The whole business around financial advice reforms is very complicated so let’s try to simplify it.
Like all things it’s a balancing act. On the one hand, there is consumer protection and on the other, there is red tape reduction to unleash enterprise. The challenge is avoiding rip-offs while driving innovation.
Problem is that the Government aided by PUP senators, has managed to pull off the impossible and – diminish consumer protection while increasing red tape. No really.
It’s the equivalent of naming David Luiz as your central defender and captain. You get no defence, little leadership and a 7-1 hiding.
Think of it like this: you are about to go on holiday to the tropics where there are plenty of mosquitoes. You head to the chemist and ask for some repellent because you don’t want to get bitten.
The chemist denies you the repellent because it’s unfair for the mosquitoes who have made a livelihood and invested in top-grade stingers for sucking blood from mugs like you. Instead, the chemist provides you with some salve for when you do get bitten. Of course, the chemist makes clear that the salve has no properties to deal with dengue, Ross River fever, elephantiasis, malaria, etc. so you’re basically on your own then.
Well, sort of on your own, apparently as a consumer protection device, the disease spreading mosquitoes will self-report and disclose themselves to a register of infected mosquitoes, which you can refer to and work out if you are about to get sick…
Now no self-respecting chemist would do this but this just happened with financial advice reforms.
So what’s the fuss about?
Well, Bill Shorten and Chris Bowen as Labor Ministers worked on a series of reforms called the Future of Financial Advice.
This was done in the wake of a series of collapses for financial planning firms. The most high profile of this was Storm Financial where about 4000 clients suffered losses estimated to be $3 billion – that’s an average of $750,000 each or approximately 13 years on the median full time wage assuming no living costs or savings. In Government, Labor sought to end people’s lives being decimated by rogue and greedy operators.
The Future of Financial Advice laws started on 1 July 2012 and became mandatory on 1 July 2013. The regulatory framework was implemented on a graduated basis deliberately to give time for the industry to adjust.
In early June, the Government announced changes to roll-back Labor’s laws via regulation. This was supposedly in the name of red tape reduction. (They had initially tried to this by legislation but figured that it was easier to save time from Parliamentary deliberation and to just do it by the pen of a Minister.) Labor sought a disallowance motion to this regulation in the Senate.
Last night this disallowance failed as PUP senators agreed to changes proposed by a letter from the Finance Minister. Interestingly, the Finance Minister promises to make the changes in 90 days which expires well after the provisions in the current repeal regulation becomes law.
Senator Dastyari today explained it best: “PUP senators have been sold a pup.”
So what are the key elements of Labor’s reforms, the Government’s repeal and why do they matter?
First, under Labor, for the first time financial advisors had to act in the best interests of their clients. Let me repeat that again: previously financial advisors could act in their own interests, which did not have to align with your interests even though you were paying them!
What the Government and PUP have done is agreed to water this best interests test down so now advisors don’t need to make all reasonable steps to act in the best interests of their client.
Second, under Labor’s laws you had to opt-in to the fees you paid. Now they just have to be disclosed. When an industry creates a whole category of clients named ‘orphans’ who are still charged fees even though their advisers are no longer in the dealer groups the clients signed up with and when those clients are often in aggressive (and risky) strategies then you know that mere disclosure is going to achieve basically no policy effect. It’s remarkable therefore that you can with a straight-face argue that this increases consumer protection.
Thirdly, the line between general advice and personal advice is so blurred now that it’s meaningless. In fact, the interim report of the Financial System Inquiry from former CBA head David Murray raises this specific concern. General advice is when you go into a bank branch and someone talks to you about how you can get life insurance if you have a super fund. Personal advice is when they start getting advice about their circumstances and what they should do (which involves paying someone for it!)
Lastly, nothing has been done about changing soft dollar payments or conflicted remuneration, which Murray has also found presented risks to the financial system. ”Conflicted remuneration” is where advisers receive payment tied to the sale of a particular product. The proposed Government/PUP deal unwinds Labor’s protections from this. There is also a major drafting problem in the government’s regulations which will enable conflicted remuneration to be paid to financial planners even in circumstances where the government claims it is prohibited.
There are apparently other consumer protection measures but they are all largely meaningless. The Government claims that it will implement a 14 day cooling off period and a better public register of financial advisers to help consumers check their financial adviser’s credentials and status in the industry. Anyone familiar with behavior will know that the response rates and engagement on this will be minimal.
A good way of working out whether this repeal is good or bad for you is to see who supports and who doesn’t.
Here’s the group for this: big banks, listed financial companies, major investment houses, dealer groups, financial planners.
Here’s the group against this deal: the Government’s own expert Financial System Inquiry, National Seniors and Council on the Ageing who represent pensioners, consumer groups like CHOICE, industry super funds.
Going back to our mosquito analogy, if you came home after your holiday having spewed your guts out with a grotesque fever and missing the beach because you were bed-ridden for two weeks you’d probably be fairly agitated with the chemist that refused to sell you the repellent.
Well that’s the effect of this. The next time there is a major financial collapse because of greed and bad practice then it’s on this Government and on PUP.
All last night’s shenanigans have done is guarantee another Storm or Opes-Prime or Trio or Astarra. You know how I know?
The financial advice industry once labelled Chris Bowen’s concern that the FoFA reforms were needed to prevent another Storm Financial collapse as “complete rubbish”.
Less than a year later it was revealed that the financial advisers from the Commonwealth Bank of Australia had provided dodgy advice which cost their clients assets and savings of around $170,000. The clients were offered compensation of only $6,000. Worse still, we only found this out because a whistleblower revealed this. The regulator this year had it’s funding cut by a $100m.