Financial services policy review: changing horses in 2009

IIt may have been suitably muted, but you could almost hear the collective sigh of relief emitted by some senior executives within the Australian financial services industry when the Prime Minister, Kevin Rudd, announced the full spread of his Cabinet reshuffle on Saturday, June 6.

The reason for the collective sigh of relief was the news that the Federal Assistant Treasurer, Chris Bowen, had been elevated to the Cabinet with a portfolio brief encompassing the full spread of financial services including, crucially, “superannuation and corporate law”.

While some headlines may have suggested that Senator Nick Sherry had been “promoted” to the position of Assistant Treasurer, he had in fact lost carriage of “superannuation and corporate law” and remained outside the Cabinet room.

Sherry arguably deserved better. He was clearly a busy and pro-active minister who oversaw one of the most volatile periods in recent market history.

However, this collective almost audible, sigh of relief from within the financial services industry was owed to the fact that, privately, many senior executives had begun losing faith in Sherry. They had interpreted a string of statements over the past nine months as suggesting the minister was increasingly reflecting the agenda of industry superannuation funds.

There had been a growing feeling within financial services boardrooms that the industry had been forced onto the back-foot in the policy debate; that it has lost traction in Canberra.

This belief was born of a perception that, in Labor Party political terms, the industry funds were ‘owed’ for the support provided in the election of the Rudd Labor Government.

Some of the Government’s policy announcements were therefore perceived as being indicative of the industry funds movement calling in its debt. The Government, albeit at the margin, appeared to be increasingly supporting the policy posture of the industry funds figureheads on key issues such as commissions-based payments and intra-fund advice.

While no one in the financial services arena, particularly those running retail master trusts, were prepared to be openly critical of Sherry, they were privately declaring their uneasiness and increasingly looking to bypass the minister by going directly to the Federal Treasurer, Wayne Swan.

They were also clearly happier discussing issues with Bowen but painfully aware that within the Treasury portfolio hierarchy, Bowen was junior to Sherry and clearly not responsible for superannuation and corporate law.

All of that changed on Saturday June 6, when the Prime Minister announced his Cabinet reshuffle and released a statement was telling for its lack of recognition of Sherry’s long-standing involvement with Australian Labor Party’s superannuation policy during its long years in Opposition.

While Sherry had in fact been the face of the Labor Party on superannuation for more than six years in Opposition, the Prime Minister’s reference to the Senator was confined to the following: “Senator the Hon Nick Sherry will be appointed Assistant Treasurer. Senator Sherry is a former Shadow Assistant Treasurer and was Parliamentary Secretary for Primary Industry, Energy and Resources during the Keating Government.”

In other words, not one mention of the Senator’s efforts on superannuation and financial services in Opposition nor of his carriage of the superannuation portfolio and associated legislative environment during the Rudd Government’s first year and a half in office.

Yet, Sherry had overseen what proved to be an appropriate and effective regulatory response to the global financial crisis and, while he may have rocked some boats, he had initiated some much-needed improvements to the broader financial services regulatory environment.

As well, he found many of his options with respect to policy closed off by the processes that surrounded the Henry Tax Review.

The reaction of the major industry organisations to the Cabinet reshuffle and its implications was typically muted, with the Investment and Financial Services Association’s chief executive, Richard Gilbert, focusing on the fact that the financial services portfolio now commanded a seat at the Cabinet table.

For her part, the chief executive of the Financial Planning Association (FPA), Jo-Anne Bloch, noted that Bowen would also have carriage of human services, which would be important to her organisation because it covered the Federal Government’s financial counselling services.

She said the FPA looked forward to continuing to work with the Sherry as Assistant Treasurer in the significant areas of tax reform.

The big question now confronting the financial services industry is what the Cabinet reshuffle and the elevation of Bowen to the inner Cabinet will mean.

Clearly, there are issues on foot with which the new minister will have to deal and there will be relationships to patch up and adjust as he settles more fully across what now represents an almost standalone portfolio.

Under Sherry, superannuation and corporate law sat separately under his jurisdiction within the Treasury portfolio whereas Bowen, alongside Treasurer Swan, clearly has responsibility for the entire swathe of financial services within the Cabinet.

At the same time, the Prime Minister has given him a substantial vote of confidence via the double portfolio of financial services, superannuation and corporate law, and human services.

In doing so, Rudd paid tribute to the manner in which Bowen had “overseen significant reform in improving fairness and integrity in the tax system and in important areas of consumer rights”.

It will take a month or so for Bowen to settle into what represents a complex and, currently, highly active portfolio, but the Australian financial services industry from retail master trusts right through to individual planners will be looking for some early indicators of his attitude on key policy issues.

Given the make-up of the review committee and the breadth of its remit, there will be a lot of interest in Bowen’s approach to the Review into Superannuation and whether he is happy to leave things under the structure announced earlier this month by Sherry.

It ought to be remembered, in fact, that the full title of the review announced by Sherry was the ‘Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System’ — a broad range title that gave the review panel a very broad remit.

The members of the panel, as announced by Sherry on May 29, were the chairman, Australian Securities and Investments deputy chairman Jeremy Cooper, and a panel made up of industry funds stalwart Sandy Grant, former Lazard managing director; Brian Wilson, former AMP director; Kevin Casey, Australian Chamber of Commerce; Greg Evans, industry chief executive; and Dr David Gruen, a senior Treasury official.

The immediate complaint of many in the financial services community was that while the industry funds clearly had their champion at the table in the form of Grant, there was no obvious champion for the retail master trusts.

Sherry then detailed the terms of reference of the review as being to “comprehensively examine and analyse the governance, efficiency, structure and operation of Australia’s superannuation system, including both compulsory and voluntary aspects, addressing, but not limited to, the following issues:

1.1 Governance: examining the legal and regulatory framework of the superannuation system, including issues of trustee knowledge, skills and training, and thoroughly assessing the risks involved in the use of debt and leverage and the development of investment options that lead to a weakening of the diversification principle in the superannuation system;

1.2 Efficiency: ensuring the most efficient operation of the superannuation system for all members, whether active or passive members and whether making compulsory or voluntary contributions, including removing unnecessary complexities from the system and ensuring, in light of its compulsory nature, that it operates in the most cost-effective manner and in the best interests of members;

1.3 Structure: promoting effective competition in the superannuation system that leads to downward pressure on system costs, examining current add-on features of the superannuation system and examining other structural legacy features of the system; and

1.4 Operation: maximising returns to members, including through minimising costs, covering both passive defaulting members, who should receive maximum returns and value for money through soundly regulated default products, and actively selecting members, who should not be negatively impacted by conflicts of interest that may inhibit advice being in the best interests of members.

The concern among retail master trust executives and the financial planning industry was that on the issues of efficiency, structure and operation, the review could be construed as being a vehicle via which to prosecute the agenda of the industry superannuation funds.

The suspicions harboured by retail master trust executives are understandable in circumstances where the Industry Super Network (ISN) mounted a relentless campaign that not only heavily promoted the value of industry superannuation but also sought to question the validity of retail master trusts, the role of planners and the value of advice.

The efforts of the ISN on this front, and in relation to the terms of reference as outlined by Sherry, were never made clearer than when ISN executive manager David Whitely sought to leverage questions around the lifting of the superannuation preservation age to the role of advice in the sector.

He did so by claiming that lifting the preservation age to 67 would not be necessary if the Government moved to increase the efficiency of the superannuation industry.

Whitely referred to modelling commissioned by the ISN and undertaken by Access Economics that found an increase in net performance of less than 1 per cent across the industry would be comparable with increasing compulsory contributions to 12 per cent.

He then pointed to a recent study conducted by ISN on the opportunity cost of workers’ superannuation savings being directed to underperforming retail super funds by financial planners paid via commissions and away from better performing funds.

Whitely said the Government should seek to exhaust every option to improve how much super workers had before increasing the age at which workers could access their own superannuation.

“The first and most obvious step would be to get the superannuation industry to increase its net performance by eradicating the conflicts of interest inherent in the sales commission system,” he said.

With a constant stream of similar statements having been issued by Whitely, it was hardly surprising some within the financial services industry were feeling uneasy about the agenda Sherry appeared to be pursuing.

Fees versus commissions

Then, too, there was the move by the FPA to embrace a policy that will see the phasing out of commission-based payments for financial advice.

Bloch commented that it was a case of the industry moving of its own volition before the Government legislated or regulated on the issue.

Bloch and the FPA will no doubt have noted some early comments on the part of Bowen suggesting that he holds a similar view on the question of planner commissions to that of his predecessor.

Intra-fund financial advice

But while the FPA may have succeeded in broadly setting its own agenda on the question of fees and commissions, the same cannot be said with respect to the question of discussion around intra-fund advice.

Those discussions have gone largely unremarked in the broader financial planning community because they have been effectively hidden behind a veil of Government-imposed confidentiality.

The participants in the intra-fund discussion have been required to sign confidentiality agreements. This has effectively muted debate on discussions about just how far superannuation funds will be able to go in providing financial advice to members and whether enabling them to do so can be achieved by regulation rather than via the introduction of new legislation.

There has been industry concern that while superannuation fund trustees will need to hold an Australian Financial Services Licence, the scope of the proposed intra-fund advice regime will allow them to provide members with a broader range of advice unconstrained by many of the rules that apply to financial planners.

Many in the financial services industry will be pressing Bowen to lift the veil of confidentiality that has surrounded the intra-fund advice issue to allow a full-blown debate.

Publication of superannuation performance tables

One of the most forthright and possibly far-reaching initiatives by Sherry was to have the Australian Prudential Regulation Authority (APRA) publish relative fund level superannuation performance data in circumstances where, otherwise, only private sector ratings houses such as SuperRatings were providing regular analyses.

The problem for Sherry was that while APRA has been collecting superannuation fund performance data for years, it has been doing so only in aggregate and, by its own admission, has not been positioned to quickly deliver on more detailed fund-level analysis.

The regulator as recently as late May released a discussion paper in which it canvassed collecting deeper fund-level data, including collecting data on the accrued benefits of a small number of representative members to ensure comparability of performance data.

Notwithstanding the amount of effort being expended by APRA, it seems unlikely the regulator will have achieved the sort of outcomes many in the industry had hoped for before the next election.

While the Federal Budget and the recommendations of the Henry Tax Review have pretty much ruled out any near-term increase in the superannuation guarantee, Bowen has made clear that he believes it is something that is desirable in a perfect world.

Commenting on financial services issues even before he had been sworn into his new portfolio, Bowen agreed that the existing 9 per cent superannuation guarantee was probably not enough to fund a comfortable retirement and that, in a perfect world, it should probably rise to 15 per cent.

Crucially, however, the new minister added that such a rise would be difficult in the current economic environment.