Peter Townsend

The Murray Report’s recommendation to ban SMSFs from borrowing is inconsistent and based on a flawed approach to the regulation of the superannuation system.

The Report’s argument that superannuation should be treated as a savings vehicle for retirement income rather than a broader wealth management vehicle is a totally new way of viewing the role of superannuation which, if it were to be accepted consistently and fully, would see funds banned from investing in anything other than the safest and least volatile of investments – and certainly not the share market.

Even the most blue-chip sector of the market cannot guarantee a complete lack of volatility and therefore should be more appropriately put in the ‘wealth management’ box (which is allegedly bad for super) not the ‘savings’ box.

This new characterisation of superannuation (savings only) would permit only the least volatile of investments – term deposits backed by the strength of Australian banks with their new capital adequacy requirements as recommended by the Report.

That investment strategy might be OK if you’re accumulating superannuation continuously for a working life of 40-50 years but heaven help you to save enough super if you’re

• out of work,
• a woman who is unemployed for various periods of time throughout her working life and generally is on lower wages anyway, or
• self-employed and not always able to make the necessary contributions.

Oh, and of course such a strategy is great for the banks but there goes the need for any involvement by the financial planning industry – who needs an adviser to invest in term deposits?

The whole notion of super as solely a savings vehicle is fraught with difficulties and deeply flawed. It has never been the basis of our approach to superannuation and cuts across every other area of financial management.

The suggestion that borrowing be banned because it is not in keeping with that ‘savings vehicle’ philosophy is biased against SMSFs unless public offer funds are similarly turned into solely savings vehicles.

The truth of the matter is that with assets subject to borrowing accounting for only about 1.7% of all assets held by SMSFs the borrowing ban is a solution to a non-problem. It is designed to make the public offer funds feel better after the Report severely criticised their fees and has nothing to do with the proper administration of self-managed superannuation.

As always it is not regulation that is necessary but education.  Not mindless guff about how to be a trustee but rather about the strengths and weaknesses of gearing as an investment strategy.  The only requirement should be that the person understands what they are risking by using the strategy.

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Phil Anderson

The Association of Financial Advisers (AFA) has welcomed the release of the Financial System Inquiry (FSI) report (the Report) following a 12-month review into the Australian financial system.

AFA Chief Operating Officer, Phil Anderson, said the report addressed a range of key issues right across the Australian financial system. “This is a critical report that is likely to have significant implications for both consumers and participants in the industry,” he said.

“We particularly note the measures focused upon competition and consumer outcomes.” Mr Anderson said it will take the industry some time to consider the implications of the 44 recommendations and other key observations.

“We welcome the Government’s intent to consult broadly on these recommendations as they consider them,” he said.

“The recommendation with respect to increasing adviser competency standards is broadly consistent with recent proposals from within the industry and recommendations put to parliamentary inquiries. The AFA supports the introduction of a relevant degree requirement for new advisers and an increase in standards for existing advisers based upon a range of options.”

The AFA also noted the recommendation with respect to life insurance remuneration for financial advisers. “We are conscious of the concerns expressed in the Report and the recent ASIC Report on life insurance with respect to the risk of excessive incentives inappropriately influencing adviser behaviour,” Mr Anderson said.

Mr Anderson said the AFA believes that care must be taken in seeking to get the right balance on commission arrangements.

“The outcome needs to address the significant time and cost involved in giving initial strategic advice on life insurance and implementing life insurance business,” he said.

“This is a matter that is currently being considered by the joint AFA/FSC Life Insurance and Advice Working Group. The AFA is of the view that financial advisers should be able to be appropriately remunerated for the work they do.”

The AFA is awaiting the Government’s response to the Report and is looking forward to working with a range of stakeholders as it further considers the Report recommendations.

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John Brogden

The Financial System Inquiry released on Sunday by the Government lays the foundation for a strong and efficient financial system for Australia.

John Brogden, CEO of the Financial Services Council (FSC) said: “The FSC supports the emphasis on the need for greater competition and transparency in superannuation and for improvements to retirement incomes policy.”

“The FSI has outlined sensible and strong reforms the majority of which we have advocated and support,” Mr Brogden said.

Superannuation

Choice of fund

“The FSI strongly endorses the principal of a consumers’ right to choose their superannuation fund. This must be a foundation of superannuation in compulsory system.”

The report states “…everyone should be able to choose the fund that receives their Superannuation Guarantee contributions.”

“The FSC will recommend to the Government that this be applied across the industry,” Mr Brogden said.

Governance of superannuation funds

Mr Brogden also said: “Superannuation Boards must be independent and free of vested interests from unions and other bodies. We strongly support the recommendation to require public offer superannuation funds to have a majority of independent directors and an independent chair.

“This is already a standard required of Australia’s’ retail superannuation funds who are members of the FSC.

As the FSI states: “Including independent directors on Boards is consistent with international best practice on corporate governance.”

Fees and default superannuation

“Fees are already coming down in superannuation,” Mr Brogden said.

“Research by Chant West in 2014 shows the average fees for MySuper funds are already 85 basis points (0.85%).”

“Fees can come down further through increased competition.”

“However the FSI fails to recognise that maintaining the Fair Work Commission closed shop in default super will stymie competition and further reduction in fees.”

Retirement Incomes

Retirement products

“The FSC strongly supports the FSI’s recommendation that superannuation funds are required to select an income product for their default members at retirement.”

“Australia must have a comprehensive retirement outcomes policy, not simply a superannuation accumulation policy.”

Financial Advice

Adviser Competency

“The FSC has consistently advocated for increased competency standards for financial advisers. We support this recommendation.  However we await the Parliament’s current inquiry into competency and education standards.”

Public Register for Financial Advisers

“The FSC strongly supports a clear and transparent register for financial advisers.

Relabelling General Advice

“The FSC recommended to the FSI that “General Advice” should be relabelled to “General Information” to help provide greater consumer clarity. We are pleased our recommendation has been adopted.”

Powers to ban individuals

“The FSC supports increased powers to allow ASIC to ban individuals from managing a financial services business. This will ensure that ASIC can remove people from the industry who fail consumers.”

Taxation

“We support the FSI’s recommendation for the Government’s Tax White Paper to consider taxation of financial services.”

Financial Services Trade

The FSI recommends changes to the Managed Investment Schemes sector, including strengthening regulators’ focus on competition in the financial system, and identifying barriers to cross-border provision of financial services.

“The FSC welcomes the recommendation to strengthen regulators focus on competition including identifying barriers to cross-border provision of financial services.   We are disappointed that the report does not elaborate further on international competitiveness of funds management,” Mr Brogden said.

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Graeme Colley

Self-managed super funds received a pre-Christmas gift with the final report of the Financial System Inquiry (FSI) making no recommendations on imposing controls over expenses for the set up and administration of SMSFs, minimum balance requirements or any restrictions on establishing SMSFs.

In addition, the FSI’s recommendation to seek clear objectives on the superannuation system and obtain bipartisan support to take it out of the budgetary cycle – something SPAA has advocated for many years – is an enormous positive to come out of the report.

The only potential downside for SMSFs is the prospective prohibition on limited recourse borrowing arrangements (LRBAs), although all current arrangements will remain in place. No date has been set for the proposal to begin.

Graeme Colley, the SMSF Professionals’ Association of Australia’s (SPAA) Director of Technical and Professional Standards, says the FSI report is a “ringing endorsement” of the SMSF sector.

“Like the Cooper inquiry (2010) it has given the SMSF sector a clean bill of health with no moves to limit the setting up of SMSFs, whether it be minimum balances, educational qualifications or any other impediments. This was the position SPAA strongly advocated to the Inquiry and it’s pleasing to see that it saw the merit in our arguments.

“The fact SMSFs are barely mentioned in the report and then it’s only about not requiring them to meet CIPRs (comprehensive income products for retirement) and a recommendation that they not be prudentially supervised is evidence of this.”

Colley says SPAA also endorses the report’s proposals to continue the ongoing push to improve the education and qualifications for financial advisors who are providing Tier 1 advice as part of the move towards greater professionalism in the financial planning space.

“The report recommends a tertiary degree that is relevant, competence in specialised areas such as superannuation where it is relevant and ongoing CPD requirements. SPAA is well placed to assist those advisors who wish to gain expertise in SMSFs.

“It also proposes that ASIC should complete the establishment of an enhanced public register of all financial advisers, which includes those who are employees. The Inquiry considers that the register should include licence status, work history, education, qualifications and credentials, areas of advice, employer, business structure and years of experience – a position that SPAA totally endorses.”

In terms of the FSI’s recommendations across the broader superannuation sector, Colley says the proposal to limit the non-concessional contributions will mean that those who are nearing retirement for some years to come will be discriminated against as they currently have significant shortfalls in the amount they have available to fund their retirement.

“The age bracket of 50 plus is also the time when people are able to save for retirement as non-concessional contributions come from after-tax savings unlike tax deductible concessional contributions that are strictly controlled and capped.

“For those under age 50 the ability to create a savings pool that can be set aside for retirement is severely hampered by paying off the home mortgage and raising children with all the expense that entails.  In addition, those who have broken work patterns for various reasons need to have the opportunity to fund for their retirement which varies according to the individual.”

Colley says the proposal to ban LRBAs in SMSFs had been widely mooted in the wake of the interim report, and as such this announcement came as no surprise.

“SPAA remains firmly of the view that there is scant evidence of abuse of LRBAs to date, but can appreciate the FSI’s position if leverage in superannuation did grow to a level where it could be a threat to people’s retirement savings.”

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Dante De Gori

The Financial Planning Association of Australia (FPA) welcomes Sunday’s release of the Financial Systems Inquiry (FSI) Report. Many of the Report’s key recommendations align with the FPA’s 10-point plan, set out in May this year, and provide important foundations for better consumer outcomes, improved professional standards for financial planners and confidence in the financial services system.

Dante De Gori, GM Policy & Conduct FPA said: “We are pleased to see a number of the recommendations handed down in today’s report support the financial planning industry as it continues on its journey towards improved professionalism. These recommendations are also critical to ensure the industry as a whole better meets the financial needs of all Australians. Through its members, the FPA stands with Australians for a better financial future. A future that delivers trusted advice.”

In particular, the FPA welcomed the following recommendations of the FSI panel’s final report which align with its submissions and 10-point plan:

Better product regulation

• The need for ASIC to have the tools to better prevent bad products entering the market, as well as introducing new accountability obligations on product manufactures. This includes the recommendation to strengthen product issuer and distributor accountability and the introduction of product intervention powers.
• The recommendation that the removal of regulatory impediments such as tax settings for income streams, in order to provide industry with greater scope for product innovation.

General Advice

The term ‘general advice’ should be renamed to remove confusion and uncertainty with this term.

Financial Planning Standards

• Financial planner education standards should be raised to a relevant tertiary degree requirement.
• ASIC to be provided with enhanced powers to ban individuals, including officers and those involved in managing financial firms.
• An enhanced Adviser Register, which the Government is already committed to implementing.

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