tip off

Coalition embraces big bank gouge that even Howard rejected

The Abbott government wants to allow conduct by financial planners that will boost the banks and has long been banned — and which even the Howard government refused to legalise.

The government’s winding back of the Future of Financial Advice reforms will legalise conduct by financial planners that has long been banned and hand a major win to the big banks and AMP — one that even the Howard government rejected, Crikey can reveal.

Draft regulations to reverse the Future of Financial Advice reforms established by Labor were released by Assistant Treasurer Arthur Sinodinos last week as the Coalition rushes to remove reforms that took years of consultations, parliamentary inquiries and reviews to develop, trying to do as much as possible via regulation in order to avoid parliamentary scrutiny.

Among the government’s changes, however, will be one that doesn’t merely reverse the FOFA reforms but would legalise conduct that has been prohibited for many years, was the subject of major action by the Australian Securities and Investments Commission against AMP in 2006 and that even the Howard government insisted on keeping prohibited.

In 2006, ASIC launched an investigation into the practices of AMP’s financial planners, who were recommending clients switch to AMP products without comparing the returns AMP products would offer to the returns of products clients were already using, such as industry super funds, which might have been higher. Clients expecting objective advice about what would yield the best returns or best suit their needs were being told only about AMP’s products. AMP argued its planners’ advice was consistent with the requirement to provide advice in the client’s best interests because it had obtained clients’ consent to confine advice only to what was on AMP’s “Approved Products and Services List”, or APSL. AMP later admitted it instructed its planners:

… if the client understands and agrees that advice would be limited to the products on the APSL, AMPFP Planner was permitted to give advice to the client about those products on the APSL but was not permitted to give any advice about the client’s existing product.”

ASIC rejected the rationale that clients could agree to narrow the scope of advice so that it wasn’t in their best interests and secured an enforceable undertaking from AMP to end the practice. AMP undertook to require that planners provide advice both on the products they recommended and the client’s existing products, enabling a fair comparison.

Not long afterward, the body representing retail super funds, the Investment and Financial Services Association (now the Financial Services Council), began lobbying to dump the prohibition. The Howard government had begun a consultation process in 2006 for its Corporate and Financial Services Regulation Review and IFSA, representing the interests of the big banks and AMP who effectively control retail super, complained about ASIC’s action and demanded that:

… an adviser and their client must be allowed to determine the extent and coverage of personal advice. Advisers should be allowed to limit personal advice to products that the adviser is allowed to advise on, such as those on an approved list, or to the client’s specific personal circumstances.”

The retail sector calls it “scalable advice”, and it’s a highly lucrative area of financial management: many clients approach financial planners because they’ve acquired a lump sum (for example, inheritance) and want to know what they should do with it; “scalable advice” would enable a planner to advise that the client should put it into a product on the planner’s company’s list, rather than recommending, for example, it be used to pay off existing debts that might be better overall for the client.

But the Howard government rejected IFSA’s demand, and its reform package didn’t include any such amendments.

The Sinodinos package, however, includes exactly what IFSA wanted, claiming in the explanatory memorandum that it will “better facilitate the provision of scaled advice to reduce uncertainty and enable cost-effective scaled advice to be provided to consumers”. The regulations now explicitly provide that there is nothing that “prevents a client from agreeing the subject matter of the advice sought by the client with the provider”. Retail funds and planners will be able to do exactly what AMP was banned from doing.

The financial planning sector and the retail sector insist that clients will be protected because planners will still be required to consider clients’ “best interests”. But Sinodinos’s reforms water that down, too — indeed, the explanatory memorandum actually has an unsubtle heading “Reduced best interests obligation”. It removes the current “catch-all” provision of the strengthened FOFA best interests requirements for planners, reducing the “best interests obligations” to six specific steps, including only to make “reasonable inquiries” if the planner feels a client hasn’t fully disclosed all relevant information about his or her circumstances. There will no longer be an additional requirement that planners ensure they have “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.

It all means a huge win for retail super funds and planners who now don’t need to tell clients that a product they’re pushing them into will perform more poorly or generate higher fees than the product they’re currently in, as long as they can get clients to agree to narrow the scope of advice to their own products.

It was a gouge too far even for the Howard government — but the Abbott government wants to deliver it.

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  • 1
    Bill Hilliger
    Posted Thursday, 6 February 2014 at 1:11 pm | Permalink

    Many believe that the essence of the Sinodinos dictum to the retail super industry is …treat the public like sheep. The coalition government and retail super industry realise and know sheep need to be shorn of their hard earned money at regular intervals.

  • 2
    Electric Lardyland
    Posted Thursday, 6 February 2014 at 2:16 pm | Permalink

    Another indication that the members of the Abbott government seem to have learnt essentially nothing from the Global Financial Crisis.
    Actually, could somebody in the Australian media, please start asking Abbott what he did learn from the GFC? It would be interesting to observe the long moment of blankness, as the internal hamsters desperately try to spin the mental wheels into place, before his neurons finally link GFC and pink batts, and he scrambles to the safe ground of blaming Labor.

  • 3
    MJPC
    Posted Thursday, 6 February 2014 at 2:48 pm | Permalink

    The Abbott Government wants to deliver it and who amongst the media (apart from here) has this been highlighted. We have the barbarians banging on the door and joe public sound asleep in their beds thinking they are bring guarded.

  • 4
    zut alors
    Posted Thursday, 6 February 2014 at 3:31 pm | Permalink

    Bill Hilliger, Sinodinos can’t be blamed for treating the public like sheep having seen News Corp successfully drench the electorate in a generous misinformation dip then herd them into the polling booths last September.

  • 5
    Jimmyhaz
    Posted Thursday, 6 February 2014 at 3:57 pm | Permalink

    Truly amazing, I find it absolutely outstanding that even though the shock-waves from the GFC are still being felt, this government feels the need to give large private financial corporations more power with less oversight. I mean, it’s getting to the point where I feel that they are intentionally sabotaging our economy, I’m starting to eagerly await an announcement on our return to the gold standard, and the repositioning of a debt limit.

  • 6
    Bill Hilliger
    Posted Thursday, 6 February 2014 at 4:52 pm | Permalink

    Zut Alors, agree with you there.

  • 7
    CML
    Posted Thursday, 6 February 2014 at 5:01 pm | Permalink

    Anybody with half a brain needs to keep right away from the ‘retail sector’ when it comes to investments.
    Stick with Industry funds and the honest financial planning advice they offer - at least in my experience.

    And Jimmyhaz - don’t you know Australia NEVER HAD A GFC?!! The rAbbott and his motley crew have been telling this particular fairy story for years now. We didn’t need the stimulus spending, BER, pink batts, or any of the other measures introduced by the Rudd Labor government, which gave us one of the best outcomes from the GFC anywhere in the world.
    They have no bloody idea!

  • 8
    sparky
    Posted Thursday, 6 February 2014 at 5:16 pm | Permalink

    This follows a theme of “personal responsibility”, we’ll help you get screwed because it will be your responsibility to look after yourself.

  • 9
    Jimmyhaz
    Posted Thursday, 6 February 2014 at 5:42 pm | Permalink

    CML

    Personally I do think Joe Hockey has some understanding of how national economies work, i.e all government spending being stimulus spending. I get the feeling he’s using the LNP’s message of SURPLUSSURPLUSSURPLUS as a Trojan horse to push through his particular brand of libertarianism.

  • 10
    Patrick
    Posted Thursday, 6 February 2014 at 5:56 pm | Permalink

    I think this is just 1 stream of the union bashing jihad the government is following. Those pesky industry super funds are just too close to the union movement to be trusted. So let’s allow planners to give advice that ignores the low fees charged by industry funds and the high fees charged by retail funds. After switching from a retail fund to an industry fund a few years ago, I was stunned by the fee difference I was paying under my old crappy retail fund versus the very, very low fees I am paying in an industry fund. To the banks and AMP it is just a fantastic money spinner.

  • 11
    Malcolm Street
    Posted Thursday, 6 February 2014 at 7:26 pm | Permalink

    Patrick - did the same myself. Particularly with the low yields over the last few years reducing overheads can make a big difference to any returns.

  • 12
    Andybob
    Posted Thursday, 6 February 2014 at 8:17 pm | Permalink

    Anyone who charges a fee for financial advice should act in the best interests of the client full stop.

  • 13
    Paul Nelson
    Posted Sunday, 9 February 2014 at 9:01 pm | Permalink

    Is it just me or is this all going a bit George W?

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