Two reports issued this year highlight how regulatory reforms in the financial services sector go wrong.
The first was issued by the Productivity Commission after a 12-month inquiry into the competitiveness and efficiency of Australia’s superannuation system. The draft report issued in May 2018 stated that the high administration costs of SMSFs were the primary cause of poor net returns the sector experienced.
This statement clearly demonstrates how a government body misunderstands some basic facts about SMSFs. One of the major reasons administration costs are so high is that a large percentage of the administrative burden placed on SMSF trustees/members is, in fact, designed to protect members of industry and commercial funds from the actions of trustees. The means SMSFs have to perform ridiculous administration steps that, in effect, exist to keep trustees from ripping themselves off.
The productivity commission will, it is hoped, recommend that the regulation of SMSFs be simplified, removing such administration steps and focusing on rules designed to protect superannuation and ensure it is used for retirement benefits.
The second key report, the interim findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, provides more than enough evidence of how legislators’ past efforts to control the financial advice industry and protect consumers have failed.
Commissioner Kenneth Hayne detailed the main previous reforms of the financial sector, starting with the Corporate Law Economic Reform Program (CLERP 6), which resulted from the Stan Wallis financial system inquiry. That was followed by Future of Financial Advice from 2012. Hayne showed how they both failed to regulate the financial services and advice industry properly.
One of the major failings of the Wallace inquiry, as the interim report stated, was that the rise in competition was expected to “eliminate mispricing of financial products and services, create efficiencies in the system and ultimately produce lower costs to consumers”.
Instead, the four major banks and other large financial institutions created vertical integration. This led to the much-publicised abuses that the royal commission has revealed.
With FoFA, the major problem was not its three main principles of putting the client’s best interests first, banning conflicted remuneration and requiring greater transparency with regard to fees. Instead, the commissioner identified that the protracted consultancy led to a watering down of those three principles.
The major contributor to this was the introduction of the grandfathering provisions that, in effect, resulted in two classes of investors: those that obtained advice tainted by conflicted remuneration prior to the introduction of FoFA and those that received advice after July 1, 2012.
The interim report did not list any of the recommendations the commissioner was considering but the section dealing with the grandfathering provisions in FoFA poses a question, “Why should the grandfathering provisions remain?”
Now, two more reports are coming. The Productivity Commission is due to release its final report to the Australian Government in late December and the royal commission is required to submit its final report and recommendations by February 1, 2019. It is hoped that both will contribute to a stronger and fairer superannuation and financial services system.