Politics overtakes financial services reform

The electoral cycle has overtaken the Government's agenda to change the financial planning industry and, as Mike Taylor reports, the ultimate outcome will be dictated by the policy priorities of the winner.

The Federal Government is now in possession of the final recommendations of the Cooper Review into superannuation, but the window of opportunity for informed discussion around those recommendations closed before the full, final report was even delivered.

The opportunity for discussion and debate around the Cooper Review recommendations closed on Friday, 24 June when the Parliament rose for the winter recess and when the newly installed Prime Minister, Julia Gillard, signalled the likelihood of a Federal Election before the end of August.

According to the Minister for Financial Services, Chris Bowen, delivery of the Cooper Review recommendations should have represented the closing chapter of the Government’s underlying agenda for financial services reform.

The opening chapter had taken the form of the Parliamentary Joint Committee into financial services (the Ripoll Inquiry), the second chapter had been delivery of the Henry Review into Taxation and the third and final chapter was to be delivery of the findings of the Cooper Review.

Each of these chapters, in their own way, stood to have an impact on the financial services industry.

However, where the Ripoll Inquiry recommendations formed the basis of the Government’s so-called Future of Financial Advice changes, the Cooper Review recommendations would have completed the picture with respect to the status of advice related to superannuation.

And underlying all of the Government’s efforts with respect to the financial planning industry over the past 24 months has been the adverse publicity that flowed from the collapse of Storm Financial and the ongoing fallout from the collapse of Westpoint.

Indeed, every major speech made by a Government representative with respect to the reform agenda has seen fit to reference Storm Financial, defining the collapse as a catalyst.

However, any honest appraisal of events in the financial planning industry since the election of a Labor Government in 2007 might equally have referenced the campaign sustained by the industry superannuation funds.

If financial planners have emerged as net losers from Labor’s first term in office in the new millennium, the industry funds must be regarded as the net beneficiaries.

It is estimated that in the past five years the industry super funds have spent well over $50 million on television advertising, much of it either directly or indirectly attacking retail master trusts on the basis of paying commissions to planners.

In circumstances where the trade union movement provided substantial funding to the Australian Labor Party’s successful 2007 election, few people doubted that the views of the industry funds lobby would ultimately be reflected in Government policy.

And that has largely proved to be the case, with commissions about to become a thing of the past, a fiduciary duty imposed on planners and superannuation funds being empowered to provide limited advice to members on terms very different to those imposed on financial planners.

Bowen rolled out the essence of his Future of Financial Advice changes in April and followed up with a more definitive explanation on the same day that his party decided to topple the then Prime Minister, Kevin Rudd.

It is unlikely Bowen will now have an opportunity to formally outline the Government’s complete response to the Cooper Review recommendations before the expected August election, but he need not worry because the loquacious and media-friendly chairman of the review, Jeremy Cooper, has made no secret of his preferred approach.

The net result for planners is that if the Labor Party is returned to power at the next election and a newly installed Gillard Government remains committed to its previous policy principles, the business and revenue models of planners will need to change.

This is because there is a common theme across Ripoll, Henry, Cooper and the Future of Financial Advice — commissions are dead.

The Cooper Review approach is outlined in its default ‘MySuper’ model, which specifically outlaws trailing commissions.

The Government is even more up-front with respect to its Future of Financial Advice approach, with Bowen stating during the last sitting of the Parliament that it was intended to ban conflicted remuneration structures at the same time as making specific reference to commissions and volume-based rebates.

The Minister even sent a clear message to those dealer groups considering changing their business models to accommodate the proposed new regime — asset-based fee models would also have their limitations.

According to Bowen’s statement to the Parliament, the Future of Financial Advice changes would contain “three key reforms” to apply from 1 July, 2012:

• “a ban on conflicted remuneration structures, such as commissions and volume-based payments. Percentage-based fees (also known as ‘assets under management’ fees) can only be charged on un-geared products or investment amounts;
• the introduction of a statutory fiduciary duty for financial advisers requiring them to act in the best interests of their clients, subject to a ‘reasonable steps’ qualification; and
• a new ‘product neutral’ adviser charging regime, which is all about ensuring advisers and clients agree to the fees and services provided, and that those fees are clear while retaining flexible options for consumers to pay for advice. This includes a requirement for retail clients to agree to the fees and to annually renew (by opting in) to an adviser’s continued services.”

Bowen has allowed for consultation around his Future of Financial Advice proposals, but it was clear from his words to the Parliament that he believed the Government was on the right track and that those changes that did occur would only be at the margins.

What was clear from Bowen’s statement was that he had been comforted by the fact that neither the Financial Planning Association nor the Investment and Financial Services Association had seen fit to dismiss the Government’s broad policy agenda.

“Major reform is difficult and requires a mature and measured approach from industry. To respond to change in any other way diminishes an industry’s standing in the eyes of the community,” he said.

“I welcome the positive response from a range stakeholders, including many in the industry, to the Government’s financial advice reforms.

“The Financial Planning Association and the Investment and Financial Services Association have agreed that the broad thrust of our reform package is sensible and much-needed.

“I have been particularly pleased by the number of emails and letters of support I have received from individual planners and smaller planning practices who understand how beneficial these reforms are for their customers and, therefore, how beneficial they are for the industry.”

In short, the Minister has determined to continue pursuing his agenda because he does not view any of the reservations expressed by the major industry bodies as being a particular impediment to the Government’s ultimate policy objectives.

For his part, Cooper has left little doubt about the shape of his panel’s recommendations — something revealed when he outlined its guiding principles to a stock brokers’ conference in early June.

He said the following principles would be guiding the panel’s ultimate recommendations:

1. Superannuation must always be for the benefit of members. The superannuation system does not exist to support intermediaries. Trustees must be relentless in seeking returns for members at the expense of other participants.
2. The superannuation system needs to be well regulated to address prudential and other risks so that members can have the confidence to invest their retirement savings for their long-term financial benefit.
3. Transparency and disclosure are essential for the effective operation of the system, but are not substitutes for well-designed products that work in members’ interests. Disclosure is a necessary, but not a sufficient condition for ensuring that member interests prevail.
4.  Individual choices for members should be available and respected, but members must recognise and accept the increased responsibility that comes with making those choices.
5. The superannuation system must be supported by high quality research and data and intermediaries with professional standards.
6. Financial literacy is an important long-term goal, but a compulsory superannuation system cannot depend on all of its participants having the skills necessary to comprehend complex financial information.
7. Fees and costs matter; they detract from members’ retirement savings and need to be managed at least as diligently as the generation of investment returns. Technological improvements and innovation generally should be encouraged when they benefit members.
8. Superannuation is a large and complex system with an increasingly important social and macroeconomic dimension. It must be regulated and administered coherently and rule changes, including to taxation rules, should be made sparingly and in a way that engenders member confidence.
9. The system must have sufficient flexibility to accommodate its inherent growth path and should strive for continual improvement, rather than abrupt changes. Where possible, government and trustee decisions about superannuation should be taken with a long-term perspective. Stability and a longer-term horizon should predominate over short-term opportunism.
10. Governments should not seek to direct super funds to invest in particular assets or asset classes, regardless of how much it might seem in the national interest to do so.

When these so-called guiding principles are taken together with Cooper’s known recommendations, such as MySuper and SuperStream, it is not difficult to discern the shape of the policy options he placed before Bowen as the financial year came to an end.

What financial planners can be certain of, however, is that except for promising consumers a better deal and greater protections and possibly canvassing the benefits of lifting the superannuation guarantee, the Government will not be making financial services a mainstream issue during the forthcoming Federal Election campaign.

Indeed, some might argue that the Government would not be well served in seeking to prosecute any of the industry fund’s agendas in an election context in circumstances where the Federal Opposition might then point to the influence of the ‘faceless men’ within the trade union movement.

The future of the financial planning industry therefore resides in the outcome of the 2010 Federal Election and the policy priorities of whichever party gains power.

Given the events and allegiances that resulted in Gillard becoming Prime Minister, there is every possibility that Bowen will not be in charge of Financial Services even if Labor is returned.