More reform needed: Standard Life Investments

Standard Life Investments, the global investment manager, believes the underwhelming response of Japanese exports to the plunge in the yen should serve as a warning sign to Japanese policymakers that more reforms are needed, both at government and corporate levels.

The latest edition of Global Perspective examines why the recent sizeable depreciation of the yen has not had more of an impact on Japanese exports. Detailed analysis shows a range of long term factors at work.

The report highlights that widespread structural reforms, including changes to the tax system, labour market institutions, innovation policies, product market regulations and corporate governance, must be recognised as being just as essential for restoring Japan’s external competitiveness as they are for revitalising the domestic economy. If the so-called third-arrow agenda continues to disappoint, then the long-term decline in Japan’s export market share is unlikely to be reversed, regardless of the future path of the currency. This has implications for domestic growth and therefore portfolio investment in Japanese companies.

Jeremy Lawson, Chief Economist, Standard Life Investments, said: “Japan’s weak export performance under the Abe government suggests that the country’s problems have been misdiagnosed.

Structural reforms are the key to boosting exports in the longer term, as well as unlocking domestic growth potential and encouraging portfolio investment in Japanese companies. Currency devaluation can only ever be a stop-gap measure.

“The implications of Japan’s experience should not be lost on those nations considering currency devaluations as a short-cut to regaining international competitiveness. While facilitating depreciation can be an effective way of absorbing negative external shocks, in the long-run it does not boost living standards or prevent the erosion of export market share, particularly when the supply side of the economy is the real problem.”

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Changes to tax deductions for self-education

The Federal Government’s decision to cap tax deductions for self-education at $2000 flies in the face of its stated aim to improve professionalism across the financial services sector.

The SMSF Professionals’ Association of Australia (SPAA), which has been at the forefront of lifting professional standards across the SMSF sector over the past decade, says this decision is both “short-sighted and self-defeating”.

SPAA Senior Manager, Technical & Policy, Jordan George, says: “A quick check of what’s involved for SPAA members to remain at the top of their game in a FoFA environment clearly indicates that the $2000 cap is totally inappropriate and misunderstands the costs of professionalism.

“By our reckoning a SPAA specialist would spend more than $6000 a year attending conferences and participating in courses and webinars just to stay abreast of developments in their professions, and that’s taking a conservative view of what courses and conferences they attend.

“What has to be remembered is that gaining a qualification doesn’t end the education process; a changing world means members have to continually improve their skills.

“All our feedback from our members, of whom 50% attend the national conference, is that they enormously value the technical content of what SPAA offers, believing it’s integral to their professional development. And it’s the clients who lose when our members face barriers to improving their professional skills.”

George says with the SMSF sector now having about $500 billion in assets under management, and with the number of trustees approaching one million, the need for trustees to be able to access the highest quality professional advice has never been greater.

“We constantly read how the Government and regulators have concerns about the SMSF sector. One way to help alleviate those concerns is to ensure SMSF advisors are encouraged to continually upgrade their skills,” he says.

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ASIC has an interest in a range of Stronger Super reforms, but those ASIC has been most involved in are the SMSF auditor register, the intra-fund advice aspects of MySuper and the regulatory settings around disclosure in super.

The MySuper and Governance reforms started largely on 1 July. However, there have been deferrals to the implementation dates of the following measures:

• product dashboard for MySuper products (until 31 December 2013), and
• new content requirements, particularly fees, for Product Disclosure Statements for super and managed investments (until 31 December 2013 and 1 July 2014 respectively).

ASIC has also deferred until 31 October 2013 the implementation of section 29QB of the Superannuation Industry (Supervision) Act 1993 and the executive remuneration and systemic transparency requirements (refer: [Class Order 13/830] RSE licensees of registrable superannuation entities)

The portfolio holdings disclosure requirements were delayed until mid-2014 with the passage last week of the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act (Tranche 4).

ASIC anticipates issuing its information sheet on product dashboard requirements shortly and is updating its Frequently Asked Questions (FAQs) to include information about executive remuneration and systemic transparency measures.

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To read the draft legislation in full, click here.

“It is a concern that only one in five Australians access financial advice. These reforms will restore trust and confidence in the sector following collapses such as Storm, Westpoint and Trio. They also remove the red tape that has prevented low-cost, good quality advice being delivered to millions of Australians.”

“These reforms are in fact a growth strategy for the financial planning industry,” Mr Shorten said

The first tranche of the draft Bill covers a number of key components of the FOFA reforms, including opt-in, the best interest duty and the increase in ASIC’s powers to enforce the new elements of these reforms.

“The second tranche, which I expect to release for public consultation shortly, will include the ban on conflicted remuneration (covering commissions and volume payments), the ban on ‘soft dollar’ benefits, the ban on asset-based fees (where there is gearing), and the definition of intra-fund advice. I will also be announcing at that time my decision on the replacement of the accountants’ exemption,” Mr Shorten said.

“The Coalition’s Financial Services Reform Act in 2001 failed to deliver on its promise to consumers because, unlike the Gillard Government, they didn’t make the tough decisions on commissions or soft dollar.”

The best interest duty requires financial planners and advisers to act in the best interests of the client, and to give priority to the interests of the client in the event of conflict between the interests of the client and the interests of the individual providing the advice, or their employer.

The ‘opt-in’ measure requires a financial adviser or planner to send a renewal (‘opt-in’) notice every two years to new clients, as well as an annual fee disclosure statement to all clients. There will be significant flexibility in terms of how advisers are able to discharge the opt-in obligation.

Rice Warner have estimated the cost of opt-in to be around $11 per client. This includes set-up costs and the cost of chasing up clients who are charged on-going fees but who advisers may not be in regular contact with.

“Opt-in won’t create a significant new impost for advisers who are in regular contact with their clients,” Mr Shorten said

The extension of ASIC’s powers will give the regulator the capacity to act at an earlier stage if it has concerns about individuals or a licensee. For example, it enables the Commission to ban a person who is not of good fame and character or not adequately trained or competent to provide financial services (in essence they are not a fit and proper person).

The ban on risk insurance commissions will apply to commissions on group life insurance in all superannuation products, and to commissions on any life insurance policies in a default or MySuper product from 1 July 2013.

“These reforms will mean that MySuper will be commission-free,” Mr Shorten said.

The exposure draft and explanatory memorandum is available on the Treasury website today. Interested parties are invited to make written submissions on the draft legislation by Friday 16 September 2011.

“With broad agreement among stakeholders that the ban on soft dollar benefits should include life insurance outside superannuation I have decided to extend the ban in order to provide increased consumer protection and certainty for business,” he said.

The Government has also clarified that the reforms will not unfairly impact the stockbroking industry, with Minister Shorten today confirming that traditional remuneration models in the stockbroking industry will not be unduly impacted as a result of the reforms. For example, stamping fees or similar payments relating to capital raising will be permitted in order to preserve an important channel for companies to continue accessing the retail investor market in order to raise capital.

“Where brokers undertake financial planning activities, the ban on product commissions will of course still apply, ensuring there is no gap in protection for consumers.”

The ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.

This means that, in relation to trail commissions on individual products or accounts, any existing contract where the adviser has a right to receive a trail commission will continue after 1 July 2012, or in the case of certain risk insurance policies in superannuation, 1 July 2013.

Treasury will release a public consultation paper by the end of the year on restricting the term ‘financial planner’ in the Corporations Act 2001 (Corporations Act).

“The ongoing consultation around these reforms has been difficult and robust and, as Minister, I thank everyone involved for their time, efforts and patience,” Mr Shorten said.

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And that’s why I maintain that regulation won’t lift our collective reputation and our individual service to our clients unless something inside us all changes.

At the end of my Grow Your Business program on the weekends on Sky Business, I always end the show with “if nothing changes, nothing changes”. Yes, I know it is a cliché but it is the kind of provocative
advice I offer for many of us who are weighed down by complacency. And the change I believe our industry is crying out for is leadership.
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I reckon MLC’s boss, Steve Tucker, showed it when he railed against commissions years ago and put his team on percentage fees. Sure the purists can argue that flat dollar charges are purer but at least he was
prepared to question the prevailing paradigm.
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However, the leadership that is overdue in the financial planning fraternity is the one that should be practised and learnt on a daily basis in every financial planning business in the country.
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It is an irony but many of us think leadership is the preoccupation of the likes of executives of big organizations but the truth is leadership is needed when you lead a small business, a sporting team, a classroom and a family.
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But wait there’s more.
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We need leadership skills when we deal with our clients. In fact, we are in a leadership position when someone comes through the door hoping to put their financial life in order. We clearly have to be great at our product knowledge but we also have to be aware that these people, who are paying us to fix up their financial future, want us to lead them to a better position.
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So, how does someone engage with leadership?
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The first step is to admit that you have a leadership inadequacy but how do you know that? Well, if you have trouble influencing your teenage sons and daughters, your Gen Y staff or family or even your partner in a relationship, you have to be realistic that it could be your leadership that is letting you
down.
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If your conversion rate of customers is not as high as it should be, well, once again it could be your leadership that needs some work. Okay, if you can be honest with yourself that your leadership quality
could be the missing link in your life and your business then don’t delay by changing what you are currently doing.
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If you are not reading books on leadership or listening to DVDs on the subject when you are driving then you are misallocating your precious time.
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In Dubai two years ago, I MC’d a conference where the US leadership guru — John Maxwell — was speaking. He has penned a number of books that have been on the Wall Street Journal’s and New York Times best seller list and he has sold over, wait for it, 20 million books! My favourite is The 21 Irrefutable Laws of Leadership, which the great Stephen Covey, the author of The 7 Habits of Highly Effective People, said of the book: “It will change the way you live and lead.”
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To me Maxwell’s greatest advice was: “Leadership is developed daily, not in a day.” When that happens you change permanently and the influence you wan to have on your customers, your staff and your family becomes more effective. If you want a great business, Maxwell says, everything rises and falls on
leadership — everything! He argues that if you are a 5 out of 10 leader you will probably have a four out of 10 business, but never 6,7 or 8. And forget 10!
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This is my number one business tip — if you get leadership right, you will know what to do, who to recruit, where to go and who you need help from to build a great business.  For more business tips from Peter Switzer, visit www.switzer.com.au

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The TOFA reforms were first announced in the 1992 budget and were later taken up by the Review of Business Taxation. The review’s final report – A Tax System Redesigned (the Ralph report) – made various recommendations about the taxation of financial arrangements.

While some of the recommendations made in the Ralph report were rejected, several of the concepts proposed have been implemented progressively over the years. Stages one and two of these reforms were introduced in 2001 and 2003 respectively.

The recently introduced Division 230 implements stages three and four of the TOFA reforms.

TOFA is intended to reduce the influence of tax considerations on how financial arrangements are structured, emphasising other factors, such as risk, when making financing decisions.

Although TOFA provides a comprehensive and overarching framework to address the economic substance of arrangements, it is not an exclusive code for the taxation of gains and losses from financial arrangements.

Unless otherwise specified, other provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997) still deal with gains or losses from financial arrangements where TOFA does not.

(All legislative references in this guide are to provisions of the ITAA 1997 unless otherwise specified.)

Problems with how tax law applied to financial arrangements before TOFA

Before the TOFA reforms, the income tax law placed too much emphasis on legal form rather than the economic substance in the context of financial arrangements. This resulted in inconsistencies between the tax treatments of different types of transactions that have similar economic substance.
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Also, the inflexible, form-based rules did not keep pace with financial innovation, creating opportunities for tax deferral and tax arbitrage.
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Income and deductions from financial arrangements were often dealt with on a realisation basis, although some income and deductions from financial arrangements were dealt with on an accruals basis. This meant that the income tax law did not adequately take into account the time value of money or provide for an appropriate allocation of income over time.
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Previously, the way tax law applied to financial arrangements resulted in tax-timing and tax-status mismatches between revenue and capital items. Also, the law did not address the tax-timing treatment of emerging hybrid instruments or new structured products, including those with fixed and contingent returns.
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The piecemeal approach to amending the law to address a new product or fix a problem resulted in complex law that was a combination of both general and specific provisions.

Click to view more details about the tax treatment of gains and losses, hedging and general information about the TOFA reforms visit the ATO website

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After meeting with key independent politicians in Canberra this week, the Association of Financial Advisers (AFA) can confirm that the concerns of financial advisers in relation to the Future of Financial Advice (FOFA) reforms are being heard.

An AFA delegation returned from the national capital this week, after visiting independent Members of Parliament, Tony Crook, Rob Oakeshott, Tony Windsor, and Andrew Wilkie, as well as the Greens, the Minister for Financial Services and Superannuation, Bill Shorten’s key adviser and Treasury.

“We had great access to politicians and are very pleased to report that they have met with many of their local constituent advisers often,” Mr Klipin said. “This tells us that our grass roots campaign to move the policy debate to political engagement is working.”x

Mr Klipin said it is very encouraging that the politicians the AFA visited had heard and understood the very real concerns advisers have about the profound and potentially damaging effect some aspects of the FOFA reform will, if carried forward into legislation, have on advisers, their businesses and the clients they serve.
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“The message we took to Canberra was that the AFA is actually really supportive of the intent of FOFA – everybody, including financial advisers, would like to see legislation that results in better outcomes for consumers and better access to advice,” he said. “We would love to publicly support the legislation when it comes out in draft form, but we can’t support components which we believe are clearly not in the national interest.”
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The AFA has consistently argued that some aspects of the FOFA reform package announced by the Government in April will impose higher costs on consumers, impede their access to advice, tie them up in red tape and create even greater confusion.
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Mr Klipin reiterated that while the AFA believes the original intent of FOFA was commendable, the execution is not. “As they currently stand, the FOFA reforms mean even fewer people will have access to affordable advice which could ultimately mean fewer will have adequate levels of insurance and fewer will have enough in retirement savings. The impact of that is crystal clear – more people lining up for Centrelink benefits.”
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Mr Klipin quoted from the AFA’s Back to Basics research which identified that while only two in 10 Australians currently get advice, good advice gives people choices and leads to higher levels of savings, more appropriate levels of insurance and greater control of their future.
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Mr Klipin also said that while the AFA’s grass roots campaign is gaining traction, now is not the time for complacency.
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“In fact, advisers should be upping the ante,” he said. “Our endeavours to have some of the FOFA proposals amended so that we actually see an improvement in outcomes for advisers and their clients have only just begun. We encourage all advisers who have not yet visited their Member of Parliament to make an appointment today.”
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The Minister for Financial Services and Superannuation, Bill Shorten will address 400 AFA members at the AFA lunch on Monday 27 June.
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“If you have questions you want to put to the Minister, Monday is your opportunity,” Mr Klipin said.

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As an AFA partner, Guardian has the opportunity to create and maintain quality relationships with the AFA’s influential members and enjoy the following benefits:

– Representation before the Government and regulator on policy issues
– Opportunity to work with Australia’s leading advisers.
– Reduced membership fees for Guardian advisers.

AFA CEO Richard Klipin said: “The AFA is delighted to welcome Guardian Financial Planning on board as a licensee partner. Guardian is home to around 150 authorised representatives operating across Australia who look after the needs of more than 130,000 clients in Australia.

”Guardian Financial Planning Executive Manager, Simon Harris, said it was Guardian’s ongoing responsibility and commitment to advisers that compelled the group to join the association.

“Our  partnership  with the AFA  gives our advisers a stronger voice in the current dynamic and changing regulatory environment,” Mr Harris said.

The  partnership will also ensure that Guardian works collaboratively with the AFA’s  Licensee Working Group to allow advisers’ interests to be represented fairly and adequately before the Government and regulators.

“Over the last three years, the AFA has reinvigorated itself as an association that truly understands and cares about advisers  – and one that  has  championed their needs in the face of significant regulatory change,” Mr Harris said. Mr Klipin  said.

Guardian’s membership  complements the growing number of quality advisers and planning groups the AFA engages with.

“The AFA’s strategy is to welcome more advisers to the association so that their voice is heard more distinctly and strongly within our industry and in Canberra.

“The AFA is and always will be an association which represents the concerns of advisers, adviser businesses and the clients they serve.

”The AFA represents 7,000 advisers through its relationships with licensees across Australia and individual adviser members.

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The objective of this paper is to demonstrate that politicians of all persuasions over the past 30 years have failed to make critical structural changes to protect consumers from investment product failure. Most have preferred to make cosmetic changes that have suited political objectives at the time without materially adjusting the industry’s fundamentals. The adage of ‘The future is the past returning through another door’ will continually haunt consumers and the industry well after the politician’s have moved on. As history has continually demonstrated, this outcome we can be guaranteed of.

A footnote to this paper is the AIOFP is not being critical of the regulator. ASIC are merely an organ of Government and totally reliant upon the parameters set by politicians. In fact, the recent budgetary cuts and resultant departure of 150 mostly investigatory staff is a major blow to consumer and adviser security.

Ironically, ASIC and advisers interests are aligned, we both rely upon third parties to perform their duties diligently to avoid product failure and the resultant carnage. A significant portion of the blame for the $29 billion of either frozen or failed products since 2006 can be attributed to the performance of  Research Houses, Auditors, Trustees and Directors of the entities. But, at the end of the day it has been the poor decisions by politicians who have the ultimate responsibility of framing market supervision and structure that needs to change.

We are recommending two fundamental changes that will significantly enhance protection for consumers and advisers when making product decisions.

ASIC’s role with Product Disclosure Statements [PDS] – ASIC have been telling consumers and the industry for many years that they do not scrutinise new product PDS’s entering the market. Arguably the message should have been clearer but consumers and the industry have not been listening. Everyone has assumed that a PDS is checked for commercial viability including the role and character of Directors/Promoters by ASIC before market release. Most have treated it as a first ‘filter’ in the due diligence process. Wrong, all PDS’s are released to the market with minimal if no ASIC scrutiny with an accompanying ‘buyer beware’ tag. This will come as a major shock to most in the industry and all consumers.
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ASIC only have the resources and ‘politician driven’ power to be reactive to product failure not proactive. In analogous terms, they are ‘policemen/women’ enforcing the laws and ‘ambulances’ attending accidents trying to look after the injured but they do not act as Protectors. Thanks to the politicians, ASIC do not have the power or resources to be proactively looking to stop the accidents happening. We are absolutely positive that all consumers and the industry would want ASIC to be proactively protecting consumers from dodgy operators and fundamentally flawed products by being more active in the front end of the industry. This can only be achieved by politicians giving the resources to stop the accidents happening and being more creative with legislative strategy.
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Suggestion 1 – Politicians legislate to give ASIC more resources to become not only the Policeman and Ambulance of the industry but the front end consumer Protector.
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The role of Research Houses in the advice process – Research Houses play an absolutely critical role in the industry for consumers, ASIC and advisers. They are unofficially empowered with the decision making role on which manufacturer’s products are good, bad or exceptional and whether they commercially survive. They have unfortunately become the unofficial ‘gate keepers’ of the industry with far too much power in our view.
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Advisers need positive research ratings to satisfy their Insurers and due diligence process, hence they rely heavily upon research houses. Product manufacturers need a positive research report to get inflows from advisers; hence they rely heavily upon a positive research rating. You can see where this is heading. The massive problem facing this intertwined relationship is that research houses are getting paid by the product manufacturers to rate their products. This profoundly conflicted relationship has proven to be extremely costly for consumers, advisers, ASIC and society generally. Of the $29 billion of failed or frozen products they all had a positive research rating. This culture has fostered complacency, sloppiness, ‘special favours’ and down right incompetent decisions that leaves consumers, advisers and ASIC wounded while the research houses run for cover behind their disclaimers. This all care and no responsibility attitude has to be stopped by the politicians.
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ASIC should be the ‘gate keeper’ to the industry, it is a far too potentially conflicted role to allow commercial operators to have this much power. Remember Joh B’s classic comment? ‘if there is no conflict there is no interest’. Advisers should be the only source of income for research houses. US Congress recently addressed the ‘shop around for a rating’ scandal that ignited the GFC, our politicians need to be brave enough do the same. There needs to be a levy placed on all advisers to fund an ASIC supervised panel of research houses. They should be generously paid to ensure that high quality staff is employed and their business model is commercially viable. All PDS’s must then be scrutinised by this panel before the ASIC process and adviser/client consumption commences. Yes a back log on PDS approval would probably happen but it is better than the alternative.
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Suggestion 2 – Politicians follow their US counterparts by legislating to give ASIC control of the research process to protect consumers and advisers.
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FOFA has been largely driven by the spate of product failures and bad advice events like Storm. With the exception of Storm [which incidentally was influenced by a large Institution] bad advice issues are on the lower scale and normally resolved by FOS or COSL anyway. The big ticket items are products failing, hence the $29 billion figure already mentioned. The reason why these products failed are varied but it is commercially inconceivable to link it to product commissions. Commissions are a fraction of the capital involved, the cold hard facts are many of these products should not have been on the market in the first place and directly linked to politicians not making hard decisions and preferring to gorge on low lying political fruit.
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Some brief views on the current FOFA proposal to demonstrate it is a superficial cosmetic approach.

1. Banning of product commissions – totally agree, it is an inducement that leads to conflicts of interests. Will make a huge difference but most have already done it anyway.
2. Opt in – totally unnecessary, with a no commission environment advisers will be charging clients directly. Each and every year advisers will be judged on their performance and clients will be making a ‘cheque book’ judgement on whether to pay or not. Considered to be a political concession to the Industry Fund lobby.
3. Bests Interests – nice cosmetic touch but we are subject to a fiduciary duty in the courts anyway. Quickly changed from the original proposal of Fiduciary Duty when the full ramifications were considered.
4. Platform rebates/profit share – Industry Funds subsidise their advice practices with their internal platform profits, why can’t independents negotiate a share of a platform profit to subsidise advice? Platforms are administration services not investment products. A clear case of favouritism for Industry Funds.
5. Banning risk commissions in Super – Australia has a $1.3 billion underinsurance problem already in a commission environment, it will only exacerbate the problem. Widely considered to be a poorly thought through ‘red herring’ to leverage publicity.

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We trust you can now see that these 5 FOFA items, when put into context with our two suggestions, will make little difference to whether products will fail or not. As previously stated, these failed products should not have been on the market in the first place. Until the supply and scrutiny process is addressed the adage of ‘the worst thing about history is that every time it repeats itself the price goes up’ will continue to haunt us.
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Finally, It should also be noted that an advisers entire commercial and family life depends upon clients avoiding product failure, it can and does destroy every aspect of their life. It is inconceivable to even suggest an adviser would select a product purely based on receiving a very short term benefit knowing that it would fail.
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FOFA has received unprecedented publicity and has conditioned every one for change. The AIOFP hopes politicians will embrace the occasion with sound, commercially driven decisions that will make a real difference to the industry going forward.
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We welcome your comments and feedback.

The post AIOFP paper: FOFA – a chance to get it right appeared first on AdviserVoice.

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The Beaton IFA Market Pulse is a quarterly survey among financial advisers in Australia. The survey provides a platform for participating insurance providers to get feedback from advisers on topics of interest and gives advisers the opportunity to share their views and opinions on topical industry issues with their peers.
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Participating insurance providers are Asteron, AIA Life, CommInsure, Macquarie Life, OnePath and Zurich.
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The first wave of the survey was conducted between 21 March and 30 March 2011 with 528 advisers across Australia completing the survey.
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Advisers were asked to comment on the impact of the ban on their advice businesses, clients, and the insurance industry.
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Click Adviser Sentiment Report to read the full report, including some comments from financial advisers who participated in the survey.

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