What is it with assistant ministers? First the assistant health minister pulls down a healthy food labeling website, then the assistant treasurer insists he’ll plow on with plans to neuter Australia’s new financial advice rules.
One took two years to build, the other took five years. The food website had just gone live. The Future of Financial Advice legislation has been in place seven months.
What assistant ministers Fiona Nash and Arthur Sinodinos have in common is a willingness to buckle to the least consumer-friendly parts of the industries they regulate.
Nash was helped by a Chief of Staff who had an undisclosed conflict of interest. Sinodinos was until recently a senior executive at the National Australia Bank.
The legislation Sinodinos plans to stifle was born out of the collapse of Storm Financial.
Thousands of elderly and poor investors lost everything they had and more, persuaded by their advisors to borrow against their homes to buy shares and then to borrow more using the shares themselves as collateral. When the share price collapsed in the global financial crisis they lost the lot and owed even more.
The owners of Storm financial pocketed 7.5 per cent of everything that was sent their way, upfront. That’s 7.5 per cent of everything the clients invested as well as everything the clients borrowed. They directed huge chunks of it as rewards to the advisers the clients trusted.
After a landmark parliamentary inquiry and three years of subsequent negotiations Labor introduced a new law designed to make sure it could never happen again.
Financial planners would be required to act in the “best interests” of their clients. It was that simple. Sure, there were also specific requirements, but behind them was a straightforward requirement to act in their client’s “best interests”.
One of the specific requirements was a ban on commissions and other forms of conflicted remuneration...
It’s hard to work for a client when you are being rewarded for steering your clients in a particular direction. Doctors are unable to receive payments for scripts from drug companies. It’s fairly straightforward.
And advisors who continued to receive annual so-called “trailing commissions” from the makers of products they had previously sold would be required to let their clients know, by letter, once a year.
Every two years the clients would be asked by letter whether they wanted to continue to have the trailing commission deducted from their funds. If they failed to “opt in” the deductions would stop.
It would be fair to say much of the industry has already adapted to the changes (just as much of the food industry has already adapted to the food labelling changes that annoyed the assistant health minister).
Financial planners whose business model was built around commissions have left the industry. Many of those that remain are keen to serve their clients.
During the election the Coalition said little about the Future of Financial Advice Act (just as it said little about food labelling). Sinodinos didn’t know he would have the portfolio.
Just before Christmas he declared that the law had gone “too far”. They had created “unnecessary complexity”.
Oddly the part of the law he was keenest to remove was the simplest - the requirement for an advisor to act in their client’s “best interests”.
Taking it away would leave the process-related steps, the boxes that should be ticked, making it legal for an advisor to tick each box and yet not act in their client’s best interests.
Conflicted payments would be allowed once again, where the advice was general in nature and not personal. Put simply, if an advisor promises not examine a client’s circumstances, they are able to receive a kickback.
Advisors continuing to receive trailing commissions won’t need to let their clients know. Annual letters will be required only to clients signed up after July 2013. Sinodinos says “applying this requirement to existing clients is overly onerous” - an odd statement given that trailing commissions are said to be a continuing fee for an ongoing service.
And “opt in” will become “opt out”. Clients will be able to stop financial planners getting what might be an ongoing 0.5 per cent of their funds each year, but only if they find out about it and only if they make the effort of “opting out”.
It’s the delivery of a wish list which is making some in the industry blush. Although not the banks. They hated it the new law. They want to be able to continue to incentivise their employees for steering their customers into their own products. Being freed from the need to act in a customer’s “best interests” is worth a lot.
If Sinodinos was going to change the law he would have to act quickly. It has been in place since July 2013. Waiting until the Senate changed in July 2014 would waiting too long.
So he is going to try and do it by regulation. Regulations can be disallowed by the parliament, but that needn’t be an impediment if Sinodinos introduces them just after the parliament rises on March 27. It won’t sit again for six clear weeks giving his regulations the force of law - if they are legal, which the top law firm of Arnold Bloch Leibler believes they are not.
Regulations are intended to implement the provisions of an laws rather than nullify them it says in advice to Industry Super. Sinodinos will be hoping that by the time anyone challenges the regulations a more compliant Senate will have amended the law, giving him cover.
But it’s a big risk for an infinitesimal political gain.
Sinodinos is looking like Nash.
In The Age and Sydney Morning Herald