FOFA – Page 2 – Digital Finance Analytics (DFA) Blog

Life Insurance Remuneration Reform Regulations

The Government has released draft regulations that will support the Government’s life insurance reform package to better align the interests of financial firms with consumers.

Remuneration relating to life insurance advice provided outside of superannuation was excluded from the ban on conflicted remuneration (remuneration likely to influence advice) introduced under the Future of Financial Advice (FOFA) laws.

A series of reports, including a review the Australian Securities and Investments Commission (ASIC), the industry-commissioned Trowbridge Report and the Financial System Inquiry (FSI), identified the need to better align the interests of providers of financial advice in the life insurance sector with consumer outcomes. As part of its response to the FSI, the Government announced that it would support a reform package put forward by industry.

The reform package introduced by the Life Act removes the exemption from the ban on conflicted remuneration, and introduces caps under which commissions will be permitted to be paid, as well as arrangements to ‘clawback’ commissions where policies lapse in the first two years. The reforms will commence on 1 July 2016.

The Regulation supports the reform package introduced by the Life Act by:

allowing the temporary inclusion of stamp duty relating to death benefits to be included in commission calculations while industry update its information technology systems;
prescribing circumstances where ‘clawback’ does not apply, such as in situations where a policy is cancelled automatically due to the age of the insured or where a premium rebate is offered to encourage customers to take up a policy; and
ensuring that existing life insurance remuneration arrangements are grandfathered in a manner broadly consistent with FOFA by ensuring that remuneration arrangements not effectively grandfathered by the Life Act
(i.e. employee-employer remuneration arrangements) are explicitly grandfathered in the Regulation. Grandfathering means that the existing rules continue to apply to existing arrangements, while new rules apply to new arrangements.

Closing date for submissions: Thursday, 28 April 2016

Time To Fix Financial Planning Properly

There will, no doubt, be more calls for a Royal Commission into the impact of poor advice provided by financial planners, following the reports of mis-advice at the NAB, which follows on from CBA, and a long list of other firms.

It is clear that there has been significant poor advice provided by some, perhaps influenced by target chasing, commissions, personal gain or errors. Many who received such poor advice will probably be unaware, and simply observe their portfolios are not performing as they expected. On the other hand, poor performance does not necessarily mean poor advice, it could be simply market dynamics, because most investments are inherently risky. That said, it is therefore hard to get a good read on how many people are impacted, but my guess it is into the many thousands, many of these victims do not have deep pockets so cannot fight back.

The superannuation balances of Australians now stand at more than $1.93 trillion so more households will need advice going forward. Much of that could still be conflicted in the current industry structures. Conflicted advice is right in the middle of the current industry problems, and whilst there are many excellent advisors doing the right think by their clients, the reputation of the entire industry is being trashed.

Despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide.

Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here. Any link between the two creates conflict and the risk of poor advice.

So, first we need to fix up the industry going forwards. Personally, I think the architecture of a solution is pretty clear, if unpopular from a market participants perspective. Next we need a mechanism to identify people who have received wrong advice, so it can be rectified. That of course is a complex process, and again will be resisted by the industry.

We do not need another couple of years of inactivity whilst yet more inquiries rake over the coals some more. Rather it is time for action.

NAB Financial Advisors Under The Microscope

According to the Sydney Morning Herald,

“The National Australia Bank has quietly paid millions of dollars in compensation to hundreds of clients given what it considers inappropriate financial planning advice since 2009.

The bank is the latest institution to face disturbing revelations of misconduct in its financial planning division, with a Fairfax Media investigation uncovering instances of forgery, “rogue advisers” and multiple sackings inside its financial advice arm.

A cache of confidential internal documents obtained by Fairfax Media reveals that, according to NAB, 31 of its financial planners were terminated, suspended or had their resignations “ensured” due to conflicts of interest, inappropriate advice, inappropriate practices or repeated compliance breaches

Disturbingly, the document states that these instances were not detected by the bank’s internal controls, but through client complaints or queries by authorities”.

This is further evidence that the financial advice sector is not up to scratch, and that despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems. Remember the superannuation balances of Australians now stand at more than $1.93 trillion.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide. Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here.

FSI – On Financial Advice

The FSI report discusses the alignment of consumer outcomes and financial advice firms, questions “general financial advice” and adviser qualification. The report recommends that the term “general advice” be changed to better reflect what is intended and that the financial adviser or mortgage broker should be required to clearly explain their association with the product issuer. In addition, advisers should be better qualified and cultural misalignment addressed.

The GFC brought to light significant numbers of Australian consumers holding financial products that did not suit their needs and circumstances — in some cases resulting in severe financial loss. Previous collapses involving poor advice, information imbalances and exploitation of consumer behavioural biases have affected more than 80,000 consumers, with losses totalling more than $5 billion, or $4 billion after compensation and liquidator recoveries. The changes outlined in this report should also significantly improve consumer confidence and trust in the financial system.The most significant problems related to shortcomings in disclosure and financial advice, and over-reliance on financial literacy. The changes introduced under the Future of Financial Advice (FOFA) reforms are likely to address some of these shortcomings; however, many products are directly distributed, and issues of adviser competency remain.

The current regulatory framework addresses advice on financial products. The framework makes an important distinction between personal and general advice:
• Personal advice takes account of a person’s needs, objectives or personal circumstances, whereas general advice does not.
• General advice includes guidance, advertising, and promotional and sales material highlighting the potential benefits of financial products. It comes with a disclaimer stating that it does not take a consumer’s personal circumstances into account.

However, consumers may misinterpret or excessively rely on guidance, advertising, and promotional and sales material when it is described as ‘general advice’. The use of the word ‘advice’ may cause consumers to believe the information is tailored to their needs. Behavioural economics literature and ASIC’s financial literacy and consumer research suggests that terminology affects consumer understanding and perceptions. Often consumers do not understand their financial adviser’s or mortgage broker’s association with product issuers. This association might limit the product range an adviser or broker can recommend from. Of recently surveyed consumers, 55 per cent of those receiving financial advice from an entity owned by a large financial institution (but operating under a different brand name) thought the entity was independent.

The Inquiry believes greater transparency regarding the nature of advice and the ownership of advisers would help to build confidence and trust in the financial advice sector. In particular, ‘general advice’ should be replaced with a more appropriate, consumer-tested term to help reduce consumer misinterpretation and excessive reliance on this type of information. Consumer testing will generate some costs for Government, and relabelling will generate transitional costs for industry — although these are expected to be small. The Inquiry believes the benefits to consumers from clearer distinction and the reduced need for warnings outweigh these costs.

Although stakeholders have provided little evidence of differences in the quality of advice from independent or aligned and vertically integrated firms, the Inquiry sees the value to consumers in making ownership and alignment more transparent. In particular, these disclosures should be broader than Financial Services Guide and Credit Guide rules currently require, and could include branded documents or materials. The Inquiry believes the benefits to consumers would outweigh the transitional costs to industry of effecting branding changes.

In addition, the report highlights the need to raise the competency of financial advice providers, and introduce a register of advisers. The register was announced recently but we argued it was not alone sufficient.

The Interim Report observed that affordable, quality financial advice can bring significant benefits for consumers. However, according to the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS), “the major criticism of the current system is that licensees’ minimum training standards for advisers are too low, particularly given the complexity of many financial products”. This affects confidence and trust in the sector and can prevent consumers from seeking financial advice.
A number of high-profile cases where consumers have suffered significant detriment through receiving poor advice, and a series of ASIC studies, have revealed issues with the quality of advice. For example, ASIC’s report on retirement advice found that only 3 per cent of Statements of Advice were labelled ‘good’, 39 per cent were ‘poor’ and the remaining 58 per cent ‘adequate’. Although these cases and many of these studies occurred before the FOFA reforms to improve remuneration structures, this is not the only issue. Adviser competence has also been a factor in poor consumer outcomes. ASIC’s review of advice on retail structured products found insufficient evidence of a reasonable basis for the advice in approximately half of the files.

Under the current framework, ASIC guidance sets out the minimum knowledge, skills and education for people who provide financial advice to comply with the Corporations Act 2001 and licence conditions. The training standards vary depending on whether the adviser is dealing with Tier 1 or Tier 2 financial products. As a minimum, current education standards are broadly equivalent to a Diploma under the Australian Qualifications Framework for Tier 1 products, and to a Certificate III for Tier 2 products.

Register of advisers
As the PJCCFS stated, “the licensing system does not currently provide a distinction between advisers on the basis of their qualifications, which is unhelpful for consumers when choosing a financial adviser”. ASIC currently has a public record of financial advice licensees and is notified of authorised representatives. However, ASIC has little visibility of employee advisers, or access to the type of information that an enhanced register could hold, such as length of experience and employment history. ASIC argues that transparency about advisers through an enhanced register is an important piece missing from the regulatory framework. Most stakeholders support introducing such an enhanced register.

Conclusion
The benefits of improving the quality of advice are significant. To achieve this, the Inquiry believes that minimum competency standards should be increased and the current Government process to review these standards should be prioritised.
In advance of the completion of the Government process, some adviser firms have recently announced they are increasing their own qualification requirements. However, low minimum competency standards have been a feature of the industry for a substantial length of time, and change is needed across the board. Many stakeholders are highly concerned about the low minimum education standards of financial advisers, with most supporting lifting education requirements to degree level.

Internationally, Singapore and the United Kingdom are seeking to raise minimum competency standards. The Inquiry is of the view that Australia should set high standards in comparison with peer jurisdictions. Although the Inquiry does not recommend a national exam for advisers, this could be considered if issues in adviser competency persist. For individual advisers and firms, the cost of undertaking further and ongoing education would be significant. However, this is a necessary transition to move towards higher standards of competence and would deliver long-term benefits for consumers. The cost would be mitigated by an appropriate transition period. Raising the minimum competency standards may increase the cost of advice for consumers. However, various cost effective market developments are emerging, such as scaled or limited advice and using technology to deliver advice.61 The Inquiry encourages advisers to develop new models for delivering advice more cost effectively to sit alongside existing comprehensive face-to-face advice models.

The requirement for higher education standards may cause some existing advisers to exit the industry and may deter some from entering, potentially causing an ‘advice gap’ for some consumers. Transitional arrangements to give advisers appropriate time to upgrade their qualifications would help manage this risk. Raising standards would also increase confidence and trust in the industry, encouraging more individuals to choose financial advisory services as a career path, and increasing the supply of financial advisers.

The Inquiry has not made a recommendation in relation to mortgage brokers. However, it considers that ASIC should continue to monitor consumer outcomes in this area and the performance of the industry in relation to its obligations under the National Consumer Credit Protection Act 2009. In relation to the register of advisers, the Inquiry supports the establishment of the enhanced register to facilitate consumer access to information about financial advisers’ experience and qualifications and improve transparency and competition. Further consideration could be given to adding other fields, such as determinations by the FOS.62 The register should be designed to take account of possible future developments in automated advice and record the entity responsible for providing such services.

At the heart of the matter is the question of aligning the interests of financial firms and consumers. This is a question of culture.

Recent cases of poor financial services provision raise serious concerns with the culture of firms and their apparent lack of customer focus. Research in 2009 suggested that financial firms may not be implementing systems and procedures within their organisations that promote ethical culture and integrate governance, risk management and compliance frameworks. In 2011–12, approximately 94 per cent of ASIC’s banning orders involved significant integrity issues, where the alleged conduct would breach professional and ethical standards and/or the conduct provisions in the Corporations Act 2001. The remaining 6 per cent of cases involved competency issues. The Inquiry considers that cases of consumer detriment and poor advice reflect organisational cultures that do not focus on consumer interests. Such cultures promote short-term commercial outcomes over longer-term customer relationships. This has contributed to a lack of consumer confidence and trust in the system. In research undertaken by Roy Morgan, only 28 per cent of participants gave financial planners ‘high’ or ‘very high’ ratings for ethics and honesty, and trust in bank managers was held by just 43 per cent of participants. In addition, ASIC found only 33 per cent of stakeholders agreed that financial firms operate with integrity.

Banning power
ASIC has observed phoenix activity in financial firms, where senior people from a financial firm with poor operating practices may establish a new business or move to an alternative firm. Currently, ASIC can prevent a person from providing financial services, but cannot prevent them from managing a financial firm. Nor can ASIC remove individuals involved in managing a firm that may have a culture of non-compliance.

Conclusion
To build confidence and trust in the financial system, financial firms need to be seen to act with greater integrity and accountability. The Inquiry believes changes are required not only to the regulatory regime and supervisory approach, but also to the culture and conduct of financial firms’ management, which needs to focus on consumer interests and outcomes. A change in culture in line with community expectations should promote confidence and trust in the financial system and limit the need for more significant regulation. Raising standards of conduct and levels of professionalism would require both a coordinated industry approach and focus of attention by individual firms. Industry associations could lead this initiative, with stakeholder input from ASIC and consumer organisations. Introducing or enhancing individual firm or industry codes of conduct is one way in which industry could set raised standards and hold themselves accountable. An enhanced banning power should improve professional behaviour, management accountability and the culture of firms, by removing certain individuals from the industry and preventing them from managing a financial firm. This should also include individuals who are licence holders or authorised representatives, or managers of a credit licensee. It should prevent those operating under an Australian Financial Services Licence from moving to operate under a credit licence and vice versa.

The Inquiry notes the FOFA ban on conflicted remuneration and associated measures are relatively new and should bring significant change to the industry and benefits for consumers. However, some incentive-based remuneration models remain, including grandfathered arrangements and other specific exclusions. The Inquiry believes that these instances of conflicted remuneration should be monitored, and Government should intervene if further significant issues are observed. Specific attention is required in the stockbroking sector in the immediate future. Unlike in the life insurance industry, a recent review of practices in stockbroking has not been undertaken. The Inquiry considers that ASIC should review current remuneration practices in stockbroking and advise Government on whether action is needed. The Inquiry believes that better aligning the interests of financial firms with consumer interests, combined with stronger and better resourced regulators with access to higher penalties, should lead to better consumer outcomes.

Given the current state of FOFA, there is an opportunity to get this reform on the right footing based on the recommendations. Most importantly, we believe product sales should be clearly separated from advice. Advice should separated from commissions and payments. Product sales can continue, but separate from advice. We agree that General Advice is not a helpful term.

Enhanced Financal Adviser Register Necessary, But Not Sufficient

The Treasury has released their proposals for an enhanced Financial Adviser Register for consultation. On 17 July 2014, the Government announced that it would establish an enhanced register of financial advisers, and on 24 October 2014, the Government announced details of the register’s content. Whilst the register is sound (we do not know how many advisers are operating in Australia), and the enhancements are appropriate given the issue of trust with respect to financial advice, DFA is of the view there are still significant gaps in relation to remuneration of advisers and potential conflicts. You can read our recent comments. In addition, further consideration needs to be given to how someone would find a suitable adviser. The MoneySmart Government website refers people to the professional associations, advice from friends and you can check the adviser or licensee’s name on ASIC Connect’s Professional Registers. However, currently advisers who are ’employee representatives’ will not appear on the register as their employer holds the AFSL. This is a muddled processes, and leaves consumers in the dark. More fundamental consideration needs to be given to this from a consumer perspective.

Turning to the current Exposure Draft, the Regulation proposes to make a number of amendments to the Corporations Regulation 2014 to:

enable ASIC to establish and maintain a public register of financial advisers; and
for Australian Financial Service licensees to collect and provide information to ASIC concerning financial advisers that operate under their licence.

A Consultation Note has also been developed to invite feedback from stakeholders on the key drafting issues, to ensure that the Regulation will implement the Government’s policy intent. This Consultation Note also includes: information on timing to enable the Register to be implemented by March 2015; and detail on the form lodgement fee increases necessary to fund the register. Submissions can be made to 17th December 2014.

Picking up on the background in the supporting papers, currently, a person who carries on financial services businesses must obtain and maintain an Australian Financial Services Licence (licence) with the Australian Securities and Investments Commission (ASIC). This person is referred to as a financial services licensee (licensee). Among other things, a person carries on a financial service business if they provide financial product advice. Currently, financial advice is classified under two categories. ‘Personal advice’ is financial product advice which takes into account the personal financial circumstances of the client. Any other financial product advice that does not take into account the client’s personal circumstances is termed ‘general advice.’ Individuals may provide financial product advice in a range of circumstances. They may be licensees themselves; or directors or employees of licensees. They may be non-director/non-employee representatives of licensees – these individuals are referred to as ‘authorised representatives’. In certain circumstances, an authorised representative can ‘sub-authorise’ another authorised representative to act on behalf of the licensee.

‘Representative’ is the overarching term used to describe authorised representatives, director representatives and employee representatives (including those that operate under a related body corporate of the licensee) and any other person acting on behalf of the licensee, that provide financial services under a licence. Responsibility for day-to-day supervision of representatives operating under a licence is devolved to licensees. Financial services licensees are not required to provide ASIC with certain information on director or employee representatives that operate under their licence. This may be contrasted with the requirements imposed on a licensee when it authorises a non-employee or non-director representative to act on its behalf. For these authorised representatives, licensees must lodge certain information with ASIC, and then ASIC must maintain a register of these individuals. Consequentially, there is no register that provides information to consumers, the financial advice industry, or ASIC regarding employee and director representatives of licensees. ASIC is currently only required to maintain public registers of licensees and authorised representatives of licensees. These registers provide information on a licensee or authorised representatives’:

registration/licence number;
licensee name/authorised representative name;
address;
start date of registration/licence;
history of previous licensees (for authorised representatives only);
status (whether the licensee/authorised representative is currently authorised); and
details of any conditions or restrictions about the registration.

As ASIC currently maintains registers of licensees and authorised representatives, but not other representatives of licensees, the total number of financial advisers operating in Australia is not known. There is also limited information available about financial advisers who are director or employee representatives. This transparency gap means consumers cannot easily check whether a particular individual is authorised to give them financial advice, or look up other information that would be valuable to them when verifying the credentials and status of an individual adviser. This gap also means that ASIC has limited visibility of the natural persons providing personal advice on more complex products to retail clients, and is restricted in its ability to identify, track and monitor these individuals who move from licensee to licensee as employees or directors. As a result, this limits ASIC’s ability to take action against individual advisers over and above action that relates to the relevant licensee.

The proposed new law will require a register of all individuals who provide personal advice on more complex products to retail clients under a financial services licence will enable consumers to verify that their individual adviser is appropriately authorised to provide advice and find out more information about the adviser before receiving financial advice. A comprehensive register will also assist ASIC to a regulate advisers who move between licensees as well as enabling the financial advice industry to better protect itself from rogue financial advisers. The new register will be limited to those providing personal advice on more complex products to retail clients – focussing on the area where rogue advisers or ‘bad apples’ present the greatest risk to consumers. The new register will build from the existing registers, and also contain information informing consumers of an adviser’s experience, their recent work history, the eventual owner of licensee they work on behalf, as well as information about whether ASIC has banned, disqualified or obtained enforceable undertakings in relation to them. It is intended that the register will, in time, also contain educational qualifications and professional association membership information. This would require further amendments to the Principal Regulations. The benefits of the enhanced public register include:

providing an easily accessible central record of the competency, employment history and misconduct of individual advisers;
assisting ASIC in its compliance activities and ability to respond to problem advisers;
assisting the industry itself to address risk where ‘bad apples’ are concerned; and
providing broad support for industry efforts to improve professionalism of the industry.

FOFA Disallowed In Senate

The government’s changes to FoFA are now under threat, following a move which saw four crossbench senators join with the Labor and the Greens to overturn the changes to the financial advice laws. This reverses some of the changes which as we discussed before were aligned with the major banks, and saw consumer protection eroded. As a result, Labor now appears to have secured the support it needs in the Senate to reverse the regulations. This overturns the earlier deal with the government and the minor Palmer United Party (Pup) in July to push through the Senate changes to Labor’s Future of Financial Advice (FoFA) laws.

Pup Senator Jacqui Lambie, and crossbenchers Ricky Muir and John Madigan, and independent senator Nick Xenophon have joined with the opposition on the issue. Xenophon called it “a coalition of common sense”.

“Our common, unequivocal objective is to have the government’s FoFA regulations disallowed today in the Senate because they are unambiguously bad for consumers”

ASIC commented:

ASIC notes the Senate has disallowed the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014.

ASIC will take a practical and measured approach to administering the law as it now stands following the disallowance of the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014. We will take into account that – as a result of the change to the law that applies to the provision of financial advice – many Australian financial services (AFS) licensees will now need to make systems changes. ASIC recognises this issue may arise in particular areas, including fee disclosure statements and remuneration arrangements.

We will work with Australian financial services licensees, taking a facilitative approach until 1 July 2015.

We believe this represents an important opportunity to revisit the fundamental flaws in FOFA as originally incarnated, and exacerbated by the recent government amendments. But is also continues the uncertainty around the nature of good financial advice, something which is critically important to get right, given the swelling superannuation balances in Australia, now worth $1.85 trillion.

Savers Quest For Yield

The CPI data which came out from the RBA yesterday registered 3%. This was very bad news for households with savings in deposit accounts at the banks, because ever more are finding that returns after tax are well below CPI. This is part of a worrying trend for many, and is prompting them to seek out alternative and possibly higher risk saving vehicles. Today we examine this issue in the light of latest data from our household surveys.

First, here are some benchmark savings rates mapped to the CPI and RBA benchmark rate. Many savings rates are now below the CPI, even before we consider the tax implications, as of course income from deposits is taxable. More and more households will see their savings eroded in real terms. It may not be as bad as in the UK, where thanks to even lower base rates, central bank intervention and other factors, deposit rates are around 1% and inflation above 3%, but its getting all too familiar.

The RBA has observed in its monthly updates that investors are seeking higher risk, higher return alternatives to bank deposits. Our surveys illustrate this nicely. We have been asking savings households about their intentions each month. Now, up to 80% of households with savings of more than $250k are actively seeking alternatives. It is lower for smaller balances, because typically these need to be readily available in case of emergencies. But even here, 35% are reconsidering their options.

We also split the analysis between those saving within SMSF and those outside, as SMSF have advantaged tax treatment we expected these savers to be less concerned, but not so. We found that more of those saving via a SMSF were more actively seeking alternatives than those saving in their own names. This is a clue to why SMSF’s are investing direct in property.

For households looking beyond bank deposits, it is worth highlighting they are moving away from secure savings options, because of course the government guarantee on deposits remains at $250,000 per customer per institution without charge. So if households start looking for other options, they might consider shares (though the market is close to its highs), property (will prices rise further?) or other wealth management products, where fees are not well disclosed, advisors may not give best advice, and returns are uncertain. There are certainly no simple alternatives. That in turn allows the banks to let their deposit rates slip, source funding cheaper from overseas wholesale markets, and by maintaining loan deposit rates, bolster their profits. We are mandated to save, yet the fact is, its hard to find solutions which provide returns above inflation at reasonable risk. Caveat Emptor!

The incredible morphing FOFA beast

I wrote a piece, published today for the ABC News – The Drum, arguing that far from reducing the cost of financial advice and improving access, the PUP-approved FOFA changes will favour the big banks and allow planners to provide poor advice. It was based on my earlier and more details post published here, but updated to take account of latest developments.

Why FOFA Matters So Much

Last week, the Future of Financial Advice regulations were tabled in Parliament, following the recently published Senate review. As currently incarnated they have the potential to drive a coach and horses through the original intentions of the FOFA reforms. Today we explore why this is so, and highlight some of the consequences for both the managed funds industry and investors.

First, we need to remember that according to the ABS, as at 31 March 2014, the managed funds industry had $2,338.8bn funds under management, an increase of $31.3bn (1%) on the December quarter 2013 figure of $2,307.5bn. This is the marked to market value of the overall portfolio, helped by the facts that S&P/ASX 200 increased 0.8%; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 0.6% and the A$ appreciated 3.1% against the US$. Here is the trend chart from the ABS series.

Looking at the splits by type, superannuation is the largest contributing element, with 74% of the total, or $1.706.1bn. This is not surprising seeing as we have a forced savings scheme for households.

The ABS also show the industry flows in their report. Local Investment Managers have $1,520 bn invested, whilst $828.6 bn are invested with managers overseas, or directly into the market.

There has been considerable consolidation in the managed funds industry, looking at the managers themselves, the financial planners, and the wealth management platforms. The big banks are estimated to have about 80% of the financial planners, and are behind the bulk of the wealth management platforms and fund managers. This significant industry concentration is bad for competition, households and savers. We discussed this at length in our earlier series on superannuation. This is part of a wider consolidation within financial services, and should not have been allowed to happen, because such value chain consolidation allows a small number of players to control the industry, reduce competition and keep fees high. We recently covered the question of wealth management fees, those in Australia are significantly higher than elsewhere, despite the higher savings per capita. There have also been reports of poor or fraudulent advice to investors, where advisors recommended their own solutions, even if they were not the best for the investor concerned. Of course the original FOFA proposals was a response to this. We covered the history of FOFA up to the recent Senate Inquiry here.

So, now lets look at the latest regulated changes. On 30 June 2014, the Government registered the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014. These changes to the FoFA laws were effective from 1 July 2014, and note they are yet to be tested in the Senate, maybe the regulatory amendment approach was seen as a way to avoid scrutiny. The changes are

to remove the Opt-In requirement;
to require Fee Disclosure Statements (FDS) to apply prospectively – for new clients from 1 July 2013 only;
to remove the requirement to satisfy section 961B(2)(g) (the ‘catch-all’ provision) from the best interests duty;
to allow for scaled advice;
to amend the grandfathering regulations in order to remove the current restrictions on trade for financial planners who may change employers/licensees, and enable fair market competition for financial planners selling their business;
to ban commissions on investment and superannuation products, and eliminate the possibility of a re-introduction of these commissions through the previously proposed general advice exemption.

The Governments position is that financial planners will continue to provide advice in the best interests of their clients, without the catch-all provision, and that as commissions have been banned for providing general advice, (despite the fact that advisors may receive other remuneration options and bonuses), they will not be conflicted. Therefore, the changes will reduce the costs of advice, and provide greater access to potential investors.

We are not convinced. In fact, we think that the latest adjustments will lead to confusion in the industry, enable the large banks to continue their consolidation and control of the industry, and will lead to investors potentially being given poor advice.

First, it will be easy to get round the ban of commissions. The original FOFA would have outlawed financial planners working in the banks to receive any reward for suggesting their own products. In addition, any fees or commissions would have had to be disclosed. Now, planners can provide general product advice, and get rewarded. In addtion, bank tellers, and other bank employees are now able to receive bonuses for selling products under general advice, provided they have an appropriate “target” and it is not called a commission. This creates a conflict.

Second, the original FOFA did not really separate specific advice (where a planner takes the history and needs of a client, to work out what their best investment strategy might be) and general product advice, or splitting advice from product sales. Product sales were overlaid with considerable obligations and requirements, more befitting advisors. In addition, people selling products could not be rewarded for achieving sales (as happens in most sales environments). What should have happened was a clear distinction between sales and advice, with sales able to be remunerated, but advisors not. Advisors would never sell products, so could not be conflicted.

The proposed changes which the Senate Inquiry considered were to allow planners to receive a proportion of their income from product sales, with the caveat that it should be in the best interests of the client. However, now in the regulated clauses, this best interest element has gone missing. Because the best interest clause has been removed, financial planners are now able to point potential investors to their own bank products, provided they meet their savings requirements, even if they are not the best products. So, a planner has no obligation to point to the best product in the market, even if that is with a competitor.

So, the amendments as currently in the regulations, work in favour of the big banks, means that planners can remain conflicted, tellers can sell products, and the potential to release real competitive tension into the market as products would have be compared cross market (with an bias towards cheaper?) are all gone.

We can only hope the new Senate will have the chance to review and change the regulations. The really interesting question, is whether the latest round of changes reflect a poor understanding of how the wealth management industry works, or whether the big banks, protecting their own highly profitable enterprises have lobbied successfully. Remember wealth management fees in Australia are three times higher than they should be!