2015: A year of policy challenges
Mike Taylor reflects that 2015 was a year of policy challenges for the financial services industry, many of which will continue into 2016.
If one thing distinguished 2015 as an important year for the Australian financial planning industry, it was the Life Insurance Framework (LIF) and the manner in which it will irrevocably change the business models of life/risk advisers.
In a year during which the findings of the Financial System Inquiry (FSI) were front and centre alongside the recommendations of the Parliamentary Joint Committee (PJC) and the Government's moves to change superannuation funds governance, it was only the LIF process which came fully to fruition.
As 2015 comes to a close, the recommendations of the Parliamentary Joint Committee (PJC) inquiry into education and professional standards remain to be fully implemented despite broad bi-partisan and industry support for their objectives.
Similarly, the recommendations emanating from the FSI remain a work in progress with some elements such as flat risk commissions overtaken by the LIF process while others must await the outcome of the Government's review of taxation arrangements.
Where superannuation funds governance is concerned, the new Assistant Treasurer, Kelly O'Dwyer, has voiced her determination that the changes are necessary and must happen, but the make-up of the Senate suggests they will pass the House of Representatives only to be ultimately vetoed by the Labor Party, the Greens and some independents in the Senate.
Less problematic for the Government are the changes relating to default funds under modern awards in circumstances where moves are afoot to utilise the renewal of awards and enterprise bargaining arrangements to change the process.
For the financial planning industry, the largest continuing issue will be the manner in which the recommendations of the PJC inquiry are implemented together with the manner in which the Government ultimately chooses to turn its responses to the FSI recommendations into reality.
For the superannuation industry, the key issues remain the Government's intended changes to superannuation fund governance and default funds under modern awards.
The Life Insurance Framework
The Trowbridge report, which gave rise to the LIF grew out of the late 2014 agreement between the Financial Services Council (FSC) and the Association of Financial Advisers (AFA) to form the Life Insurance Advice Working Group chaired by former Australian Prudential Regulation Authority (APRA) executive, John Trowbridge.
That process had, in turn, evolved out of a highly critical Australian Securities and Investments Commission (ASIC) review of Life Insurance Advice in October, 2014.
The AFA entered into the Working Group process with a view to achieving a workable outcome for its members. In the event, the recommendations delivered by Trowbridge in his final report proved highly problematic for the organisation, particularly with respect to future upfront commissions and responsibility periods.
In the face of a clear message from the then Assistant Treasurer, Josh Frydenberg, that the parties deliver an outcome from the Trowbridge recommendations or face Government intervention, the AFA, together with the FSC and the Financial Planning Association delivered a position which became known as the LIF.
The first iteration of the LIF, announced by Frydenberg in late June comprised of:
1) Maximum total upfront commission of 60 per cent of the premium in the first year of the policy, from 1 July 2018.
2) Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 January 2016.
3) Three year retention (‘clawback') period, to commence from 1 January 2016 to apply as follows:
- In the first year of the policy, to 100 per cent of the commission on the first year's premium;
- In the second year of the policy, to 60 per cent of the commission on the first year's premium; and
- In the third year of the policy, to 30 per cent of the commission on the first year's premium.
4) Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the Future of Financial Advice (FOFA).
5) Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.
6) Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 January 2016.
7) Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.
8) Maximum total upfront commission of 60 per cent of the premium in the first year of the policy from 1 July 2018.
The major rub with the LIF arrangements, particularly in the eyes of life/risk advisers, was the three-year clawback — something that was only addressed when the issue was reviewed by O'Dwyer in early November.
At that time the new minister announced:
1) Maximum total upfront commission of 60 per cent of the premium in the first year of the policy, from 1 July 2018.
2) Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 July 2016.
3) Two year retention (‘clawback') period, to commence from 1 July 2016 to apply as follows:
3.1) When a policy lapses or the premium decreases in the first year of the policy, to 100 per cent of the commission on the first year's premium; and
3.2) When a policy lapses or the premium decreases in the second year of the policy, to 60 per cent of the commission on the first year's premium.
4) Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the FOFA laws.
5) Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.
Transitional arrangements:
6) Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 July 2016.
7) Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.
8) Maximum total upfront commission of 60 per cent of the premium in the first year of the policy from 1 July 2018.
PJC Inquiry into education and professional standards
While the processes around the Life Insurance Framework gained the most media attention in 2015, there was little question that in the minds of those seeking to turn financial planning into a profession, implementation of the PJC Inquiry into education and professional standards should have been front and centre.
The PJC recommendations were tabled in the Parliament in December, 2014, but as Money Management was going to press 12 months later, implementation of many of those recommendations represented a work in progress tied to factors such as the Government's response to the FSI.
The key elements of the PJC recommendations were:
• A minimum degree qualification for all new financial planners;
• The Finance Professionals Education Council (FPEC) to become an independent body and gatekeeper of minimum education standards and requirements, setting the curriculum for the audit of education providers;
• The FPEC to be controlled and funded by professional bodies approved by the Professional Standards Councils, which are required to establish codes of ethics which are compliant with the requirements of a Professional Standards Scheme and are approved by the Professional Standards Councils;
• Mandatory ongoing professional development for financial advisers;
• Completion of a structured professional year as a prerequisite to being registered as a financial adviser;
• Mandatory membership of an approved professional body;
• A co-regulatory model that recognises the role of professional bodies in maintaining and enforcing codes of conduct;
• The term ‘general advice' should be replaced with ‘product sales information', and the term ‘personal advice' replaced with ‘financial advice';
• The term ‘financial adviser' and ‘financial planner' to be enshrined in the Corporations Act, and only individuals registered as a financial adviser can use these titles; and
• A national competency exam for financial planners as a prerequisite to being registered as a financial adviser.
Importantly, the Government's response to the FSI substantially endorsed the recommendations of the PJC, particularly the imposition of higher educational standards for financial planners, based on degree qualifications.
Superannuation fund governance
The Coalition Government came to power having flagged its intentions with respect to superannuation fund governance and default funds under modern awards.
The pre-election intention of the Government was to place superannuation funds under the same governance arrangements which apply to publicly-listed companies on the Australian Securities Exchange (ASX).
In the event, the former Assistant Treasurer, Josh Frydenberg, outlined a regime requiring at least two-thirds independent directors inclusive of an independent chairman.
The Government's position has been strongly opposed by numerous industry funds led by Industry Super Australia (ISA) which has argued strongly that the changes are politically motivated and directly targeted at industry funds.
Importantly, a Senate Committee inquiry into the Government's changes received submissions from both the Treasury and APRA supporting the proposed Governance changes.
As well, APRA member, Helen Rowell used an address to Australian Institute of Superannuation Trustees (AIST) governance forum to argue the case for change — something which earned the ire of two Labor Senators in a dissenting report from the Senate Committee.
While the Senate Committee majority report has backed the governance changes, the legislation is still expected to experience a problematic passage through the Senate.
Default funds competition
The Government, strongly backed by the FSC, has continued to pursue changes to default superannuation fund arrangements on the basis of having them opened up to all complying MySuper funds.
It is a measure of the partisan nature of the continuing debate around default funds that Industry Super Australia chief executive, David Whiteley, has consistently referred to the Government's moves as being the result of a lobbying campaign by the major banks. He has also described the current regime as a "safety net" for workers who do not actively select their own fund.
Despite the strong push back from both the industry funds and the Australian Labor Party, the Government has maintained its determination to pursue the default fund changes, with O'Dwyer, reinforcing the position.
As recently as mid-November, O'Dwyer used an address to an FSC breakfast to state:
"It is critical that people are able to make retirement savings decisions that are best for them and their future. Around two million Australians are currently stopped from choosing which fund their compulsory employer superannuation will be paid into because they are covered by an enterprise bargaining agreement or workplace determination. The Government will extend choice of fund arrangements to more employees under enterprise agreements and workplace determinations made from 1 July 2016, consistent with the recommendation of the Inquiry. Not having choice of fund can result in employees having multiple funds. This means employees can end up paying multiple fees and insurance premiums, reducing their retirement income. More choice will promote member engagement, and reduce fees through greater competition."
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