Finetuning the big picture

While the election of a Federal Labor Government late last year might have been interpreted as creating a clean slate for financial services lobbyists, the truth is that most of the key organisations had been laying the foundations of the relationship while the Labor Party was in Opposition.

This explains why the May Budget contained a number of things that had been squarely on the wishlist of the industry, including the withholding tax changes designed to make the local funds management industry more competitive and attractive to foreign investors.

While the first priority of industry lobby groups is to ensure they maintain good relationships with whichever Government is in power, a number of lobbyists have told Money Management that their task became somewhat harder over the final 18 months of the Howard Government.

It was not that the Howard Government had not delivered some substantial change, particularly with respect to superannuation, but 18 months out from the 2007 Federal Election there were clear signs that it had encountered policy development fatigue.

Having gained office, the Australian Labor Party lost no time signalling its intention to deliver change to the financial services industry consistent with the platform that won it Government in 2007, but it is certainly not rushing to impose change.

Financial planners can probably rest easy in the knowledge that the Rudd Government will not be introducing significant changes beyond those outlined in the May Budget, that is, the changes to withholding tax, the First Home Saver Accounts, the superannuation clearing house and, perhaps, some tightening of the rules surrounding self-managed superannuation fund (SMSF) trustees.

SMSFs

Indeed, if there has been one constant to the announcements issued by the Minister for Superannuation and Corporate Law, Senator Nick Sherry, it has been his concern at the release of Australian Taxation Office (ATO) data suggesting a lack of appropriate governance in the SMSF sector.

In his most recent address to the Association of Financial Advisers, Sherry said that while the SMSF segment was “a robust, important and mostly healthy area of the market”, he was concerned about data collected as part of the ATO survey.

“[The] results of a recent ATO survey indicate that whilst the majority of the sector is well-managed, a significant minority may not be,” Sherry said.

“Because so many Australians will rely on SMSFs for their retirement income, we need to ensure that SMSFs are subject to a strong governance system,” the minister said.

“Trustees in the Australian system are the key guardians and decision-makers in our compulsory system. It is critical that they have the knowledge to undertake their duties and responsibilities in accordance with the law.”

Sherry’s statement, combined with submissions to the Government’s review of governance issues surrounding SMSFs, has prompted some sectors of the financial services industry to suggest that the Commonwealth might be tempted to regulate to ensure that SMSF trustees are required to meet the same standards as the trustees of major superannuation.

The head of Macquarie Adviser Technical Services, David Shirlow, is one of those who harbours deep concerns about the tenor of the submissions received by the Government with respect to SMSF governance and the likelihood that they might result in the imposition of a significant educational requirement on trustees.

Shirlow is particularly disturbed to note that at least some of the support for the imposition of educational standards had come from the submissions filed by the Financial Planning Association and the Association of Superannuation Funds of Australia.

“I really cannot think of any other professional association in Australia that would have suggested such a thing in circumstances where members are providing advice in the SMSF arena,” he said.

“The imposition of a compulsory educational requirement on SMSF trustees has the capacity to stop the growth of SMSFs in its tracks,” Shirlow said.

“It would therefore be interesting to ask the organisations canvassing such an arrangement whether that outcome would suit their purposes.”

Shirlow acknowledges the fact that data collected by the ATO has formed the basis for many of the criticisms of SMSF compliance, but suggests that the ATO survey findings need further analysis and explanation.

He said that this was particularly the case in circumstances where the information was collected as part of the distribution of a new ATO Trustee Declaration form.

Shirlow is equally concerned about suggestions made by Sherry with respect to the impact of fees and charges on SMSF trustees, particularly the minister’s suggestion that trustees might not be aware of all the costs and charges associated with fund administration.

Shirlow suggested that any attempt to place a cap on the charges associated with SMSFs would, effectively, be placing a cap on service provision.

FSWG

Beyond the question of SMSF trustees, Sherry has been very open about the Government’s immediate agenda, making clear that much will evolve out of both the Financial Services Working Group (FSWG) and, eventually, the review of the broader taxation system.

However, for financial planners the most immediate and discernible benefits are likely to flow from the efforts of the FSWG and, in particular, its efforts to reduce the size and complexity of disclosure documentation such as Product Disclosure Statements (PDSs) and Statements of Advice (SOAs).

The chief executive of the Financial Planning Association, Jo-Anne Bloch, said another key question confronting the financial services industry is retirement incomes adequacy and how Australia moves from the current 9 per cent superannuation guarantee to a regime closer to 15 per cent.

“It is a question of how do we get there and what is the right time,” she said. “But what is clear is that the Government is highly unlikely to mandate a further increase in the Superannuation Guarantee, so it is a question of what else might work.”

Bloch believes the timing of any changes with respect to retirement incomes adequacy cannot be separated from the current state of the market and questions of confidence.

According to Sherry, the FSWG is considering disclosure documentation in a staged process, with the over-arching aim being to facilitate short, simple and readable documents to better enable consumers to understand and compare products.

As a first step, the group has been tasked with developing a concise PDS for the First Home Saver Accounts as well as examining the issue of ‘within product’ and ‘intra-product’ advice with respect to superannuation products.

Product rationalisation

A key issue that has been pushed by both the Financial Planning Association and the Association of Superannuation Funds of Australia — product rationalisation — is also high on Sherry’s agenda and is something he explains as “creating a mechanism to help move investors out of outdated managed investment products into modern ones”.

The Investment and Financial Services Association (IFSA) has consistently argued that there is a “need for the introduction of a simplified, enduring legislative process for the restructuring and rationalisation of legacy financial services products”.

IFSA claims that the current lack of a single rationalisation process across financial products impedes systems enhancements and industry efficiency.

In its pre-Budget submission, IFSA claimed that there were currently some 6,000 financial products in the funds management, superannuation and life insurance industries and that a third of these products were closed to new investments.

It said that some of the benefits derived from the introduction of a single mechanism would be enhanced competitiveness, improved disclosure and reduced operational risk.

However, product rationalisation has been on the Commonwealth’s agenda for some time and, much like its predecessor, the Rudd Government’s major challenge is adopting a tax formula that appropriately facilitates transfers without unduly hurting revenue.

IFSA had plenty to be satisfied about when the Treasurer, Wayne Swan, handed down the Federal Budget in May, primarily because its chief executive, Richard Gilbert, had campaigned hard on the withholding tax issue and the push to make Australia an international financial services hub.

Not only did the Government deliver on the withholding tax issue, the Treasurer used his Budget speech to make reference to the desirability of Australia becoming an international financial services hub.

However, other elements of IFSA’s pre-Budget wish-list will be harder to achieve, particularly where there will be significant impacts on Commonwealth revenue, thus the industry may have to wait a lot longer for changes affecting the broader tax take.

Uniform laws

Not at the top of the agendas of organisations such as IFSA or the Financial Planning Association, but nonetheless at the core of a number of changes likely to be pursued by the Commonwealth, is the harmonisation of Federal and state financial services laws, particularly with respect to mortgage origination and insurance stamp duties.

A number of the major life and risk insurance companies such as Tower have been lobbying for uniform life insurance stamp duties, an issue that was also taken up by IFSA in its pre-Budget submission, which supported the Government’s push for greater uniformity in state regulation, including stamp duty.

IFSA said that, in particular, it was keen to see the development and introduction of a uniform model to simplify and streamline the payment of life insurance stamp duties on the basis that, currently, most states and territories have a different basis for levying stamp duty on life insurance.

It said in some states stamp duty was levied on the sum insured, some were premium based, some have a combination and some have no duty on life insurance but load duties on rider benefits, with the percentage of rates levied on life rider benefits varying from state to state and product to product.

Tax concessions

High on the wishlist of the Financial Planning Association and other organisations prior to the Budget had been a push to have tax concessions apply to financial advice — a move regarded as capable of making securing advice more attractive to Australian consumers.

The central element of the Financial Planning Association’s argument was that the current deductibility of arrangements with respect to advice provided by accountants and financial planners is inconsistent.

What is more, there is a further inconsistency with respect to whether the advice is paid for by way of commission or fee-for-service.

The good news for the financial services industry is that while May’s Federal Budget barely touched the edges of the industry’s reform wishlist, the Government has a range of initiatives on foot that are likely to lead to long-term change, not the least of which is a wide ranging review of the Australian taxation system and the continuing efforts of the FSWG.

While the Government has given no firm undertakings, there are also clear signs that it will move within the next 12 months to make advice readily available to a wider range of people, particularly access to general advice, an issue that has already been the subject of an FSWG consultation paper.

Bloch said it was clear from the Government’s initial response to the consultation paper that it was listening to the industry and accepting that one size does not fit all when it comes to financial advice.

She said that beyond what could be expected from the Government, the industry would be closely monitoring the actions of the regulators, with the Australian Securities and Investments Commission expected to make an announcement flowing from its Retail Investor Taskforce.

While the Government is clearly working towards the completion of a big picture with respect to financial services policy, the regulator is clearly tidying up loose ends, and financial planners might ultimately be the beneficiaries of that exercise.