning advice thereby making it more difficult for clients to access financial planning advice?

 

Recommendation #2 – ASIC should be better resourced by government.  Why does ASIC need more money when they already have a very large budget?  Perhaps not wasting money on legal advice which fails to effectively prosecute their high profile criminal prosecutions might be a start.  Regular shadow shopping is a media circus that does little to actively improve the industry.

 

Recommendation #3 – Planners should be required to make better disclosure.  If the fiduciary duty comes in why would extra disclosure be necessary?  The new duty will make that disclosure irrelevant because either the planner will not be allowed any conflicts of interest or because they will have to show that the conflicts did not affect their recommendations.  Either way disclosure will be otiose (look it up).

 

Recommendation #4 – Payments from product providers (commissions in other words) should be brought to an end. This could be achieved by a stringent definition of the fiduciary duty which would not allow the planner to service the client if any conflict of interest even existed, let alone impacted the planner.  This would put an end to bank employed planners with limited bank products.  Will the banks lobby strongly against this?

 

Recommendation #5 – The Government should consider making fee-for-service payments tax deductible for the client.  Whenever this has been looked at before the Government has backed away because they feared a blow-out in these fees once planners told their clients they were tax deductible.  The result would be no real benefit to the market.  How to ensure this doesn’t happen is the issue.  Perhaps the ACCC has a role there?

 

Recommendation #6 – Extend ASICs powers to ban individuals from the industry.  The reasoning behind this recommendation is not clear and given the very grave seriousness of such a power great caution should be exercised in granting this additional power, particularly given ASIC’s unique multiple roles in the industry as regulator, administrator, policeman, judge and executioner.

 

Recommendation #7 – Agribusiness licensees should have more working capital. Clearly as a result of recent failures of Great Southern and Timbercorp.

 

Recommendation #8 – ASIC to be given the power to deny, suspend or cancel licence where there is reasonable belief that a licensee ‘may not comply’ with their obligations. Clearly prompted by the criticisms levied at ASIC for failing to prevent failures like Westpoint, Storm Financial, Lift Capital and Opes Prime, this power to act in advance of any actual wrongdoing is extremely dangerous and the sort of ill-considered suggestion put by non-lawyers who do not appreciate the potential for abuse of the power.  It should be avoided at all costs.

 

Recommendation #9 – Establish a Professional Standards Board.  The interaction between this Board and ASIC is still to be worked out but the focus that such a Board could give to the professional and ethical obligations of planners would be desirable.  Requiring planners to be accredited by the Board annually in order to continue to practice would give the Board added clout.

 

Recommendation #10 – Establish a statutory last-resort compensation fund for investors.  So many questions are unanswered that it is almost impossible to comment on such a suggestion.  The biggest question remains: who pays?

 

Recommendation #11 – More effective education of those who’ve not sought financial planning advice before.  Knowledge is power and too much education is never enough.

 

In summary, the Ripoll Inquiry’s recommendations are very short on reasoning and detail and suggest a political imperative rather than a focus on practical methods to improve the industry.

 

If you any enquiries, please contact Peter Townsend at Townsends Business & Corporate Lawyers (02) 8296 6222.