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Parliamentary Joint Committee on Corporations and Financial Services
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Parliamentary Joint Committee on Corporations and Financial Services
Boyce, Sen Sue
Smith, Tony, MP
Stephens, Sen Ursula
Cormann, Sen Mathias
Thistlethwaite, Sen Matt
Fletcher, Paul, MP
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Parliamentary Joint Committee on Corporations and Financial Services
(Joint-Monday, 23 January 2012)
Mr TONY SMITH
CHAIRMAN (Mr Ripoll)
Mr TONY SMITH
Mr TONY SMITH
Mr De Gori
Mr TONY SMITH
Mr TONY SMITH
Content WindowParliamentary Joint Committee on Corporations and Financial Services - 23/01/2012
BROGDEN, Mr John, Chief Executive Officer, Financial Services Council
DORBER, Ms Holly, Senior Policy Manager, Financial Services Council
STORNIOLO, Ms Cecilia, Senior Policy Manager, Financial Services Council
CHAIRMAN: Welcome. I invite you to make some opening remarks.
Mr Brogden : The future of financial advice reforms is the most significant reform to the provision of financial advice in its history. The Financial Services Council has led and embraced the overall majority of these reforms. As an industry, we want higher standards of financial advisers, we want the best-interest duty which puts the consumers' interest at the heart of the adviser-client relationship, and we want an end to remuneration structures which distort advice. These and other aspects of the package are important for the future of the industry. They have our support and we have worked hard with the government to achieve them.
When the then Minister for Financial Services, Chris Bowen, announced FOFA in April 2010, he stated that the dual objectives of the government's policy were to minimise conflicts and to improve access to advice. In its current form, this legislation will achieve the first but fail to deliver the second. There will be fewer advisers providing advice—yes, in the best interests of the client but at a higher cost and to fewer people. It would be a perverse outcome of FOFA if fewer Australians received advice because of these reforms.
Mr Chairman, I can advise the committee today that modelling based on data from the industry indicates that the full implementation cost of FOFA will be $700 million. This figure is based only on what we know now in tranches 1 and 2 and we cannot take into account further legislation yet to come. I can further advise the committee that the annual cost of complying—on top of the $700 million implementation cost—will be $375 million across the industry. Ultimately, consumers will bear the brunt of these costs as the price of financial advice increases. Worse, too many people will stop receiving advice, or will not seek advice at all. At a time when our ageing population and growing superannuation balances mean that Australians will need more and better financial advice, the wealthy will get advice while the majority of Australians will receive virtually none, and many advisers will leave the industry as they find the transformation too costly.
Financial advisers who cannot meet the new professional standards should leave the industry, but experienced, well-credentialled advisers in towns and suburbs across Australia will also exit the industry. For every financial adviser there are usually several paraplanners and administrative staff. For the bigger companies, there are scores of back office staff. Many of these jobs will also go.
Some have argued that intrafund advice will be the solution to the increased cost of personal advice. It is an illusion to believe that intrafund advice can provide the wide range of advice that Australians need. In this debate it seems to have been forgotten that intrafund advice only applies to superannuation; it does not apply to life insurance, debt and income protection, saving for a house, education and all of the other financial decisions and challenges that people face. Intrafund advice in its current form in this legislation is the opposite of the spirit and the principles of FOFA. It is distorted, it is conflicted, it includes hidden payments, and there is no opt out.
The real opportunity to provide advice to hundreds of thousands of Australians who have never received financial advice lies in a workable system of scaled advice. Many Australians need more advice than intrafund advice can give them, but they do not need a full financial plan. These people need a very limited piece of advice which meets a specific need. This is achieved by a legal framework which allows scaled advice where clients and their adviser agree on the scope of the advice being sought. Lastly, the best-interest obligation needs to be defined so that the industry understands exactly what they must do to comply with this duty and there must be a 'reasonable steps' defence so that advisers who comply with the rules have a defence in law.
These reforms are important. We believe that more than 80 per cent of the package will ensure Australians receive better financial advice. However, the 20 per cent, or the matters we raise today, risk putting financial advice out of the reach of too many Australians. Thank you.
CHAIRMAN: In terms of the $700 million extra cost with tranches 1 and 2, could you give us a bit more explanation for how you determined those figures?
Mr Brogden : Sure. We surveyed our members. We represent four broad categories of membership. We represent the funds management industry and financial adviser networks—not individual advisers but the businesses, or more properly, the licensees. We represent the life insurance industry, and the superannuation sector which, we appreciate, is a very hotly contested public space. As a consequence, many of the companies that have made submissions to you such as AMP, who I know are here today, are our members and we have worked very closely with them in our representation of the industry.
We surveyed our members across the industry and we received from a good number of them their estimated cost of implementation. We were able to extrapolate that across the industry and arrive at a figure of $700 million. The figures we used included four of the five conglomerates, if I can use that phrase: AMP, MLC, BT, Colonial First State and OnePath ANZ. These five companies which have contributed to that data, bearing in mind they represent 70 to 80 per cent of the industry. So we were able to use that information to deliver a figure of $700 million on the implementation costs and $375 million on the annual costs. That goes from the large companies right down to small mum-and-dad adviser shops in country Australia.
CHAIRMAN: In the survey did you ask or have you been provided information or advice on the disaggregation in the overall cost? Cost is one thing. The other is there are already charges. It is not cheap to get financial advice. How much of the cost of advice is actually directly put back into the service that is provided? What is the disaggregation between the new cost as additional compared to a cost a service will now have to provide even though for some they may have already been charging for it in the past?
Mr Brogden : If I understand you, the existing cost is the existing cost. The $700 million is a new cost, so that would be added to whatever their existing cost for advice is.
CHAIRMAN: I understand that is what they are saying now. Have you done any work, have you got any advice, on disaggregating that figure? Out of that figure, have you tried to determine how much of that has already been paid for but the service not provided?
Mr Brogden : None.
CHAIRMAN: I am giving them an opportunity to answer. I am sure they are more than capable.
Ms Storniolo : The law has not passed yet.
CHAIRMAN: Have you been given the advice that this is a 100 per cent transfer?
Mr Brogden : This is to comply with all of the new requirements of the legislation.
CHAIRMAN: That is it—I was just asking the question.
Mr Brogden : There are no costs already being expended by our member companies to comply with the legislation as it stands, mostly because obviously we do not know what it is going to look like.
CHAIRMAN: You also said there would be fewer people getting advice, it would cost more and it would be in their best interests but would be tilted to larger holders of funds—so the more wealthy. Does that mean that others go somewhere else or are there provisions for people to get cheaper advice? In the work we did, one of the big problems we found was that advice is out of reach for the vast majority of Australians.
Mr Brogden : There are two poles of advice that are provided presently: intrafund advice in its current form, which the legislation will seek to expand—we have commented upon that and are happy to comment again—and full or comprehensive advice. The industry figure you would have most heard is about $2,500 for the provision of full advice. At the other end, I cannot speak to the cost of that advice. There are, I think, hundreds of thousands of Australians in the middle who either want financial advice but simply cannot afford it at that scale or need more than they will get over the telephone. The real opportunity that exists to provide that—an exciting opportunity, frankly, for the industry and for Australians—is scalable advice. The only way scalable advice will work, however, is if the best interest duty is agreed between the adviser and his or her client; otherwise, no adviser will be confident in providing that advice because the opportunity for ASIC to interpret the legislation and consider that an adviser has acted not in their client's best interest is so wide no adviser would be prepared to risk their licence or status on providing scaled advice in the current form. We really want to provide scaled advice. I use an example in our submission: let us think about someone whose mother dies and leaves them $50,000 out of the estate. That person does not need full comprehensive advice and they need more than they would get over the phone. They would probably have a handful of questions: do I put it in the bank, in a term deposit, in my superannuation or do I pay off the mortgage or do I go and buy some shares?
That is very scoped and scaled advice; it is not worth $2,500, and they would not pay $2,500. But they need to go to a place to get that basic advice, and that does not exist at either end of the market. That is why scalable advice is exciting. The objective of FOFA has to be that more Australians get advice, including people who have never received it before.
CHAIRMAN: You also said—I am just checking on a figure—there was a $375 million annual cost. Could you explain the extra cost. Is that on top of the $700 million you were talking about?
Mr Brogden : That is correct. That will principally be the provision of statements and extra paperwork. Paperwork is the—
CHAIRMAN: Annual statements—
Mr Brogden : Information is a better way of saying it—so, the opt-in requirements that are provided there. The compliance costs will be very significant. Broadly speaking, that is what covers that: compliance and information costs.
Senator BOYCE: Regarding the figures of $700 million for implementation and the $375 million a year, what would you anticipate the impact of that cost on the industry will be?
Mr Brogden : Twofold. The first one is that there will be increased costs. They will have to be passed on to consumers. We are very concerned about that, for obvious reasons. The second one is job losses. We are already aware that many of our members are preparing to slim down as a consequence of the implementation costs. They could least afford to do it, in terms of the requirements of implementation. We think the two major effects will be more expensive advice and job losses.
Depending on how you read this value chain, if you look at a planner with a small business—they may have some para-planners and back office staff—the sheer implementation and compliance costs make their burden very significant. Some of them will simply sell the book and walk away, and they have already started doing that. There is higher than—
Mr TONY SMITH: You said 'sell the book and walk away'. There is the related issue of what the book is worth.
Mr Brogden : That is exactly right. At the moment there is so much activity in the adviser market. There is concern but the biggest problem we face at the moment in terms of valuing businesses—and my colleague from the Financial Planning Association will speak much more authoritatively on this—is that we do not know what is going to be in the legislation, one and two, let alone tranches three, four, five and six, whatever they might be. So, valuing a business in this level of regulatory uncertainty is very difficult, and it only goes one way; it goes down. You do not value it up with regulatory uncertainty, you only value it down.
Senator BOYCE: But will there be a fall in the availability of financial advisers and financial advice.
Mr Brogden : There will be. There are two reasons—
Senator BOYCE: Isn't that exactly to opposite of what FOFA is setting out achieve?
Mr Brogden : That is right. There are two reasons for that. One is that there will be some advisers who cannot meet these professional standards. We are happy for them to go. This is a new world of financial advice. There is a greater expectation of professional standards and we embrace and support those. But, more particularly, there will be a number who simply cannot afford to be in the game any more. As a consequence, their jobs will not be filled at the pace of their retirements and resignations. So, there is no doubt there will be fewer advisers providing less advice.
Senator BOYCE: So, at the time you are trying to improve the professionalism, the integrity and the training of the sector, you are chopping it—
Mr Brogden : People are leaving, they are walking away, some because they cannot make the grade, and we are happy to see them go. But a large number will go because it is just too hard. That cannot be allowed to happen and it cannot be a consequence of FOFA that there is less advice.
Senator STEPHENS: This morning we heard one submission in which there was a suggestion that the legislation has a proposed ban on overseas professional development. Do you see that as an issue, and, if so, why?
Mr Brogden : We do not have a strong view on this. We simply think that companies should be able to determine appropriate professional education for their staff—in some cases that may mean overseas, or it may mean domestic. I think those sort of small facts are something we can get tied down on. But the reality is that it is whatever is appropriate, as long as it is appropriate professional education, which would be taken for granted.
Senator CORMANN: Just going back to the additional costs out of FOFA: $700 million for implementation; $375 million ongoing. That is across the whole financial services market, from product providers all the way down to financial advisers?
Mr Brogden : It is.
Senator CORMANN: And tranches 1 and 2. Does the Australian community get $700 million worth of additional value as a result of that additional cost?
Mr Brogden : They will get best interest advice, although we have argued and we continue to argue that there has to be definition there. But, no, there will be elements of this package that will be costly for what we regard as no particular benefit.
Senator CORMANN: Do we need $700 million plus $375 million a year in costs to ensure that people get best interest based financial advice?
Mr Brogden : No, we do not.
Senator CORMANN: So which parts of the package are redundant? Leaving aside what compromises you may or might not want to have entered into with the government, looking purely at wanting to make sure that we do not have conflicted remuneration and that we have a best interest based advice structure, what are the must-haves and what are some of the things that are just increasing costs for no additional value?
Ms Storniolo : I think if we had kept to the PJC's original recommendations we would probably get those costs and those benefits for consumers. If we kept it to the best interest duty and defined that the duty gave reasonable steps defence and allowed scalable advice so that consumers can get more advice at a cost that they can afford and are willing to pay and if we banned the true conflicted remuneration—for example, the product embedded commissions—then those two measures would deliver a great deal of the benefits and the consumer protections to consumers.
Senator CORMANN: So you, too, are supporters of the original Ripoll inquiry report and recommendations?
CHAIRMAN: What happened?
Senator CORMANN: I feel to compliment you, Chair, on the public record for your great work. If only the government had stuck to the Ripoll inquiry recommendations—
Mr Brogden : They would have it now.
Senator CORMANN: Yes. Going back into some more detail, can you talk us through the specific concerns you have around the definition of the best interest duty and what it is exactly that you would like to see by way of amendments to make sure that it appropriately captures the best interest duty in the way in which it was envisaged?
Mr Brogden : Thanks, Senator. We think reasonably the abolition of—is it (g)?
Ms Storniolo : There are a couple of measures. First and foremost—if I could just butt in—the way in which the current best interest is drafted is as a collection of duties and obligations on the adviser. The very first thing it says is that the adviser must act in the best interest of the client, but it does not actually define it in any way, shape of form. It then goes on to say that if you do these conduct steps you will be presumed to be acting in the client's best interest. But there are two measures within those conduct steps, in particular (g), and the fact that an adviser has no capacity to agree on the scope of the advice with the client. Those two measures alone mean that there is no ability to define or have an understanding of what the definition means.
Mr Brogden : Subclause (g) effectively becomes a catch-all. So it indicates in the preceding requirements what is in and not in, effectively, for best interest deputy and then concludes by saying, 'And, by the way—
Senator CORMANN: Take everything into account.
Mr Brogden : Yes—take into account everything else that may be included.' We as an industry have been torn by this. We generally tend to prefer a principles based legislation; however, because of the nature of this and because we as an industry or as advisers do not as a profession have the history that the medical profession and the legal profession do with respect to fiduciary duty and behaviour. We appreciate that there needs to be some level of detail, but how the legislation can identify some detail and then put a catch-all at the bottom and still expect advisers to meet the duty is unthinkable.
Senator CORMANN: It puts a catch-all at the bottom of the section that you have just quoted and it also mentions in the explanatory memorandum that an adviser is required to consider the client's overall circumstances before being able to scale advice in the best interest of the client. That would seem to take away the capacity of the industry to provide scalable advice in the way intended in the definition.
Mr Brogden : Yes, that is right. It is almost as if you have to undertake a full advice scope to realise you do not need to undertake the full advice scope.
Senator CORMANN: Yes, and charge the client for the exercise of scoping full advice.
Mr Brogden : Absolutely.
Ms Storniolo : There are a number of issues with it because the duties are a compilation of conduct steps—for example, conducts from (a) to (g). Then there is a requirement to know your client, know the product. You have to give reasonable advice and appropriate advice. You must then prioritise the client interests above your own and those of any other related party. Because it is a collection of all these things, a court of law is likely to look at it and say, 'It is not priority, it is not conduct and it is not reasonable investigation and reasonable advice,' so what is best interest? If it is not one of those things in particular, what is it above and beyond all of those things?
Mr Brogden : I guess our point is if you go into some level of detail then you need to complete that journey. To provide all that detail and turn around and say 'and whatever else' is too risky for advisers. It makes complying very difficult.
Senator CORMANN: So your assessment is that under the legislation as it stands there is no safe harbour. There is difficulty around providing scalable advice. The question in relation to this is: would the removal of what you describe as the catch-all provision in clause 961B(2)(g) from the second bill achieve what you are looking for, or are there other things that need to be done?
Mr Brogden : That achieves the greater definition of best interest duty. So that would help us with the best interest duty. In the broad, in terms of specifically referring to scalable advice, we need another set of amendments which we have outlined in our submission.
Senator CORMANN: What are they?
Mr Brogden : We need the ability for the instructions to be agreed between the client and the adviser. In our submission we provided you a redraft, if you like, which makes minor amendments to the current legislation that would not only enable scalable advice but afford the protections within the spirit of what the government has put forward.
Senator THISTLETHWAITE: I think it is recommendation 19 in your submission. You do not delete subclause (g), do you? You simply add some words to it.
Ms Storniolo : No, that is right.
Senator THISTLETHWAITE: So is it your submission that you want subclause (g) deleted?
Ms Storniolo : Our preference would be for it to be deleted.
Senator THISTLETHWAITE: But that is not in your submission.
Ms Storniolo : That is right. We perceived it would be more reasonable to work within the scope of the drafting and look at those amendments that would maximise the possibilities of achieving success post these hearings, for example.
Senator THISTLETHWAITE: I think we need to clear this up. Are you submitting that we should adopt recommendation 19 of your submission or do what you are saying now?
Ms Storniolo : We would prefer you to delete (g), but if you will not delete (g) then we would consider that recommendation 19 is the alternative.
Mr Brogden : We are saying that is the very least you should do.
Ms Storniolo : That is the very least, working within the spirit.
Senator CORMANN: We had one of your members here this morning, AMP, and they were advocating for the deletion of (g), fairly and squarely. That is the context of the question.
Mr Brogden : If I could just make an analogy, it is like going to get your car repaired and the car repairer telling you you need a new set of windscreen wipers and a complete grease and oil change when you are saying all you want is a new muffler. They are trying to up-sell you. If all you want is a certain requirement, that is all you should contract for.
CHAIRMAN: Unless your oil does need changing, and the professional would be the person to provide you with that advice. That is the problem with analogies. It is like a medical analogy: the professional is the one with—
Mr Brogden : You have to make a judgment. You might not be able to afford the oil and you might be happy for it to keep on going.
Senator CORMANN: The consumer is probably—
CHAIRMAN: The advice might be that the engine will blow up.
Senator THISTLETHWAITE: I can see you pulling apart every house and rebuilding it.
Senator CORMANN: You state in your submission that the proposed annual fee disclosure statement should be prospective only. Can you just explain to us the concerns of the industry if such statements were required to be retrospective? Also, before the current legislation was tabled were you aware that there would be a requirement in it that annual fee disclosure statements would be retrospective?
Mr Brogden : I was not quick enough. I should have said you must have a different mechanic to me! First of all, our understanding of this legislation has always been that one principle to which it would adhere is that of prospectivity—that there would be no retrospective application of legislation. As you know, as serving parliamentarians, retrospective legislation is something that is only undertaken in two circumstances. One is matters of extraordinary significance such as national security. The other one would be where you are willing to pay compensation. So we had never expected there to be any retrospectivity in this legislation. What the government has proposed here is clearly retrospective. Part of the cost that will be attached to it comes from the sheer age of some of these products. AMP could speak much more authoritatively than we could. It is a company that has been around for an extraordinarily long time and some of the benefit funds they had were written in COBOL computer systems. The cost of reopening and re-engineering them potentially for a closed product with a very small number of members is significant.
Senator CORMANN: So significant complexity, significant cost and additional red tape—we are talking $700 million and $375 million ongoing. Are you surprised that the government did not go through a full and proper regulatory impact assessment, as is required by the government's own best practice regulation requirements?
Mr Brogden : We would have preferred one.
Senator CORMANN: Do you think there should still be one before this goes ahead?
Mr Brogden : Yes. We would like to see that. Clearly the government is not willing to do that at this stage.
Senator CORMANN: The parliament has got to make a judgment on whether we want to force the government to have a regulatory impact assessment. Given the magnitude of the costs involved, given the magnitude of the complexities involved, given the implications for a significant industry and for consumers across Australia, do you think it is desirable to have a proper and full regulatory impact assessment before considering legislation like this?
Mr Brogden : Yes, with one proviso—that is, as long as the implementation date moves back.
Senator CORMANN: That was my next question. I suspect I know what the answer is going to be. Do you think that the 1 July 2012 implementation date is realistic? Do you think it would be more desirable to align the implementation date of both FOFA and My Super? If so, can you give us a bit of context around that from your point of view?
Mr Brogden : No, it is not realistic. Yes, we would like to align them. I think originally the government's hope, understandably with its parliamentary agenda being significant, was that this legislation would go through in the second half of last year. We may have been able to wear elements of it then coming into force on 1 July 2012. It is now inconceivable. You could advise us, but this will not go through parliament or through the House of Representatives until March, April or May.
Senator CORMANN: Mr Brogden, have you seen any regulations yet?
Mr Brogden : No. That is the issue. As you know, once the legislation goes through, Treasury will have to provide the regulation. If we are lucky, we will know what the law says on 30 June 2012 for an implementation one minute later.
Mr FLETCHER: On the implementation complexities, in your consultations with Treasury has there been much chance to talk about, for example, the IT reworking, the retraining and all the other aspects that are required.
Mr Brogden : Thank you, Mr Fletcher. The first thing I want to say—and I say this at every opportunity I get, both publicly and to the Treasurer and Mr Shorten—is that Treasury have been faultless through this process and they have been extraordinarily consultative. We are very happy with the access to Treasury. We also say publicly that, despite their best efforts, this has been very complex and it is an areas they have not had expertise in. So there has been a very significant learning period, but access has been exceptional.
I would say that we have made it very clear on a number of occasions and our members have made it clear directly to Treasury, we have made it clear to the minister and our members have made it clear directly to the minister, that cost is significant for IT implementation alone, let alone training costs. At the very least, our members need a six- to nine-month run-up period before they can start implementing it. That is one of the other reasons why we think a 1 July 2013 date, which of course synchronises with the My Super start date, makes perfect sense. In effect the government is going to get massive change. There is no downside in waiting 12 months. In fact, there can only be an upside and that upside will be that the industry will be better prepared to provide best interest advice and adhere with this legislation.
Mr FLETCHER: In terms of your large members, what is the scale of the IT change program that is required to implement this?
Ms Storniolo : I might just quickly add to the previous question. With regard to the fee disclosure statement, particularly with regard to the retrospectivity of the statement, that was never discussed in any detail with Treasury, particularly with the peak consultation group. It was never, ever alluded to until it appeared in the legislation which was tabled in parliament. Indeed, in the month just preceding the bill being tabled in parliament, the conversations with Treasury, peak consultation groups and other consultation participants was that the policy was determined and it would be prospective, and therefore no discussion was entered into. So, in terms of the IT cost and the burden et cetera, with regard to that measure alone, there has been no discussion at that consultation level. In terms of other measures, we have been talking to Treasury, as John has alluded to, for about 18 months. In particular, that peak consultation group process has considered a substantial number of the measures.
Senator CORMANN: This process has been going for more than two years and there were a number of late changes. In April 2011, which was late in the piece, there was a proposal all of a sudden to ban commissions on all risk insurance, all individual and group risk. That has been scaled back a bit now. Then we had this change. Where did these changes come from if they were not part of the consultation that you were involved in? Mr Brogden, you tell us that you had great access and regular contact, yet you were still taken by surprise at the end of a two-year consultation process. Where did these ideas come from if they were not part of the consultation process?
Mr Brogden : I guess one perspective is: the longer these things are out in the open rather than legislated the more people will put ideas forward. Other participants in this debate will be very disappointed about the way this legislation has turned out, because it does not go far enough. I cite, for example, Choice, who will be disappointed with some of these requirements, despite the fact they themselves have become a financial services provider in recent months and have no interest or no expectation to meet the best interest duty. We cannot explain why these changes have kept on going. We found ourselves in a difficult position with the minister, and we were very honest with him. On one hand he was saying, 'You guys keep complaining about this taking so long and now you want to slow it down.' We were saying, 'Because it keeps changing.' If it was, broadly speaking, the same piece of legislation—without wishing to join in on the banter—that is, if the recommendations—
Senator CORMANN: Please go for it!
Mr Brogden : as put forward by the Ripoll committee, broadly speaking, had formed the basis of the legislation and there had not been an expansion, you would have that now. I assume that would have been through the parliament and we would be almost implementing it. The continual expansion and the shifts have made it very hard for us to keep a clear direction. It has also made our members very shy in providing the implementation process. Why would you be prepared to spend tens of millions of dollars on your IT upgrade when the legislation keeps changing all the time? We have already had three plans on what insurance will look like.
Senator CORMANN: Can you talk us through the insurance status? We had the initial proposal in April last year to ban commissions on all individual and group risk. That has now gone down to banning commissions on just group risk. What is your assessment of where things are at, in terms of the treatment of commissions on risk insurance inside superannuation? Do you think we have reached the right place or is there still a bit further to go?
Mr Brogden : We have reached a workable compromise, with one exception that Holly will speak to. We are broadly happy that a directly advised individual will still be able to receive their advice on a life insurance product via commission.
Senator CORMANN: What happens with directly advised insurance in a group insurance context?
Mr Brogden : That is the challenge. That is the issue.
Ms Dorber : To be clear, we support the ban on commissions for a default product, where a member in a super fund has not made any selection for their individual needs. The concern that we have is about the way it is drafted in the legislation. It creates an artificial distinction between individual advice, as John was saying, and group policies. It is a structural difference. The way that policies inside superannuation are structured provides administrative simplicity for the trustee and gives members access to wholesale insurance rates. But the way that it is drafted means that, if a member seeks advice and tailors their insurance, whether it is the type of product they hold or the sum insured that they have, they are not able to make a decision about how their adviser is remunerated. If that is by commission, that will be banned under the current drafting.
Senator CORMANN: In an ideal world, what sort of amendments would the parliament have to make to the legislation to put it beyond doubt that the ban is on default insurance inside super rather than on any advised insurers?
Mr Brogden : We are referring to people who are covered presently in the default arrangement but who believe the $50,000, $100,000 or $200,000 life cover or whatever might be the income protection cover is inadequate. They want to top up; that is effectively what the industry would describe it as. For those individuals, we believe that, once they move into a directly, personally advised relationship, there should be the ability for them to have their adviser remunerated via commission.
Ms Dorber : Yes. It is a relatively simple amendment to the legislation. It would just be deleting proposed section 963B(1)(b)(i).
Senator CORMANN: It's simple!
Ms Dorber : It is very simple! It is deleting the reference to group insurance where it is not default.
Ms Storniolo : It is recommendation 24 in our submission.
Ms Dorber : That is easier. Also, if there were a need to create extra protection for members, you could put in a provision saying that, if you are an RSE licensee and you are in a choice fund, you cannot default members in that fund into any insurance products.
Ms Storniolo : It is important to remember that, from 2013, SG moneys will go into a MySuper product which will have all the protections afforded to consumers—in particular, commissions attached to those products. If the MySuper legislation and the rest of the legislation from the super package goes through, there will be a period not too far after 2013 when all remaining default clients will be moved into the MySuper arrangements. So, from a consumer protection perspective, a lot of consumer protection mechanisms are built into those processes.
Senator CORMANN: Quickly going back to the annual fee disclosure requirements, you mentioned in your submission that it would cost around $54 per client prospectively and $98 per client retrospectively. Is that going to be a cost that will be passed on as such to the clients?
Ms Storniolo : That is the opt-in cost, yes?
Senator CORMANN: Also, I guess I am trying to understand how the process required under the legislation which is causing these costs compares with the fee disclosure arrangements that are currently in place.
Ms Storniolo : We have already heard from a number of participants that highlight that there are already disclosure requirements in place in the market. The law at the moment requires that product providers provide that information—that is the way it is currently structured—because the law has structured it so that a financial product provider has to provide it. The proposed legislation puts the obligation on the fee recipient, which is explicitly the adviser, not necessarily just the licensee. Clearly the licensee has the obligation to ensure that their employee or authorised representative complies with the law. So these are additional costs.
Senator CORMANN: But the more product providers you deal with, and the more diverse a product offering you make available to your clients, the more complex the implementation of that requirement would be for you as an adviser. Is that a fair assessment?
Ms Storniolo : Yes, it is.
Senator CORMANN: So going down this path and putting that obligation onto the financial adviser would actually provide a disincentive to have a more diverse product offering. It would provide an incentive, in a way, to deal with a smaller number of products.
Ms Storniolo : Yes, potentially.
Senator CORMANN: Which is counterproductive, really.
Ms Storniolo : That is right, potentially—or to seek the IT provider who can solve that issue for you, because, as we have heard before, there are multiple service providers that will have to feed information through to that adviser. That adviser will also be required, because of the minutiae of detail that are required by the legislation, to capture other information. For example, any time the client calls, any time they send them a fax or anything that is a detailed minutia recording of the activity the adviser has had with that client will also have to be recorded, and that does not exist today.
Senator CORMANN: So the annual fee disclosure requirement does not provide information the client does not already get; it is just that it would bring it into one piece of paper, whereas at the moment it might come from different directions.
Ms Storniolo : That is right. So today the client will receive it from their product provider—their super fund, for example. Tomorrow they are going to get it from their super fund and their financial adviser.
Senator CORMANN: Which is redundant.
Ms Storniolo : So the consumer has the potential, I guess, to get confused and think they are two different things—two different costs—and they are paying twice.
Senator CORMANN: 'I've paid twice.'
Mr FLETCHER: But you also have a concern, don't you, about the wording in the draft legislation that requires each paragraph to provide so-called 'details'?
Ms Storniolo : That is right. We have concerns about the details. If we look at the principle of this measure, the principle is to ensure that the consumer understands exactly what they are paying and what they are getting. If that is really the objective of the measure then does the client really need to be reminded that they called the adviser 20 times and received X amount of emails? The key is what the client paid last year, what the client will pay in the forthcoming year and what services they agreed to.
Mr FLETCHER: So the requirement is a lot more onerous than it needs to be to achieve the policy objective?
Ms Storniolo : That is right.
Mr Brogden : We believe a summary can provide that.
Mr FLETCHER: I also ask about section 1528, which is the one that supposedly delivers on the minister's commitment about grandfathering of remuneration. You have a concern that that does not really work.
Ms Storniolo : We have concerns that the way it is drafted there is confusion in the industry from the legal community as well as some of the lawyers in our member group. If the community cannot agree on what it actually means then what does it mean? Our concern is that, the way it is currently drafted, it ensures that the ban on commission is not a prospective ban but an actual retrospective ban; therefore, it does not match what the minister has said.
Mr FLETCHER: It specifically bans payments from platform providers, and that is—
Ms Storniolo : Eighty per cent of the market today.
Mr FLETCHER: the bulk of the commission flow now. So how could they have put in a provision which does not really seem to understand how the market works?
Ms Storniolo : I cannot speak for the parliamentary drafters. I am sorry.
Mr FLETCHER: Perhaps wise.
Senator THISTLETHWAITE: You said that in terms of disclosure your organisation feels that a summary of the breakdown would be sufficient. Can you expand on that a little bit? What are you talking about? What level of detail would it be?
Mr Brogden : Sure. First of all, we are happy to negotiate and discuss openly with the government what that looks like. Our submission would be, to use Cecilia's example, to ask whether they needed to know there were 20 phone calls? Could they simply have a heading that says 'services'? It is that level. It is the difference between getting something that looks like a telephone bill and something that looks like a one-page summary statement. Research costs would be one indication. Servicing costs would be another. Those would be two off the top of my head. We are generally advocating a summary of information. We want to make it very clear that we are quite comfortable with that information being provided; in fact, we think it is essential. We just do not want to put so much information on there that it almost confuses people.
Senator THISTLETHWAITE: What about models that have the payment of ongoing fees out of the asset?
Mr Brogden : First of all, an ongoing fee would be an agreed relationship between the client and the adviser. It would not be a trailing commission, because they are banned. It may be, for instance, a repayment arrangement where you may pay the cost of the advice over four years. So, yes, that would of course have to be disclosed. That is entirely appropriate.
Ms Storniolo : Asset based fees are interesting. They are ongoing costs regardless of whether they are a percentage or not. We are advocating for a dollar amount to be estimated and included in the statement for prospective cost and, retrospectively, for what advice was received from the client in the previous 12 months. That should be as a dollar amount popped into that statement. Technically, the asset based fee notion is going to be no different from the notion of the intrafund advice fee, which will be charged as an admin fee to all consumers of a super fund in the future. They do not opt in for that and they do not necessarily get the service, so there is a mismatch.
Senator CORMANN: I have a final question in relation to the same issue. Intrafund advice, of course, is covered as part of the MySuper legislation, and FOFA is supposed to be about transparency of fees, removing conflicts and so on. There seems to be an inconsistency, doesn't there, between the proposition that super funds can bundle the cost of intrafund advice into their overall admin fee, which is not transparent, and that they can also charge it to 100 per cent of the fund's clients even when only three to 10 per cent of the clients access that advice. The chairman made the comment earlier that, while intrafund advice does not just apply to industry super funds but is available to all super funds, what is your assessment of the desirability or otherwise of intrafund advice and the consistency or inconsistency of intrafund advice with the objectives of FOFA?
Mr Brogden : We think that the provision of intrafund advice as proposed in this legislation is completely at odds with all the principles being outlined in FOFA. It benefits those who provide intrafund advice—and they could be industry funds or retail funds. Frankly, the retail sector does not want to provide intrafund advice that is not disclosed and not in a manner from which you can opt out. What we are meant to be abolishing with FOFA is people paying for something that they do not receive. That is exactly what is going to happen for the X per cent of members of a superannuation fund who pay in one form or another through a service fee for somebody else's advice, effectively.
We are trying to make all the advice relationships placed in a position where a client can opt out at any time. But how can you opt out? There will be no allowance for a member of a super fund to opt out and there will be no requirement for a super fund to allow an individual member to say that they do not want to pay that portion of their service fee that goes towards providing advice for somebody else, and there will be no disclosure of what the cost is.
So we are advancing significantly towards a professional industry for independent delivery of advice. But the argument is: it does not cost much so it does not have to be disclosed. That is a very dangerous act of hypocrisy, one that undermines all the principles of FOFA. We think that it is unthinkable and untenable to propose a revolution in financial advice in terms of transparency but to say that for intrafund advice, don't worry, it doesn't cost much and you don't have to provide any information—and you have to pay for it even if you are not getting it.
Senator CORMANN: So what we should have is affordable, scalable advice paid for by whoever accesses the advice rather than intrafund advice which potentially is conflicted because it only focuses on one product offering and is non-transparent.
Ms Storniolo : The modelling we have done, which is in our submission on pages 73 and 74 using statistics given by ASFA in their submission, indicates that approximately $405 million per annum would be deducted from all super fund members' accounts per annum. If you use the statistics that the Cooper review uses with regards to who is an engaged client and who is not and therefore accessing that advice that they are paying for, it would mean that approximately $324 million per annum of the $405 million per annum would be used to cross-subsidise the 20 per cent who actually do seek the advice. So what happens with the rest of the money?
CHAIRMAN: Thank you very much. If there are no further questions, we will resume at 13:30.
Proceedings suspended from 12:48 to 13:30