By Michelle Levy
The Senate Economics Committee's Report into ASIC's performance is an interesting read. It opens by calling ASIC a 'timid, hesitant regulator, too ready and willing to accept uncritically the assurances of a large institution.' And continues in a similar vein for almost 500 pages. ASIC says it does the best it can in the circumstances.
ASIC and the Committee make some suggestions about how those circumstances might change and in doing so, provide some indication of what might lie ahead for the financial services industry and its customers.
First, a tougher and less trusting regulator with increased powers, undertaking more intrusive surveillance, demanding more stringent undertakings and more willing to bring proceedings against large financial institutions. And then, a more profound change to the way the financial services industry is regulated. The report signals a shift to a more paternalistic approach to regulation – conduct and disclosure rules don't work unless consumers are both interested and well-informed. The evidence suggests they are neither. ASIC has been calling for powers to 'promote investor and consumer protection' suggesting that '"merits" regulation of financial products' might do the job better than disclosure rules, and it appears that the Committee agrees. It recommends that the Financial System Inquiry consider measures to protect consumers from unsafe products, including by giving product issuers a positive obligation to design 'suitable' products. Is this an acknowledgement that the Future of Financial Advice laws are not enough?
The Financial System Inquiry's Interim Report doesn't give much away on product suitability rules, although it does say that conflicted remuneration structures compromise the quality of financial product advice.
The Streamlining of Future of Financial Advice Regulations were made on 30 June and, following this week's decision by the Palmer United Party not to support the Opposition's disallowance motion in the Senate, they are here to stay, or at least for a while. They permit conflicted remuneration to be provided to employees who provide general advice, provided the benefit is not a commission, and performance bonuses to be paid to advisers, provided that the bonus is outweighed or balanced by other elements of their remuneration. Depending on your politics, the regulations strike the right balance and 'cut red tape' or they are the thin end of the wedge, marking a return to the bad old days of upfront and trailing commissions.
But does it matter? It is possible that FOFA may have had its day. If ASIC has its way, financial products will need to be suitable and instead of financial advice being in the best interests of the customer, the financial product will need to be. If that is the case, does it matter if the person 'selling' it doesn't act in the best interests of the customer or if they are paid a commission by the product issuer?
If I visit a Toyota dealership, I expect to be sold a Toyota – I know the salesperson is not acting in my best interests and I suspect they will get a commission. But provided the Toyota does the job, there is really no reason to complain. If it doesn't, Toyota is responsible for fixing any defects. If I want to know which is the best car for me, I will ask an independent expert, I won't visit my Toyota dealer. Why should buying a financial product be different?
This isn't so fanciful – David Murray and the Financial System Inquiry appear to support distinguishing sales and independent advice. In the Inquiry's Interim Report, there is a clear recognition that a lot of general advice is in fact part of the sales pitch – 'this is a great car' or 'this is a terrific superannuation fund'. And provided that they are, no harm is done because the 'adviser' is in fact a salesperson and not independent.
The Stronger Super laws already require MySuper products to be designed so that they are in the best financial interests of product holders (members) and they require the product issuer to decide every year that the product continues to be in the members' best interests. The Regulator's job is to authorise the issue of the product and monitor the performance of the fund. If the product doesn't meet the members' best financial interests, the issuer needs a plan to move the members to another product or to change the product. The legislation was built on the premise that the members don't read or understand product information and don't make informed choices. It might herald a brave new world where product issuers are free to sell their products, provided they, like the Toyota, do the job well and, if they don't, the product issuer, not the 'adviser', will be responsible. In this brave new world, ASIC will be responsible for supervising the merits of the products and FOFA would be sidelined, at least for most us. For others who are looking for the best product, independent financial advisers acting in their client's best interests, not product issuers, can help.
An edited version of this article appeared in The Australian Financial Review on 8 August 2014.