At the recent Investment and Financial Services Association conference, Money Management conducted a round table in which industry leaders canvassed various issues facing the sector.
JM: Jim Minto (managing director, Tower)
BB: Brian Bissaker (chief executive, Colonial First State)
DR: Don Russell (global investment strategist, BNY Mellon Asset Management)
GF: Gerard Fitzpatrick (general manager of policy and government relations, Financial Planning Association)
BL: Barry Lambert (chairman, Count Financial)
RK: Richard Klipin (chief executive, Association of Financial Advisers)
MT: Mike Taylor (managing editor, Money Management)
MT: I’m just wondering whether the Government ought to be looking at Financial Services Reform (FSR) and the role of the regulators in all of the inquiries that are going on at the moment; whether the thing we’ve learnt out of Storm and Westpoint is that the regulations really don’t quite fit the industry.
JM: In just a very broad sense the regulators do a pretty good job, but I think there’s another point here that goes way back to HIH. When HIH blew up, all the people came out of the woodwork and said we’ve been talking about this for years, the problem was emerging, it wasn’t solved, and so on.
The Storm thing has been talked about for a long time. Why wasn’t it acted on? In a consumer sense, a lot of people who simply didn’t understand what they were doing were engaging in transactions that were jeopardising their personal savings in Storm. It’s not a question of whether the regulators going in, ASIC (Australian Securities and Investments Commission) in this case, determine whether there’s technical compliance with all the Statements of Advice (SOAs). The point is the substance of what was actually being dealt with here and what people are ending up with, and I think that that is the greater test.
And if there’s a lot of noise about Opus or Storm … and others, regulators need to be far more proactive in a commercial sense and make commercial judgments about what’s actually going on here. Now APRA (Australian Prudential Regulation Authority) does that in the banking and life environment and so on. It looks at it and asks, ‘What’s going on here?’, it’s not asking, ‘Have you filled these forms in right?’. It sees that, but it’s looking for the wider import.
BL: I think it’s nothing to do with commissions. Obviously commissions are in there with a lot of these things, but it comes back to quality advice. I asked [a member of an industry body] about Storm … whether they thought 10 per cent commission was moderate and she had no view on that fact when talking about Storm. She said Storm provided wonderful service. She said they took people overseas and did all sorts of things. The point is, if someone’s getting 10 per cent commission, there’s something wrong with that product and it’s going to come out of the pockets of the client. There should have been alarm bells ringing on Westpoint.
So Jim’s right, these things go on out there, everybody knows about them, but the regulations said tick these boxes, everything’s okay. Well it’s not okay, so we need effective regulation and we need advisers who know what in the hell they’re doing, and you’re never going to get that. The FPA (Financial Planning Association) doesn’t represent them very well, it’s a trade association. The regulator just has all these boxes you’ve got to tick and they admitted recently that licensing is too easy. The problem isn’t licensing, it’s people who have the licence who shouldn’t have licences.
RK: I’ll just comment on the regulation side. We sat around [at the IFSA conference] and argued the point that the reason why Australia’s been cushioned from global financial crisis is because there are regulations, so there needs to be credit where credit is due. However, at an IFSA dinner last night I think it was the deputy director of APRA who said in his introduction that he is the poacher turned gamekeeper in the sense of being close to the market and understanding commercially what’s actually going on. There’s lots of stuff that happens in the marketplace, and if we sat around the table representing all of our constituencies, we’d have a pretty good handle on stuff.
Just to Barry’s point on Financial Services Reform (FSR) … we think that FSR is actually being productive because what it has done is raise the bar. It’s certainly been clear, so consumers have a trust factor within the advice that they get rather than ‘here’s the latest glossy brochure and fill out the form’. Sometimes that was appropriate because you’ve got the right person with the right experience, but often chop shops were set up which just flogged stuff out the door, and whether it was in the best interests of the client was fairly debatable.
JM: I agree with Bill. Last thing we should be doing here is tightening up (FSR). In fact, the intra-fund advice rules are actually saying they’re going to recognise the need to loosen it up, not tighten it up, just make it more relevant.
The most valuable thing people want is advice. That’s what the super funds are asking for, they’re screaming out for it, they need more not less, so what we do need to do is make sure there’s some pragmatic, practical regulation and simplify disclosure for people who have simplified needs.
And it’s an old thing Barry was basically alluding to, you’re in this regulatory world, you underwrite the individuals, so whenever you’re going to do business with people like that [you ask], who is this person? What are they doing? What’s their background? The regulator should be able to understand deeply who these people are, what they’ve done previously and monitor their behaviour rather than the boxes they’ve ticked. The advice model is not broken, the quality of advice has been good. My problem is not enough people are getting access to it, and the few fringe players are stuffing it up for everybody else. So there’s just a few fringe players here who have been undetected who are stuffing it up for good advisers right across Australia. So don’t go and handcuff the good advisers to try to protect the few people who should be behind bars. Go and effectively regulate them.
GF: I totally agree with that. I think there’s always a tendency after an event such as Storm to really reach for stronger regulation … and we’re beginning to take a very balanced view on how we address this … The regulators working with the industry is a real basis on which to go forward.
So it’s not about giving the regulator some more powers. I think there are issues around licensing. I think there are a few issues that need to be addressed, but one of the primary things is ensuring the people who operate in the market are the right people. It’s very important that we don’t lose sight of the concept of quality advice. Over-regulation will stultify and limit the ability to provide quality advice, so we need to take that within the view of working with the capacity to provide advice by professional advisers.
DR: It’s not an area that I’m normally having to come to grips with, but just listening to what people are saying, I fully understand the need to be able to go further than regulatory arrangements [that involve] ticking the boxes. You can tick the box and it means nothing if the quality of advice is misplaced. But if the regulators are involved in whatever enables them to scrutinise the quality of advice, you’ll end up with a system where the regulator has a fair amount of discretion. You’re effectively wanting the regulator to say that the nature of the business, Storm or whatever, is just wrong, that people should not have access to the business because of its nature. You’re effectively saying in that situation that regulators should be in a position to make a judgment on whether the products being offered by this particular company are inappropriate ...
If you’ve got appropriately qualified people, they’ve filled in all the forms and the advice appears to take account of the needs of the individual, and everybody knows at the end of the day that the product being offered is really quite inappropriate, you’ve got to leave the regulator with the power … I’m not quite sure what the answer is. Maybe the natural practice is for the industry itself to take a greater interest in what its members are doing because, in some respects, it’s easier for the industry to do it because everyone gets tarred by the same brush, so if you’ve got an industry which is providing good service for 90 per cent but there are people at the fringes, it’s really very much in the interest of the industry itself to either name and shame or just drive people out of business.
GF: The regulator is always going to take a view on [quality] of advice through the prism of its role as enforcing the legislative requirements, and I think it is up to the industry to be talking about what is quality advice and what is inappropriate.
MT: So what is the view of the round table here on co-regulation, I guess, because that’s what Don has effectively raised, the question of the industry working in some way with the regulator to get rid of the bad apples?
JM: I think it can be done. [But] we can’t create a monolith that’s trying to audit every financial plan and their intent.
There’s a whole supply of information that feeds through from stakeholders, consumers, friends of people who get advice and so on, and just even listening and monitoring that information is important, but it must become more of a substance than form.
So to pick up the Westpoint thing, the regulator was attacking technical compliance of Westpoint structures with certain sections of the Act and arguing with them as to whether they complied. The reality was it was a blindingly dumb structure and it ought to have been said you can’t do this. If it has to be that, I don’t accept necessarily that it can’t be done, it just adds another layer. The industry would have to basically say everybody must be in an approved body and then we’re going to collectively crunch people and refuse to allow them to ever give advice again. That’s basically what you’re going to do.
MT: Richard, you sat at the table of an industry organisation. Do you think your members would be happy with a co-regulated environment?
RK: Yes, I think Don’s point is right. If we accept that the problems at the moment are the licensing — you tick a box and if you meet the criteria you’re in the door — and the scuttlebutt around the marketplace that says people are operating at the fringes ...
I think at those two points, the entry point and the operating outside point, that’s when market intelligence and people connected to the industry are going to be able to point that out before the disasters happen. ASIC has invested a lot of time in various consultative bodies. I’d suggest that needs to be tightened up with a far clearer frame of reference so that it’s actually there to feed into the various intelligence units within ASIC. With a bit of meaningful dialogue the confidence comes back because it’s been open season on advisers, every ill in the entire world gets down to the poor adviser who lives in suburban Australia, and blaming the mass for the sins of a few is nice convenient stuff, but it’s actually doing a disservice breaking down confidence.
So I think that’s definitely something on the table for Tony and the ASIC team to explore, but I think Association of Financial Advisers members would be pretty supportive of that.
MT: Gerard what do you think the view of the FPA would be on this?
GF: I think our members would be supportive, but we also have to look at what type of co-regulation we’re talking about. Quite often when you have a regulatory model, effectively what’s happening is the regulator is outsourcing its legal compliance obligations to the industry body. I think we need to think a lot broader and further than that. I think we need to think about where the expertise lies and where the appropriate requirements lie … There are practice standards, there are approaches that we can take where the industry is looking after what the industry does best and the regulator can look at the legal underpinnings that sit there, sits beneath that and support that, then we’re working together and we’re each doing the part that is most appropriate for us to do. I think that can work. I think it can work very effectively and it doesn’t necessarily mean that you then put on a whole new layer of additional requirements that obviously have an impact on costs and compliance.
So it’s about what type of model we want to have and how we can make that work, and I think if ASIC can see its role within a broader view of a regulatory framework, we can make quite significant steps in that.
MT: We’ve got all these inquiries going on at the moment and I’ve got to say, I don’t think even under the Hawke-Keating regime we’ve had quite so many reviews. I notice the PricewaterhouseCoopers research [at the IFSA conference] said it is undermining confidence in super and a whole lot of other things. To what degree is uncertainty being caused and do we accept the Minister’s offering to us to just accept that there will be this period of uncertainty and that we’ll have at least 10 years of certainty after that because no one will dare change the framework?
BB: The issue which I think makes consumers nervous is potentially the Henry Tax Review because of the implications for the three pillars [compulsory contributions, voluntary contributions and government pensions] and the re-weighting there. If you start playing substantively with those, that’s when we could face problems … [On the Ripoll Inquiry and Cooper Review], there would be some issues there and some issues around remuneration models. But the real potential damage comes out of the fact that it could potentially change the mix between concessional contributions and compulsory and government pensions.
DR: I think with the Henry inquiry the concern there, and I agree about the need to maintain the integrity of the three pillars, but I think there’s another level of uncertainty associated with Henry in the sense that the Henry inquiry is not just about super. Henry’s been set up to look at the entire structure of the tax system and doubtless there’ll be recommendations to do with a whole range of taxes which are quite separate from super, and I think the concern would be that as with all these things they are packaged, and if you’re reviewing the tax system there are going to be areas where the Government will want to provide benefits to the system.
There’ll be negatives, in other words, in terms of the tax break, but overall Henry will want to be tax neutral. There will be in the end a balance that goes on where they’ll want to find extra revenue to balance expenditure or tax cuts that they’re going to make somewhere, and that could be done at the end and not in the context of what’s in the best interest of particular areas but in terms of where it’s easiest to raise taxes.
So if you’ve got tax cuts to fund from somewhere, I think in that situation you do run into problems where at the end of the day judgments are being made about ease of raising revenue and not necessarily about the best interests of the individual sectors, which probably would be a concern that the industry probably has or should have.
JM: But the fundamental premise that people should be encouraged to save for their retirement, have their own choices, options, dignity and so on in retirement and the provision of local insurance through super is fantastic and it’s working very well. It’s a good model. There’s a lot of competition, there could be more competitors, but it’s not broke, it’s working well.
This is an edited transcript of the round table discussion.