Another Financial Advice Inquiry: Australian Super Worlds Second Best or Too Complex?

Thursday 16 October 2014 @ 11.59 a.m. | Corporate & Regulatory | Taxation

On 4 September 2014, the Senate referred an inquiry looking into the Scrutiny of Financial Advice to the Senate Economics References Committee (the SERC). The reference requested an inquiry be carried out and a report by the first sitting day of the Federal Parliament in July 2015 (note: submissions close on 5 December 2014).

The reference is reported to follow from dissatisfaction with the Government’s amendments to the Future of Financial Advice (FOFA) legislation by the opposition and independents in the Senate and the inquiry is being called for by Labor Senator, Sam Dastyari. The inquiry represents yet another review into the protections afforded to financial advice consumers.

Status of Current Financial Advice Legislation

Currently the Federal Government's Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (the FOFA Bill) has moved past the House of Representatives and is in the Senate (as at 1 September 2014) where it also awaits further review by the Senate Economics Legislation Committee (the SELC).

With respect to the FOFA Bill there is also the fact that the opposition has pursued several disallowance motions to cancel the FOFA amendment regulations enacted in July 2014 and that there is still another disallowance motion on foot moved by Senator Williams, the Chair of the Standing Committee on Regulations and Ordinances which is not due to be voted on until December 2014.

What the SERC Inquiry will Encompass

The SERC review is to look at the:

"Implications of financial advice reforms, with particular reference to:

  •  the current level of consumer protections;
  • the role of, and oversight by, regulatory agencies in preventing the provision of unethical and misleading financial advice;
  • whether existing mechanisms are appropriate in any compensation process relating to unethical or misleading financial advice and instances where these mechanisms may have failed;
  • mechanisms, including a centralised register, that would ensure financial planners found to have breached any law or professional standards in their employment are transparent, for both the sector and consumers;
  • how financial services providers and companies have responded to misconduct in the industry; and
  • other regulatory or legislative reforms that would prevent misconduct; and any related matters."

Former Government Ministers Critical of Financial Advice Industry

Interestingly, at a time when the Financial Advice Industry is increasingly under the micro-scope and the subject of government inquiry and review, the ABC has reported that:

"A day after Australia's superannuation industry was voted second best in the world behind Denmark, it has been given a savaging by two former government ministers."

The ABC report refers to comments by former Liberal Treasurer Peter Costello who has: "accused the industry of self interest and acting like spoilt brats . . ." and to comments by former Labor superannuation minister Nick Sherry who has written that: "Australia's retirement savings system is the world's most complex".

Mr Costello's comments are reported as being from a superannuation industry conference, where he also pointed out that:

  • in his view the industry was mostly interested in getting more money to manage as such usually meant more fees, indicating that Australians are paying $20 billion a year in fees, a process, Mr Costello is reported as saying, "making superannuation industry participants very rich".
  • in Mr Costello's view the industry is too focused on its role as provider and not focused enough on the ". . . people for whom this industry exists, . . ." He argued that mostly the returns in the industry follow the equity market and that in his view ". . . millions of Australians who give the super industry 9.5 percent of their salaries are generally not impressed with the sector".

The ABC report also refers to an article by former superannuation minister in the Rudd Labor government, Nick Sherry, who has also criticised the Financial Advice Industry, with his key concern being its "complexity". To support this, Mr Sherry is reported as saying that the "wide range of electable options makes the system unwieldy and costly". As particular examples, he cites disability and unemployment insurance, consolidation of funds, estate rules, salary sacrifice and early retirement arrangements as adding unnecessarily to complexity.

Mr Sherry is also reported as saying that insurance provided within superannuation is a key area that is ripe for reform saying that it ". . . diverts resources from retirement income, . . ."

Another point made by Mr Sherry, reported by the ABC, is the inconsistency of existing "transition to retirement" provisions which are available from age 55, even though the pension age is set to rise from 65 years to 70 years of age.

Ahead for the Financial Advice Industry

Given the above inquiry, the progress of the legislation and the comments about the industry from all sides of government, it is likely that the financial advice industry, its structure and practice will remain in the news for quite a while to come.

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