“The Future of Advice” - Speech to The Association of Financial Advisers - 13 August 2013
I am pleased to have the opportunity to speak to you today on this important topic.
I bring greetings from the Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann, who is unable to be here today because of campaign commitments.
I have worked closely with Mathias on Parliamentary Joint Committee on Corporations and Financial Services, and through that process I have gained a good sense of how much attention from government your sector has been privileged to receive!
In discussing the future of advice, I wish to talk about three things today. Firstly, why advice is so critical – especially independent advice; secondly, where the present government has got it wrong in its policies in this area; and, thirdly, what the Coalition’s plans are for this sector.
Why advice is so critical
The retirement policy framework in Australia requires Australians to take a great deal of responsibility for themselves – in accumulating and managing the pool of wealth on which they will depend to generate their income in their retirement years.
Given this reality, the wide availability of appropriate financial advice is critical – to individuals and from a system-wide perspective.
Let me start with individuals. For most people, accumulating and managing wealth is not easy. You have to make complex decisions. Often the best course of action flies in the face of your natural instincts.
For example, the notion that you should take a certain degree of risk is very unattractive to a lot of people, as is the notion that you should invest a proportion of your wealth outside of Australia.
It is very tough to navigate the balance between risk and reward, and when you combine it with complicated rules regarding tax and the superannuation system, this undoubtedly presents problems for individuals.
There are both structural and cyclical reasons why advice is more important to individuals than it ever has been. The superannuation system is now dominated by accumulation products and not defined benefit products – meaning Australians have to make their own decisions.
I would argue that there are essentially three groups when it comes to retirement income, with most of us in the middle:
- 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 accumulation schemes. That includes, I might add, federal parliamentarians who entered the parliament after 2004.
There is a key cyclical factor in this process; 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 and advisers, 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.
Advice is equally critical from a system wide perspective.
The superannuation system has a vital role in taking the weight off of the pension system. 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.
Where present Government got it wrong
I want now to highlight several areas where the present government in my view got the policy mix wrong. Firstly, the FOFA changes have some seriously adverse consequences. Secondly, the government’s response to the threat to our superannuation system posed by fraudsters and criminals has been very weak. Thirdly, the anti-competitive approach to default funds has been very disappointing.
Let me start, then, with the package of legislative changes entitled by this government, ‘Future of Financial Advice’ or ‘FOFA’.
The FOFA changes go back to the collapse of Storm Financial – which 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 FOFA measures – even though these measures were supposedly in response to the Ripoll Inquiry.
I want to argue that the FOFA measures as implemented involved several serious problems. First, the retrospective fee disclosure requirement is extremely burdensome. 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.
Recently 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.
Second, 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.
Third, 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 a pretty 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 former Minister for Financial Services and Superannuation, Bill Shorten, is a former director of a predecessor organisation of the biggest of the industry super funds, Australian Super.
Fourth, these changes make the business model for independent advisers much harder to sustain.
Supposedly, the evil FOFA was designed to address was advisers who were nothing more than sales people employed by banks or other product manufacturers.
In fact though it has made the business model of genuinely independent advisers harder to sustain than before.
Onerous new requirements such as the requirement to provide a single annual fee statement are more difficult to meet for independent firms than for someone who is tied to a particular manufacturer and puts all his or her clients into the products of that manufacturer.
Similarly opt-in makes it harder for independent advisers to compete against larger organisations with huge sales and marketing budgets.
A set of reforms which makes it harder for independent advisers to operate a sustainable business also makes it harder for Australians to get access to independent advice.
Criminality & Soft response to Trio
Let me next turn to the threat of fraud and criminality – as highlighted by the collapse of Trio.
Over 6,000 Australian superannuation and other investors were defrauded of $176 million in retirement savings when Trio collapsed.
The fraud began in late 2003 when its perpetrators took over an existing funds manager - but it took almost six years before the regulators APRA and ASIC intervened, only doing so when notified by an alert industry participant.
Bill Shorten as the Minister showed a troubling lack of urgency and engagement on this. He awarded compensation to some investors with losses totalling $55 million, but criticised other Trio investors, who lost over $120 million, for “swimming outside the flags”.
In taking that approach, he completely ignored the unique circumstances of the Trio collapse.
The unanimous bipartisan report of the Parliamentary Joint Committee on Corporations and Financial Services pointed to the failure of regulators to take appropriate action to protect investors and the failure of the government to pursue the masterminds behind the Trio fraud.
Trio investors did not consciously set out to put their retirement savings into particularly risky investments. They were victims of fraud and, according to a comprehensive parliamentary inquiry, the failure of relevant authorities to act in a timely and appropriately coordinated manner.
It took Bill Shorten nearly a year to consider the recommendations made by that key parliamentary committee - and even then he only provided a preliminary response, merely announcing further new reviews and 'consultations' as a means of following his longstanding practice of avoiding making actual decisions.
The Trio case demonstrates that Australia’s $1.6 trillion superannuation savings pool is exposed to international criminal activity targeted at defrauding Australian investors, as the unanimous cross party Parliamentary Committee report highlighted.
Here is what the Australian Crime Commission said in a report released recently:
There is evidence that organised crime groups, including highly professional international organised fraud networks, are targeting the Australian securities and investment sector.
The Trio Capital superannuation and investment fraud case in 2011 is an example of the sophisticated methodologies that these organised fraud networks employ.
Lack of a pro-competitive approach
I want to now highlight a third failing in the Labor government’s approach to superannuation: its lack of focus on stimulating competition.
The Coalition has no preference for any one sector of the superannuation industry over any other sector.
Our preference is for an efficient, competitive superannuation industry which serves Australians building up savings for their retirement in the most cost-effective way.
As long as different fund types are competing on a level playing field – we say good luck to all of them.
Unfortunately the same cannot be said for the approach of the current government.
It has completely failed to deliver a competitive market in the provision of default funds.
Julia Gillard’s Fair Work Act 2009 established so-called ‘modern awards’ – and one of the matters these cover is the specification of a ‘default superannuation fund’.
Modern awards need the approval of the Fair Work Commission – an organisation stacked with ex-union officials. So it is not surprising that modern awards overwhelmingly specify industry and public sector funds as the default superannuation fund.
Following growing complaints, Labor was forced to include in its 2010 election policy a promise to introduce an open, transparent and competitive process to select default funds under modern awards.
The Productivity Commission was given the job of designing such a process. In its draft report in June 2012, it found the default fund arrangements ‘could be improved to promote the best interests of members’, that the primary objective should be ‘the best interests of members’ and proposed that the selection of funds should be ‘merit based.’ 
The clear implication was that the existing process did not meet this test.
The Productivity Commission said that one option to improve the process would be to establish a new body, independent of Fair Work Australia, to ‘select and assess the funds to be listed in modern awards.’
Bill Shorten, alert to the threat to the union-linked funds, soon announced that he wanted funds to be chosen by an expert panel within Fair Work Australia. Shorten’s model is now law: the expert panel will advise the Fair Work Commission (the renamed Fair Work Australia) on selecting default funds, but the final decision will be made by the Full Bench of the FWC.
This is likely to mean that existing default funds will stay on the list in existing modern awards; and given the conservative and legalistic nature of the process, new and innovative funds are likely to have a hard time making it through the two stage process. In other words, it is a very long way from the promised open, competitive and transparent process.
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 financial services.
We want to support and stimulate a vigorously competitive market in the provision of financial advice to Australians.
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 these recommendations.
Let me be specific about the changes we would make. We would:
- Remove the opt-in arrangements;
- Bring about the simplification and streamlining of the additional annual fee disclosure requirements;
- Improve the Best Interest Duty;
- Provide certainty around the provision and availability of scaled advice (that is, personal advice which is limited in scope); and
- Refine 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 have already issued a series of detailed commitments regarding superannuation. Let me repeat them today.
We will move to change the current anti-competitive system for choosing default super funds.
The Productivity Commission’s report into default funds presents an amusing series of arguments from industry funds and unions – including the SDU, United Voice, CBUS, LG Super and the ACTU –explaining why competition and contestability is a bad thing. 
I felt like I was back in my Optus days, reading submissions from Telstra. The Productivity Commission gave their arguments short thrift, concluding:
… enhancing contestability and providing incentives for funds to deliver improved products are essential in ensuring that the interests of employees who derive their default superannuation product in accordance with modern awards are best served. 
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. Here, let me add that we acknowledge the announcement in the May budget of the government’s plan to extend concessional tax treatment to deferred lifetime annuities, and we welcome that as far as it goes. However we want to go through a proper and methodical process of having a look at the barriers applicable to income stream products.
- 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.
The provision of advice is a key part of this sector.
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.
We have seen a lack of commitment by the current government to the principle of competitive neutrality across the sector.
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 – and we see the advisory sector playing a key role in that.
Australian Government, Treasury, Australia to 2050 – future challengers, January 2010, p.10, http://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf
MYEFO 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
Productivity Commission Draft Report: Default Superannuation Funds in Modern Awards, June 2012, p 2
Productivity Commission Draft Report: Default Superannuation Funds in Modern Awards, June 2012, p 2
Bill Shorten, Minister for Financial Services and Superannuation, Media Release No 052, 22/8/2012, ‘Government Supports Evidence Based and Expert Led Process for Default Funds.’
Productivity Commission Final Report: Default Superannuation Funds in Modern Awards, October 2012, p 149-152
Productivity Commission Final Report: Default Superannuation Funds in Modern Awards, October 2012, p 153