Industry Super Network

The Future of Financial Advice reforms rest on the best interests obligation

Robbie Campo, Manager – Strategy, ISN, asks whether it is really possible for any financial institution to argue against the introduction of a best interests test for financial advisers. 

The best interests duty is considered by many to be the cornerstone of the Government’s Future of Financial Advice (FoFA) reforms introduced into Parliament last week. It is a long overdue measure that will assist the industry in transitioning to a credible and trustworthy profession.  But while there is a high degree of agreement that the Government has presented to Parliament a balanced yet effective best interests duty, banks and large insurers are largely unhappy.

The Financial Services Council (FSC), which represents banks and insurance companies, contends that the duty is unworkable. As banks and insurance companies are major employers of financial advisers (around 85 per cent of financial planners are employed by product providers) and have traditionally used planners as their primary distribution channel, it is no surprise that they are objecting.

The best interests obligation, which will require a client’s interests to be given priority over all other interests, will impact on the sales function that banks and retail funds have traditionally assigned to planners. Yet if the best interests obligation and other FoFA reforms fail to free financial planners from being sales agents, then we will have failed one of the key policy objectives of this reform process.

The FSC, on behalf of major banks and insurers which run retail super funds, has raised concerns that the best interests duty is unworkable because it is not completely defined by a step-by-step process. However, an effective best interests test cannot be condensed to a finite number of steps. It requires astute and professional judgement based on an adviser’s knowledge and experience, rather than just imposing a ‘tick-a-box’ approach.

Initially, stakeholders were divided as to how the obligation should be defined. Some stakeholders, including the Financial Planning Association, sought a principles-based approach, while others argued for a tight set of regulations. In the end, the Government struck a compromise between the two and provided a significant level of prescription by identifying a number of ‘reasonable steps’ an adviser could follow to prove that they have acted in their client’s best interests. This approach, however, does not exclude the need for an adviser to exercise some professional judgement.

The FSC is also arguing that the Bill fails to provide the requisite certainty to enable planners to offer basic advice on a single or limited subject matter. Interestingly, industry super funds, who are currently the major providers of single issue financial advice, do not share this concern.

The Bill and the Explanatory Memorandum make very clear that a planner can scope advice to a single subject matter, provided this is done in the client’s interests. However, this has not gone far enough to appease the big banks and insurance companies. So what modifications to the duty do they seek?

The FSC’s submission to Treasury on the draft legislation argued that a client and adviser should be able to “agree” on the scope of the advice, to give the provider certainty regarding the extent of their liability. However, typical Australians are vastly less knowledgeable and experienced in financial matters than their planner and often do not provide clear instructions. Is it to be seriously contended that the capacity for ‘contracting out’ should be built into the best interests obligation, given the gap in financial knowledge that exists between most clients and their financial planner?

Properly identifying the scope of advice in the client’s interests is fundamental to any professional obligation – for instance, a doctor does not always just look at the immediate symptoms of which a patient complains. A doctor will often question a patient to consider whether further investigation/tests are warranted. However, a doctor would not contemplate getting a patient to ‘agree’ to the scope of the diagnosis or treatment. In any normal professional engagement, it is incumbent on the professional to direct or advise their client, not the other way around.

The Government has delivered a best interests duty that offers some compromise between the choice of a principles-based obligation or a qualified set of steps which enables a planner to demonstrate compliance with the duty. 

The Government has undertaken over a year’s intensive consultation in an effort to address all legitimate issues raised by industry stakeholders. The current form of the duty sets a professional standard for financial advice, which is why it is supported by a number of key stakeholders including Choice and the Financial Planning Association.

Any further compromise would simply return financial advice to sales.

For further information on the FoFA reforms, contact Robbie Campo on rcampo@industrysuper.com

AIST Awards for Excellence and Leader Development Scholarships

The AIST Awards for Excellence and Leader Development Scholarships recognise diversity in superfund communication strategies. Find out who the winners are for 2011.

On 24 November, AIST held its 2011 Awards for Excellence and Leader Development Scholarships.

Fiona Reynolds, CEO, AIST said that the awards highlighted the pool of talented teams and individuals that play a key role in the ongoing success and out-performance of not-for-profit super funds.  The Awards also demonstrated that there was no ‘one-size-fits-all’ approach to successfully engaging fund members, she said.

“In 2011, we’ve seen how using social media creatively can deliver for one fund, while a relatively straightforward, but cleverly-targeted, advertising campaign worked for another,” Ms Reynolds commented.

“In this climate of uncertainty and caution, it’s important that super funds continue to explore different and innovative ways to engage their members and maintain member confidence.”

Industry super funds, CareSuper and HOSTPLUS, took out two of the top AIST Awards for Excellence.

CareSuper was honoured with the Platinum Communication Award for its ‘Why Should You Care’ advertising campaign, which features former Olympic swimmer Giaan Rooney.

Ms Reynolds congratulated CareSuper on the campaign, which saw monthly traffic to the fund’s website rise by more than 50 per cent and also help boost young membership in the fund.

“What this campaign highlights is the value in finding the right people to engage and attract young fund members,” Ms Reynolds said.

HOSTPLUS won the Super Member Services Award as well as the Gold Communication Award for its suite of educational and marketing initiatives, in particular, the ‘Cook for your career’ campaign. This campaign was promoted heavily through Facebook and Twitter and was a great hit with younger audiences. It also helped position HOSTPLUS as a leader in social media, while confirming the fund’s role as a hospitality industry supporter.

“I would like to congratulate all of our 2011 entrants,” Ms Reynolds said. “The nominations and submissions this year were of the highest standard to date, making it very difficult for the judges involved.”

AustralianSuper leads the way with new investment offering in term deposits

AustralianSuper is meeting member demand for more conservative investment products by offering term deposits in its Member Direct Option.

AustralianSuper has announced the inclusion of term deposits as part of its Member Direct investment option. The super fund has developed the new product as more members begin to seek investment options that have a greater level of certainty in the marketplace.

Ian Silk, Chief Executive, AustralianSuper, said that term deposits in general had been growing rapidly in recent years and that he expected a greater interest in term deposits within super to follow.

“AustralianSuper is committed to developing and delivering market-leading products and services at low cost and our new term deposit options are an excellent example of this,” he said. “Members will be able to choose between options of three, six and 12 month terms, with a minimum deposit of $2,000 and a maximum of $5 million – and at sustainably competitive rates.”

AustralianSuper has selected NAB and ME Bank as the Fund’s term deposit providers following a competitive tender process.

“Unlike other platforms or retail super funds, we are not tied to a product provider, so we can focus on achieving the best possible deal for our members,” Mr Silk said. “Our size and scale also gives us significant bargaining power on behalf of our members in the market.”

AustralianSuper’s Member Direct investment option provides members with the opportunity to have more direct control over how their super is invested. The option allows members to invest directly in ASX300 companies, ETFs and term deposits.  It also includes an associated cash account, as well as sophisticated research and reporting capability.

For more information, visit the website.

Australian Government introduces Low Income Earner Government Super Contribution

More than 3.6 million Australians are set to benefit from the introduction of the Low Income Earner Government Super Contribution. This is a significant win for many low income workers who  until now, have not received any tax breaks on their super, says Matt Linden, ISN’s Chief Policy Adviser.

On 2 November, the Australian Government introduced the Low Income Earner Government Super Contribution into Parliament. The new legislation is designed to help low income earners save for their retirement by providing a tax rebate on their super of up to $500. The new legislation will apply to those earning $37,000 or less.*

Significantly, the Government has removed the requirement for low income workers to lodge a tax return to receive the contribution. Instead, the benefit will be determined by the ATO, based on an individual’s income and tax data.

Matt Linden, Chief Policy Adviser, Industry Super Network, said that the legislation is a great win for Australian workers.

“ISN has long advocated for tax concessions for low income earners on their mandatory super contributions, some of whom have been paying more tax on their super than on their ordinary income. This new legislation effectively abolishes the 15 per cent tax that is paid on low income workers’ super contributions, effectively making their super tax-free. This will make a big difference to workers’ final retirement savings.”

The new legislation, once passed by Parliament, is expected to benefit more than 3.6 million lower income earners and 2.1 million women.

To read the speech introducing the proposed legislation into Parliament, click here.

*However eligibility will be restricted to individuals with earned income in line with requirements for the Co-contribution scheme. Only individuals who earn more than 10 per cent of their total income from employment or business will be eligible. Temporary residents or those with an entitlement of less than $20 in any year will also not be eligible.

ISN applauds Superannuation Guarantee rise to 12%

The Government’s proposed increase of the Superannuation Guarantee to 12% is set to boost Australians’ retirement savings by tens of thousands of dollars. The move is to be applauded, says David Whiteley.

Industry Super Network (ISN) has congratulated the Government on the passing of legislation to raise the Superannuation Guarantee from nine to 12 per cent in the House of Representatives last week.

ISN Chief Executive, David Whiteley, said that in combination with the Future of Financial Advice and Stronger Super reforms, the new measure will improve the retirement savings of average Australians by tens of thousands of dollars.

“This new legislation moves Australia closer to a vastly improved retirement savings system,” he said.

“ISN has long advocated boosting the compulsory Superannuation Guarantee, while at the same time improving the efficiency and equity of the superannuation system through bans on commissions and improving tax incentives for low income earners.

“Increasing the Superannuation Guarantee contribution to 12 per cent will add tens of thousands of dollars to the retirement income of average Australians.

“In addition, more than 3.6 million lower income earners are set to benefit from the low income superannuation tax rebate of up to $500 per annum, once this has been passed by Parliament.”

David said that the entire package of reforms represented the most comprehensive improvement to the retirement savings system since the introduction of compulsory superannuation.

“Australians deserve a dignified retirement and these laws will complement the wider reform of the superannuation and financial advice industries to help deliver that outcome,” he concluded.

To read the speech introducing the proposed legislation into Parliament, click here.