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Tuesday, 8 February 2005
Page: 49

Mr CADMAN (5:24 PM) —In 1997 the financial system of Australia was examined by the Wallis committee. One of the recommendations was that a new process of raising levies to pay the costs of some of the financial regulators be instigated. The government established an inquiry into that process to examine how that should be done. As APRA is funded primarily from levies collected from the financial institutions that it prudentially supervises, it was important that this examination be done carefully. The terms of reference for the 2002 review specified that the review was required to examine the arrangements for determining how financial sector levies should be imposed on the financial services sector. The 2002 review therefore considered issues such as industry cross-subsidisation, the merits of placing caps on the amount of levy an institution is required to pay and reporting on the cost of supervision—all of which were finalised by the review which was chaired by the Department of the Treasury, resulting in the bills before the House today.

This is an important measure, because it covers a wide range of organisations. The levy is imposed on various organisations broadly described as financial services institutions: authorised deposit-taking institutions, foreign bank branches, superannuation funds, life insurers, friendly societies, general insurers, retirement savings account providers and non-operating holding companies. The levy is to be reviewed on an annual basis, overcoming some of the criticisms that were enunciated by the spokesman for the opposition—that is, that the levy ought to be able to be geared in such a way that there is not an oversupply of funds to the institutions supported by the levy. For example, in the 2004-05 financial year the levy rate for superannuation funds was 4.2 per cent, while in the 2003-04 financial year the levy rate for superannuation funds was 3.5 per cent. So there is a variation from year to year.

The levy amount paid by each institution is determined by multiplying the assets of the institution by the sector’s levy rate. Therefore, we have a variation in the way in which organisations subscribe to this process. Maximum and minimum amounts are prescribed so that each sector cannot be overcharged or pay too little. For example, the maximum amount payable by a superannuation fund in 2004-05 is $99,000. An institution cannot pay less than the minimum amount. For example, the minimum amount for a superannuation fund in 2004-05 is $600. The processes are in place and the estimate is that in 2003-04 approximately $85 million was raised. For the current financial year finishing on 30 June it is forecast that $96 million will be raised by these levies.

It is interesting that the House is required to consider a large number of amendments in seven bills: the Financial Institutions Supervisory Levies Collection Amendment Bill 2004—these are great titles!—the Authorised Non-operating Holding Companies Supervisory Levy Imposition Amendment Bill 2004; the Superannuation Supervisory Levy Imposition Amendment Bill 2004; the Retirement Savings Account Providers Supervisory Levy Imposition Amendment Bill 2004; the General Insurance Supervisory Levy Imposition Amendment Bill 2004; the Life Insurance Supervisory Levy Imposition Amendment Bill 2004; and the Authorised Deposit-taking Institutions Supervisory Levy Imposition Amendment Bill 2004. These bills cover all those various financial institutions.

These are costs, of course, that everybody realises will eventually be paid by those who insure, superannuate or carry out some of the other financial processes. It does require the passing on of these costs. Regulated financial sector entities will continue to pay financial sector levies, which, in turn, will be used essentially to fund the operations of APRA—the Australian Prudential Regulation Authority—as well as certain related activities undertaken by the Australian Securities and Investments Commission—ASIC—and the Australian Taxation Office. So these various levies get passed on generally to APRA, with some finances passing on to ASIC and the ATO.

The minister, in introducing this legislation, said:

These arrangements recognise the particular importance of regulating the largest institutions in our financial system as the larger the financial institution the greater the likely impact on the financial system and the economy in the event of it facing financial difficulties or failing.

We have seen that, and we understand why there is a need for supervisory processes to be put in place that are transparent, rigorous but fair, and not over-costly or expensive.

I would suggest that we need to watch these costs factors in the financial sector. It seems to me that the financial regulatory process in Australia is a very rigorous one, and it is one where often the providers have gone over the top in requiring professional indemnity and insurance against anything that might happen, from tsunamis to failed marriages, ill health and all sorts of impossible things that may occur. The 150-page documents that are required in many of the financial advisings indicate that the lawyers have been rigorous in seeking to protect every possible aspect of a financial transaction. This is onerous and unbelievably extensive, in my view—too extensive and impractical in many cases. I know, Mr Deputy Speaker Adams, that you would be shocked and absolutely flabbergasted to learn that such a simple thing as changing a name on an insurance policy would require documents of 150 pages. I know that, with your care for detail, you would carefully read every page, every line and every letter of that 150-page document requiring you to change your name on an insurance policy. Why is this so? It is because of the over-enthusiasm of the legal institutions to protect everything that moves. I believe that it is time we revisited this area and looked for a simpler approach, one where we could gain the supervisory rigour that is required. Nobody wants to encourage a recurrence of an HIA failure. One wants to have adequate resources for APRA, ASIC and, indeed, for the ATO. They need to have the resources to supervise, because one of the failures in the past process was that there was a 10-year record for HIH that was identified by the forerunner of APRA, the insurance commission, and action was not taken.

So these bills seek to provide strong supervision and adequate resources. However, in so doing, costs are lifted, complexity is increased and, therefore, the paperwork is the major problem. The problem is that it is an irony that the people who need the most assistance in terms of financial advice are going to be in a position where they just cannot jolly well afford to buy it, because financial advisers, acting on the processes that we have set in place, are charging fees that are going to preclude the people most needing advice from gaining that advice. This is a problem we need to deal with. It is something that I believe that advice providers are aware of, but the finance provider, the person standing behind the individual, giving advice, is protected lock, stock and barrel in such a way that I do not believe the intentions of the government are being fulfilled for those who are most in need of getting the advice they richly deserve. It is a daunting process to unravel this but we need to tackle it. The financial services reform that has gone on, of which this levy setting is a part, needs an examination for us to really be able to claim that we are in the forefront of financial management and that we are going to become the financial headquarters of Asia.

People with the greatest financial assets can most easily pay for advice on financial services, so the point I am making is that those with the largest assets and the greatest capacity are the ones who are going to get the best advice because of the cost factors built into advice provisions. There will be a greater barrier for people to gain advice than there was previously, particularly for those people who really need it. As I understand it, for people setting aside only a small amount in a superannuation fund, a life fund or general assurance, the advice is just as rigorous and just as extensive as for people making a large investment, so the people making large transactions are the ones who will most readily be able to pay.

Some interesting statistics were reported in Money Management on 20 May 2004 in an article by Jim Minto, Chief Executive of Tower Australia, who said:

Statistics from one area of study indicated that the average Australian has term life insurance of $143,000. This is 26 per cent of the required amount calculated. Further studies reported that the average Australian’s income is under-insured by an annual benefit amount of $26,000.

That means that an average Australian is probably insured at a rate of about $8,000 or $9,000, which is not a significant amount. But the cost of servicing that and the fees involved for the financial advice required to service that are just as much as if people were fully covered and insured to the full amount, which is some hundreds of thousands of dollars—roughly half a million dollars. So the process of advice giving and the cost of doing it is something that I believe the parliament needs to give attention to. In the article, Jim Minto said:

... the under-insurance epidemic currently plaguing average Australians will undoubtedly continue.

He is saying that we will continue the underinsurance. We will continue the low contribution factors which average a benefit of something like $8,000 or $9,000 per annum and for which there will be advice costs from time to time. He continues:

This means advisers, who need to earn a reasonable living, might naturally gravitate to service those clients who have larger balances or premiums.

There is the industry saying that this is a natural thing if you are going to earn an income by advice giving. What does that leave for the average person to do? It means they are stuck with the banks or other financial institutions, which may or may not want to give advice. I think that the government needs to look at this. My own view is that there needs to be government support for this process, which is not my personal inclination. Alternatively, the banks ought to take up some sort of social and corporate responsibility in society and provide a service for those low contributors, those small fund holders, so that they can at reasonable cost—which is below the cost applied to the larger fund holders—provide advice to the average person. I think that is a change that is needed.

With the introduction of choice in superannuation, this becomes an even more significant thing. A person seeking to consolidate their superannuation funds, for instance, may have six, seven or eight funds with small amounts. I cannot imagine any of those fruit-pickers, builders’ labourers or people who have worked for a series of bosses—people who have small amounts here, there and everywhere under various insurers or with various providers—wanting to pay a fee to have the process consolidated. There must be a way of consolidation in choice that we can find which will be cost-effective both for the providers and for the individuals concerned, otherwise they will not do it. It is very much to their advantage that the initiative of choice—implemented by this government and rejected time and again by the Senate, and a critical factor in allowing people to have a worthwhile retirement benefit—be pushed on with and provided at a reasonable cost.

The fact of the matter is that those who most need advice about the consolidation of their accounts into one superannuation fund of their choice will be the least likely to be able to afford the advice they need about how to go about it. Most providers cannot afford the time required under the present processes to do a 150-page document, carefully prepared, to which personal and professional competence pertains, which means that that provider of information and advice is liable at all times to be sued for incorrect advice given. Those factors have to be covered, and the fees must cover that process. But the requirements to achieve that end are too onerous. Therefore, as we move into choice in super, I believe that we need to be more careful in the way we are doing things and think through the process and the outcome.

Finally, I would like to draw to the attention of the House an article in Money Management on 3 February this year where Craig Phillips interviewed a person formerly involved in actively looking at financial services reform and providing advice within the Australian government. Pauline Vamos is a former Australian Securities and Investments Commission director of FSR licensing. She is now consulting with overseas governments about financial services in Australia. On her return from Asia, she made some interesting comments. In this article in Money Management, she said that she was:

“... shocked by the ferocity of what some of our neighbours are saying, with some saying ‘we don’t want anything like Australia’,” Vamos told Money Management.

She was saying that Asian entities are saying that they do not want to go into the complexity and cost that Australia has imposed on its financial services industry. That is something of a warning. It may be only a small voice and only a single voice at this point, but my knowledge of the industry and my impression of the industry indicate to me that it is a voice worth listening to and taking note of.