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Parliamentary Joint Committee on Corporations and Financial Services

ANDERSON, Mr Philip Paul, Chief Operating Officer, Association of Financial Advisers

BINEHAM, Mr Marc, Director, Association of Financial Advisers

KLIPIN, Mr Richard, Chief Executive Officer, Association of Financial Advisers


CHAIR: I now invite representatives from the Association of Financial Advisers. I invite you to make an opening statement and then the committee will ask questions.

Mr Klipin : Good morning, all, and thank you for the opportunity to appear at this hearing. I will give a brief introduction to the AFA. The AFA is Australia's oldest professional financial adviser association. We were founded in 1946 and we celebrate our 66th anniversary in 2012. We are and have always been an association of, by and for advisers. We have a membership of over 2,000 individual members and through our licensee partners represent just under 7,500 advisers across the country. Our individual members are in essence mostly small businesses who serve their clients and their communities with distinction. Our view is that the role of financial advisers is to build, manage and protect the wealth of Australians. Our members today provide broad and holistic advice to all Australians. Our members have a strong heritage in insurance but now provide broad advice, including corporate superannuation.

Today we are here to provide input into the MySuper tranche bill 3; however, we would also like to talk in broader terms about the value of advice and importance of encouraging people to seek advice. We recognise that this inquiry and hearing have been arranged at short notice and that there is apparent urgency to move forward with the legislation. We also see MySuper, as has been said in previous conversations, in the broader context of FOFA and the Productivity Commission's work into MySuper.

We are focused on consumer outcomes, along with fairness and transparency, across all of these changes. With regard to MySuper we are going to focus on two main issues in our opening address; that is, the areas of intrafund advice and of mandatory transfer of default accounts by 1 July 2017. There are other issues in our submission but these are the two main issues we would like to address.

In terms of intrafund advice, good advice is key to people's financial future, and as such we have no objection to superannuation funds providing advice to their members. However, our concerns relate to whether the advice will be provided in the best interests of clients and also the issue of cross-subsidisation of advice by paying for it out of the administration fee which is spread across all members. In our view, the payment for personal advice out of an administration fee is a less-than-transparent mechanism and also serves to detrimentally impact the perceived value of any advice that people get. Anything you get for free you do not properly value, and if you can get it for what appears to be free from your superannuation fund then why would you go to a financial advisor and pay for it? This is about protecting advisers from what we believe is an artificial distortion in the marketplace.

We note that changes have been made where the ability to cross-subsidise has been limited to non-complex advice and non-ongoing advice. Our strong concern is that the legislation is inconsistent, and seems to allow for advice on a pension fund and insurance, which is, in general, complex advice and not simple advice. Advice on pension funds is retirement advice, and retirement advice is complex advice. It should not be allowed to be considered an advice that can be covered by an administration fee. The situation is pretty much the same for insurance advice, as this requires a very good understanding of clients' personal circumstances, relevance, amount of cover, type of cover and making sure that the level of cover they have meets their needs and objectives. This goes in many ways to the heart of the FOFA changes around best interest and keeping the client's needs front and centre.

Our view is that advice that is provided without any adequate investigation of the client's personal circumstances poses a very serious risk. This is a consideration that has been pointed out in the recent ASIC shadow shopper survey on retirement advice, where some of the advice failed to take into account a client's existing debt, for example. Our concern is that this legislation will encourage superfunds to see all advice as simplistic, and this may ultimately be very disadvantageous to clients.

That is the first issue. The second issue is the transition to MySuper. The AFA strongly opposes the mandatory transfer of default fund balances to MySuper for the following reasons. The first is our view that the government has failed to put forward an adequate case to justify this huge exercise. Many members, as we have heard in previous conversations, will be disadvantaged by this, and this is being done contrary to the active decisions that have been made by many members to invest in a default option. An opt-out approach based upon one communication is simply inappropriate. This is fundamental, and goes to the heart of the lack of consumer protection within this bill. This has been designed in a way to work around an important issue of the extinguishment of adviser commissions in the form of acquisition of property rights that seems to be on unjust terms, and would therefore in other circumstances be contrary to the Constitution.

This will be an extremely expensive exercise to undertake, particularly for retail funds that have always involved greater levels of investment option choice. We are also very concerned about the definition of 'accrued default amounts' and what this might mean in terms of the legislation and the impacts for retail superannuation products where a client has received financial advice and is in an investment option that happens to be the default option selected by the trustee.

I will speak briefly about complexity. Maybe someone has assumed this is a simple exercise, given that in one fund there may be hundreds of different employees and employers, that there may have been a different decision made about what kind of default option they should choose, and that this may change over time. The determination of which members have an accrued default amount across hundreds of thousands of members will be a huge challenge for trustees. We are also aware of the fact that some members may need to be moved to a different fund, which will pose a very real risk about the ability to transfer their insurance arrangements. For long-term members with health issues this can become a very significant risk.

We are particularly surprised that the government is giving trustees a blanket protection from any action by members. How can a government force members to move but then offer them no protection in the event that something goes wrong? In raising the issue of the annulment of an adviser's commission rights and the directly related issue of acquisition of property rights on unjust terms, many will see this as merely an issue around self-interest. The FOFA legislation, however, has recognised the existence of property rights, as we have just heard, and has therefore put in place grandfathering arrangements for existing clients. We are keen to explore why the government has taken a different approach from what they took with FOFA.

Finally to the issue of costs: some of what we have said previously points to the considerable cost of this exercise. It is a pity that the regulatory impact statement made no effort to quantify cost. We question whether other MySuper members will need to pick up the costs of this huge transfer exercise as it is totally unreasonable to pass any of these costs on to fund members who have chosen a choice fund. Is the cost of this exercise justifiable particularly in the context of the risks these pose and the lack of consumer protection? So, on behalf of members of the AFA and the clients that they look after, we thank you for looking at this legislation and seek your support to address the key areas of concern that we have raised.

CHAIR: Thank you very much, Mr Klipin. Mr Fletcher, do you have some questions?

Mr FLETCHER: Yes, please. Thank you, Mr Klipin. Do you believe that the arrangements under which a significant number of Australians are going to be defaulted into MySuper will automatically be in the best interests of those Australians or is there a risk that a significant number of those Australians are going to end up worse off?

Mr Klipin : We have overall broad concerns and Senator Thistlethwaite raised in a previous piece what the strategic intent of MySuper is. Our view is that taking a view that people are disengaged and will always be disengaged is actually the wrong premise. The premise ought to be: how do we actually get people to engage in superannuation and make active decisions? Whilst we understand the issue around if you do not make a choice you ought not to be paying for it—and we agree that we need to address that—I think the ultimate premise needs to flip around. We have $1.4 trillion in super and it is only going to get bigger. I do not think taking a view that people are not interested and will never be interested is in the best interests of the fund member or any people that look after them or in the country's interests for that matter.

Mr Anderson : If I could add to that, I think there are two key areas where we believe that members are at risk. One is insurance, and we have heard quite a bit about that already where a member who already has extensive insurance arrangements may lose some of those as a result of being transferred. The second area is around investments and the risk profile, making sure that the asset allocation is in alignment with what their needs and objectives are. We are aware that within many retail master trusts there could be a huge number of employers, each of whom can select a default option. Those default options can be from a 50-50 split all the way up to 85 growth and 15 defensive. The trustees are going to have to choose one MySuper option, which is presumably going to be somewhere in between. So people will have either less exposure to growth assets than they want or more than they want. You cannot get a perfect solution given the variety of default option arrangements.

Mr FLETCHER: I am trying to understand that point. There will be members who have made choices, sometimes with the benefit of advice and sometimes without, to be in a product which happens to be defined as a default product and they face the risk of now ending up in a MySuper product which will have a very different allocation between risky and lower risk assets. Is that right?

Mr Anderson : That is correct.

CHAIR: Excuse me, Mr Fletcher, but can we clarify that that will only occur if the person that is being referred to does not engage in making a choice when offered the choice?

Mr Anderson : That is correct. The process allows for a communication to the member, but we know very well that there is a high percentage who will not get to read that or will not get around to responding to it, for whatever reason. So we still believe that there will be a significant proportion who go through this exercise and end up, despite having the opportunity to respond, in a position that is contrary to what they wanted.

CHAIR: Do you have any suggestions about how a higher level of engagement could be had? This seems to be a very important point that has been made by a number of witnesses this morning. You are engaging with these people all the time through your business. What suggestions do you have to offer the government that will improve the connection between your clients and the decision that they need to make in terms of opting to hold a current choice?

Mr Anderson : This impacts not only the clients of financial advisers but also those who have chosen their investment options directly and where there is no intermediary, no adviser, involved. There is a range of things that could be done. The best outcome would be if we moved to an environment where members have the opportunity to opt in to be transferred rather than to opt out. But if it is an opt-out model, then there needs to be extensive consultation with members, advertising that the government runs, mail-outs—all those sorts of things. One simple communication will not get the attention of members. And it puts so much of the emphasis on the trustees, when this is actually a government-driven initiative.

CHAIR: The government currently has policies and processes around health, for example. There are health promotion policies that involve education and community consultation, reaching out into the community, for the improvement of physical health and wellbeing. Are you aware of any similar financial health-and-wellbeing general communication strategies in use anywhere around the world?

Mr Klipin : The best initiative that has come out recently is the MoneySmart website from ASIC.


Mr Klipin : If there were an opportunity to re-put the strategic intent piece back on the table, the AFA would be there tomorrow to discuss how we get people engaged. My colleague, Phil, has spoken about the advertising. There is MoneySmart. The people inside the financial services industry are very willing and very able to engage in coming up with answers to: 'How do we better engage people in their financial lives?' Two in 10 Australians actively seek financial advice. So there is huge disengagement, for all sorts of reasons. 'How do we get to the other eight in 10?' is not just an AFA issue; it is a whole-of-industry and whole-of-government issue, because what we do know is that, when people engage, they end up with higher levels of appropriate cover, they invest better, they save better and they have better wellbeing financially, which then plays out into their broader lives. That is an issue which we have been debating within the AFA and within the industry for the last three years. So I am delighted to hear you raise that as an opportunity.

CHAIR: While we are very mindful of and respect the concerns that you have raised, this is actually a historic opportunity for a high level of engagement of Australian citizens with people from the sector and the government to improve our collective literacy about our financial situation, and, given the fact that we have got $1½ trillion sitting in this, it is probably opportune that we do this.

Mr FLETCHER: Is that question, Chair, or a policy statement?

CHAIR: Well, no; it is just an observation.

Mr Anderson : Let me respond—

CHAIR: I would be very happy to have your response to that.

Mr Anderson : I think the whole issue of financial literacy is fantastic, and every initiative that can be pushed through to get that outcome would be great. The situation, though, with this particular case is that, no matter how much money is spent or how much effort goes into this communication, whilst this is an opt-out scenario there is still a significant risk that people will not respond and will be detrimentally impacted. So we absolutely support activity to communicate, but maybe that activity to communicate could be part of an opt-in regime rather than an opt-out regime.

Mr FLETCHER: I would like to come back to the specific provisions of the bill before us. I want to make sure I understand what you are putting to us. What you are putting to us, if I hear you correctly, is that the definition of proposed section 20B in the SIS Act will mean that a significant number of Australians who have exercised a choice will, nevertheless, be automatically defaulted into a MySuper product. Is that correct?

Mr Anderson : That is correct. Whether you look at corporate super, retail products, master trusts, wrap arrangements—

Mr FLETCHER: Can I just follow up on that. If the premise of the policy is to focus on the interests of people who have been disengaged, then we have a mismatch here, because the policy also captures a big bunch of people who have specifically taken an action to be engaged.

Mr Anderson : That is correct. This latest version of the legislation moves away from where we were. It broadens the definition around the default.

Mr FLETCHER: If the first issue we have is, as we have just agreed, a mismatch between the stated intent and what the provisions of the bill do, is the second issue that the provisions of the bill will have adverse consequences for a proportion of people who get defaulted into a MySuper product when they were not expecting that to happen and have made conscious choices to establish particular arrangements—for example in relation to insurance? Is that correct?

Mr Anderson : That is correct.

Mr FLETCHER: What about the issue of a risk allocation? In other words, is it possible that a member would have said, for example, 'Well, I want 70 per cent fixed interest in low-risk assets and 30 per cent growth assets. This particular option suits me; I'll take that,' and if it happens to be a local default they will get bounced into a MySuper product? Is that correct?

Mr Klipin : That is very possible.

Mr FLETCHER: Mr Anderson, I think you said that in some cases what is labelled as a default product could have as high as 85 per cent in growth assets.

Mr Anderson : As I understand it, yes, there are certainly some employers who choose the growth option.

Mr FLETCHER: So the way this is going to work is that whichever specific choice the trustee makes, that will become the trustee's MySuper product and that will have a particular asset allocation embedded in it.

Mr Anderson : Yes. The trustee has to make a decision, and when you are looking at a master trust that has many employers and many different defaults they have to choose one.

Mr FLETCHER: So a proportion of people face the risk of moving from an asset allocation that they have actively chosen to a different asset allocation, which could, for example, be significantly riskier than they are personally comfortable with.

Mr Anderson : That is correct.

Mr FLETCHER: It could also be an asset allocation that is inappropriate for their stage of life. For example, it might be a high allocation to growth assets at a time when they are approach retirement and should be in higher weighting to lower risk assets. Is that correct?

Mr Anderson : That is correct.

Mr FLETCHER: Do you believe there has been an adequate opportunity to discuss these concerns with Treasury or the government?

Mr Klipin : I think, as the previous speaker said, across the financial services landscape, the raft of changes, the amount of changes, and the narrow window in which to assess, analyse and respond, has meant that everyone is effectively chasing their tail—not giving due time and due process. The short answer is no.

Mr FLETCHER: Would you say there is a wide level of understanding amongst Australians with superannuation who have made a choice that this is coming?

Mr Klipin : Absolutely not.

Mr FLETCHER: What would your specific recommendation be? Are you recommending specifically that there ought to be a reworking of the proposed definition in section 20B?

Mr Klipin : If things are on the table then some of the issues we have addressed in our submission we would want to table and get the legislation amended. If we are seriously going back to the drawing board we would obviously have input around the broad thrust of how you engage disengaged people. I suspect it is more the former than the latter. On that basis we would be recommending and suggesting changes to the legislation so that they do not create the unintended consequences that we have just spoken about.

Mr Anderson : To expand on that, our preference is that this is an opt-in situation, and that all sorts of communication can be put out there to encourage members to consider an alternative that may deliver a better outcome for them.

Senator THISTLETHWAITE: Can I take you to task on that. Superannuation has been around in a compulsory form since 1993. There has been plenty of time for people to begin advocating for opt in. We brought in choice legislation because we thought that would engage people more. It has not worked. Now we have a situation where there has been one of the most thorough reviews of superannuation in this country, probably since its inception, and they have made these recommendations. The government is acting on those recommendations. I cannot see how we can act otherwise, particularly when you have those figures of close to 80 per cent of members being disengaged.

Mr Anderson : We are simply responding to the risks of detrimental client outcomes as a result of this so that is why we were talking about alternatives here. Clearly if this goes down the path of an opt-out scenario then I think the definition needs to be looked at and there needs to be a mechanism to exclude those arrangements where we will get detrimental outcomes.

Senator THISTLETHWAITE: That is probably a much more sensible approach to engaging with the government and getting some changes in this legislation.

Mr Anderson : It should be people who have not made any choice. The extra part of the definition to include people who happen to be in an option that is classified as the default, even though they may have selected to go in there, is a change that has come about most recently and that is the one that drives things the worst.

Senator THISTLETHWAITE: I take your point on that and that is something we will certainly put to Treasury this afternoon.

Mr Anderson : People could have chosen an insurance option but left their investment to one side, not been actively involved in that and ended up in the default option. They have put a lot of effort into getting their insurance right but they are now exposed because of that. So it should not just be about choosing your investment, it should also cover people who have made conscious decisions around their insurance arrangements.

Senator THISTLETHWAITE: That is certainly a common theme we are getting from the submissions.

Mr Klipin : The AFA has been very supportive of the rise from nine to 12 per cent. We have been on a platform of 15 per cent as a target so we absolutely support what the government has done in lifting the numbers. It just seems strange that within a generation the single greatest asset that most Australians will have will be their super fund balances yet we are not taking steps to engage, empower, involve people in managing that future. When you talk about big public policy campaigns, I go back to Norm in the eighties who was talking about public health, getting active and so on. I do not think there are things we cannot do. I just think there are things we have not tried and collectively we need to do that as a community sooner rather than later—rather than just take what looks like an easy way out and just put people into a no-involvement, no-engagement, low-cost offer.

Mr Bineham : From an adviser's point of view, who looks after corporate super, to your point about here is an historic opportunity, I think we are not recognising that advisers are educating those members and helping them becoming engaged at this present time—as the gentlemen before us, who were looking after corporate superannuation specialists, said. I think we should be doing anything to encourage those advisers who are actively out there helping employers educate their employees for their financial health. It is just unfortunate in this situation that when moving it to MySuper the opportunity for us to be paid for this service has been taken away.

Mr TONY SMITH: I want to take you to some of Mr Fletcher's questioning where you were talking about the perverse outcome when someone makes an active choice. They might make an active choice to wait on fixed interest for all the reasons Mr Fletcher outlined: their age and proximity to retirement. Are you saying that someone who has made an active choice earlier on for all the reasons that underpin it can have that reversed essentially by virtue of what is proposed in this legislation?

Mr Anderson : That is absolutely correct. In a master trust the employer can play a role in choosing the default. If an employer has a high level of older employees or more risk-adverse employees, their default may be a lower growth option. There may be another employer that has a lot of young people with a long time to play out until retirement and they may recommend a high-growth option. That is within the one trust. There needs to be one decision that gets made. It is going to have an impact on both of those two groups because it will be somewhere in between.

Mr TONY SMITH: And the whole reason that that person would have made the choice that they did some years earlier was because they wanted their individual circumstances recognised. That is the whole purpose of it.

Mr Anderson : That is right.

Mr TONY SMITH: On the consultation—and I take Senator Thistlethwaite's point that we are seeing Treasury this afternoon—what response have you had when you have put these self-evident facts to Treasury or any of the representatives of APRA or other agencies of government? I know that it has been a short period of time—as Mr Klipin said, it has been quite rushed. What response has there been?

Mr Anderson : We made an earlier submission with respect to the draft legislation. This new legislation has been out for a couple of weeks. I attended a session last week.

Mr TONY SMITH: It was introduced on 19 September or something, wasn't it?

Mr Anderson : Yes. I had an opportunity to talk to the Treasury last week and I raised our concerns with them at that particular meeting. But above that, there has not been extensive consultation.

Mr TONY SMITH: We will hear from them later on. To date, you have not had as a result of those representations answers back to say what is intended. The response has been more along the lines of, 'Thanks for your representations; we'll have a think about it.' Would that be fair?

Mr Anderson : We did not have the opportunity to discuss the significant changes in this version of the legislation until after they had been put into the parliament and the legislation had gone through into this process.

Mr TONY SMITH: Is it fair to say that you had absolutely no knowledge that this was going to occur until it was put into the parliament?

Mr Anderson : That is correct.

Mr TONY SMITH: So you do not know what has driven that?

Mr Anderson : No. That is particularly the case for the change in the definition of accrued default amounts. We had no knowledge of that and no understanding of—

Mr TONY SMITH: So it is fair to say that you were not consulted beforehand.

Mr Anderson : Yes.

Mr TONY SMITH: There was consultation previously but it is fair to say that you were not consulted on this additional measure or change that was inserted into the legislation.

Mr Anderson : Not prior to it being tabled in parliament. There is some story around this being about simplification of the process. But the argument that we have put forward today is that it will not simplify the process of identifying those members who have what are defined as accrued default amounts.

CHAIR: Referring to Hansard, the record shows that no member is forced to transfer their balance to MySuper if they do not want to. They will be notified before a transfer occurs. Indeed, it says that trustees will have up to four years to communicate with members about their options. Is that your understanding, too?

Mr Anderson : That comes down to the deadlines. If they have to move by 1 July 2017, I guess that that is correct. But what is quite clear is that the emphasis of this is to have them move sooner than that. Some trustees may want to move much sooner than 2017. While 2017 is nearly five years off, some may want to move much sooner than that.

CHAIR: You have outlined quite clearly, though, the risks of moving too quickly. What do you think would be the likely response of the sector? It does not seem to me that they are hastening this.

Mr Anderson : It is too early to tell what the timeframes are going to be for movement. But what is clear from the draft APRA standard is that obligations kick off from March as far as reporting and transition plans go. That comes with costs. The sooner that they move, the sooner they avoid those costs. It is too early to tell when people might choose to move. There is a lot that still needs to be worked out in this. From the perspective of a master trust trustee who has many different default options and who has to select one, that is a very big decision. They will need to go through an extensive exercise of making sure that they manage their risks as appropriately as they possibly can.

CHAIR: Thank you. Thank you for your evidence here this morning.