PUP rolls over on FOFA
On Tuesday in Canberra, a chilly nine-degree day, something was in the offing. In the senate courtyard, consumer advocates – Choice’s Alan Kirkland, National Seniors’ Michael O’Neill and Ian Yates of the Council on the Ageing – stood and sounded a warning.
In peril was FOFA, the Future of Financial Advice laws that were ushered in by Labor in 2012 and due to take full effect this month. The protections, which were prompted by abuses that cost thousands of people their life savings, were aimed at ensuring advisers do just that: advise their clients.
“Today is a big day for the senate,” said Kirkland. “The senate needs to decide whether it’s going to back the interests of big banks and big investment companies or the interests of mum and dad investors.”
For “the senate”, read Clive Palmer, who was known to be wavering. The week before, the Palmer United Party leader had been adamant, saying of the Coalition’s plans to water down the regulations, “They can stick it up their arse and you can quote me on that.” But by Tuesday he was in talks with Mathias Cormann, the finance minister and the man leading the charge on FOFA for the Abbott government.
Never mind that through the day another warning came. David Murray, the former Commonwealth Bank chief heading the Financial System Inquiry, released a report that flagged problems with the financial planning sector, especially incentives doled out by the banks.
Come late afternoon in the senate, Cormann revealed he had cut a deal with Palmer. Just after five o’clock, the regulations made it through a vote, thanks to PUP’s senators and Australian Motoring Enthusiast Party senator Ricky Muir. Canberra-watchers scrambled to grasp the terms of the compromise.
To understand the rules at stake, it helps to know their genesis. First, picture a business model that arose from the declining life insurance sector, complete with the same distribution network – the banks along with AMP selling investment products through their in-house planners and external salesmen-turned-advisers. On figures cited by the previous government, there are 18,000 financial advisers or planners, with one in five Australians taking their advice.
Next, add what is described as “vertical integration”, whereby the banks selling investments also own or control businesses offering financial advice. With AMP, the banks control more than 70 per cent of the sector. The point was recently illustrated on the ABC’s The Checkout, which scrolled through the innumerable names of AMP-aligned advisers.
Now take some cases where the business model has failed. Or, more precisely, where it succeeded disastrously. There was Storm Financial, the advice-giving behemoth that folded in 2008. Clients were encouraged to put houses in hock and borrow in grand style, while advisers pocketed fat commissions. Investors lost up to $800 million; of the 13,000 people affected, some lost everything. Or take Timbercorp, an investment scheme. Promising big returns on timber plantations as well as tax deductions, it also paid advisers huge commissions to rope in investors. Advisers recommended clients borrow money against their houses; now more than 300 stand to lose their homes.
The recent revelations about Murray’s former bank offer a fresh example. In June, a cross-party senate inquiry exposed how CBA’s financial planners wiped out the savings of thousands of customers while chasing big bonuses ahead of the global financial crisis. Current CEO Ian Narev apologised to affected customers earlier this month.
Such fiascos and inquiries shaped FOFA’s provisions. The centrepiece was a general requirement for financial advisers to act in their clients’ best interests. A second key protection was a ban on commissions, captured by the phrase “conflicted remunerations”. A third was a clause that put a two-year limit on the charging of fees unless a client “opted in” again.
These changes were aimed at prompting a move from a bad business model to a professional advice sector. That’s why the Financial Planning Association backed the ban on commissions, saying the profession needs a true fee-for-service model. And that was also why the banks have been vehemently opposed. With credit growth in the doldrums, they’re out to incentivise planners and advisers to push their investment products.
Pre-election, the Liberals promised to change FOFA. Initially, the job went to Arthur Sinodinos, then the assistant treasurer and formerly an executive at NAB. He maintained changes were needed to cut red tape and avoid driving up the cost of advice. When he stepped aside in light of allegations at the Independent Commission Against Corruption, Cormann rehearsed the same arguments.
In March, the Coalition introduced a bill with changes. One watered down the general best-interests duty by scrapping what was known as the “catch-all clause”; advisers would be taken to fulfil the duty if they ticked off certain steps, but would not have to show that they took all reasonable steps. Another change purported to keep the ban on commissions, but defined commissions in artificially narrow terms while increasing allowed types of “conflicted remuneration”, including bonuses for bank staff. A further clause removed the “opt-in” rule.
Still, without control of the senate, more than a bill was needed to avert the July 1 deadline for FOFA compliance. On the eve of the new financial year, and without an announcement, the government introduced its regulation, which was signed by the governor-general and came into force.
The senate had the right to vote to scrap the changes, but the government delayed tabling its regulation, trying to stall until it could garner support. Last week, in an unusual move, Labor senator Sam Dastyari tabled the government’s regulation. Thus the scene was set for Tuesday’s disallowance motion.
Labor and the Greens expected crossbencher backing: Ricky Muir was being briefed and Nick Xenophon voiced support. As late as Monday evening, Palmer was saying he had not budged. But he had conveyed to Cormann the terms on which he would compromise. And, on the back of its botched attempt to repeal the carbon tax, the government was of a mind to give the big man what he wanted. After the vote, Cormann lauded Palmer’s FOFA changes as “sensible suggestions”.
Palmer certainly seemed to think he had improved things for consumers. Giving journalists the thumbs-up, he passed out bullet points of his deal. On the list: a statement of advice signed by the adviser and client that will include fee disclosure; a written assurance that the client’s interests will come first; a 14-day cooling-off period and the right for a client to change their instructions should their circumstances change.
All of which sounds great. But as Alan Kirkland of Choice told The Saturday Paper, “The things the government agreed to really add nothing. They reflect things already in the watered-down version of the laws.”
Worse, Palmer did not stop important protections being removed. “Advisers no longer need to take all reasonable steps to act in a client’s best interests,” said Kirkland. That’s because the catch-all provision goes, leaving the tick-the-box approach. The opt-in rule goes, too, meaning clients may be charged fees years after they get advice.
As for conflicted remuneration, the deal does nothing on this score. When asked about the issue, Palmer twice responded by addressing a separate issue – that of fees and charges. Either he was dodging or he missed the point. He disclaimed the need to consult stakeholders or advisers, saying that wasn’t the way he’d become a billionaire.
But Palmer might wise up yet, which would be to the good. On Wednesday, he left open the possibility of backing out of the deal. Raised on the Gold Coast, he wants to do right by the white-shoe set. He might remember that Queensland was also home to Storm Financial. A rerun would be something even Clive could ill afford.
This article was first published in the print edition of The Saturday Paper on Jul 18, 2014 as "PUP rolls over on FOFA". Subscribe here.