The art of reforming reform

3rd October 2019

In the run-up to the 2019 federal election, both sides of the political aisle were adamant about their commitment to reform in the financial services industry. Following its fairytale victory in May, the Coalition seems to have lost some of its reformist zeal, with cautious words replacing statements of intent.

This month’s Industry Insights takes a look at how the landscape is continuing to shift under advisers’ feet and examines individual issues that will be of greatest importance.

Grandfathered commissions still on the way out

One major reform that seems to remain firmly on the agenda is the ending of grandfathered commissions on superannuation and investment products. The government used the first full-length sittings of parliament after the election to introduce a bill implementing the reform.

While progress of the bill through the parliament has not reflected any great urgency – the bill passed the House of Representatives early in the September sittings but did not progress in the Senate in the ensuing week – it seems likely to pass the Senate without great opposition. It would take a remarkable turnaround for grandfathered commissions to survive their January 1, 2021 execution date.

Don’t take it on FASEA value

The first round of FASEA-overseen adviser exams passed (along with most of those who sat the test) and it seemed the deadlines for existing advisers to complete their new exam and education requirements were set in stone. This presumption was turned on its head on the last day of August when the Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, announced extensions to both deadlines.

This announcement was, unsurprisingly, met with positivity by the industry, but winning an amendment of policy in your favour is not all upside. As soon as government starts making amendments to career-altering dates, it is hard to believe they won’t keep shifting the goalposts in other areas. Superannuation has long had this problem. Many pre-retirees and retirees have limited faith that the rules governing super won’t change after they have made unalterable commitments. These concerns are well founded, with continual rule tinkering (and sometimes far more than tinkering) radically changing super many times.

This uncertainty is heightened by reports that any legislation to amend the deadlines will have a hard time passing the Senate. The Senate is controlled by the cross-benchers, and on lower profile amendments such as this one it is always possible some well executed horse trading will secure passage of the bill, however it doesn’t help advisers to act with any greater certainty.

So, what to do in the face of uncertainty? The safest course of action for those who plan to continue in the industry long term is not to rely on last-minute study. Whether the exam deadline is 2021 or 2022, it will still need to be passed in order to continue in the industry, so it should be a priority. The education requirements are similar, with most existing planners needing to complete fewer than 8 subjects (sometimes far fewer) by 2024 or 2026. Starting sooner will make attaining completion by either date easier.

Super reset

The last term of government saw multiple bodies recommend reforms to default superannuation fund selection and retirement income streams, including advice thereon.

The Productivity Commission laid out a set of recommendations that would see default super fund selection taken out of the hands of employers and conducted independently. These recommendations were supported in the final report of the Banking Royal Commission. Furthermore, Treasury laid out a reform pathway that would see super funds required to offer intra-fund advice on retirement income stream products. You can read more on both of these issues in our white paper.

Post-election, the future of these recommended reforms seems far less clear. In his “Royal Commission Roadmap”, Treasurer Josh Frydenberg stated:

Implementation of this recommendation (stapled default super funds) will be considered in the context of the findings and recommendations of the Productivity Commission’s report Superannuation: Assessing Efficiency and Competitiveness

This has been followed up by the announcement of a review into the current retirement income system (including the age pension, compulsory super savings and private savings). The terms of reference the Treasurer included in his press release are not particularly broad and don’t seem to include the ability for the panel to make recommendations – they are just to report on how the system works.

Presumably, no policy direction on the Productivity Commission recommendations to “staple” funds to employees and take the choice of default funds out of employers’ hands will be issued until after the final report is issued in June 2020. As such, the waiting game on superannuation reform will continue.

Insurance commission conundrum

On the issue of adviser commissions on life insurance policies, the government has been entirely consistent. In 2021 they plan to let ASIC review the Life Insurance Framework (LIF) reforms that limited upfront commissions, then policy will be set in response to the review. This has been a major point of difference between the recommendations of the Banking Royal Commission and the government’s policy.

At a recent industry summit, the Finance Minister, Mathias Cormann, was noted as saying that the government will still need to ascertain if commissions are in the best interests of consumers. The problem with such an approach is that little seems to be being done that would inform this approach.

In June, we gave an analysis of the global independent research into the impact commissions have on consumer outcomes. To give a brief summary, there is too little well-conducted research to draw definitive conclusions, particularly in Australia. Almost no research has been conducted domestically into the impact removing commissions would have on consumers’ likelihood of purchasing insurance or seeking advice on insurance. One ASIC review on lapse rates and some randomly conducted audits of advice documents is not going to give the full picture.

The review of commissions on life insurance products looms as the next major reform confronting the advice industry, and it is crucial for all the stakeholders that such reform be informed by broader, well executed studies into the area.

Keep swimming

In light of yet more unknowns, all advisers can do is to keep working for their clients. Change will continue, and the best way to survive and prosper in a shifting regulatory landscape is to be prepared to adapt.

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