Next week could be very character forming for Finance Minister Mathias Cormann, one of the government’s high flyers.
The Senate is set to vote on his regulations to change Labor’s Future of Financial Advice legislation, which have been widely criticised for watering down consumer protection.
Among other things, these remove a catch-all provision in the test to ensure advisers act in clients’ best interests; scrap the requirement for advisers to get clients to opt into ongoing arrangements every two years; and allow bank employees’ bonuses to include an element of reward for products sold.
If the regulations are disallowed, Cormann and the government will have been pretty much routed in their efforts to rewrite FoFA.
Labor believes it has the numbers for disallowance. Cormann has been fighting a desperate rearguard action. He gazetted the regulations however delayed the tabling, to get maximum time to work on the crossbench senators. But he was outsmarted by Labor, whose senator Sam Dastyari managed to table them.
Dastyari has only been in the Senate since last year but he comes with substantial experience in political tactics. He was general secretary of the NSW Labor party and a mover and shaker in the right faction, before filling a casual vacancy in the upper house. Presumably he’s also acquired a few skills from chats on the home front – his father-in-law is Peter Barron, who was one of Bob Hawke’s most senior and savvy advisers.
With former West Australian senator Mark Bishop’s term ending, Dastyari has taken over the Senate economics references committee, which under Bishop’s chairmanship recently produced devastating findings against the Commonwealth Bank of Australia, detailing how clients were ripped off and the bank also engaged in a coverup.
The CBA scandal inevitably fed into the public worries about the FoFA changes. Labor is now also seeking to set up a new Senate inquiry into the CBA and linking it to the wider issues. The opposition wants the inquiry to look at “the implications of financial advice reforms on the financial services sector, including moves to reduce consumer protections in light of the CBA misconduct”.
Cormann announced his revised FoFA changes (which included some stronger reassurances that commissions would not be allowed back) before the report on the CBA group’s misbehaviour. He was always going to be in a weak position after that report.
There were already howls of outrage, especially from the representatives of seniors groups, about the fiddling with FoFA (which the government defends as cutting red tape and reducing the cost of advice).
Independent senator Nick Xenophon says: “When you have groups such as Choice and National Seniors Australia expressing concerns, I take their opposition very seriously. I think ultimately the government might have to go back to the drawing board”. The DLP’s John Madigan says he hasn’t made up his mind on his vote yet and is undertaking intense consultations.
To try to get the changes working quickly Cormann resorted to regulation, saying there would be legislation introduced later on some aspects. This has just produced more confusion for the industry, given the prospect for disallowance.
The Senate report on the CBA recommended a royal commission but the government refuses to go down that path. The bank is trying to limit the damage – on Friday it announced that retired High Court judge Ian Callinan will chair the review it has set up in the wake of the affair. He will advise on ensuring the review supports affected customers and guarantees an independent investigation of their cases.
Cormann is losing some spruikers in his fight for his changes. The banks are keeping a low profile after the CBA’s problems. And on Friday John Brogden, CEO of the Financial Services Council, a lobby group for the industry, resigned to move to another job. He has been a strong advocate for the Cormann measures.
It’s hard to see where the government could go if the regulations were disallowed. Legislation would presumably not have any better chance. If there is a fresh Senate inquiry it is likely to produce some more horror stories, working to the advantage of those against removing protections.
This is an issue on which members of the public feel strongly, and it would be counterproductive for the government to push too hard. People are likely to be more worried about the dangers of being advised badly or fraudulently than attracted to the argument that lifting some requirements will bring the cost of advice down. The government, anxious to please the banks, made a fundamental misjudgement about public opinion on this issue.
There is a certain parallel with the misjudgement it made in its desire to water down the Racial Discrimination Act. In that case it was driven by its outrage over a court judgement against conservative commentator Andrew Bolt but it neglected to anticipate the intense reaction from ethnic communities. Intending initially to move quickly and having put out a draft for feedback, the government now has slowed the process considerably.
If his regulations are disallowed, Cormann would be more sensible to cut his losses and turn attention to measures to improve the educational requirements for advisers and ways to eradicate the bad eggs from the industry.
The prospect of a knockback on FoFA is not Cormann’s only looming problem. The debate on the budget measures in the Senate will be ugly and there are some big defeats expected.