There is no dearth of policy developments in the financial planning space this year but all developments are currently on hold.
Prime Minister Malcolm Turnbull requested the Governor-General to dissolve both houses of Parliament and hold a double-dissolution election in May, which placed the Government in caretaker mode. Now, we are just over a week away from the 2 July Federal election.
Prior to the election being called, Assistant Treasurer Kelly O'Dwyer, asked the Treasury to continue with the consultation process on many of the policies, but the Government cannot conduct discussions or action those policies until after the election.
Therefore, in late June 2016, there are at least three areas of policy that could have ramifications for financial advice businesses, clients' financial plans, and planners' decisions to continue doing business.
1) Implementation of the superannuation changes announced in the 2016 Federal Budget;
2) Implementation of the Life Insurance Framework (LIF) and specifications around commission rates, and commencement dates; and
3) Increasing professional standards and introducing a new body that establishes independent standards.
Industry bodies have also pointed to other recommendations stemming from the Financial System Inquiry (FSI), which they would like the Government to explore and establish after the election.
Both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) cited concerns about the retrospective nature of the changes to superannuation in the Federal Budget.
AFA general manager for policy and professionalism, Samantha Clarke, said advisers were concerned about how the retrospective nature of the changes would affect small business owners as they sought to sell their businesses in the future and direct the proceeds to their super.
"Those strategies have now been impacted potentially by these changes proposed by the Government. They're very concerned that they have been (as most small business people do), using their small business as a retirement savings strategy but now that's really impacted their thinking," Clarke said.
"If or when they sell their business to move into the superannuation environment, that opportunity will be limited going forward and it's a concern for them given the perceived retrospective nature of the changes and the cap."
Both the AFA and the FPA had particular issue with the $500,000 lifetime cap for non-concessional contributions, with FPA professional standards and advocacy member, Benjamin Marshan, stating that the Government should examine the significant concerns before embedding the policy in legislation.
"It doesn't create good consumer outcomes. It's not easy to understand, it's going to be very hard for the ATO [Australian Taxation Office] to provide the data so financial planners can have some certainty around strategies," he said.
However, in a statement titled ‘The Turnbull Government's Superannuation Measures — Myth Busting', O'Dwyer said there would be no penalty for those who had made more than $500,000 in non-concessional contributions prior to the Budget, with only future non-concessional contributions facing restrictions.
She also said there would be no penalty for those who had already transferred more than $1.6 million into the retirement phase before 1 July, 2017.
An editorial published in Money Management earlier this month said there were various technical and implementation issues that needed to be dealt with before the legislative changes could be presented to Parliament.
However, advocates could only perhaps hope for some astute grandfathering and technical tweaking rather than comprehensive changes.
Marshan agreed, stating that O'Dwyer and the government were clarifying their positions with industry groups rather than seeking specific feedback, adding the Government had not shown any flexibility at this stage to change its stance.
When Colonial First State FirstTech executive manager, Craig Day, spoke about the implications of the super changes for advisers at an adviser briefing earlier this month, he pointed to the increased complexity, and the risk of clients losing faith in the super system due to constant tinkering.
The focus of his discussion, however, was on the unknowns rather than the known.
The Government said it would remove the tax exempt status of earnings supporting the transition-to-retirement (TTR) income stream, and said individuals would not be allowed to treat certain super income stream payments as lump sums for tax purposes.
However, Day said it was still unclear whether the TTR balances would count towards the $1.6 million super transfer balance cap.
"You may be familiar with what they've announced as part of the TTR proposals is to actually tax the assets supporting a TTR pension as normal accumulation assets. What they're talking about is, ‘we're limiting the amount that you can transfer into the zero tax environments'," he said.
He argued that if the Government started taxing the TTR super balances at 15 per cent, then TTR pensions should not count towards that $1.6 million transfer balance cap.
"So by starting a TTR pension, we won't have used up a proportion but we simply don't know that yet. The government hasn't told us," he said.
On reversionary pensions, if someone who received a pension died and that pension continued automatically to the surviving spouse, and both the spouses had reached the maximum limit of $1.6 million, the surviving spouse would now suddenly have amassed $3.2 million inside the concessional taxed environment.
"[Are] they okay or will they be required to remove that? If you take the view that the reversionary pension has not stopped, then the answer should be no, they can continue to have the $3.2 million. But we don't know for sure there," Day said.
He noted, however, that O'Dwyer had clarified the Government's position on exemptions on what amounts would count towards the $1.6 million balance cap. She said personal injury payments would be exempt.
"So these are payments that you can contribute without the current non-concessional contribution cap applying. It's where you've suffered an injury and the court has awarded damages. You can actually contribute those into super and the current non-concessional contribution caps don't apply," Day said.
However, it was not clear whether total and permanent disability (TPD) insurance payments were exempt.
"If someone is now totally and permanently incapacitated at age 45 and they can't work anymore and they have a $2 million insurance payout that's come through the super system, they should be able to commence an account based pension to support themselves without the $1.6 million rule applying," Day argued.
Life Insurance Framework
Advisers were coming to terms with the recommendations set out by the chairman of the Life Insurance and Advice Working Group, John Trowbridge, this time last year, while the FPA, AFA, and the Financial Services Council (FSC) were collaborating to create a joint position to take to Government.
A year later, the LIF was "still floating out there", as Marshan said, and industry groups were keen for the Government to provide certainty as quickly as possible.
Marshan said the Australian Securities and Investments Commission (ASIC) continued to receive submissions until 31 May on the legislative instrument, "with the proviso that any changes to the start date would be reflected in the legislative instrument once it was finalised".
The FPA was seeking clarification on the start dates of the legislation, and whether it was going to shift by six months or a year.
"Essentially, because the start date was meant to be 1 July this year, and the election is not until 2 July, there's no chance of legislation being implemented that quickly," he said.
O'Dwyer said the commission rates would be 80 per cent on 1 January, 2017, 70 per cent on 1 January, 2018, and 60 per cent on 1 January, 2019, along with a maximum 20 per cent ongoing commission (up from 10 per cent today).
These were maximum caps rather than fixed prices. The level commissions and adviser fees would remain uncapped.
"Each of these effective dates is six months later than previously announced, as the reform measures are now not expected to be legislated until the second half of this year," O'Dwyer said.
"A re-elected Coalition Government will reintroduce the legislation into the Parliament as soon as is practical. The legislation applies to life insurance sold via both general and personal advice, including through direct sales channels."
In its submission on LIF, the AFA urged insurers and ASIC to ensure the data captured around policy lapses and cancellations for the purposes of ASIC's review of the framework for the 2018 report be granular in nature.
It said the information should capture the reasons for cancellation in an impartial manner and it should also specify subset categories that identified:
- If it was client-directed or other reason (e.g. age-based expiry);
- If the cancellation followed a change in policy features either by the insured or insurer;
- If policy cancellation came with payment difficulty; and
- If policy cancellation was related to premium paid.
"So if an adviser in discussion with a client has cancelled a policy due to best interest duty reasons, then that shouldn't be penalised as a lapse for the purposes of the LIF reform assessment," Clarke said.
Clarke said the AFA, FPA, and the FSC would collaborate on the life insurance code of practice before releasing the revised legislation draft and said there were one or two differences yet to be ironed out.
"I believe it's around the timing of when they could release the consumer-only code versus when they could factor in commitments to advisers. We would like to see the adviser commitments fit in to the first release of the life insurance code of practice," she said.
Both the FPA and the AFA welcomed the second draft of the professional standards legislation, which provided extensions for existing advisers to attain a degree qualification.
The education and exam requirements were proposed to commence on 1 January, 2019 rather than 1 July, 2017 and existing advisers had until 1 January, 2024 to reach degree-equivalent status and until 1 January, 2021 to pass the exam.
However, Clarke wanted assurance that the independent standard setting body would have a board position that included somebody with practical experience as a small business adviser.
Marshan said while the FPA was largely comfortable with the board composition, it was concerned that some of the definitions were potentially restrictive in finding suitable board members.
"There's the ability to find academics who have an understanding of financial services but probably none that are currently lecturing or run courses at the moment so there's a perceived conflict there," he said.
"It is a more restrictive definition that just restricts the pool of people you can choose from."
Looking into the horizon
The FPA would also like the Government to focus on some of the other recommendations stated in the FSI, including strengthening product regulation and enhancing ASIC's powers to prevent faulty products from entering the market.
"They basically have to wait until something goes wrong with the product before they can shut it down," Marshan said.
"What that means is consumers are already invested in it, exposed to it, and are already going to suffer losses from it. So we think ASIC should have the powers to shut down products a lot earlier and a lot more aggressively to protect consumers."
Marshan also said that while ASIC should receive sufficient funding to be an effective regulator, small financial planning businesses should not have to pay disproportionately higher costs and big businesses should not receive discounts due to scale.
Both the FPA and AFA urged the government to examine statements of advice (SOA) in the second half of this year, to ensure it was easier for consumers to understand them.
They urged licensees, insurers, wealth management companies, and advisers to commit to concise SOAs that made it more relevant for consumers.
"At the moment we get feedback that the industry is providing huge documents to customers because they're so large customers don't read them so that's a concern for the industry," Clarke said.