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Saturday Breakfast with Geraldine Doogue -

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Interview with Geraldine Doogue

Radio National Breakfast with Geraldine Doogue

Saturday, 21 June 2008

SUBJECTS: Superannuation, financial services reform, simpler disclosure

GERALDINE DOOGUE:

Well as you know the end of the financial year is looming, hard to believe isn't it, and it could
be a sobering time for many with superannuation as we were just discussing with Max Walsh as the
funds are preparing to post their worst returns for 20 years. Now these poor returns are not a
surprise, they have been predicted for a while now and although super funds can do nothing about a
global downturn, there are still questions about the need to reform the super industry and to
ensure all Australians, not only those who are financially savvy get the best returns possible.
Senator Nick Sherry is the Minister for Superannuation and Corporate Law and he's kick started a
whole suite of analyses of the way the world of modern finance intersects with everyday
Australians, so as the Tasmanian senator mulls over possible changes, he joins us on the phone from
Devonport to give us hopefully an insight into what's governing his thinking in a bit more depth.
Welcome to Saturday extra Senator.

NICK SHERRY:

Good morning Geraldine and good morning to your listeners.

GERALDINE DOOGUE:

Do you mind just telling us what has prompted you to call for this green paper. The industry is
looking on, I read with some anxiety, though is also delighted that you have focused on all of
these issues. What's driving you?

NICK SHERRY:

Well, I think there are two main reasons. Firstly, we've seen the impact of the crisis out of the
United States across the financial sector, US sub prime, which has hurt our share market in
Australia and I think it is a good time to have a hard look at some issues in the financial
services sector. The second related set of issues is that it is a much more technical and complex
world. Financial products are much more complex and difficult for people to understand in many
cases. Again, partly a product of the US sub prime situation. We have a very complex regulatory
system where the states still have some responsibilities in Australia and on coming to government
we generally believed that single standard national regulation of all financial services is needed.
It's just too complex with six states and two territories, so they're the two main reasons for
having a look at a range of areas in the financial services sector including superannuation.

GERALDINE DOOGUE:

Look I know that when a lot of people hear the words regulation their eyes glaze over and it's
quite a big discussion about how much governments get in people's lives and how much they leave
people to come to their own conclusions and I wonder where you lie on this. You sit in Tasmania,
which is not a wealthy state, and you have something called the Burnie pub test and you want the
Burnie pub customer, the average Burnie pub customer - as I read it anyway - to feel as comfortable
as a financier sitting in the middle of Melbourne with what's going on. Is that a reasonable way of
trying to distil it?

NICK SHERRY:

Well there are a range of ways to protect consumers in financial services. Firstly, it depends on
the type of product. I think there's a greater duty of care on government in superannuation because
it's compulsory, it is long term, and is not voluntary. There are issues around how you regulate
the institutions, how you ensure protection, how you inform consumers and disclosure. One of the
central protections in Australia is disclosing the details of a financial product to an investor or
a consumer and in this area we are carrying out a major overhaul. The disclosure regime in
Australia has resulted in very lengthy and complex documents.

GERALDINE DOOGUE:

You couldn't be more right.

NICK SHERRY:

Fifty to 100 pages is common. I refer to them as Latin-like documents. Now when protecting
consumers is dependent on them being able to understand and read documents, 50 to 100 pages, is
just useless so we are re-writing disclosure documents. We want much more simple, standard
documents that individuals can read and understand. We will road test that for understanding and I
will apply what I call my Burnie pub test which Burnie is a city on the North-West Coast here. My
view is that if the average person in a city like Burnie can't understand a document then we
haven't got it right and we've got to make sure it is readable.

GERALDINE DOOGUE:

Is that what they tell you?

NICK SHERRY:

I think in terms of what would be readable in a local community where I live, hence the term Burnie
pub test, but we are going to consumer test them.

GERALDINE DOOGUE:

I suppose what I'm wondering is what drove you? I've been watching your statements and I thought
what's got him going? What's upset him such that he's put all of these reviews into place. Is it
what people have said or is it your own instincts?

NICK SHERRY:

I think it is both. Time and time again I get complaints from people who say look how on earth
could I understand this document? It's just too complex and that is central. Understanding a
financial document is critical to consumer protection in our system. Time and time again I get
complaints about fees and I look at the document, the disclosure document and the fees are on page
20 or 25 and there's a great long list of them and you can't make head nor tail of them and that
does annoy me.

GERALDINE DOOGUE:

So this notion of choice then comes with the notion that people need to make their own decisions
about their financial health. Are you starting to question the virtue of that?

NICK SHERRY:

Well, I think we've got to be very careful about the number of choices. There's some interesting
research into human behaviour that shows if you give people 20, 30, 50 choices it actually
overwhelms them and you've got to ensure people are able to make an informed choice. It's all very
well having lots of investment options in superannuation for example but the extent to which the
average person can actually understand it and use it is quite questionable in many cases.

GERALDINE DOOGUE:

So what do you do about that as a government when you've got complex machinery in place and people
are constantly saying don't fiddle more - do you need to fiddle more?

NICK SHERRY:

I think it comes back to the simplest, most effective regulation and disclosure appropriate for the
product. Some products are much more complex than others. Superannuation is much much more complex
say than a bank product, although some would find a bank product more complex. You can't just rely
on disclosure. It's also how you regulate the providers, the financial institutions, like mortgage
brokers. I mean what we are looking at is mortgage brokers, trustee companies, and margin lending
which has been very controversial in the current stock market, and its decline. We are going to
transfer regulation from the six states and two territory governments to the Commonwealth so you
have one national set of rules. That actually makes it easier for consumers but also for business.

GERALDINE DOOGUE:

But are you suggesting, just going back to super, that you are thinking of changing some key
regulations around super?

NICK SHERRY:

Oh yes, certainly.

GERALDINE DOOGUE:

I don't mean just about disclosure, I mean in terms of providers.

NICK SHERRY:

Well yes, there are a range of governance issues in superannuation that go beyond simple disclosure
issues. In superannuation for example the trustee is the critical guardian or decision maker. So
I'm having a hard look at all areas of superannuation to see how we can improve what I call
governance - that's trustee behaviour, issues around fees. They go well beyond simple disclosure.
We are having a look at the trustee governance in self managed superannuation funds, the so called
Do It Yourself (DIY) funds. There seems to be a significant minority of trustees who don't
understand their obligations in current law in terms of investment issues.

GERALDINE DOOGUE:

Right, so we could look for some alterations there. I wonder whether you believe what John Howard
believed that Australia ought to become a shareholder society? In effect, for a lot of people that
was via their super, they actually become aware of the marketplace, those who bothered to look.
They actually become aware of it. Do you think that's been a good thing? I mean do you want to see
that continue or do you think that has not treated people fairly?

NICK SHERRY:

Well I think it has been a very good thing. It's enabled a greater sharing of economic wealth. I
mean shares are owned directly, through direct investment or indirectly through your
superannuation. I mean it was a Labor Government 20 years ago almost to the day that made
superannuation compulsory for every one and with compulsion comes a strong duty of care. But the
general concept of share ownership in society is a good thing, whether it's individual retail or
through your superannuation.

GERALDINE DOOGUE:

And just very quickly, what won't you touch in all of this?

NICK SHERRY:

I think it is better to say what we are doing. Simpler disclosure, removing complexity around
disclosure, having a look at the governance in superannuation, the trustees.

GERALDINE DOOGUE:

When is this all going to happen?

NICK SHERRY:

I'm hopeful by the end of this year. We've also got some urgent issues to deal with around share
market regulation because of the fall out we've seen as a consequence of the US sub prime.

GERALDINE DOOGUE:

Well thank you very much for joining us.

NICK SHERRY:

Thanks Geraldine.

GERALDINE DOOGUE:

Senator Nick Sherry, Minister for Superannuation and Corporate Law and he's issued a green paper on
some of those issues which you might like to seek out on his website.