2020 – a year of incidents and challenges

If 2020 is to be remembered for anything in the financial planning industry then it will be as the year in which a global pandemic hastened inevitable change including the increased adoption of technology and the continuing exit of financial advisers.

What it also revealed, however, was the reality that the industry had become mired in regulatory red tape which was capable of being pulled aside by a Government and financial services regulators keen to ensure that the clients of financial advisers were not needlessly inconvenienced and disadvantaged as a result of lockdowns, particularly in Victoria.

But, beyond the COVID-19 pandemic, what are the events which will be seen as having marked 2020?

• IOOF acquired the MLC Wealth business;
• AMP Limited was the subject of an adviser class action, the controversial exit of its wealth chief executive, Alex Wade, the consequent exit of its chair, David Murray, a sexual harassment scandal around its chosen chief executive for AMP Capital, Boe Pahari and then a takeover bid;
• Iress acquired OneVue;
• More than $35 billion was withdrawn from superannuation under early release arrangements;
• The chair of the Australian Securities and Investments Commission (ASIC), James Shipton, stood aside amid an expenses scandal. His deputy, Daniel Crennan, first stood aside and then announced his resignation;
• The Financial Adviser Standards and Ethics Authority (FASEA) financial planning exam continued to generate 79% to 88% pass rates but dissent continued around its code of ethics; and
• The Australian Securities and Investments Commission (ASIC) started its review of the Life Insurance Framework.

THE FUTURE OF AMP LIMITED

Currently the subject of a takeover bid by US private equity bidders, what is clear is that AMP Limited will likely never be the same again.

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AMP’s 2020 woes started with the somewhat peremptory exit of AMP chief executive, Alex Wade, in early August amid allegations of inappropriate conduct with respect to female colleagues.

The company’s woes became magnified within weeks amid media and shareholder pressure around the appointment of Boe Pahari as chief executive of AMP Capital in circumstances where had been the subject of sexual harassment allegations while running the company’s infrastructure team in the UK in 2017.

The circumstances surrounding Pahari’s appointment and exit also led to the resignations of AMP chair, David Murray, and AMP Capital chair and AMP Limited non-executive director, John Fraser.

Within weeks, the AMP board virtually declared it was putting the company on the sales block by announcing a “portfolio review of the group’s assets and businesses”.

That announcement, on 2 September, noted that “AMP periodically receives unsolicited interest in its assets and businesses, and recently has experienced an increase in interest and enquiries”.

“The board has therefore decided to undertake a portfolio review to assess all opportunities in a considered and holistic manner, evaluating the relative merits as well as potential separate costs and dis-synergies, with a focus on maximising shareholder value,” the company said.

By the end of October, AMP announced that it had received a takeover bid from US firm Ares Asset Management.

In the meantime, the company remains subject to a class action mounted by current and former AMP advisers over buyer of last resort (BOLR) contracts as well as exposure to a multi-million dollar client remediation bill.

IOOF TAKES MLC WEALTH

IOOF currently employs the second largest number of financial planners in Australia. From 2021 onwards, because of its acquisition of MLC Wealth, it will likely be the largest employer of financial planners.

However, as is usually the case with major financial planning acquisitions, a number of MLC Wealth financial planning practices together with some from IOOF have voted with their feet by moving to other financial planning licensees.

IOOF announced in late August that it had entered into transaction agreements with National Australia Bank to acquire 100% of MLC Wealth for $1,440 million, claiming the acquisition was expected to deliver in excess of 20% earnings per share share accretion.

It said the transaction comprised MLC Wealth’s financial advice, platforms and asset management businesses and would lead to IOOF being the number one advice business with 1,884 advisers and funds under management and advice of $510 billion.

However, by the close of the year the transaction was being scrutinised by the Australian Competition and Consumer Commission (ACCC) and a number of MLC Wealth-aligned advice firms were signalling that they were unhappy with the terms being offered to move under the new IOOF licenses.

It remains to be seen whether the company’s prediction of 1,884 advisers within its licenses is realised.

FASEA – STILL PROBLEMATIC

The Financial Adviser Standards and Ethics Authority (FASEA) arguably remained unpopular with many financial advisers in 2020, particularly with respect to its code of ethics.

Notwithstanding the impact of the COVID-19 pandemic and lockdowns, financial advisers continued to sit and pass the FASEA exam with the lowest pass rate being a very robust 79%.

However, the bone of contention between FASEA and financial planners continued to be the code of ethics and, in particular, Standard 3, with the authority’s latest release of guidance around the code failing to gain any significant support from any of the major financial planning organisations.

Indeed, as the year came to an end the Financial Planning Association (FPA), the Association of Financial Advisers (AFA), the SMSF Association, the Stockbrokers and Financial Advisers Association (SAFAA) and the Institute of Managed Account Professionals (IMAP) continued to express their concerns about the code.

On top of this, key Government members of the Senate Economics Committee continued to question FASEA chief executive, Stephen Glenfield, about how the authority had arrived at the wording of Standard 3.

Questioning by Queensland Liberal Senator, Amanda Stoker, succeeded in persuading FASEA to make the submissions it had received underpinning its approach to the code of ethics publicly available.

At the time of writing, some of those submissions were being made publicly available for the first time.

Perhaps significantly, the October Federal Budget did not define continuing funding for FASEA beyond the 2021 Budget scheduled for May next year, giving momentum to suggestions that the authority will ultimately be rolled into the structure of the Financial Adviser Single Disciplinary Body recommended by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

EARLY RELEASE SUPER – THE FUTURE WILL TELL

Australian superannuation fund members have drawn down a combined total of over $35 billion under the Government’s COVID-19 early release scheme.

The Government has been hailing the scheme as a success while its critics have been arguing that it has simply forced people to use their own resources to fund themselves through COVID-19 hardship.

At the time of writing, 3.3 million people had utilised the early release scheme, with a further 1.3 million people having made repeat applications. The rules stated that people could access $10,000 in each of two tranches.

The average amount drawn down from early release superannuation in the first tranche was $7,401 while the average amount drawn down in the second tranche was $8,336.

It surprised no-one that the superannuation funds most exposed to superannuation early release were the largest funds such as AustralianSuper and those with most exposure to the areas hardest hit by the COVID-19 lockdowns and border closures such as Rest and HostPlus.

What the early release scheme also triggered was significant debate within the Government backbench about the overall future of superannuation, with Liberal backbenchers such as NSW Senator, Andrew Bragg, questioning not only the future of the Government’s timetable for lifting the superannuation guarantee but also compulsory nature of the superannuation guarantee charge.

Having last year commissioned its Retirement Income Review, the Government was this year expected to publish the results of that process and deliver a policy roadmap.

However, it has not yet done so and the impact of superannuation early release and other changes suggests the review findings are already significantly dated.
The early release scheme is scheduled to cease at the end of 2020.

How it is viewed by history will likely be determined by the extent to which early release drawdowns increase pressure on the Age Pension in future years.

ASIC – THE WATCHDOG BEING WATCHED

As 2020 draws to a close, the Australian Securities and Investments Commission (ASIC) chair, James Shipton, is stood aside and awaiting the outcome of a review into expenditure on his personal tax affairs.

His deputy, Daniel Crennan similarly stood aside over expenditure on his removal allowance from Melbourne but has subsequently signalled his resignation.

For financial advisers and financial planning licensees, the uncertainty within the upper echelons of ASIC comes at a time when the regulator is reviewing the affordability of financial advice, the success of the Life Insurance Framework (LIF) and as the status of FASEA code of ethics breaches remains in limbo.

The uncertainty about the future leadership of ASIC also comes amid its efforts to introduce the new Design and Distribution Obligations (DDO) regime and to refine RG 97.

While the Treasury-initiated review of the regulator and Shipton’s review is afoot there is likely to be no certainty about the future policy stance of the regulator and whether the Government would look for another external replacement for the current chair or look internally.