The interim report of the Financial Services Inquiry
, headed by former Commonwealth Bank chief David Murray, has given the Australian financial system a big tick, with no significant changes flagged for the structure and nature of the system. But the report does raise significant concerns about two of the most significant issues in the sector currently: retirement incomes and consumer protections.
On both issues, as it turns out, the government is heading in the opposite direction to that indicated by Murray.
The interim report calls for more submissions and discussion on a long list of issues. While the traditional areas of the banks and insurers won't be much impacted by the inquiry, judging by the interim report, the superannuation sector looks like it could be targeted by many of the changes that could emerge from the final report when it's finished later this year. The inquiry has accepted the contention of the Reserve Bank and others that "notwithstanding the difficulties in comparing fees and costs across funds, Australia’s superannuation sector has some of the highest operating costs among OECD countries". And those costs have fallen only marginally over the last decade, despite the massive growth in funds that should have delivered economies of scale.
There are a number of reasons identified for those high costs, such as high demand for liquidity and aggressive management in pursuit of short-term returns. Moreover, the default MySuper system introduced following the Cooper Review of superannuation by the previous government may eventually address some of the problems. But the increasing trend of vertical integration -- the ownership of retail super and wealth management funds by the big banks and AMP and other institutions -- is also flagged as a concern:
"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."
Greater vertical integration of course is exactly what the government is encouraging with its restoration of conflicted remuneration in its repeal of the Future of Financial Advice reforms.
The inquiry is also concerned that we focus too much on the accumulation phase of super and not enough on the retirement phase, when consumers, who have been able to take a hands-off approach while working, suddenly have to make enormously important "once in a lifetime" decisions about trading off income versus longevity. "The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees," the report says bluntly -- a statement that should deeply concern both consumers and policymakers, bearing in mind it's the taxpayer who ends up on the hook, via the aged pension, for consumers who get the balance between super and longevity wrong.
"Risk management is a major weakness of the drawdown phase. Although individuals are concerned about outliving their savings, few retirees use income stream products with longevity risk protection, and there a limited choice of these products. Australia is unusual in not encouraging its citizens to use income streams with longevity protection in retirement.
And despite persistent calls from banks for deregulation, the inquiry expresses concern about consumer protections and the powers and funding of the financial regulators -- at the exact moment the government is watering down consumer protections and cutting funding to the Australian Securities and Investments Commission.
"Submissions identify areas of improvement in relation to operational and budgetary independence. Current funding models for the Australian Prudential Regulation Authority (APRA) and ASIC diverge from best-case funding models for financial regulators. In particular, the current funding models potentially could be improved through increasing the certainty of year-to-year funding."
The inquiry also flags that ASIC needs greater flexibility and resources in recruitment given "[r]egulators face strong competition for top talent, given the size and high remuneration levels of the Australian financial sector. Another hurdle is the perception that APRA and ASIC’s operational independence and effectiveness are unduly hampered by public sector operating constraints".
"If Treasurer Joe Hockey and Finance Minister Mathias Cormann are serious about implementing Murray's report, they need to put the brakes on repealing FOFA ..."
The inquiry is also blunt about the quality of financial advice and available protections for consumer. Immediately after its description of the government's repeal of FOFA, it states:
The Inquiry considers the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice.
Whether that's a shot at the government's restoration of conflicted remuneration in its gutting of FOFA isn't clear, but the inquiry's views on financial planning certainly are:
"The quality of personal advice is an ongoing problem ... This poor-quality advice mainly relates to two factors, the:
"The price of personal advice has often been hidden by opaque price structures and indirect payments. FOFA has driven a move to fee-for-service structures; however, some consumers are reluctant or unable to pay for financial advice through upfront fees."
- Relatively low minimum competence requirements that apply to advisers
- Influence of conflicted remuneration arrangements
The interim report suggests lifting the standard of financial advisers and having a national register, as well as greater powers for ASIC to kick advisers out of the industry. It also takes aim at a policy stance -- almost an ideology -- touted by the big banks, financial planners and deregulationists, that disclosure is the panacea to all consumer problems in financial services. In a marked departure from the language and thinking of the Wallis Inquiry nearly 20 years ago, it says:
"Although disclosure is an important part of the regulatory regime for providing financial products and services, alone it has not been sufficient to enable consumers to make informed decisions and consistently purchase financial products and services that meet their needs. Consumers are often disengaged and do not invest the time — and some consumers also lack the financial literacy skills — to understand disclosure documents. Disclosure has also been costly for industry."
The inquiry suggests aiming for more effective, simpler disclosure (a view akin to motherhood) but also more powers for ASIC to intervene in the way financial services providers describe products and disclose fees and other relevant matters to consumers. More importantly, it also flags extending the logic of the Cooper Review, and regulating for more default products to address the ongoing problem of disengagement of clients and super account holders, rather than hoping to achieve some form of disclosure perfection that breaks through consumer disengagement.
There's plenty more meat in what is, unexpectedly, a substantial report from a man who drove the Commonwealth Bank's entry into wealth management. But the language of retirement incomes and consumer protections is clearly deeply inimical to exactly what the government is currently doing. If Treasurer Joe Hockey and Finance Minister Mathias Cormann are serious about implementing Murray's report, they need to put the brakes on repealing FOFA and get serious about overhauling ASIC. Then again, the government has ignored the Commonwealth Financial Planning debacle, the ASIC inquiry and the concerns of all stakeholders except the big banks about its gutting of FOFA, so another report, even by its own handpicked inquiry, is unlikely to have any effect.