The banks are circumventing FOFA says ISA

17 August 2017

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.”

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“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:

  1. 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
  2. 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
  3. Very limited obligations for those selling super products to make sure the products are suitable and in the interests of consumers
  4. 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.”

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Howling ranga Whiteley, you mean like the ISA has already circumvented it with their own little Labor granted carve out exemption from FoFA?

Terrible, imagine a level playing field for a change instead of the current mandated Union super funds funneling money to their own pockets, utter lack of transparency in fee and asset valuation & placement reporting, trustees not needing to adhere to the sole purpose test spending millions on sponsorship and 'hate' ad campaigns, and pure unadulterated product flogging with absolutely no need to provide advice based on best interests.

If the ISA are so pro FoFA, simple, they need to be made to adhere to the same rules, regulations, requirements and disciplinary action that the rest of our industry (and indeed the rest of the nation) has to abide by.

The 100% conflicted preaching to others. Oh spare me stanctimonous bleatings of ISA.

Dear ISA. If you can't say something nice, maybe say nothing at all? Especially when you are the pot calling the kettle black!

The banks are simply using the same carve out that the ISA/unions created for themselves with their ALP mates when they drafted the FOFA regulations together. It's pretty rich when you complain that someone else uses the rules you created. Further it is very telling that not once does the ISA/unions mention the impact on clients. They are only interested in the loss of funds out of their default funds, i.e. how the ISA/unions/ALP is affected.

“So far, we can see clear strategies based on general advice and switching members to choice superannuation products to obtain risk insurance commissions."
How can you switch a client to a new produce under general advice? I thought that would be automatically personal advice and be an SOA

For Financial Planners YES. For everyone else NO!!!!!!!!!!!!!!!!!!

Two points:
I join an Industry fund due to it being my employers default option and receive automatic group insurance. As per recent MoneyManagement article quoting David Hayne, “I am aware that some of our super fund members have risk sharing arrangements in place with their insurers,” So they receive a payment for insurance products clients are given without their consent.

Secondly “Very limited obligations for those selling super products to make sure the products are suitable and in the interests of consumers”.
The group insurance automatically given has exclusions for pre-existing conditions. So you are charging them premiums and receiving payments for something they may never be able to claim on. You also have not completed any assessment to determine ‘the products are suitable and in the interest of consumers’. What if they don’t need insurance?

Please, let’s have an honest chat about ‘lower levels of consumer protection’!!!!!

Maybe the reason consumers are flocking to direct, bank-controlled super funds is because they have finally realised industry funds aren't all that good.

If the insurance products within products such as Industry Super were of any value, of course I would recommend them. Seriously, how could I recommend a product with a TPD definition that makes it almost impossible to ever successfully claim against or income protection that may only pay for up to two years? The definitions and now more often than not the cost, are the reasons I recommend retail products instead of group life.

Not to mention the fact that any income protection policy held within super won't pay a benefit to anyone who is not actively working at the time of the injury or illness. All of these industry super members with their default income protection cover think it's going to be there for them but if they just happen to be in between jobs when they suffer the injury or illness then the policy can't provide them a benefit. This is an issue with all IP in super but a bigger issue for people who blindly believe that the cover they've been gifted by the super fund will be there for them when they need it.

I wonder if this communication was sent by Industry Super Funds preferred method of communication..a guy on a donkey and a fax, straight out of the factory in Ukraine.. how is belonging to a fund like that in anyone's best interest is beyond me.

Of course the ISA fails to mention that it is actually possible to access some individual super funds at a lower admin fee than many default super funds. Which actually meets the ASIC best interest requirement for fund members.

Industry Funds operate under a vertically-integrated model themselves. When their members call they will be encouraged to roll all of the super into the one product, buy & retain all insurances through their one provider, and will not consider any other available products in the market. The recommended strategies are biased towards maximising member's super balance and sums insured.

How is this in line with FOFA or clients' best interests? Financial planners who aren't employed by an industry fund cannot legally operate like this.

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