MATTERS OF URGENCY;Future of Financial Advice – 23 Jun 2014

I will start my contribution with a quote:

Each one of these is what I feel: persistent feelings of sadness, feelings of failure, feeling overwhelmed, loss of interest, withdrawal from family and friends, frequent anger, lack of confidence, poor concentration, tiredness, sleeping problems, feeling sick and changes in appetite.

All those is what I’ve been feeling in the last few months since we’ve been sold out of the market and just realising that it’s an impossibility to restore.

This quote comes from Storm Financial investor Phil Green when he was interviewed by the ABC. The interview formed part of a 2009 episode of the Four Corners program, entitled ‘The Perfect Storm’. Phil Green told Four Corners that he earned $50,000 a year while trying to pay off a $1.8 million debt. Business commentator Robert Gottliebsen was also interviewed for the Four Corners program and told reporter Paul Barry that Australians had lost billions of dollars in margin-lending schemes. Like Westpoint and Timbercorp, Storm is an investment scheme that collapsed, destroying the lives of ordinary Australians who invested their life savings expecting their investments to be safe.

These tragedies occur because Australians receive bad financial advice. They receive bad advice because that advice is conflicted by commissions and vested interests. The only way to protect Australian investors from this exploitation is to make sure that they receive advice with one beneficiary in mind—and that is the investor. That was the principle which underlined Labor’s Future of Financial Advice legislation, and that is the principle which is being fundamentally undermined by the Abbott government’s attempt to dismantle our reforms. Rice Warner actuaries’ modelling predicted that by 2027 the reforms would boost private savings by $144 billion, double the provision of financial advice and almost halve the average cost of advice. You see, Mr Acting Deputy President, what small investors need is genuine financial advice given by financial advisors, not a sales pitch given by marketers. They need advice which is in their interests, not in the interests of the people selling the product.

Submissions to the government’s exposure draft of the bill and to the Senate economics committee inquiry into the bill reveal the breadth and depth of community opposition to the changes the government has proposed. The consumer advocacy group CHOICE, which is highly regarded, noted in its submission to the Senate inquiry that:

FoFA was a compromise between the interests of consumer protection and industry, and the proposed Bill tilts the balance further away from consumers.

In evidence given to the Senate inquiry, CHOICE described ‘the best-interest obligation, the changes to rules about conflicted remuneration, the removal of the requirement that clients opt in to fees and the removal of the requirement for annual fee disclosure statements’ as ‘pretty basic consumer protections and, indeed, signs of basic good practice in business that any financial adviser should be happy to sign up to.’ National Seniors Australia, an organisation which represents people over the age of 50 and has over 200,000 members, said in their exposure draft submission that the government’s legislation would ‘remove essential consumer protection measures and expose older Australians to greater risk and uncertainty’. The Council on the Ageing, another group representing seniors, told the Senate inquiry:

We believe the cumulative effect of these changes is to seriously weaken the reforms, giving less consumer protections and ultimately undermining confidence in the financial advice sector.

The criticisms from various professional, consumer and other community groups were nicely summed up in an opinion piece by experienced financial journalist, Alan Kohler, in which he wrote:

Under the cover of streamlining the laws and removing red tape to lower cost, the government is proposing eight changes to the law that will allow banks to once again use licensed financial advisers to sell investment products while pretending to provide independent advice.

In the detail of many submissions not only on the exposure draft but also to the Senate inquiry are criticisms of the government’s proposal to weaken the best interest test; criticisms of the government’s proposal to scrap the opt-in provisions; and criticisms of the government’s changes to the annual disclosure and conflicted remuneration provisions. All these provisions were put in place by Labor as part of the FoFA reforms for one major reason—that is, to protect consumers.

Scrapping opt-in provisions means that most people will pay fees for services they do not get—some will pay fees without even knowing. The government’s changes to the best interest obligation would effectively weaken that obligation to a tick-box approach. In fact, the government’s changes will weaken this provision to such a degree that they may as well scrap it entirely. As for the changes to conflicted remuneration, various stakeholder groups including financial planning industry associations have raised concerns about the potential for this to lead to unethical practices. In its evidence to the Senate inquiry, Industry Super Australia pointed to research which estimated the cost to consumers of this change alone would be more than half a billion dollars a year. This is almost three times the estimated savings to business. Mark Rantell, Chief Executive Officer of the Financial Planning Association of Australia, said in his evidence to the Senate inquiry that there were several risks in allowing commissions for general advice. In particular, he mentioned: the difficulty for consumers in distinguishing personal financial advice from marketing; the potential to shift licensees and representatives away from the provisions of personal advice in order to earn commissions; and the erosion of public confidence in Australia’s financial system. With the government’s legislation removing so many basic consumer protections, is it any surprise that there is such widespread opposition to these laws?

The Abbott government’s attempt to dismantle FoFA has very few remaining supporters. As with anything else this government does, if you want to see who they represent, it is instructive to see who supports their actions. The few remaining supporters of this legislation are the big banks, AMP and the Financial Services Council. The FSC is essentially a proxy for the big banks, given that it is controlled by them. It is run by former New South Wales Liberal leader, John Brogden, and its political donations—at least those reported up to 30 June last year—have heavily favoured the Liberal Party. The acting finance minister, Senator Cormann, received $10,000 from the FSC in August 2012, and the Treasurer, Mr Hockey, received $11,000 through his—I might call it somewhat shady—fundraising vehicle, the North Sydney Forum.

Is it any surprise that this government would push a reform that is overwhelmingly opposed by groups representing seniors and consumers, while being supported by a small group of powerful vested interests? It is just one more of the many examples of how this government represents the big end of town; just like they represent the big end of town with their budget of cruel cuts and broken promises. This is the government which would tax ordinary Australians when they get sick, when they need medicine and when they need to go to the doctor—while giving a tax cut to billionaire mining magnates. This is the government which would cut payments to struggling families, and cut vital childcare assistance—while giving up to $50,000 to millionaire mums who have children. This is the government which would increase taxes on petrol—while cutting funding for public transport concessions. And this is the government which has the audacity, and the cruelty, to deny young jobseekers an income for up to six months—while increasing university fees and cutting money from education.

We know that this is a dishonest government; an unreliable government. We know that this is a government that lied before the election, and that delivered a budget full of broken promises. But there is one thing in which this government will always be consistent; there is a pattern of behaviour that this government can always be relied upon to adopt—and that is, given a choice between standing up for the least powerful or the most powerful in our society, they will always side with the powerful vested interests. They will do so even when it is at the expense of ordinary Australians.

These laws are not about removing red tape; they are about dismantling Labor’s reforms and leaving consumers at the mercy of shonky and unethical financial advisers—dismantling the very laws that Labor designed to protect consumers from disasters such as the Storm Financial collapse. They are essentially the same laws that were proposed by their original author—do you know who that was, Mr Acting Deputy President?—Senator Sinodinos. And I would suggest that, just as Senator Sinodinos might have been sent to the back blocks for quite a while, so should the Prime Minister also send this reform to the back blocks for just as long.