Challenges ahead for financial services
The Australian financial services industry is facing some serious challenges through 2012 – something which Financial Services Council chief executive John Brogden pointed out during the first of this year’s FSC/Deloitte Leadership Series luncheons.
The financial services industry led the Australian economy in both size and contribution in 2011. Financial services remained the largest single sector in the economy, representing 10.6 per cent of Gross Domestic Product.
But like much of the economy, particularly on the east coast, financial services experienced a flat 2011.
Outlook for 2012: Financial advice
No other sector will undergo as much change as financial advice will in 2012.
The two Future of Financial Advice (FOFA) Bills in Parliament will drive a wholesale restructuring of the financial advice industry and the manner in which advice is provided.
There will be continued mergers in the financial advice segment. Increasing cost pressures from regulatory reforms will mean only providers with sufficient scale able to make the required investment in systems and training will be able to absorb costs and remain competitive.
With the advent of FOFA on our doorstep, 2012 will see more financial advisers leave or sell their businesses under the pressure of increased cost and compliance.
Should the new regime not stymie innovation and greater flexibility in the provision of financial advice, there is also great opportunity.
The critical outcome of the FOFA legislation must be the creation of a workable scaled advice framework.
Between intra-fund advice at one end, and comprehensive financial advice at the other, there are many new and different forms of affordable advice that can be provided – and millions of Australians who need it.
A regulatory framework that facilitates genuine scalable advice will open up new markets of millions of consumers. The company that gets their model in the market earliest will have a massive first mover advantage.
Superannuation
In 2012, the superannuation industry will be consumed by preparation for the commencement of the new default superannuation system from 1 July 2013.
MySuper will see the dominance of industry funds in simple, low-cost superannuation aggressively challenged by retail players.
However, the most significant changes to the superannuation sector from the Government’s reforms will be to the structure of the industry. Consolidation of superannuation funds will accelerate in 2012 and over the next five years. Most of this merger activity will take place in the industry fund sector.
The introduction of new, higher capital standards for Australia’s superannuation funds will also accelerate a major long-term restructure of the industry.
Given the current capital requirement of just $5 million, there will be many smaller funds which, when they review their risks, will have no choice but to hold more capital to reach a level closer to the 25 basis points of funds under management that the Australian Prudential Regulation Authority (APRA) expects licensees to hold as their target level by 2016.
Productivity Commission
An important development in 2012 is the Productivity Commission review of the default award provisions in superannuation. The Commission delivers its final report on 6 October 2012.
It is inconceivable that the Productivity Commission review could conclude anything other than that the current arrangements for selection of default funds is conflicted, inadequate and grossly uncompetitive.
A quick response from the Government and the opening up of awards to full competition is critical.
Governance
Despite the Government not accepting the recommendations of Stronger Super on the governance of superannuation funds, we have seen a robust public debate on this issue break out this year.
In particular, the existing ability for superannuation funds not to report the remuneration of directors has come under attack.
The debate on corporate and investment governance standards of superannuation funds will only intensify this year. We support APRA’s proposals to further align corporate governance standards in super with banking, general and life industries.
Life insurance
Life insurance will see changes on many fronts in 2012.
Group insurance
Group insurance continues to mature – with levels of cover increasing significantly. This is a highly competitive segment and will only become more competitive as MySuper brings with it an obligation on trustees to develop an insurance strategy that addresses the insurance needs of their membership.
Direct
The direct channel has led innovation in the industry. With the regulatory headwinds facing other channels, we expect competition in this segment to further intensify.
However, there is no doubt that claims experience is tightening. Managing this shift will be critical to the industry’s capital position and profitability and affordability to consumers.
Regulatory reforms
Both the FOFA and Stronger Super reforms will impact on life insurance to varying degrees. If unamended, the reforms will generate greater complexity and increase the cost of life insurance.
We remain hopeful that the government will simplify its complex proposals in this area to ensure consistency in how consumers pay for financial advice – irrespective of whether they purchase a policy using superannuation monies or non-superannuation monies.
New capital standards
During 2011, APRA undertook a General and Life Insurance Capital Review. The review sought to improve the risk sensitivity of the standards and achieve better alignment across APRA-regulated industries.
The new standards do not require across-the-board increases to capital, and through 2012 the industry will prepare for their likely commencement in 2013.
Funds management
Regulatory reforms will not impact funds management to the same extent as other segments. Indirectly, however, both FOFA and Stronger Super will intensify cost pressures across the industry and affect the way superannuation monies are invested – by financial advisers and superannuation funds.
Ultimately, the industry’s future remains incredibly bright with the almost certain increase in the SG to 12 per cent, and the prospect of significantly greater fund flows from offshore as a consequence of important tax changes being introduced by the Government.
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