Malavika Santhebennur writes that many policy issues that beleaguered the financial services sector in 2015 remained in 2016, and would continue into 2017.
A fleeting glance at Money Management's summary of policy issues in 2015 revealed discussions around the Life Insurance Framework (LIF), new education and professional standards for financial advisers, and superannuation default funds competition. A year has passed since that review, and this author finds herself reviewing almost identical issues to 2015.
The LIF remained a source of angst and consternation for risk advisers in 2016, and the industry is still awaiting passage of the legislation through Parliament. The industry is also still awaiting the passage of legislation of professional standards and education, although more details have emerged around the standards setting board including composition and funding arrangements.
The Federal Government, the Financial Services Council (FSC), and industry funds continue to be at loggerheads over the issue of super default funds, with the Government and the FSC continuing to push to have them opened up to all complying MySuper funds.
If there was one notable addition, it was the Australian Securities and Investments Commission's (ASIC's) Regulatory Guide 255 (RG255) on providing digital financial product advice to retail clients, which provided direction to digital advice providers but also a benchmark for ASIC to assess them.
The industry noted the stringent requirements around record keeping, and the emphasis on cyber security threats.
THE LIFE INSURANCE FRAMEWORK
The LIF arose out of the Trowbridge report and a scathing review by ASIC of life insurance advice in October 2014, when the FSC and the Association of Financial Advisers (AFA) reached an agreement to form the Life Insurance Advice Working group, chaired by former Australian Prudential Regulation Authority (APRA) executive, John Trowbridge.
Two years later, Minister for Revenue and Financial Services, Kelly O'Dwyer, reintroduced legislation into Parliament in October to implement the LIF reforms, which stalled in June after Prime Minister Malcolm Turnbull requested a double dissolution election.
While there was no clear indication on when the legislation would pass through Parliament, the AFA welcomed the Federal Government's amendments and improvements to the legislation.
The resulting amendments included:
- Expanding legislation to nil advice sales, ensuring no carve-outs for direct sales, and future sales methods designed to avoid reforms would be captured;
- A postponed implementation date of 1 January, 2018 to be applied to all types of advisers regardless of employment arrangements, whether it was those under enterprise agreements or self-employed advisers;
- ASIC's review of lapses and the effectiveness of LIF reforms has consequently been postponed to 2021;
- A three-year clawback period reduced to two years, which the AFA and the Financial Planning Association (FPA) negotiated in consensus;
- Key dates for when maximum hybrid remuneration and ongoing commissions would lift to 20 per cent were:
- 80 per cent from 1 January 2018;
- 70 per cent from 1 January 2019; and
- 60 per cent from 1 January 2020.
In its submission to the government on the revised LIF reform regulations, the AFA asked for common sense from life insurers when deciding on exemptions to clawback for advisers, and argued clawback should not be triggered where insurance policies ended or premiums reduced despite financial advisers complying with obligations or for reasons beyond their control.
While the AFA acknowledged it would be difficult to predict every situation, it cited a few scenarios where clawback should not be triggered. This included:
- Where a policy holder attains a maternity leave "premium holiday", due to maternity leave or financial strife, which would result in a premium reduction within the first two years; and
- Where a policy holder receives an inheritance or a windfall and asks for a sum insured revision within two years after paying a significant portion of their debts, which would result in a premium reduction due to lower benefit coverage.
The AFA also sought clarity on whether the clawback responsibility should rest with an Australian financial services licensee (AFSL) or the adviser/fee recipient where an arrangement might change.
"We understand that the general rule is that the risks and liability are acquired with assets purchased, unless the parties state otherwise," the submission said.
"Accordingly, the AFA recommends that the regulations should clarify that responsibility rests with the servicing adviser (at the time of clawback) unless agreed to otherwise by the parties." All of this occurred in a year where the AFA held an extraordinary general meeting (EGM) at its annual conference this year so members could cast their vote on a special resolution to change the AFA's constitution and force it to oppose the LIF for three years. It was rejected with a clear mandate, with 222 members voting for the resolution, and 620 members voting against it.
Those risk advisers in the industry seeking to undo these reforms should take note of the fact that the reforms have bipartisan support from both sides of politics, while the EGM results also indicated the industry had also accepted these changes were inevitable.
THE FSC CODE OF PRACTCIE
The FSC released its industry-led consumer Life Insurance Code of Practice in October, emphasising that it was "first and foremost for consumers".
When the FSC released a draft of the code, the AFA released its submission in September and noted the code did not include commitments to the financial advice profession, arguing that 50 per cent or more of Australia's life insurance is arranged through financial advice.
"The commitments to consumers are as yet insufficient in substance to drive cultural change; and the role of the life insurance advice profession has been ignored," it said, adding the code should be modified to include this even if it meant releasing it post the 1 October deadline.
With the first version of the final code released in October, AFA general manager, policy and professionalism, Samantha Clarke, said most of the recommendations in their September submission were still yet to be implemented, and said she hoped the code would continue to evolve.
The submission had called for the banning of insurers' sales practices that could interfere with the quality of financial advice, the cessation of incentives that could conflict with an adviser's obligations and a commitment that life insurers are subject to remuneration structures that encouraged retaining existing policies suitably weighted against attracting new business.
"So I thought in the press that there was some mention that there may not be inclusion of commitment to advisers in a future code," Clarke said.
"That's contrary to our understanding and discussion with both the FSC, the FPA, and the Government, right from the beginning, of the reason for this code being in place. The code is not complete unless there are those commitments to the advisers who serve half of those consumers in life insurance."
The FPA called for more simplified language in the code, particularly as it was posited as a consumer code, with head of policy and government relations, Benjamin Marshan, saying consumers should be able to understand the language on life insurance products when making purchases.
"At the moment the code is very legalistic and in some instances it makes similar points several times," he said.
EDUCATION AND PROFESSIONAL STANDARDS
The LIF reforms may have dominated advisers' minds and media headlines in 2016, but those in the industry, including former AFA national president, Deborah Kent, believe the new education and professional standards would have a more significant impact on the entire industry, as it sought to transition into a profession.
The Federal Government announced it would introduce legislation into the Parliament this year to mandate professional standards for financial advisers, as it looked to implement recommendations of the Parliamentary Joint Committee (PJC) inquiry into the issue. The reforms would include compulsory education requirements for both new and existing financial advisers, supervision requirements for new advisers, a code of ethics, an exam, and ongoing professional development.
The regime would begin on 1 January 2019, with existing advisers having until 1 January 2021 to pass the new exam and 1 January 2024 to reach degree-equivalent status.
The government also announced an independent standards body that would govern the professional standing of the advice industry. It would comprise of nine members, three of whom would be from the financial advice industry with working knowledge and experience in providing advice and running advice businesses.
It would be funded exclusively by the large banks and AMP.
Clarke said the directors of the standards setting body would have to be independent to avoid any potential conflicts of interest.
"We're pleased that small business advisers aren't being asked to fund the initiation of this body given a lot of the problems have come from the larger institutions," she said.
Marshan said the body's board would likely be established between April and June 2017, which would then appoint a chief executive, who would then appoint staff.
The CEO and staff would then consult and build the curriculum specifying course requirements for advisers, which could take around 12 months before it was approved.
He said uncertainty and confusion remained amongst financial planners around the specifics of the new curriculum, adding the FPA was receiving enquiries on what they needed to do and how best they could prepare themselves for the new standards.
"Unfortunately with the timing of when the standards setting body is being set up and that they're providing [the curriculum], but probably still at best case 18 months to 24 months away from actually having a curriculum, [before] existing planners will know what they need to do from an education perspective," Marshan said.
"Having said that, we've had degree entry standards since 2007, so many of our members already meet the education levels that will be required under this framework."
ASIC's RG255 on providing advice to retail clients received mixed reviews from the industry, with Decimal saying it a unique paper and an inflexion point in rebuilding trust in financial advice, while law firm, Holley Nethercote, said it did not build on ASIC's previous consultation paper on issues like responsible manager competency.
In its whitepaper on RG255, Decimal particularly noted that digital advice providers must have a secure system for automatically logging and storing every client response, activity, and exchange. The system must then be able to record the algorithm used to deliver the advice and the content on each screen seen by the client. The requirements were more stringent than what was required by traditional advisers.
Head of software, product, and engineering, Jan Kolbusz, said traditional advisers should be subject to the same stringent requirements of record keeping standards to restore trust in the industry.
"At the moment a licensee is obviously supposed to keep all the detail of that but there's no guidelines in terms of how that's done. Typically we know it's done very inconsistently," Kolbusz said.
"In some cases it's literally stored in paper files, in some cases it's stored in word documents on PCs, in some cases it's stored on servers, but it really needs to be stored in a centralised controlled, secure place."
Holley Nethercote partner, Paul Derham, noted ASIC's emphasis on cyber security threats or incidents, and said the corporate regulator was justified in escalating its focus in this area, given the scale of the threat.
He warned digital advice providers and other Australian financial services licensees (AFSLs) that cyber security threats and incidents could also mean privacy breaches as per new legislation tabled that introduced mandatory data breach reporting. He warned that licensees should implement a cyber resilience program that would be linked with their privacy policies.
"All I'm saying is the law around privacy is gaining momentum and what licensees need to realise is when they have a cyber security incident, that triggers a possible privacy incident and a possible contravention of Australian Privacy Principle 11, which is the obligation to keep information secure," Derham said.
DEFAULT FUNDS COMPETITION
The Federal Government and the FSC have continued to pursue changes to default super fund arrangements by having them opened up to all complying MySuper funds to increase competition, a move that has been vehemently opposed by the industry super funds and Industry Super Australia (ISA).
O'Dwyer introduced the Choice of Fund Bill into Parliament in March to allow employees the option to choose their super fund, in its first major challenge to the default funds under modern awards regime introduced by the Rudd Labor Government.
It was expected the changes would extend choice to up to 800,000 employees who currently did not have choice of fund under enterprise agreements and workplace determinations that may mandate a super fund.
The Productivity Commission Issue Paper on ‘Superannuation: Alternative Default Models' released in September said some of the original reasons for the current default model were no longer relevant as the system had matured over the past 25 years, and had become more transparent and compliant.
"Australians are much more familiar with the concept of superannuation and its workings. However, retirement decision making remains very complex," it said.
The FSC used its submission to the Productivity Commission inquiry into alternative default models to argue that the Fair Work Commission process had been proven by the Federal Court to be a flawed process "whereby the commissioners responsible to act as agents for consumers are likely to have conflicts of interest".
"Major principal-agent issues exist, where trade unions, employer associations and the Fair Work Commission (FWC) are all entitled to make decisions on behalf of consumers, sometimes in the context of serious conflicts of interest," the FSC said.
However, ISA chief executive, David Whiteley, attacked the banks over cross-selling in the context of super products, and suggested much of the existing default regime should expand to cover all employees, and be designed to prevent workers being "cross-sold under-performing super funds by banks".
In terms of which products should be eligible to be used as defaults, the AFA said in its submission it supported a market-based model, which would involve a formalised process wherein products would compete to be deemed eligible as defaults under a tender or reverse auction process. Super funds would have to bid for the right to receive contributions from default members.
"The AFA supports the market-based approach, which enables a combination of both practical pragmatic approach as well as enabling choice for those members who prefer to have that choice and work with their advisers," Clarke said.