Tuesday, May 20, 2014

Budget 2014. Settling scores and looking after mates

The budget was an exercise in settling scores and looking after mates.

Sure, it improved the nation’s finances. But at every turn it took the opportunity to punish or threaten the Coalition’s critics while protecting its supporters. Australians on benefits get their incomes cut by up to 10 per cent and in some cases 18 per cent. They will be charged for previously free visits to the doctor. Organisations that normally speak up for them such as the Council of Social Service have been told their government funding will be extended by only six months this year and then the contracts put out to tender.  

Big food, big tobacco and big alcohol have been thrown the carcass of the Australian National Preventive Health Agency. Like the introduction of Medicare co-payments the move won’t actually save the budget any money because the savings will be redirected to medical research, but it will please corporations which have been amongst the Coalition’s biggest backers.

Coalition pets such as the banks, private health insurance industry and private schools get off lightly. The government will hand private schools $6.8 billion in the coming financial year - no cutback on what was scheduled - and $9.3 billion the following year. The private health insurance rebate survives with barely a scrape. It’ll cost $5.5 billion this coming financial year and $5.8 billion the next.

And the banks profit hugely from the tens of billions of dollars handed out every year in superannuation tax concessions, also untouched.

They are about to be given a second helping. Hurriedly pushed on to the back burner in March when assistant treasurer Arthur Sinodinos stepped aside over questions about his behaviour at the NSW Independent Commission Against Corruption, the government is about to revive its attempt to neuter parts of the financial advice law.

It wants what the banks want. They want to remove the  requirement for financial planners to always act in their clients' best interests, and they want to reintroduce limited commissions.

It’s a prospect that terrifies anyone who had just watched Four Corners. On May 6 reporter Adele Ferguson examined the behaviour of the Commonwealth Bank, one of the banks that wants Labor’s new law to be watered down.

It rewarded its tellers for trawling through information about their customers in order to find prospects for financial planners.

“A lot of people, what they don't understand is that the teller will be looking up their details on the bank's information system, identifying if they could be sent to a planner,” a former Commonwealth planner said. “They are given targets for referrals each week.

“The emphasis is always on trying to get the maximum share of wallet out of each customer. The planners have actually been incentivised or forced in a way to give advice that's not in people's best interests, and the whole system is really structured to bring that about.”

Four Corners told stories of families almost brought to ruin after the Commonwealth Bank and its representatives steered them out of safe products into dangerous ones, in some cases “without ever explaining the risks”.

Labor’s law, already in place, requires financial planners to take all reasonable steps to act in the best interests of their clients.

The banks and the Coalition want to water this down so they merely have to complete a checklist of six specific steps. Monash University corporate law specialist Paul Latimer told the Senate inquiry that removing the overarching best interests requirement would be like leaving doctors with only a few specific boxes to tick instead of asking them to also ensure they were acting in the best interests of their patients.

And they want to allow tellers to once again receive commissions for pushing products and advisors their customers’ way.

Why? Right now the big four banks with the AMP control 80 per cent of the financial planning industry. If they can’t leverage their tellers that share will shrink. And incentives work.

In 2012 two economists from the Federal Reserve Bank of Chicago and Ohio State University published a study entitled Do Loan Officers’ Incentives Lead to Lax Lending Standards?. It found that loan officers whose pay was supplemented by incentives wrote 19 per cent more loans than those whose pay was not. And the loans they wrote were 28 per cent more likely to default.

Incentives work, even if - in some cases, especially if - they are small.

The banks need to blunt the Future of Financial Advice Act. But it’s less clear why the Australian government needs to blunt it. It’s true that banks have been big supporters of the Coalition. One of them, the National Australia Bank, employed the assistant treasurer Arthur Sinodinos as an executive after he left John Howard’s office and before he joined the Senate where he drew up the pro-bank legislation the government is about to introduce.

In The Age and Sydney Morning Herald