The problems in ASIC’s regulation of financial services aren’t confined to the Commonwealth Bank, and they’re continuing right now.
I’ll start this piece on the ASIC inquiry report and superannuation calculators with a methodological note. I sense the eyes of even Crikey’s sophisticated, engaged and informed readership begin to glaze over when we cover financial matters, so I want to offer a super-short explainer of why this stuff is very important.
By virtue of compulsory superannuation, over 20 years without a recession and rising incomes, Australia has vast treasury of personal wealth, soon be worth $2 trillion, and even with baby boomers drawing down on it in retirement, that treasury has been estimated to reach over $7 trillion by the 2030s. Effectively managing Australians’ access to those savings in coming decades is a critical economic and fiscal question, which will play a big role in the budgetary and macroeconomic decisions treasurers and other key policymakers will make in decades to come.
But there are several threats to that expanding pool of wealth: lots of people want to get their hands on it before retirees do. In particular, our four big banks — and financial services giant AMP — see superannuation as a major source of revenue growth, which is why they have long since aggressively moved into the retail section of wealth management.
The second threat is from the financial planning industry and the fees it, along with the retail super sector, charges. This is an industry that is in the throes of professionalisation, moving from an old model in which planners steered clients into funds that delivered them large commissions to a new, more professional business model that gives much greater priority to client interests. Like any industry in transition, different parts of the industry are moving at different rates — many planners have long since abandoned commissions and regard them as an embarrassing anachronism; others continue to cling to old business models.
Fees are crucial to how much wealth clients will take into retirement, because the more wealth that is transferred to planners and the owners of the retail funds — the big banks and AMP — now, the less their clients will have in retirement.
The third threat is, to be blunt, the Coalition. The Coalition has always instinctively opposed industry superannuation, demonising it as run by corrupt union officials (despite industry super funds outperforming retail funds) and has regularly tried to tilt the regulatory playing field toward financial planners and retail funds. Its gutting of Labor’s Future of Financial Advice consumer protections is just the latest in a succession of moves to make life easier for retail funds and financial planners.
Which brings us back to last week’s report of the inquiry into ASIC. You might be forgiven for thinking the committee report was primarily focused on the Commonwealth Bank’s financial planning arm, which is certainly the target of the recommendation for a judicial inquiry or royal commission. But the examination of Commonwealth Financial Planning and another financial services arm of the Commonwealth was only intended to be a case study of the broader issues in the financial planning industry — an industry, ASIC told the committee, that was still a “target-rich environment” for the regulator, and one it doesn’t trust as much as it used to.
One area that emerged during the inquiry separately from the Commonwealth is that of the online calculators the big banks’ financial planning arms offer consumers, notionally as a way to determine how much a consumer might take into retirement based on his or her level of contributions, but in fact used as marketing tools by companies touting for business — and which thus in many cases fail to adequately disclose fees and their impact on retirement benefits.
The issue of calculators came up in the evidence of former ASIC officer James Wheeldon, who raised two substantive sets of issues — the way ASIC managed conflict of interest of officers on secondment from industry, and the way calculators have been “regulated” by ASIC after it gave the industry an exemption from regulations in 2005. The committee suggested the Commonwealth Ombudsman examine Wheeldon’s allegations about ASIC’s handling of conflict of interest — albeit with the proviso that the events in question happened nine years ago.
But the issue of calculators is far more contemporary. It’s only been a few months since Fairfax’s Michael West — who is currently in the middle of a rich vein of journalistic form — pinged MLC for a calculator that fully failed to disclose fees. The calculator issue thus isn’t ancient history — there are consumers potentially being misled right now by big funds.
The committee agreed, saying it:
“… is concerned that after it made the class order granting relief, ASIC did not review the calculators the industry designed and published. This is a further example of ASIC not displaying sufficient scepticism of the industry it regulates and not monitoring compliance with an arrangement it has authorised.”
ASIC’s evidence to the committee about calculators was, in essence, there was nothing to see here, everything is fine — despite the fact that we know sections of ASIC in 2005 were concerned about the fees issue.
That is, for nearly 10 years, ASIC — which has its own, very good calculator on its website — has known about the way major funds refuse to disclose fees in their calculators, misleading consumers and debauching the educational point of such tools, and funds are still being caught up not being upfront with consumers.
And to think, the government seriously wants us to believe this industry needs deregulation.