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Ripoll on target as expected: essential changes to the financial services industry will be forthcoming

By TechConnect Team

On 23 November 2009 at 8.50pm (AEST), the long awaited report for Parliamentary Joint Committee (“the PJC”) on Corporations and Financial Services’ inquiry into (non- super) financial products and services (which is commonly referred to as the Ripoll Inquiry) was released.

The PJC on Corporations and Financial Services inquired into financial products and services in Australia following the collapse of Storm Financial, Opes Prime and others, affecting thousands of investors.

The report acknowledged that the Committee is not necessarily responding to recommend reform in response to a particular collapse or event (Storm Financial, Opes Prime etc). Isolated corporate failures are not necessarily indicative of, or caused by, a regulatory failure.

The Committee believed over the course of its inquiry, it collected sufficient broad and consistent evidence to justify making 11 key recommendations (set out below) which are designed to enhance professionalism within the financial advice sector, consumer confidence and protection.

11 key recommendations

Recommendation 1

The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients' interests ahead of their own.

Recommendation 2

The committee recommends that the Government ensure ASIC is appropriately resourced to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. ASIC should also conduct financial advice shadow shopping exercises annually.

Recommendation 3

The committee recommends that the Corporations Act be amended to require advisers to disclose more prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest.

Recommendation 4

The committee recommends that the Government consult with and support the industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.

Recommendation 5

The committee recommends that the Government consider the implications of making the cost of financial advice tax deductible for consumers as part of its response to the Treasury review into the tax system.

Recommendation 6

The committee recommends that section 920A of the Corporations Act be amended to provide extended powers for ASIC to ban individuals from the financial services industry.

Recommendation 7

The committee recommends that, as part of their licence conditions, ASIC require agribusiness MIS licensees to demonstrate they have sufficient working capital to meet current obligations.

Recommendation 8

The committee recommends that sections 913B and 915C of the Corporations Act be amended to allow ASIC to deny an application, or suspend or cancel a licence, where there is a reasonable belief that the licensee 'may not comply' with their obligations under the licence.

Recommendation 9

The committee recommends that ASIC immediately begin consultation with the financial services industry on the establishment of an independent, industry-based professional standards board to oversee nomenclature, and competency and conduct standards for financial advisers.

Recommendation 10

The committee recommends that the Government investigate the costs and benefits of different models of a statutory last resort compensation fund for investors.

Recommendation 11

The committee recommends that ASIC develop and deliver more effective education activities targeted to groups in the community who are likely to be seeking financial advice for the first time.

A copy of the report can be found on the Parliamentary website by accessing the following link - Parliamentary Joint Committee on Corporations and Financial Services.

The Government’s response

The Government has responded by welcoming the report and will respond to the recommendations in conjunction with Cooper Super Review, which will also look at commissions and fee structures in superannuation. The Government has said any changes will be guided by the principles that financial advice should be in a client’s best interest and remuneration models that could compromise this should be minimised. However, any changes should not make financial advice unaffordable.

Conclusion

Due to report by 30 June 2010, the industry is still braced for the key recommendations to be released from the Superannuation Systems Review (“the Cooper Super Review”) which focuses on the governance, operation, efficiency and structure of the superannuation system.

We expect the combined recommendations of Ripoll Inquiry and Cooper Review will have a significant impact on the financial services industry. The wealth management industry as we know it will no longer be the same.