On the day the financial services inquiry is flagging the high cost of vertically integrated wealth management, Clive Palmer looks set to help the government gut consumer protections.
The opposition’s effort to prevent the government from gutting the Future of Financial Advice consumer protections appears doomed to fail, with a desperate government agreeing to a series of demands from Clive Palmer for more red tape in financial planning laws.
providers of financial advice to issue a “legally binding” advice to clients that advice is independent and in the best interests of the client;
providers of financial advice to advise in detail on fees that would be paid by the client;
a “cooling off” period after a client agrees to investment advice; and
an escape clause for investors to switch strategies in the event of under performance.
Crikey understands that the government, which has promised the big four banks and AMP that it will gut FOFA and is desperate to ensure its repeal regulation survives in the Senate, has agreed to Palmer’s demands, which would require additional regulations to be made, or they will be added to the FOFA repeal bill the government will eventually bring before the Senate.
However, industry experts from all sectors say Palmer’s checklist adds nothing to existing requirements and fails to address the systemic problems created by the government’s repeal of FOFA in relation to conflicted remuneration, while imposing more red tape:
a requirement for “legally binding statement” would add nothing to existing requirements except more red tape — advisers either comply with the Corporations Act’s requirements on acting in a client’ best interests or they don’t, and a compulsory statement won’t change that;
advice on commissions and fees will merely perpetuate current arrangements that are inferior to the “opt-in” requirement abolish by the government, which required planners to tell clients their fees and commissions every two years and obtain clients’ agreement to them;
there’s already a cooling off period in the Corporations Act;
investors can switch strategies now — and most decisions to switch come after disruptive events have already inflicted significant losses on investors.
The only requirement likely to cause any concerns among the big banks and financial planning groups cheering on the gutting of FOFA relates to the assurance of “independent” advice. That would depend entirely on the drafting and definition of “independence”, a concept that isn’t currently used in the laws covering financial services.
In short, the Palmer “demands” add little to existing requirements and don’t address the systemic flaws of the government’s repeal, which includes a drafting flaw opening the way to the full return of conflicted remuneration.
If the government and PUP defeat the motion to disallow, it will be a huge victory for the vertically integrated financial planning arms of the big banks and AMP, which at one stage were the only supporters of the government’s gutting of FOFA, with even financial planners baulking at the return to open slather on conflicted remuneration.
Remarkably, it also comes the day the Financial Services Inquiry, in its interim report, has raised concerns about vertical integration in superannuation and the resulting higher costs for clients in the retail super sector. The inquiry’s interim report says
“A trend in the wealth management sector is towards more vertical integration. Although this can provide some benefits to members of superannuation funds, the degree of cross-selling of services may reduce competitive pressures and contribute to higher costs in the sector.”
A return to the status quo ante on financial planning regulation will see a big shift in wealth from clients to vertically integrated providers, possibly up to half a billion dollars a year, as retail funds take advantage of conflicted remuneration, a watered down “best interests” test and softer disclosure laws to gouge clients, perpetuating exactly the problem David Murray’s inquiry is warning against.
It’s also another example of policy on the run from a government that professes itself to be an opponent of red tape, but which is eager to pile it on if it brings Clive Palmer’s support in the Senate. In this case, the red tape will do nothing to help consumers, who are the big losers from the deal.
Between the Commonwealth Bank’s behaviour, the ASIC inquiry, the government’s efforts to gut consumer protection and, now, the deal with Clive Palmer, the longer term question is whether the financial planning industry can regain the trust of Australians. With FOFA repealed and a weakened regulator, why would anyone trust a financial planner linked to the big banks or AMP?