Common sense tells you that if you cut tape lengthwise you end up with twice as much. The Coalition’s plans to cut red tape in the financial services industry by diluting the Future of Financial Advice reforms could well end up costing us far more than the $ 190 million a year saved in compliance costs.
To put it into perspective, at a Senate inquiry into Australian Securities and Investments Commission’s performance this week, chairman Greg Medcraft estimated the Storm Financial collapse cost it $ 50 million. For victims it was far worse. Almost $ 3 billion in investor funds was lost, forcing many of them onto the taxpayer-funded pension.
Storm Financial is one of many scandals made possible by the presence of a conflicted remuneration model and fuelled by boiler room cultures.
Some scandals get buried, while others only come to light when a whistleblower such as Jeff Morris comes forward. Morris and a group of insiders exposed a boiler room culture inside Commonwealth Bank’s financial planning division in 2008 that encouraged advisers to move clients to CBA products, which ultimately hurt a number of people. Seven planners were ultimately banned and the bank entered an enforceable undertaking with ASIC until October 2013.
But it is a salutary lesson of the power – and inherent conflicts – of vertical integration. A glaring example of this was in April 2008 when a few Commonwealth Financial Planning managers, worried they would not meet their bonuses, called on the planners to tap massive deposit books and encourage customers to switch to mortgage funds (which gave a tidy trailing commission and which were frozen in October 2008 because they were not covered by the government’s guarantee).
”This was so everyone – including the managers – would hit their full-year targets and qualify for a hefty bonus … it was big money at stake,” one senior planner said.
The original FOFA reforms came about to correct some of the more blatant gaps in the standards of financial advisory practice on the basis that commissions influence behaviour. While the FOFA reforms did not address the conflicts of interest of vertically integrated institutions such as banks owning wealth management arms, which manufacture the products and use planners, it did try and ban commissions.
The proposed amendments, introduced by Assistant Treasurer Arthur Sinodinos, further embed the vertically integrated model by allowing commissions to be charged for general advice. This was never mooted before the election.
Sinodinos’ logic for carving out general advice is that it often educates and informs clients, providing many clients with financial information they would otherwise be unable to afford. This might be so, but at what potential cost?
Given the banks and AMP own or are affiliated with up to 80 per cent of financial planners, the ability to earn a commission on general advice can be likened to owning a golden goose.
It means the bank tellers – now known as customer service operators or customer service representatives – can sell products and collect commissions as long as they issue general advice, or advice that is not specific to a customer’s needs. If they issue a disclaimer, their advice is not personal, they can collect the commission.
This means the ”tellers” do not have to fill in financial statement advice forms or be accredited.
It is hard to understand how this amendment can be good for consumers.
The Coalition is obviously relying on the consumer protection law that any benefits given to a licensee will be banned if it could reasonably be expected to influence the product selection. How a commission-driven bank teller who places one in-house product in front of a consumer will not be influencing which product that consumer chooses is hard to imagine.
The Coalition’s various amendments to the country’s $ 1.7 trillion retirement savings have opened up a number of hornets’ nests. For instance, Financial Standard reports that BT Financial Group is planning to pitch its MySuper product to at least 30,000 small to medium-size employers (SMEs) who bank with Westpac via Westpac’s business bank if the government proceeds with its plan to take super out of modern awards.
There is no doubt the current award system has its own set of conflicts, but the current proposal opens up another set of conflicts that are detrimental to consumers.
For starters, it would allow a bank manager to sit down with an SME and spruik the bank’s other superannuation products as the default fund for that SME’s employees.
In the most egregious of cases where an SME is desperate for a loan, it could encourage some bank managers to engage in third-line forcing, where the SME only gets a bank loan on the condition it takes up other products.
Stats compiled by Rice Warner Actuaries estimate the FOFA reforms would boost Australians’ private savings under advice by $ 144 billion by 2027. It estimates the average cost of advice would fall from $ 2046 before the reforms to $ 1163 after the reforms by 2027. They are compelling numbers that need to be considered in all this talk about red tape.