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“Maintaining confidence in the financial services industry” Presentation to Colonial First State Leaders Series 1 March 2013
The financial services sector touches just about every Australian.
The work you do is vital – to our national economic performance; to the quality of life of millions of Australians, particularly in retirement; and to our collective sense of security and wellbeing.
Today I want to argue that a key policy objective for both sides of politics is maintaining public trust and confidence in the financial services sector.
I will look first at why that is so – reflecting both structural changes such as the ageing population, and cyclical factors such as the savage market downturn in 2008.
Second I will argue that while maintaining trust and confidence has been a stated objective of the Rudd Gillard Government, it has done a poor job of giving effect to this policy objective – not least because of other motivations influencing its decision making.
Third I will talk about the approach the Coalition intends to take in this important area.
Why maintaining trust and confidence is so important
If we look first at why trust and confidence in the financial system is so important, a major driver is that we expect people to take responsibility for their own financial well being, and particularly for supporting themselves in retirement.
We have an ageing population: the share of those aged 65 and over is projected to rise from 13.5 per cent of the population in 2010 to 22.7 per cent in 2050, according to Treasury estimates. If all of these people drew their income solely from the age pension, the cost would become a crushing burden on the federal budget. Already, income support for seniors makes up almost ten per cent of the Commonwealth’s budget: in 2012-13, it will be $37 billion out of total spending of $376 billion.
That is why our superannuation system plays such an important role: if the majority of people at retirement age have a balance sufficiently large to wholly or partly fund their retirement, it will greatly reduce pressure on the commonwealth budget.
Now in recent weeks there have been a lot of big numbers thrown around by Labor politicians about the value of the tax concessions underpinning superannuation. These numbers depend on some highly questionable assumptions about what people would do with their money if they did not invest it in tax advantaged superannuation investments.
But it is also very noticeable that the Labor politicians making these comments have failed to tell the other side of the story: the budgetary benefits in the future of the superannuation balances Australians are building today. To talk about the tax concessions government is giving today – but not mention the offsetting benefits to the budget in the future – is quite misleading.
We all know why the Gillard Government is doing this – to soften us all up for a big new tax grab from superannuation.
This might help it fill a short term budgetary hole. But it will do major damage to public confidence in superannuation as a vehicle for long term savings.
If you want Australians to put their money away for the long term to fund their retirement, they need to know that the rules won’t be repeatedly changed for short term reasons.
Millions of Australians will rely on the superannuation system to support them in retirement. That makes it vitally important that Australians retain trust and confidence in the system – and the financial services sector which takes on the task of managing the funds. The changes the current government is widely expected to make will it harder for Australians to retain that trust and confidence.
Further, because the superannuation system is now dominated by accumulation products and not defined benefit products, Australians – especially those approaching retirement age – watch their balances increasingly closely.
Essentially there are three main groups when it comes to retirement income. The least well off rely solely on the pension – essentially a defined benefit system, with the caveat that the benefit is quite modest. At the top end, some are lucky enough to be in defined benefit superannuation schemes – but that is a finite and generally diminishing class of people. The great majority of us are in the middle – in defined contribution schemes. That includes, I might add, federal parliamentarians who entered the parliament after 2004.
So there are structural factors which makes it vital that Australians have trust and confidence in the financial services sector: the ageing population and the dominance of defined contribution superannuation schemes.
There is also a critical cyclical factor: the 2008 market crash. When you have increasing numbers of people watching their balances carefully – and when you have gut wrenching drops in asset values – it has a very big impact on confidence. This is something that all of you, as financial planners, know extremely well. To take one example, Australians had been told for many years that property trusts were a safe asset class offering reliable income with a bit of capital growth thrown in. Then in calendar 2008, Australian listed property produced a return of negative 54 per cent.
Of course, in the famous Warren Buffet quote, when the tide goes out you see who has been swimming naked. The market collapse of 2008 exposed a number of investment products that turned out to be somewhere on the spectrum between highly risky and downright fraudulent – such as Storm Financial, Westpoint and Trio Capital. Hence, not only did Australians suffer sharp reversals in their superannuation balances – some saw their wealth wiped out due in the collapse of these dodgy products.
What then has been the approach of the Rudd Gillard Government to the policy objective of maintaining trust and confidence in the financial sector?
Labor has implemented a whirlwind of legislation – much of it purportedly responding to the Storm Financial collapse.
Storm triggered an inquiry by the Corporations and Financial Services Committee of the Parliament, known as the Ripoll Inquiry. The key recommendation was to impose a fiduciary duty on financial advisers, requiring them to place the interests of their clients ahead of their own – a principle of course supported by the Coalition.
Interestingly, the final report of the Ripoll Inquiry specifically noted that it was not an absence of regulation that was the problem; instead it was an absence of enforcement:
“The committee is of the general view that situations where investors lose their entire savings because of poor financial advice are more often a problem of enforcing existing regulations, rather than being due to regulatory inadequacy. Where financial advisers are operating outside regulatory parameters, the consequences of those actions should not necessarily be attributed to the content of the regulations.
Somewhere along the line this principle got lost as the government developed its Future of Financial Advice, or FOFA, measures, supposedly in response to Ripoll.
Let me mention three of the very detailed sets of rules contained in FOFA: retrospective fee disclosure, banning of commissions for insurance inside superannuation and what are colloquially known as the opt-in provisions.
With many products currently in the market being ten, fifteen or more years old, the retrospective fee disclosure requirement means that our major financial services providers need to open up, and make major changes to, their legacy IT systems which supports these products. Such an exercise is always risky, expensive and deeply fraught.
Just last week the Financial Services Council estimated that its members will incur around $1.5 billion of costs in implementing the changes imposed by the Rudd Gillard Government in the areas of superannuation, advice and insurance reforms.
The banning of commissions for insurance inside superannuation sold under group superannuation policies in my view is poor policy. It will discourage the operation of an existing and proven distribution channel under which many people today are educated about the most cost-effective means to obtain insurance—that is, via their superannuation fund.
The overreach of these reforms demonstrates Labor’s strong faith in bureaucrats, more regulation and a “government knows best” approach.
The imposition of the 'opt-in' requirement — under which every financial adviser must obtain written confirmation from a client every second year that he or she still wishes to retain that adviser – demonstrates another factor which is at work here.
The opt-in requirement was dreamt up by Industry Super Network, the lobby group for industry super funds – and you can see why they like it. It makes very little difference to the business model of the industry funds – while doing quite an effective job of disrupting the business model used by retail funds, in which financial advisers play an important role.
No doubt it did no harm to ISN’s prospects of getting a hearing that the Minister for Financial Services and Superannuation, Bill Shorten, is a former director of the biggest of the industry super funds, Australian Super. So are two other current members of the Parliamentary Labor Party, Greg Combet and Senator Doug Cameron, and so too is the failed Labor candidate for Melbourne in the 2010 federal election, Cath Bowtell.
Ms Bowtell is Labor’s candidate for that seat again in 2013 – and in the meantime she was warehoused in the job of CEO of Australian Government Employees Superannuation Trust, before it was folded into Australian Super – so it all worked out very nicely for her.
The cosy relationship between the Labor Party, the union movement, and the union-dominated industry superannuation funds has driven some bad policy measures like opt-in; it has also meant some good policy measures, such as governance reforms in superannuation, have gone nowhere.
Today, under the so called equal representation model, an industry fund or a public sector fund typically has up to half of its directors appointed by one or more unions, and up to half appointed by an employer association. There are some variations to this. Sometimes there is an independent director on the board and sometimes there is an independent chairman.
The equal representation arrangements were specifically designed in the industry superannuation fund system when it was set up by the Hawke- Keating Labor government. This had the effect of entrenching its friends in the union movement at the centre of the governance system of industry super funds.
Last year I looked at the arrangements across 64 public sector and industry funds, with a total of more than $300 billion under management. I counted over 150 directors appointed by the unions, with a significant number of funds where the unions appoint at least half of the directors.
It is easy to see how these arrangements serve the interests of unions. It means a large number of well-paid directorships are allocated amongst the union mates. In some cases it seems fees paid to directors of industry super funds are pocketed by the individual, in other cases the fees are paid to the union.
But the interest of the union is not the same as the interest of a member of the superannuation fund – and this can raise serious conflict issues. There is a very timely example.
The Victorian branch of the construction and general division of the CFMEU is attempting to put pressure on building industry superannuation fund CBUS in relation to property developments pursued by CBUS. This follows a major industrial dispute last year between the CFMEU and Grocon.
According to media reports last month, CFMEU Victorian secretary John Setka said his members were angry that CBUS had awarded Grocon a $430 million project in Sydney. “I reckon it’s a slap in the face for the union, what CBUS has done,” Mr Setka is quoted as saying.
The CFMEU has sought expressions of interest from other super funds to become the default fund. Presumably it intends to use the award process to have CBUS removed as a default fund for workers covered by the relevant awards. This would stop the flow of contributions from such workers to CBUS.
This is an attempt by a union to use the economic resources of a large superannuation fund over which it has substantial influence – including appointing three directors – to secure industrial or political outcomes, in this case to advance its industrial dispute with Grocon.
What would such action mean for the interests of the 655,000 members of CBUS? The property development venture is being pursued to generate economic returns to fund the retirement incomes of members of CBUS – members who by operation of statute have a proportion of their remuneration paid in the form of employer superannuation contributions. Grocon has presumably been chosen using normal commercial processes with a view to getting the development done as quickly and cost effectively as possible.
Yet the CFMEU is proposing to subjugate the interests of the 661,000 CBUS members to the furtherance of the industrial agenda of the CFMEU in Victoria. How could it be compliant with the sole purpose test for CBUS to agree to the CFMEU’s request? It raises a very clear question as to the approach that the three CFMEU appointed directors on the CBUS board intend to take.
A different approach under the Coalition
In the final part of my remarks I want to speak about the approach a Coalition government would take in maintaining – and restoring - trust and confidence in the financial services sector.
Our very able Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann, has been active in developing and announcing policy.
We want to ensure that the financial services sector – and every Australian with superannuation – has a clear sense of the way that we will deal with these very important issues.
Two key principles for us are to ensure the certainty and the stability of the system, and to ensure competitive neutrality. Where Labor’s legislation has violated those principles, we will fix it.
Firstly, we will fix up the FOFA legislation. When the Corporations and Financial Services Committee looked at the FOFA legislation, the Coalition members and senators on that committee issued a minority report with 16 recommendations. We will implement all 16 of these recommendations.
Let me be specific about the changes we would make:
- the complete removal of the opt-in arrangements;
- the simplification and streamlining of the additional annual fee disclosure requirements;
- improving the Best Interest Duty;
- providing certainty around the provision and availability of scaled advice (that is, personal advice which is limited in scope); and
- refining the ban on commissions on risk insurance inside superannuation.
The Coalition has made a major commitment to reduce red tape. The overall objective is to find savings in the order of $1 billion a year for business. We expect that the financial services sector will be a key beneficiary of those savings.
Reform in superannuation is a key part of our agenda.
We start from the position of the importance of a three pillar-retirement system. Key to this is the need to boost retirement savings – and to maintain a consistent set of incentives to encourage Australians to make choices which build their retirement savings. We are committed to stopping constant ad hoc changes to super which tends to reduce confidence in the system. This is what we say in our recently issued document, “Real Solutions for All Australians”:
We will deliver greater stability and certainty on superannuation – we won’t move the goalposts. It is unfortunate that Labor has wasted so much money and made so many threats and changes to the superannuation system, cutting back on contribution levels and discouraging many people from providing more for their own self-funded retirement.
This has not been in the long-term interests of Australians or Australia.
We will ensure that no more negative unexpected changes occur to the superannuation system so that those planning for their retirement can face the future with a higher degree of predictability.
We believe the people who want to plan and save for their own retirement should be supported by government, not penalised.
We have already issued a series of detailed commitments regarding superannuation. Let me repeat them today.
If the current government has not acted, we will move to change the current anti-competitive system for choosing default super funds.
We will also work with all stakeholders to:
- Improve superannuation governance, by implementing a series of corporate governance reforms recommended by the Cooper Review but not progressed by Labor;
- Make it easier for consumers to properly compare super funds by working with the industry and APRA to develop a series of industry-wide standard definitions and performance benchmarks;
- Develop an appropriate process to make sure that Australians are not unfairly penalised for genuine unintended errors when making superannuation contributions;
- If and when the budget is back in surplus and government debt is back under control – revisit concessional superannuation contribution caps;
- Cut red tape and streamline employer superannuation reporting:
- Review the regulatory barriers currently restricting the availability of relevant and appropriate income stream products for Australian retirees; and
- Review the current mandated minimum payment levels for account-based pensions to assess their adequacy and appropriateness in light of current financial market conditions.
Let me speak in more detail about our support for implementing the corporate governance reforms proposed by the Cooper Review. Many of those reforms would not be viewed with any great enthusiasm by those union officials who see a position on a superannuation fund board as a nice little supplement to either their own remuneration or their union’s income.
The Coalition considers that there needs to be action on the Cooper Review recommendations to ensure that:
- There is a more appropriate provision for independent directors on superannuation fund boards;
- Directors who want to sit on multiple superannuation boards must demonstrate to APRA that they don’t have any foreseeable conflicts of interest;
- Disclosure of conflicts of interests is mandatory; and
- Directors of superannuation funds must disclose their remuneration in line with the provisions that apply for publicly listed companies and other APRA regulated sectors.
The financial services and superannuation sectors are a large and growing part of our economy.
It is vital that Australians maintain trust and confidence in these sectors – and governments need to legislate to achieve this.
There have been waves of successive reforms in these areas over the last five years.
While some of those reforms have been necessary and desirable, in other cases they have gone too far, and imposed unreasonable burdens on the sector. We see this in a range of burdens imposed on the industry, which were not recommended by the Ripoll inquiry.
The cosy linkages between the Labor Party, the union movement and union-dominated industry superannuation funds, have driven much of the detailed content of recent regulatory changes.
In addition, short term budgetary pressures have badly distorted Labor’s approach to the taxation of superannuation – undermining incentives for Australians to save for their retirement.
By contrast, the Coalition has a clear plan based on the need for stability and competitive neutrality.
A Coalition Government will restore the trust and confidence of Australians in our financial and superannuation system – and hence support the industry in its vital task of stewarding the retirement savings of millions of Australians.
 Australian Government, Treasury, Australia to 2050 – future challengers, January 2010, p.10, http://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf
 MYFEO 2012-13 and Budget Paper No 1 2012-13.
 Parliamentary Joint Committee on Corporations and Financial Services , Inquiry into Financial Products and Services, November 2009
 Parliamentary Joint Committee on Corporations and Financial Services , Inquiry into Financial Products and Services, November 2009, p.87
 Superannuation fund annual reports; team analysis
 M Skulley, ‘CFMEU stirs up anti-CBUS campaign’, AFR, 7 Jan 2013