Senators will make a decision this week that might just save homes and help to people retire with dignity. Because when people get financial advice that’s not in their best interest, or advice that is driven by sales incentives instead of responsibility, they risk losing everything.
This week the Senate will review regulations that have removed important financial advice protections for consumers. It is no accident that these regulations are bad for consumers, because the aggressive campaign for them has been driven by the big banks and financial advice firms.
The banks and government have framed the debate around the compliance costs to industry, dressed up in an argument about the costs of advice for consumers. The real debate should be about the costs to consumers of bad advice, made easy by inadequate regulation.
The ‘opt-in’ provisions, which the regulations remove, are an excellent example of this. They introduced a simple requirement that advisers to seek consumers’ consent to ongoing fees, every two years.
Parts of the industry have lobbied for the ‘opt-in’ provisions to be repealed, arguing that requiring advisers to contact clients is onerous. This conveniently misses the point of the opt-in provisions: to stop consumers paying fees long after they cease receiving advice.
An ASIC survey of the top 20 financial services licensees found that 3.1 million – or two-thirds – of clients were inactive in 2011. They were paying ongoing fees but not receiving any benefit. Because of the structure of many financial products, many of them probably did not even realise that fees were eroding their investment income.
Conveniently for industry, the government’s regulations also address transparency around fees. Whereas the original Future of Financial Advice laws required that clients receive annual statements of fees, the regulations only require this for arrangements that commenced from 1 July 2013. Consumers with older investments will remain in the dark.
Another issue at play is the role of conflicted remuneration – financial incentives for advisers to push particular products.
The government says it has banned commissions. But commissions are just one type of payment that can influence which product an adviser will recommend. The regulations allow banks to reward their staff through bonuses based partially on how many products staff push onto consumers. The conflicts that these incentives create drove the sales culture that resulted in some of the biggest financial scandals of the past few years.
The banks have been confident about winning this game. For evidence of that confidence, you only need to look to the Commonwealth Bank, which while it was drafting its apology over the Commonwealth Financial Planning scandal was still actively lobbying for consumer protections to be watered down.
But the tide is starting to turn. And this week the Senate has an opportunity to draw a line in the sand, by voting to disallow the government’s regulations.
More than 11,000 consumers have signed the CHOICE petition calling for senators to do the right thing. We hope they hear that call.
Alan Kirkland is the CEO of CHOICE.