Industry Super Australia (ISA) has told the Productivity Commission (PC) that the major banks have been actively seeking to find a way to circumvent elements of the Future of Financial Advice (FOFA) reforms.
In a submission to the PC’s current inquiry into alternative default models, the ISA said that while the FOFA reforms had significantly increased consumer protections, a number of loopholes continued to exist.
“ISA strongly supports FOFA, but as we have suggested in respect of all regulatory policy settings, it should be seen in an evolutionary context,” the ISA said. “From inception, FOFA has been subject to substantial lobbying efforts that seek to weaken it, and for-profit entities have immediately sought to ‘work around’ and adapt to FOFA in a way that maintains as much of their lucrative businesses as possible.”
“For so long as the superannuation system allows participation by entities that have a strong culture of prioritising themselves rather than serving others, this will happen,” it said. “The inquiry’s proposed default models will certainly be subject to the same dynamic.”
The ISA submission itemised the loopholes in FOFA as including:
- An exemption in FOFA successfully lobbied for by the major banks that allows bank staff to earn a volume-related bonus for selling superannuation under general advice
- An exemption to allow the payment of commissions on individual life and income protection insurance on policies paid for out of choice superannuation products, providing strong financial incentives for advisers to switch members out of default superannuation products
- Very limited obligations for those selling super products to make sure the products are suitable and in the interests of consumers
- No requirement to disclose the receipt of conflicted remuneration for sales made through general advice.
“It is impossible to determine at this time all of the strategies being developed by for-profit financial institutions to seek to work around FOFA,” the ISA said. “So far, we can see clear strategies based on general advice and switching members to choice superannuation products to obtain risk insurance commissions. This is clear from the substantial increase in the number of people switching into bank-owned super funds via the ‘direct’ distribution channel.”
The ISA submission contains tables which it said demonstrated a shift away from sales via financial planners, to the financial institution directly, and a major uptick in the share of switchers moving to a bank-owned super fund.
“The major banks have long used their vertically integrated financial advice businesses to sell consumers bank super funds via personal advice,” it said. “There is now clear evidence of an enhanced strategy to leverage their vertically integrated structures – taking advantage of the lower levels of consumer protection outside personal advice to aggressively sell super directly.”