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Parliamentary Joint Committee on Corporations and Financial Services
05/10/2012

De GORI, Mr Dante, General Manager, Policy and Government Relations, Financial Planning Association

HALL, Mr Gareth, Treasurer, Corporate Super Specialist Alliance

LATTO, Mr Douglas, President, Corporate Super Specialist Alliance

[09:16]

CHAIR: Thank you very much for appearing this morning. We might just check to see who is on the line. Ms Smyth?

Ms SMYTH: Yes, I am on the line.

CHAIR: Ms Smyth, do you have any questions that you want to ask?

Ms SMYTH: Not at the moment, Chair. I will chip in as necessary.

CHAIR: I invite you, gentlemen, to make a short opening statement and then the committee will ask questions.

Mr De Gori : Thank you for the opportunity to appear before the inquiry today to represent the financial planning profession. For the record, the Financial Planning Association is the largest professional body and represents nearly 9,000 professional financial planning practitioners. Of those, 5,800 have achieved certified financial planning status which is recognised across 32 countries around the world. The FPA is committed to positive legislative reform that improves consumer protection and that supports the development of improved professionalism and accessible financial advice for all Australians. As such, we have broadly supported the MySuper reforms, but it must be acknowledged that we do have concerns with the fees associated with intrafund personal advice being embedded in the administration fee of the fund; the unintended consequences of the transitional measures for default superannuation funds; and the interaction with Future of Financial Advice reforms.

When discussing intrafund advice in the MySuper reforms, the FPA would like to restate that the Future of Financial Advice reforms were guided by the following principle: financial advice must be in the client's best interests; and distortions to remuneration, which misalign the best interests of the client and the adviser, should be minimised.

The FPA submits that the MySuper reforms in the area of intrafund advice fail to deliver on this guiding principle. The FPA supports the intention of MySuper objectives, which is to provide a simple and cost-effective superannuation product, including a simple set of product features, irrespective of who provides them. The FPA also understands that MySuper is intended to ensure super fund members do not pay for any unnecessary bells and whistles they do not need or use, especially where they do not require or generally do not request these additional services.

The FPA supports the intention and role of what intrafund advice can provide. However, the FPA submits that all forms of personal advice should be subject to the same set of rules, irrespective of the provider or subject matter. A workable scale of advice framework is critical to enable greater access to affordable financial advice for more Australians. The intrafund is a subset of scalable advice. It is critical that FOFA reforms such as the best interests duty and specific related remuneration provisions allow for intrafund advice and are not undermined by the commercial interest between the respective superannuation funds that MySuper will create over the number of members they can obtain and retain from their competitors.

Within the scaled advice consultation paper, ASIC makes the following point: the same rules apply to all personal advice on the same topic regardless of the scope of the advice. Scaled advice does not equate to lesser quality advice for clients or lower training standards for advice providers. Further, in the best interests consultation paper, ASIC states that the advice provider should not act to further their interests or those of any of their related parties over the client's interests when giving the client personal advice. The reason I raise this is it is the FPA's view that providing personal advice on pension funds—commercially known as account based pensions—under the provision of intrafund advice, as has been legislated in subsection 99F, will reduce the protections to those members. To support our concern I refer to ASIC's recent report on shadow shopping of retirement advice released in August 2012, which stated that it would be difficult for advice providers to provide advice on retirement planning 'without some understanding of the client's cash flow and other financial commitments'. It is our concern that this will not be the case as evidenced in paragraphs 1.46 and 1.48 of the explanatory memorandum. These paragraphs mistakenly define the recommendation of moving a superannuation member from an accumulation fund to a pension fund as investment switching when it is in fact financial product advice.

Further, we are concerned with the introduction of intrafund advice being linked to cash management facilities. Why has it been introduced? What benefit does this serve the member? How does this fall within the definition of intrafund advice? How will the collective payments for providing intrafund advice on cash management facilities, especially those provided by a third party, meet the sole purpose test?

In respect of the transition arrangements for MySuper in schedule 6, I want to draw attention to the policy intent of this measure as stated on the Stronger Super website. Default superannuation funds are those funds to which employers make compulsory superannuation contributions for employees who do not choose a fund to receive those contributions. For these employees, a default fund is selected by their employer or nominated through an industrial award or enterprise agreement. Therefore the FPA submits that the definition of an accrued default amount in section 20B for the purposes of the MySuper transition actually goes beyond that of what the policy intended. The FPA is talking about those individuals who have proactively selected a superannuation product and investment selection with or without financial advice, not the disengaged members. The FPA has provided a submission to the committee covering these issues in more detail, and I am happy to take questions from the committee.

Mr Latto : My discussion will be on the transition to MySuper, part 6 of the explanatory memorandum. The government has stated that the intention of the legislation is to ensure that all members who have an accrued default amount within their super accounts will have this amount mandatorily transitioned to MySuper unless they opt out. Accrued default amounts are described as amounts where a member has not exercised an investment option or amounts held in a default investment option of the fund. It is the CSSA's belief that this mandatory condition is not in the interests of all members and no case has been put forward by the government as to why this is in the members' best interests.

In many cases members will not exercise an investment option because their super fund adviser, provider, employer or the super fund's policy committee will have chosen an investment option that is appropriate for them. Many funds have allowed employers to choose default investment options and therefore have a number of different defaults across their fund. This will inevitably result in many members being transferred to a generic default in MySuper and not remaining in their tailored default strategy, which we believe will be less appropriate for these members. In these cases the MySuper option will be neither identical nor better—the two assumptions on which transition has been based. CSSA members spend a lot of time educating their clients on the benefits of their chosen default fund. Many members would be aware of their default investment option and would have chosen to invest in it rather than being in that option because it was their plan's default.

Similarly, many members of super funds have chosen an investment option which includes a component of the default investment option. For example, they may have chosen 50 per cent in the default option and 50 per cent in a specific choice option. In this case it is clearer that the member has chosen an investment strategy and not just chosen to place part of their moneys in a default strategy. In many cases this may have been chosen by the member without advice. The choice by the member should be recognised, and the member should not be asked to tick any boxes or rebalance their strategy should moneys be inadvertently switched to MySuper. There could also be buy-sell fees involved in this process.

It is also the case that many super platforms, such as wrap accounts, use a cash fund as a default investment option and that the transitioning of these amounts to MySuper would not be in the member's interest at all. Many members may be in cash due to the instability of investment markets in recent years and could be forcibly reinvested in the market. We feel that this may be an unintended consequence of the drafting of the legislation and that they should be excluded from transitioning. We are of the belief that if there is in fact a substantial change to an individual's investment strategy as a result of legislated automatic transition to MySuper then legislating that all new contributions are to be paid to MySuper and that all existing default balances must be transitioned to MySuper in 2017 is very possibly not in the best interest of the majority of superannuants. These people will also have no recourse if changes are made that disadvantage them.

The CSSA also remains concerned that there will be a loss of insurance benefits as a result of the mandatory transitioning of super accounts to MySuper. CSSA figures show that 81 per cent of default members outside corporate funds with a balance of more than $10,000 have insurance; the majority do have insurance. Thus many members will be transferred to a new MySuper default, and there is a significant risk that the automatic transition of accounts to MySuper by July 17 could see the cessation or reduction of insurance cover. This could have very serious repercussions for these individuals, who my be relying on this insurance protection. Many people may not respond in time to opt out of the automatic transfer to MySuper and, as a result, their insurance will be cancelled or reduced. They may not be able to obtain this insurance again on such favourable terms, if at all. We do appreciate that the member has 90 days notice of the transfer and that they have the ability to opt out of the transfer. However, we believe that there is a considerable risk that members will either not read the communication or not get around to making a decision. Typically 30 per cent of people respond to any written material.

The implementation of MySuper and the transition process will be of considerable costs to funds without any apparent benefit. These costs will inevitably be passed on to the member. The whole process is extremely complex, and in many cases identifying the accrued default amounts will be a very difficult process. We are firmly of the view that automatic transfers should not occur. Transfers should be made on an opt-in basis rather than on an opt-out basis. It is not the role of government to suggest that the current investment strategy is incorrect and mandatorily transfer their moneys.

The proposed legislation transfers the liability of any loss of consumer rights to the trustee and then absolves the trustee of all liability. This leaves the consumer—that is, the member—with no recourse, whether the loss is due to a change in investment strategy, a loss of insurance cover or an error on the part of the fund. I never thought I would see the day that a government would legislate the removal of protection for any Australian.

Finally, regulatory guides under FOFA have just been issued, recognising the existence of advisers' proprietary rights, such as commission payments for existing clients. The MySuper legislation flies in the face of this. Proprietary rights are removed or not recognised, and no compensation is offered. The CSSA has submitted to a number of inquiries and appeared at a few of the hearings; I have been here a few times myself. We have clearly explained that we deliver services to the workplace, mostly not personal advice, and this has been recognised. We did not wish to experience an unintended consequence of the legislation. The legislation removes our right to charge a collective fee for our services, removes our proprietary rights through transition and provides no compensation. We can now only assume that it is the intention of the government to remove these important services from the workplace.

Mr FLETCHER: Thank you. The first question I would like to ask is about the risk of a member being transferred into a riskier investment allocation. Is that possible under this legislation?

Mr Latto : It is extremely possible. A number of the funds we look after give a range of defaults for the employer to choose from. There could be an employer who chose a conservative default for the members and to go into MySuper, and the MySuper fund could have a higher risk level than the fund that they were in. So the answer is yes, it will be possible, and it will happen in a number of cases.

Mr FLETCHER: And it might well be the case that the member had looked at what was the default fund and said, 'Yes, that is an investment allocation I'm happy with,' and yet the way the legislation is drafted it is assumed that they have not made a choice.

Mr Latto : That is right. I suppose, on the other hand, it is a little bit hard to differentiate between the two types of people. We have had members who have ticked the box and selected the default as their strategy. Even those people would be caught up in this sweep up, which seems unreasonable since the person has actually chosen that.

Mr FLETCHER: That would be a pure fluke of the fact that the member has looked at a particular investment allocation—50 per cent conservative; 50 per cent growth—and said, 'Yes, I like the look at that; it happens to be called default. I'll tick that,' and then, because of the wording of the legislation, that person will now automatically be transferred into a MySuper fund.

Mr Latto : That is correct.

Mr FLETCHER: You gave an example, particularly, of somebody who might have chosen to have all or a large part of their superannuation balance in cash. Presumably, over the last three or four years that might have been quite a good strategy.

Mr Latto : Yes.

Mr FLETCHER: In any event, it is the strategy that a member may well have consciously chosen.

Mr Latto : Not just consciously chosen. I am talking more about wrap accounts and platforms where people go in personally, and often the cash fund is the default fund. What we are now doing is taking people who are out of the market into the market compulsorily if they do not respond and take the—

Mr FLETCHER: In other words, people who, at the moment, are largely in cash under a wrap product, and who have made a conscious choice to be in that, could find themselves, as a result of this legislation, being moved, for example, into a fund which might have a 60 per cent allocation to equities.

Mr Latto : That will happen if they do not take the action to stop it happening; yes.

Mr FLETCHER: Yes. You also talked about insurance benefits. Just explain how this issue might apply, particularly to an older member—somebody who is approaching retirement years.

Mr Latto : Certainly as you get older it is harder to get replacement cover; your health tends to deteriorate. An older member may have some sort of insurance that has arisen. He might even leave the company; he might have a personal fund with the insurance attached. Suddenly that particular fund may not have a MySuper, or you some managers have multiple funds and they may only have one MySuper so they are going to change from one of their funds into another fund, and that insurance could easily be lost, or at least reduced to—

Mr FLETCHER: I just want to make sure I understand this. As a result of government action—government legislation—many Australians who have insurance arrangements today that they are comfortable with and that provide them with a measure of protection against the financial consequences to their family in the event of early death, could find themselves, as a result of taking no action whatsoever, suddenly having that cover removed from them.

Mr Latto : The answer is yes, and with no recourse to the trustees, either.

Mr FLETCHER: So a trustee will actively move them into another product which strips away their insurance entitlement, and yet the member has no capacity to then take legal action against the trustee to say, 'Hang on, you acted in a way that was not in my interests.'

Mr Latto : That is correct.

Mr FLETCHER: And that is a consequence of this legislation.

Mr Latto : That is our concern.

Senator THISTLETHWAITE: I will ask a follow-up question on this issue. With respect to the questions that Mr Fletcher is asking, wouldn't it be the case that the member would have had to give a direction to the trustees to end up in those funds?

Mr Latto : No, in wrap funds often the cash account is a default option. This is one of the unintended consequences. In most wrap funds moneys go through the cash account before they are then placed into any choice a member makes. So there is a good chance that the member has chosen to be in the cash fund but under the legislation that money is going to be moved out onto the market in some sort of MySuper arrangements.

CHAIR: How would you characterise the engagement of people who have a wrap fund and cash that they are managing? How would you characterise their relationship with their money management? Are they set-and-forget types of people, or are they the people who would be more likely to respond?

Mr Latto : They are probably more engaged, but you can never be sure. People do not go into wrap accounts just because of advisors. Some people can go directly. Those sorts of people are just going to get caught. Even a lot of those members who have made a choice—50 per cent in default and 50 per cent somewhere else—are often not advised; they are by themselves. So no adviser is going to ring them up and say, 'Remember to do this.' They have got to do it themselves.

Senator THISTLETHWAITE: How do they end up in transferring? The definition we have here says a member has not given a direction to the investment option in which it is to be invested. Aren't those circumstances where the member has given a direction?

Mr Latto : Yes, but there is also a second part which you have missed plus anybody else who has also got their moneys in a default option. So that is the second part of the definition and they will be caught under the second part of the definition.

CHAIR: But they will be contacted and given a choice.

Mr Latto : Yes, they will have the 90 days.

CHAIR: So the assumption that these insurances will fall off is overstated, if we say that will automatically happen. We are expecting now that, no matter how long people have been in a fund, as this new legislation comes into place every single person will be contacted by their fund?

Mr Latto : Yes.

CHAIR: There will be wide understanding in the community and an opportunity for people to make an informed choice in a new climate about whether they might be able to get a product that is much cheaper for them than some of the products into which they have been put currently. Is that correct?

Mr Hall : No, that is not correct because only 30 per cent of people actually read the mail.

CHAIR: So the problem is not the legislation. It is the engagement with the mail. Is that correct?

Mr Hall : No, I do not believe that.

Mr TONY SMITH: Could I put it another way? To sum up, your point is they are not being written to and asked, 'Would you like to take up this option?' They are being written to and told, 'Within 90 days you will be moved into this.' It is a bit like the government writing and saying, 'In 90 days your mortgage will shift from one bank to another unless you tell us otherwise.' Is that correct?

Mr Hall : Exactly.

Mr De Gori : And it is also not the total mortgage or fund because, in this case, it is likely that you might have some of your money invested in cash, but because of the asset allocation they have chosen a portion of their moneys in cash and a portion in another option, but it is only the cash because it is in a default fund—

Mr TONY SMITH: Put it this way, we are giving you a choice that you have to make to keep what you have got. We are not saying we are giving you a choice. Take it or leave it and, if you leave it, you shift. That is your point.

Mr Hall : Yes, and there seems to be this underlying belief that MySuper is going to be better and less expensive. Let me tell you, there are no fees in cash in most wrap accounts. That is a fee free option. So the client is going to go from somewhere where they are paying no fee to somewhere where they are paying presumably one per cent or something invested in shares or whatever. So the consequences are quite dramatic.

Mr FLETCHER: I think what you are putting to us is that under the wording of proposed section 20B of the SIS Act, the definition of 'accrued default amount' includes an investment option which under the rules of the fund:

… would have been the investment option for the member's underlying asset(s) if no direction had been given.

In other words, if the investment option is the one into which a member is defaulted if they have done nothing, then any money that any member has in that investment option is determined to be an accrued default amount, even if the member has in fact made a conscious choice to be in that option.

Mr Latto : That is correct.

Mr FLETCHER: Therefore, you are saying that, in the case of a wrap account, a member may well have made an active choice to be in cash, but because the cash option is defined in a wrap fund as the default account, then this wording applies and that member's funds are automatically captured and put into MySuper.

Mr Latto : Yes.

Mr Hall : It is actually worse than that because, in a wrap account, any money that goes into or comes out of the account has to go through the cash account. There are no other options.

Mr FLETCHER: Someone who might have been actively managing their holdings even on a weekly or monthly basis happens at a particular period of time to have 30 per cent of their money in cash. That automatically would trigger this provision and their money is going to end up in a MySuper product.

Mr Hall : Yes.

Mr Latto : Possibly.

Mr FLETCHER: Because of the way the legislation works. I also want to ask about the consequences for advisers. You made a point at the end as to the impact this is having on your business but, therefore, more importantly on a category of people who today are able to get advice. Can you just expand on that?

Mr Latto : We are corporate super specialists. We are not just doing the personal advice. The majority of what we do is not personal advice. We provide information, we provide services. The nearest we come to advice might be seminar activity on the workplace which would be general advice. In all these services, we have an agreement with employers as to how that should be charged and there are signed agreements, and we deliver on those services. Those services are then charged back collectively to the fund on a fee basis which is transparent to the members and of which the members are informed. We cannot have that collective fee anymore. That collective fee is not one of the fees that are allowed under MySuper. We also have income coming, if you like, on our existing clients, and all that is going to be swept up and will disappear when it transitions to MySuper as well. So not only the income going forward but all our existing income disappears, and the only way we can now be paid for our services is if the employer pays directly. I can assure you, given the fact that super is going from nine to 12 per cent, that employers are not necessarily in the mood for putting their hands in their pockets at this point in time.

Mr FLETCHER: So is it a consequence of this legislative change that, effectively, a particular class of Australian businesses are having their business model terminated by government action?

Mr Latto : It is very possible that a certain number of them will, unless they have diverse businesses. We have some of our members who are not diverse businesses but solely do this and do not even do personal advice. If this disappears, the chances are that they may be out of business in the very near future.

Mr FLETCHER: Back on the point about insurance, is it fair to think of the set of benefits that a member receives from being in a fund as including the insurance benefits as well as the investment benefits? Therefore, I think the point you are making is that, if the policy intention is to move people into MySuper on the theory that it is automatically a better product, if you include insurance then that assumption is just not a valid assumption.

Mr Hall : If I may answer this, this was the point that I was hoping to make previously. There seems to be, again, this assumption that there will be insurance inside MySuper. Most default insurances inside industry funds, default funds and, from what we have seen from product providers, MySuper funds generally provide an amount of insurance which costs the member something like $1.50 or $2 a week—something of that nature. Once you get into your 50s and 60s, that probably provides you with, maybe, $5,000 worth of death and total and permanent disability cover. Big deal, right? So—

Mr FLETCHER: If you are in your 20s, what would it have provided?

Mr Hall : If you are in your 20s, it might be a couple of hundred thousand dollars.

Mr FLETCHER: Thank you.

Mr Hall : But my point is that most astute people will have their insurance cover within their superannuation account, because it is tax deductible for them if it is inside their superannuation account. Contributions go in and benefits are paid tax free to their beneficiaries. So you may find people in their 50s and 60s that have $1 million-plus of life insurance and their salary continuance insurance inside their superannuation fund. If these people happen to be travelling the world or doing something and they do not open the mail that is sent to them saying, 'Please do something or we're going to transition you to MySuper,' their whole family's financial security could be destroyed.

Mr FLETCHER: And this is because government is mandating that a contractual arrangement they have made which suits their interests and which they have assumed, on a perfectly understandable basis, is going to persist for as long as the terms of the contract provide for is now going to be terminated because of government action.

Mr Hall : With no recourse.

Mr FLETCHER: And, in the experience of the members who you ultimately serve, this could be significant numbers of Australians who are going to find, for example, that their insurance just vaporises.

Mr Hall : This could be a complete disaster.

Mr Latto : Our members service hundreds of thousands of employees.

CHAIR: Certainly we are getting a very strong message that this is a moment at which people who might have had a 'set and forget' policy about their superannuation really will need to become much more financially aware and financially literate and make some informed choices as we move forward.

Mr Hall : I am sorry: I think that is an oversimplification. I do not think it is whether they have a 'set and forget' policy at all. They could be incredibly engaged with their superannuation and their insurances; they just might be on leave. They might be overseas.

CHAIR: And we need to make provision for that.

Mr Hall : Lots of our clients travel for three months of the year. They might miss the mail.

Mr TONY SMITH: They might be sick.

Mr Hall : They could be sick. They could be in hospital.

Mr FLETCHER: Or they might have quite rationally assumed, 'Under the law as it presently stands, I am free to make a decision today as to the arrangements that will apply to me for the next five, 10, 15 or 20 years.' So they take the time and make that decision. Potentially they come back and check it from time to time, or potentially they have made the decision, 'This is what I've done, and I'm satisfied that I've provided for myself.' Now that is all being thrown up in the air. Is that correct?

Mr Hall : Yes.

Mr GRIFFIN: Walk me through the mail process.

Mr Hall : My understanding is that people will be given 90 days notice as to whether they want to opt out of this compulsory change.

Mr TONY SMITH: Or is it really that they want to opt back into what they have already chosen?

Mr Hall : That is correct.

Mr GRIFFIN: On that basis, if they are travelling for three months of the year, as long as they get the mail the day after they leave, they will get it in time to answer it. I think you are overestimating some of this stuff really.

Mr Hall : Do you think I am overestimating the fact—

Mr GRIFFIN: I think to put forward a view that hundreds of thousands of your clients will be travelling overseas for three months at a time and to put it in those terms, which are the words that you have used, is a bit ridiculous.

Mr Hall : No, I am sorry—that is not the view I put forward. Thirty—

Mr GRIFFIN: You put forward examples which utilised those very words.

Mr Hall : Yes. Some people—

Mr GRIFFIN: So you did use those words?

Mr Hall : Yes, I did.

Mr GRIFFIN: Yes, you did.

Mr Hall : I also used the words that only 30 per cent of people open their mail.

Mr GRIFFIN: I do not have any further questions.

Mr TONY SMITH: In other words, Mr Griffin, you are happy to badger the witness and not have any further questions. In all fairness, he is appearing here to give evidence. He is an expert in his industry.

CHAIR: Mr Smith, thank you very much.

Mr GRIFFIN: Mr Smith, he has made his points—and, in the circumstances, he used language which I thought was inflammatory, so I took issue with it.

Mr TONY SMITH: You do not have to treat him like he is an opponent from an ALP conference.

Mr GRIFFIN: I think you need to do it with one of your mates in the Liberal Party, mate.

CHAIR: Thank you very much. Gentlemen, I think that we have had a very fruitful presentation from FPA and CSSA. I hope that you feel your voice has been heard. We appreciate your contribution to this public process. I thank you for your evidence before the committee today.