Financial services’ year of living dangerously

Apart from volatile markets and investor sentiment, this year has also seen major policy developments, new investment trends and key career and business moves. Tim Stewart and Milana Pokrajac look back at 2012 and recall some of the major events that have unfolded in the financial services industry.

Related: Financial services' bad apples

The debate about financial services policy kicked off in 2012 with the Parliamentary Joint Committee (PJC) review into the Future of Financial Advice (FOFA) bills.

It came as no surprise when the PJC failed to produce a bipartisan report.

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While the Labor members of the PJC called for only cosmetic amendments to the legislation, the Opposition wanted wholesale changes.

The Coalition argued that the opt-in requirement be completely removed, that the annual fee disclosure be made prospective, and that the ‘best interests’ duty be altered in order to allow agreements between clients and advisers.

With such a wide rift between the parties, the fate of the more contentious elements of FOFA was left in the hands of the independent members of the House of Representatives.

The legislation itself passed through the lower house on 22 March 2012, but only after a last-minute amendment was put forward by independent Rob Oakeshott that guaranteed his (and fellow independent Tony Windsor’s) support of the FOFA bill.

Oakeshott’s amendment will provide financial planners with class order relief from the opt-in requirement provided they are signed up to an Australian Securities and Investments Commission (ASIC)-approved code of conduct that ‘obviates’ (ie, renders unnecessary) the need for the opt-in.

The amendment came after the airing of a controversial document purporting to be an agreement between the Financial Planning Association (FPA) and the Industry Super Network (ISN).

Money Management published the document in the 22 March issue, whilst simultaneously acknowledging the FPA’s assertion that it had never ceased to strongly oppose the two-year ‘opt-in’ requirement.

Speaking at a Money Management roundtable held on 26 March, FPA chief executive Mark Rantall reiterated that his organisation had never supported opt-in – but he said the final state of the legislation was much more acceptable for FPA members.

“We would have much rather opt-in had been removed, that would have been cleaner. But where it stands at the moment, we may be in a position where no FPA member has to sign an opt-in certificate. That is a reasonable win,” he said.

The legislation passed on 22 March also included a commitment from the Minister of Financial Services and Superannuation, Bill Shorten, to enshrine the terms ‘financial planner’ and ‘financial adviser’ in law.

This was later confirmed on 28 November when the Minister released draft legislation that he said would prevent “anyone who is not a qualified financial planner or financial adviser from telling consumers that they are”.

Despite the FOFA legislation passing through both houses of Parliament (it was passed in the Senate in June), there is still an elephant in the room: to what extent will the Coalition roll back the reforms if elected to Government?

Shadow Minister for Financial Services and Superannuation Mathias Cormann has repeatedly vowed to roll back certain elements of the FOFA legislation if the Coalition gains power.

Cormann has stated over the last 18 months that a Coalition Government would:

• remove the opt-in requirement;
• simplify and streamline the additional annual fee disclosure requirements;
• improve the best interests duty; provide certainty around the provision and the availability of scalable advice; and
• refine the ban on commission on risk insurance inside super.

But as with much enacted legislation, the FOFA bill may be ‘baked in’ by the time any Coalition Government comes to office, so rolling any particular element of it back may be more difficult than Cormann imagines.

The consensus in the industry is that planners should prepare for the changes – set to take place on July 2013 – as though they are set in stone. For one thing, the ban on volume rebates appears to be here to stay.

The fun(ds) starts here – by default

One major issue running alongside the implementation of FOFA in 2012 has been the Productivity Commission’s review into the selection of default superannuation funds under modern awards.

In January this year Treasury instructed the Productivity Commission to undertake a public inquiry into the matter.

The inquiry is of particular interest to retail superannuation funds, because they often have trouble finding their way onto modern awards.

According to Cormann, the current process of fund selection is “not transparent, not competitive and inappropriately favours union-dominated industry super funds”.

Shorten caused a stir in the industry when he publicly supported the submissions of two of his own departments – Treasury and the Department of Education, Employment and Workplace Relations (DEEWR) – before the final report had been made public. By doing so, Shorten broke with convention.

The amendment to the Fair Work Act put forward by Shorten adopted the Productivity Commission recommendation that Fair Work Australia establish an expert panel to oversee the selection of default funds.

In mid-October, the then Association of Financial Advisers (AFA) president Brad Fox added his voice to suggestions that the Productivity Commission had been unduly influenced by the Minister.

“We are very concerned about the influences on superannuation policy and we question, as we have previously, the appropriateness of Fair Work Australia making decisions with respect to the selection of superannuation funds in modern awards,” said Fox.

The amendment was passed through the House of Representatives on 1 November. But just like the FOFA legislation, the changes are unlikely to remain intact if the Coalition wins the next election.

All churned up over insurance

A perennial issue in the financial services sector is the concept of ‘churn’: the practice of cancelling an insurance policy (or allowing it to lapse) and then purchasing a policy with similar or equivalent coverage.

Churn is a hot-button issue because it tends to benefit the adviser (who may receive an up-front commission) rather than the client.

The Financial Services Council (FSC) announced a ‘tiered clawback provision’ at its national conference in August, which was aimed at discouraging the practice.

Under the FSC proposal, insurance companies will clawback 100 per cent of the remuneration paid to the adviser if the policy lapses in the first year; 75 per cent if the policy lapses in the second year; and 50 per cent if the policy lapses in the third year.

One vocal critic of the FSC clawback provision has been Synchron director Don Trapnell, who labelled it as “disgraceful”.

“Life insurance companies, via their association with the FSC, are … proposing a process that will financially disadvantage honest advisers for policy lapses in circumstances that are, more often then not, beyond the adviser’s control,” said Trapnell.

The FSC’s John Brogden apologised to planners for the lack of consultation in regards to the FSC proposal, explaining that comments by Shorten about a ‘clawback provision’ meant that the industry needed to address the issue.

A Money Management roundtable in September suggested that ‘churning’ was not as widespread as some of the financial services industry’s critics might think. 

The FSC is understood to be looking at amending its ‘clawback’ framework in order to take into account the industry realities facing advisers following discussions with the FPA and the AFA.

The APES of wrath

The Accounting Professional and Ethical Standards Board (APESB) has been working on a revised set of ethical standards for accountants who provide financial services called APES 230.

The second exposure draft of the standards was released in July 2012 (the first exposure draft was issued in June 2010).

The revised APES 230 standards include provisions that are even more stringent than some of the FOFA reforms. For example, under APES 230 all commissions will be banned – including risk commissions outside superannuation, which are permissible under FOFA.

The move has alarmed accountant/financial planners such as Premium Wealth chief executive Paul Harding-Davis, who believes the move to remove risk commissions will lead to lower levels of insurance among less wealthy people who are unlikely to pay a fee up front.

“All I see is that the elite will continue to afford it and will happily take the discount on the premium and cut a cheque.

And the average Australian will get less advice on insurance and, [as a result], less insurance,” said Harding-Davis.

Most of the submissions to the APESB about APES 230 have been critical of the proposed standards, with the Institute of Public Accountants (IPA) going so far as to exempt its members from the proposed ethical standards.

IPA chief executive said the APES 230 standards were not in the best interests of his members, the accounting profession and consumers.

“Our primary concern is that APES 230 reduces the ability of consumers to access competent and affordable financial advice from their trusted adviser – their accountant,” he said.

But despite the weight of submissions criticising the proposed ethical standards (81 per cent did not support APES 230, according to the FPA), the APESB has defended its decision to go ahead and finalise APES 230 by the end of the year.

At a public board meeting in November, the APESB pointed out that while it is funded by the joint accounting bodies, it does not exist to further their members’ interests. Instead, its purpose is to act in the best interests of consumers and the accounting profession in general. 

Accountants’ exemption depreciated

Another policy issue looming large for accountants who also provide financial services is the incoming limited licensing regime.

After a lengthy delay – which prompted two of the major accounting bodies to take out a full-page ‘please explain’ advertisement in the Australian Financial Review – the Government announced the replacement for the so-called ‘accountants’ exemption’ in June.

As it currently stands, accountants are exempted from the rigours of the Australian Financial Services Licence regime when it comes to advising on the setting up and closure of self-managed superannuation funds (SMSFs).

But the announcement of a limited licensing regime for accountants will mean the end of the exemption.

Under the new limited licence, accountants will be able to advise on SMSFs, superannuation products, securities, simple managed investment schemes, general and life insurance, and basic deposit products.

According to Shorten, there will be a streamlined transition period for accountants between 1 July 2013 and 1 July 2016.

“As accountants begin operating within the AFSL regime, there will be more options for consumers to access low-cost financial advice on important issues including insurance and superannuation needs,” said Shorten.

The Minister also announced an auditor registration program for people who conduct SMSF audits, due to begin on 31 January 2013.

Federal Budget’s tinker’s curse

The Government came under fire from most sections of the financial services industry for its continued tinkering with superannuation in the 2012 Federal Budget.

Financial Service Council director of policy Martin Codina commented in May that the Government had once again confirmed it was “willing to use retirement savings to pay for other political objectives”.

“This is the ninth time since 2008 the Government has changed the rules, equating to $7.8 billion less in retirement savings,” said Codina.

High-income earners took the biggest hit, with the tax rate on concessional contributions for those earning over $300,000 effectively doubling from 15 per cent to 30 per cent from 1 July 2012.

The shrinking independent advice sector

With Count Financial and DKN having been acquired by the Commonwealth Bank of Australia and IOOF respectively last year, concerned voices in the financial services industry grew louder.

When two of the largest non-bank aligned dealer groups fall under the umbrella of two huge institutions, naturally, questions about the future of the independent financial advice sector are raised.

Earlier this year, IOOF announced another acquisition – that of Perth-based dealer group Plan B and its subsidiary MyAdviser – adding an estimated 150 planners to its advice network.

Matrix Planning Services remains on the block, while the Australian Financial Services (AFS) Group seems to have given up on finding a parent, marketing itself as an “adviser-owned, adviser-run” company since last year.

The financial services industry quickly realised its aforementioned concerns were justified after this year’s Money Management Top 100 Dealer Groups list clearly showed that 18 out of the 20 largest dealer groups (by adviser numbers) in the financial planning sector were either fully owned by a bank or a large institution, or had institutional links.

There are less then 10 non-aligned dealer groups in the top 50.

That is not to say that the industry does not have a proud and vibrant non-aligned sector – though experts claim the boutique financial planning space appears to be under threat in light of FOFA.

Many have flocked to the safety of an institution due to the growing regulatory pressure, compliance and administrative costs and burdens.

In an interview with Money Management earlier this year, Synchron director Don Trapnell said that any business operating in the non-institutional space with less than 100 authorised representatives would struggle.

“It is a competitive market out there and margins are very tight for authorised representatives, especially with the big instos putting out the golden handshakes to say hello to people,” Trapnell said.

Indeed, the last couple of years have seen the “big five” involved in a so-called turf war over planning practices caught in the post-acquisition transitions.

The industry well remembers MLC’s bid to poach as many AXA Financial Planning practices as they made the transition to AMP’s network early in 2011.

Similarly, as Count practices migrated to the CBA network earlier this year, Westpac-owned BT Financial Group (which previously had a very close two-decades long relationship with Count) made its own move.

However, it came under fire after reports came out that BT was offering so-called “sign-on” fees – ranging from five-times earnings and from $500,000 and $1 million – to Count practices.

While such games can be very subtle (eg, AMP offering very generous welcome packages to AXA practices to stop them from going to MLC), Count CEO David Lane prepared a direct counter-strike by sending a letter to Securitor advisers.

“We believe that such payments, if they are not accompanied by similar payments to existing advisers, fail to sufficiently recognise the loyalty and growth potential of existing adviser firms,” the letter read.

However, while the giants fought their battle, a different player recently emerged with a strategy to attract planners who are disenchanted by the institutional environment (see Page 1).

Yellow Brick Road (YBR) launched an initiative targeting wealth professionals who want a “refreshing alternative to the institutional jobs offered by the major banks”.

Given that around 90 per cent of all planners are aligned to a major institution, it will be interesting to see whether this strategy will work, though YBR too is a product manufacturer, not unlike the “big four”.

“We have a broad Approved Product List across mortgages, investments, and insurance,” said YBR CEO Matthew Lawler in a recent interview with Money Management.

“Unlike many models – we’ll have some branded YBR, we don’t have any requirement for those to be sold, the advisers don’t get extra money for those to be sold [or a discount], but we have a branded offer in each of those segments.”

The big SMSF push

One of the main reasons CBA purchased Count Financial is because of the dealer group’s large SMSF client base, serviced by its accountant/financial planner employees.

Adopting a different strategy, AMP also decided to launch an aggressive push into the SMSF market.

In July this year the insto acquired the largest SMSF administrator – Cavendish Group – announcing at the same time the creation of a new AMP SMSF business unit.

The business unit is headed by Craig Jameson and will comprise Cavendish, Multiport and partly AMP-owned SMSF technology firm Super IQ.

Apart from the SMSF market being the fastest growing sector in the superannuation industry, AMP cited the Super System Review from 2009, which found only 14 per cent of existing SMSFs use a financial planner, as one of the reasons to tap into this market.

AMP now provides administration services to more than 11,000 SMSFs. Its multiport SMSF administration, reporting and compliance services have been rolled out to 2,800 funds, and it has a 49 per cent share of SuperIQ which services a further 430 funds.

With access to this many funds, AMP’s advice and product divisions are likely to benefit, though time will tell which strategy worked better – CBA’s or AMP’s.

Key career moves

The last 12 months have seen many high-profile executives change their roles, either moving to more senior positions or going it solo.

One of the biggest re-shuffles occurred within Professional Investment Services (PIS), starting with the departure of managing director Robbie Bennetts last year.

He opened Gold Coast-based business consultancy Robbie Bennetts Enterprises and attracted several other senior, long-term PIS employees, including former chief information officer Shannon Overs, senior executive Greg Whimp, conference co-ordinator Melanie Sharpin and former PIS national conference manager Mark Dwyer.

The new chief information officer, Len Sanders, left the group a month after his appointment, along with ASIC concern leader Kelly Hinton.

Then came the big one: former PIS chief executive officer Grahame Evans also resigned to set up his own business consultancy business – Mente.

These departures seem to be part of a company-wide clean-out after PIS entered into an enforceable undertaking with ASIC in 2011.

New chief executive officer Peter Walther recently said he had outlined a plan to rid the dealer group of the legacy compliance risk issues that dogged it under previous management.

Another surprise move this year was that of Peter Daly, who suddenly resigned from his position as chief executive and managing director of the AFS Group.

He told Money Management he was “deeply disappointed” at the board’s decision to let him go only weeks after it had approved his strategy and budget for the year ahead.

However, Daly – who was replaced by Alan Logan – landed on both feet, joining Yellow Brick Road to help with the recruitment of financial planning practices.

Richard Klipin, too, surprised the industry when he announced he would leave the AFA and take up the CEO position at ANZ-owned dealer group millenium3 in February.

Brad Fox took over as interim AFA CEO.

Klipin said the decision to leave the association was a “very difficult one personally” and came after the industry finished its lobbying efforts.

And finally, with TAL’s launch of a new dealer group called Affinia, came the appointment of Craig Parker, who will head the new group.

TAL-owned Pivotal Financial Advisers will be rolled into the new entity, the company announced, with former Pivotal head Maria Cheer having stepped down from her position in August.

Sentiment tells a story

After Australian investor sentiment dipped to all time lows in the last quarter of 2011, it seemed that the only way it could go was up.

According to CoreData’s Investor Confidence Index, investors were less optimistic about the markets in the last quarter of 2011 than during the global financial crisis.

However, the first quarter of 2012 saw investor sentiment improve – though still remain in the negative territory.

Cash remains the most popular asset, but the popularity of exchange-traded and index funds is very much on the rise.

Investment Trends also found concern levels were down for most of the year, though this might not be a positive thing, according to senior analyst Recep Peker.

“This is showing that investors have become desensitised towards all the volatility and bad news; they are used to things like fiscal cliffs and debt crises, and now see these as part of the norm,” Peker said.

Planner sentiment also improved towards the end of the year, according to Wealth Insights – something which reflected the steady performance of the Australian Securities Exchange and less “doom and gloom” on the global news front.

Experts are expecting continued market volatility in the next 12 months, but they feel more optimistic about the opportunities the year will offer.