FOFA Disallowed In Senate

The government’s changes to FoFA are now under threat, following a move which saw four crossbench senators join with the Labor and the Greens to overturn the changes to the financial advice laws. This reverses some of the changes which as we discussed before were aligned with the major banks, and saw consumer protection eroded.  As a result, Labor now appears to have secured the support it needs in the Senate to reverse the regulations. This overturns the earlier deal with the government and the minor Palmer United Party (Pup) in July to push through the Senate changes to Labor’s Future of Financial Advice (FoFA) laws.

Pup Senator Jacqui Lambie, and crossbenchers Ricky Muir and John Madigan, and independent senator Nick Xenophon have joined with the opposition on the issue. Xenophon called it “a coalition of common sense”.

“Our common, unequivocal objective is to have the government’s FoFA regulations disallowed today in the Senate because they are unambiguously bad for consumers”

ASIC commented:

ASIC notes the Senate has disallowed the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014.

ASIC will take a practical and measured approach to administering the law as it now stands following the disallowance of the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014. We will take into account that – as a result of the change to the law that applies to the provision of financial advice – many Australian financial services (AFS) licensees will now need to make systems changes. ASIC recognises this issue may arise in particular areas, including fee disclosure statements and remuneration arrangements.

We will work with Australian financial services licensees, taking a facilitative approach until 1 July 2015.

We believe this represents an important opportunity to revisit the fundamental flaws in FOFA as originally incarnated, and exacerbated by the recent government amendments. But is also continues the uncertainty around the nature of good financial advice, something which is critically important to get right, given the swelling superannuation balances in Australia, now worth $1.85 trillion.


ASIC Issues Further Guidance On Super Forecasts

ASIC has issued further guidance to assist superannuation fund trustees to provide their members with retirement estimates. The changes will allow a superannuation fund to include an estimate of the age pension which might be available to the member along with the member’s superannuation benefit at retirement. The changes are to ASIC’s existing relief for retirement estimates. A superannuation forecast is an estimate provided to a super fund member of the balance of their superannuation investment at retirement, provided in the form of a statement (retirement estimate) or a calculator.  These estimates help members to engage with their superannuation. The revised guidance and relief also make a number of minor technical changes.

ASICSuper1 ASICSuper2ASICSuper3

ASIC Seeks To Stop Property Promoter’s Unlicensed Financial Advice on SMSFs

ASIC has commenced proceedings in the Supreme Court of New South Wales seeking interim and final orders to prevent property investment promoter, Park Trent Properties Group Pty Ltd (Park Trent), from carrying on an unlicensed financial services business.

Park Trent’s business promotes the use of self-managed superannuation funds (SMSFs) to purchase investment property.

ASIC alleges and is seeking declarations that Park Trent is unlawfully carrying on a financial services business without an Australian financial services (AFS) licence.

ASIC understands that Park Trent has advised at least 500 members of the public to establish and switch funds into an SMSF which are then used to purchase investment properties that are owned or promoted by Park Trent companies.

ASIC is also seeking orders requiring Park Trent to notify current and former clients about the proceeding and to post a notice regarding ASIC’s proceeding on its website.

ASIC Commissioner Greg Tanzer said, ‘Collectively, Australians hold over $1.85 trillion worth of assets in superannuation funds, with $557 billion held in SMSFs. It is important when making decisions regarding superannuation to consider obtaining appropriate advice from an authorised financial adviser.

‘Dealing with an authorised adviser affords specific protections under the law, such as acting in the best interests of clients, a duty to avoid conflicts of interest and providing access to dispute resolution schemes.’

The first hearing of the matter is listed for 26 November 2014.

Early Access To Super Is On The Rise

The Department of Human Services released their 2013-14 Annual Report. One topic of note is the rise in the early release of superannuation savings.

According to the DHS, Superannuation cannot generally be accessed before a person reaches their preservation age. In some limited circumstances the law allows for early access to superannuation. Most of the grounds under which early access is permitted are administered directly by the superannuation funds. These include:

  • severe financial hardship
  • terminal illness
  • permanent incapacity
  • balances of $200 or less
  • permanent departure from Australia

The DHS is responsible for assessing applications for the early release of superannuation on compassionate grounds. These include payments for:

  • medical or dental treatment for you or your dependent
  • transport for medical or dental treatment for you or your dependent
  • arrears on your mortgage to prevent your home being sold by your lender
  • modification to your home or vehicle to accommodate a severe disability for you or your dependent
  • palliative care for a terminal illness for you or your dependent
  • expenses associated with your dependent’s death, funeral or burial

The regulations of compassionate grounds are set out in Australian law. While early access to superannuation is possible it is always subject to strict legal criteria. Applications must be supported by evidence. You must not be able to meet the costs by other means, such as savings

There was 7% uplift in withdraws, from last year, but the increase in applications was not matched by a rise in approvals by the department. Two-thirds of all applications were approved in full or part, with the total value of early payouts rising only 3.8%, or $5.4 million, to $151 million. The average payment approved by the department rose only two per cent to $12,874 from $12,643 in 2012/13. This is small beer relative to the $1.85 billion in super held by Australians and will reduce the chatter about the rising hardship levels amongst households. The main motivation is to pay down the mortgage, and this is confirmed by our household surveys.

DHS Chart

ASIC Says Life Insurance Industry Needs Higher Standards

ASIC today released their review of activity in the Life Insurance Industry, and finds that consumers interests are not always given priority. The $44bn industry touches superannuation, annuities, and other elements, as shown in a diagram reproduced from the report. We have previously highlighted the issues around annuities. They found that high upfront commissions are more strongly correlated with non-compliant advice, and we think that it is another case, like FOFA of product sales being dressed up as advice.


An ASIC review of life insurance advice has found that the industry needs to improve the quality of advice and ensure that the interests of consumers are given priority. ASIC’s review of more than 200 advice files from large, medium and small Australian financial services (AFS) licensees found that 63% were compliant. However, more than one third (37%) of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client. ‘This is an unacceptable level of failure, and the life insurance industry is now on notice to lift standards and professionalism. Both insurers and advice firms need to work on delivering a consistently better service for consumers’, ASIC Deputy Chairman Peter Kell said.

‘Life insurance is a key product through which consumers manage risk for themselves and their families. It is therefore important that both the products and the advice meet the consumer’s requirements. ‘There is both a need and a demand for quality life insurance advice, and our report provides examples of advisers delivering a service that meets the needs of their clients. However, this result must be achieved on a more consistent basis’, Mr Kell said. ASIC’s report sets out the various commission models that are used to remunerate advisers in the life insurance sector. The report found that high upfront commissions are more strongly correlated with non-compliant advice, including in situations where the recommendation is to switch products.

‘The industry as a whole needs to consider how remuneration and compliance practices can better support good quality outcomes for consumers’, Mr Kell said. Affordability of insurance is an important issue for consumers, and ASIC’s report includes cases where clients were recommended insurance cover that was likely to be very difficult to afford given their financial circumstances. ASIC’s report confirmed that the high rate at which life insurance policies are lapsing warrants consideration by the life insurance industry to ensure that industry practices are sustainable.

ASIC has made a number of recommendations for insurers, AFS licensees, advisers and their professional associations, including a focus on how to ensure client interests are met and balancing the issue of affordability versus cover. Mr Kell said, ‘ASIC is committed to working with the industry to address the problems we’ve identified and to improve outcomes for consumers.’ Following the surveillance work and the conduct that has been uncovered ASIC has commenced follow-up investigations in certain cases which are ongoing. ‘Where inappropriate advice was provided we are considering enforcement action or other regulatory action’, Mr Kell said.

However, DFA believes that this is part of a wider issue with consumer advice in Financial Services. The problem is the various elements within a consumer’s financial portfolio will fall under different regulatory environments, which are just not consistent. If its mortgage related, then the advice is centred on whether the loan is suitable or not (no best client interest here) and commissions are rife ; if its financial planning related, the FOFA, offers some safeguards, and also significant gaps around general advice, as we discussed recently. Now life insurance is another problematic area. It is time for some joined up thinking. A consumer will require financial service advice across multiple products including loans and investments, but all part of a single financial portfolio. There should be consist consumer-centric processes, irrespective of the products being touted. We applaud ASIC for again championing the interests of the consumer, but there is so much more to be done.

The solution is simple. Separate advice from product sales (a.k.a general advice). Exclude any incentive payments for those providing advice. Clearly disclose any product fees (including trading and transaction fees). Job done.


FOFA Survives

Last night in the Senate, the plans to disallow significant portions of the Government’s Future of Financial Advice (FOFA) reforms were blocked by a majority of two votes. The amendments were saved with support from the Palmer United Party, Motoring Enthusiast Party, Family First and Liberal Democratic Party cross-benchers. So the latest iterations of the Future of Finance Reforms stands.

The more recent changes tweaked the wording such that advisors providing general advice (a.k.a) product sales advice cannot directly receive commissions. However, it remains quite feasible for advisors and other customer facing staff to be remunerated against a set of performance targets such as number of products sold against a target. This plays into the hands of the larger banks who control most financial advisors.

As a result, it seems that consumers will need to be watchful that product sales could be dressed up as advice. We discussed the FOFA issue in some detail recently.

The right answer would have been to dispense with general advice altogether, so that consumers could either receive clear financial advice, for which no commissions or other payments should be made; or product sales advice, when commissions and other financial incentives should be openly declared.

FOFA is still a pig’s ear. The majority of consumers seeking investment advice will be older (see the chart below), and there is a risk of undue influence from advisors and others who offer sales advice in the guise of general advice.


Managed Funds Industry Now At A Record $2.4 Trillion

The ABS released their data for the managed funds industry to June 2014 today. At 30 June 2014, the managed funds industry had $2,405.3b funds under management, an increase of $46.1b (2%) on the March quarter 2014 figure of $2,359.2b. The main valuation effects that occurred during the June quarter 2014 were as follows: the S&P/ASX 200 was flat; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 4.2%; and the A$ appreciated 2.2% against the US$.
ManagedFundsIndustryJune2014At 30 June 2014, the consolidated assets of managed funds institutions were $1,895.3b, an increase of $31.3b (2%) on the March quarter 2014 figure of $1,864.0b. The asset types that increased were units in trusts, $12.5b (6%); shares, $9.2b (2%); overseas assets, $9.0b (3%); loans and placements, $4.8b (11%); bonds, etc., $3.3b (3%); short term securities, $2.1b (3%); and derivatives, $0.2b (16%). These were partially offset by decreases in other financial assets, $5.0b (12%); deposits, $4.5b (2%); other non-financial assets, $0.3b (2%); and land, buildings and equipment, $0.1b (0%).

Super Balances Now Up To $1.85 trillion – APRA

APRA just published their Quarterly Superannuation Performance data to June 2014. Superannuation assets totalled $1.85 trillion at the end of the June 2014 quarter. Over the 12 months to June 2014 there was a 15.3 per cent increase in total superannuation assets. Over the June 2014 quarter, total superannuation assets increased by 2.6 per cent.

SuperJune2014 There were $27.6 billion of contributions in the June 2014 quarter, up 5.9 per cent from the June 2013 quarter ($26.1 billion). Total contributions for the year ending June 2014 were $95.0 billion. Outward rollovers exceeded inward rollovers by $531 million in the June quarter. There were $14.7 billion in total benefit payments in the June 2014 quarter, an increase of 8.3 per cent from the June 2013 quarter ($13.6 billion). Total benefit payments for the year ending June 2014 were $55.3 billion. Net contribution flows (contributions plus net rollovers less benefit payments) totalled $12.4 billion in the June 2014 quarter, an increase of 15.1 per cent from the June 2013 quarter ($10.8 billion). Net contribution flows for the year ending June 2014 were $37.3 billion.

The number of entities with assets of more than $50m fell by 3 in the last 12 months, from 213, to 210.

The self managed super fund sector, according to the ATO, accounted for 30.05% of all assets.

SuperSplitJune2014The value of assets in SMSF continues to grow, standing at $557 billion (the red area), although the absolute percentage has fallen in the past year, from 30.8% to 30.05% (the blue line).


Government To Review Retirement Income Rules

The Treasury today announced a review seeking feedback on the types of products which would be appropriate for people approaching or in retirement with a focus on ensuring they do not out live their savings.

The Government’s superannuation election commitments include reviewing:

  • the regulatory barriers restricting the availability of relevant and appropriate income stream products in the Australian market; and
  • the minimum payment amounts for account-based pensions, to assess their appropriateness in light of current financial market conditions.

Given their interactions, this discussion paper Review of retirement income stream regulation forms the basis for consultation on both reviews.

In addition, on 14 December 2013, the Government announced it would not proceed with the previous government’s unlegislated measure to facilitate the provision of deferred lifetime annuities and that it would instead consider the proposal as part of the review of the regulatory arrangements for retirement income streams. This paper also provides a basis for consultation on extending concessional tax treatment to deferred lifetime annuities.

The Government welcomes views on this discussion paper, and written submissions will be accepted until 5 September 2014.

We believe there is opportunity to create new products and services, provided they are fairly priced and transparent. In our review of the demand for annuity products in Australia, we found that many were concerned about these issues, and of course the UK just moved from a mandatory annuity structure to allowing retirees complete freedom to save and spend as they please. They had a major mess previously. DFA believes that households should not be forced to take a particular solution, but products correctly structured and priced would be of significant help. We know from our household surveys that many are not saving sufficient to support their expected life in retirement. Indeed many had no clear expectation of how long they might live, and what they might need to have invested.

The incredible morphing FOFA beast

I wrote a piece, published today for the ABC News – The Drum, arguing that far from reducing the cost of financial advice and improving access, the PUP-approved FOFA changes will favour the big banks and allow planners to provide poor advice. It was based on my earlier and more details post published here, but updated to take account of latest developments.