Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
The Future of Financial Advice in Australia
Speech to the Association of Financial Advisers
22 May 2008
Thank you for inviting me to speak today.
It is a pleasure to be here today to discuss the future of financial advice in Australia.
Future of Financial Planning
First, I would like to say a few words about my view of the financial planning profession and its future prospects.
Financial planners are in great demand these days.
This is not surprising, given the increasing wealth of Australians.
Recent ABS statistics indicate, for example, that total managed funds assets in Australia at the end of 2007 have reached the amount of about $1.3 trillion.
This figure does not include other significant asset classes such as shares and bonds …. not to mention real estate, whether it be the family home or the investment property.
Given these impressive numbers, there is obviously an increasing need for professional advice to ensure the financial wealth of Australians continues to grow.
Hence the need for planners.
In addition, it would appear economic growth is set to continue in the foreseeable future.
Given the strong outlook, in particular for our exports, the Government expects economic growth of 2.75 per cent in 2008‑09.
Overall therefore, I expect that most Australians will continue to grow wealthier.
This means that demand for financial planning services will certainly not diminish, and could well be expected to increase.
However, I think that the industry faces a number of challenges in meeting this demand.
There is of course the basic challenge of finding enough qualified people to meet the demand, given the tight labour markets, as well as convincing Australians of the merits of using financial planners.
I am aware that the financial planning associations, including the Association of Financial Advisers, are aware of these challenges and are taking action to address it.
I offer my full support to the efforts you are undertaking in this regard, and I also want to emphasise how important this work is.
Key Budget Priorities
Before discussing the Government's priorities in the financial services and superannuation areas, I would like to take a look at this year's Budget.
The first Rudd Labor Government Budget combines nation-building initiatives with programs to redress the balance in favour of working families.
This Budget meets our commitments to Australia and begins a new era of investment in our long-term future.
Australia has not been immune to the fallout from the United States sub-prime crisis.
This is why this Budget demonstrates the responsible economic management we need right now to fight inflation… deal with future uncertainty…and give us a buffer in difficult economic times.
And this is why this Budget delivers the lowest real increase in Government spending in nearly a decade.
Every single dollar of new spending in this Budget is more than offset by revenue measures and savings in expenditure.
Working families support package
Inflation means higher prices and higher interest rates for working families. The family income is being eaten away in mortgage repayments, rent, groceries and petrol — leaving many families struggling to make ends meet.
The first priority of the Budget is to deliver much needed assistance to working families, through a $55 billion Working Families Support Package.
As well, we will fully implement our promise to reduce personal income tax by $47 billion over four years, directed to low and middle income earners.
And we will ease the burden of rising childcare costs by increasing the Child Care Tax rebate from 30 per cent to 50 per cent and paying it quarterly, at a cost of $1.6 billion over four years.
We are also improving housing affordability through a $2.2 billion housing affordability package.
The centrepiece of this package is the new First Home Saver Accounts, at a cost of $1.2 billion over four years. The new First Home Saver Accounts will provide a simple, tax-effective way for Australians to save for their first home through a combination of low taxes and Government contributions.
Meeting our commitments
The second priority of the Budget is to deliver on our promise to build a stronger foundation for Australia.
As part of our commitment to long-term reform, we are establishing three funds to finance investment in national priority areas — the Building Australia Fund… the Education Investment Fund… and the Health and Hospitals Fund.
These funds will modernise and reinvigorate our economy. They will also release around $40 billion for investment in transport and communications infrastructure… education facilities… and health, hospitals and medical research facilities and projects.
Australia as a financial services hub
I'd like to wrap up my Budget overview by touching on a measure of particular interest to the finance sector.
The Government is committed to securing Australia's place as a financial services hub in the Asia Pacific region.
The Budget includes reforms to improve the tax competitiveness of our funds management industry at a global level, by cutting the 30 per cent withholding tax on certain distributions from Australian managed funds to foreign investors. Once fully implemented, most foreign investors will face a final withholding tax rate of only 7.5 per cent.
Future direction of regulation and disclosure
The Government is committed to ensuring Australia's financial system operates efficiently and effectively.
As with every large industry, the financial services sector has a number of significant issues that need to be addressed.
In particular, investors must have access to, and understand, the information being provided to assist them in making informed decisions.
Financial Services Working Group
The quality, complexity and length of disclosure documentation is of significant concern to Government. I have been a long-term critic of how disclosure has evolved into documents that may as well be written in Latin and do not provide necessary information to inform and protect consumers.
Now, as the Minister responsible for financial services, I am determined to fix this problem. I am committed to seeing that industry providers produce simple … standard … and, perhaps most importantly, readable financial services disclosure documents. Documents that pass my personal gauge of effectiveness — the "Burnie Pub Test".
I consider a financial product disclosure document to be effective if it can be easily understood by the average person, in the average pub, in an average community, like the city of Burnie in my home state of Tasmania.
The Minister of Finance and Deregulation, Lindsay Tanner, and I have announced the formation of the Financial Services Working Group. The group have already started to examine disclosure documentation in a staged process. The over-arching aim is to facilitate short, simple and readable documents, to better enable consumers to understand and compare products.
As a first step, the Working Group is developing a concise Product Disclosure Statement for First Home Saver Accounts.
It is also examining the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The group is currently identifying hurdles to the provision of such advice.
The Working Group's agenda does not end there. It has a key task ahead of it — shortening product disclosure documentation in the wider financial services arena.
The benefits will not only serve consumers - they will also serve industry. The regulations on industry in relation to shortened product disclosure will allow for cost reduction and greater industry clarity and certainty about the requirements.
I expect that the Working Group will take these into account in its forthcoming work. The next public information session is expected to take place on 30 May and I would encourage you to participate.
A consultation paper on intra-fund advice will be released shortly.
For many years now, a cluster of financial and credit services have remained the subject of often difference state-level regulation, or have operated unregulated, despite significant growth and national importance.
Of these financial services, residential mortgages make up the largest sector, accounting for an estimated 86 per cent of all consumer loans.
Recently there have been some issues concerning certain margin and stock lending practices – these problems, while only affecting a minority of margin lenders, still need to be addressed.
Presently, we have no comprehensive national approach to credit-related financial services. Credit is primarily regulated by the States and Territories through the Uniform Consumer Credit Code. Given the number of different jurisdictions, it's no surprise that current regulation is at times patchy and inconsistent.
In addition to these jurisdictional issues, the current regime does not do enough to prevent undesirable behaviour, in particular, in situations of predatory lending and the provision of inappropriate advice.
Australia needs a financial services regulatory structure for the 21st century … one which provides the highest standards of conduct … product disclosure … and advice at a national level.
Simple, standard and consistent regulation can only be achieved at a national level … by one government rather than by six states and two territories.
The Commonwealth and the States are united in their commitment to changing this situation – and there have been some key milestones achieved recently.
COAG recently agreed in-principle to the Commonwealth assuming responsibility for regulating mortgage credit and advice, with a view to reassessing the regulation of other credit arrangements in due course.
These statements and agreements are key steps toward delivering an effective national system. This is where the hard work begins. To bring this agenda quickly forward, I have developed a Green Paper seeking comment on Commonwealth regulation options for mortgage brokers, margin lending, non-bank lenders, trustee companies, debentures, property investment advice and other forms of consumer credit. This wide-ranging Green Paper will ask stakeholders to provide their views on these important financial services.
Your submissions will be crucial to shaping the development of the new regulatory regime. I encourage your views and participation in providing feedback to the Green Paper.
Another key priority in the financial services field is to introduce a mechanism to help move investors out of outdated managed investment products into modern ones.
The rationalisation of financial products can potentially benefit everyone, but it needs to be done in a way that is transparent and fair and ensures that investors' interests are protected.
Continuing to operate legacy products imposes costs and risks on both the industry and the investors concerned, so I hope to start work on developing a solution to this issue soon.
There is still a lot of work to be done, and I am seeking the views of industry and other key stakeholders in going forward on these issues.
Short selling arrangements
Australia has not been immune from the recent financial market turbulence.
However, on the whole, I believe the strength of Australia's financial system has meant that we have responded extremely well to the volatility.
Notwithstanding the overall soundness of our regulatory system, recent issues have highlighted the need for some fine-tuning to ensure the integrity of our markets.
The Government is committed to ensuring fair, orderly and transparent financial markets. All are critical elements of a successful market that allows people and their financial planners to make financial arrangements with greater certainty.
Here a key issue is transparency; that is, promoting investor confidence in markets by ensuring that investors have access to information to make informed investment decisions.
I am sure that you would also be aware of the recent concerns expressed about short selling and securities lending.
At the outset, I would like to say that short selling is an important financial tool in promoting market efficiency and liquidity.
The specific issue that has been raised is whether the short selling rules require addresses to resolve any ambiguity about the obligation to disclose covered short sales to the market.
In the interests of transparency, the Government will pursue legislative change to the Corporations Act to address any ambiguity around covered short selling and the requirement for disclosure.
Treasury and the ASIC are consulting widely on best legislative option to address this issue, and the detail of disclosure requirements.
Here the Government is looking at the protection of investors, promoting confidence in Australia's financial markets, and maintaining the attractiveness of Australia as an international investment destination.
Labor and Superannuation
Our Government has a long history of championing the cause of superannuation for all working Australians. It was a Labor government which introduced the first fundamental superannuation reforms.
The introduction of compulsory superannuation has had a significant and continuing impact on Australia's economic health, and the retirement savings of Australian workers.
This reform extended superannuation coverage to nearly all employees. Importantly, if the Labor Government had not introduced award super in the 1980s and superannuation guarantee in the early 1990s, then it is unlikely that the majority of low‑income, casual or part-time workers in industries such as hospitality and retail would have the added financial security in retirement that they have today.
Compulsion and "duty of care"
Compulsion brings with it a strong "duty of care" by government.
Government, having rightly mandated that individuals save for their retirement, provides tax concessions, estimated in the latest Tax Expenditure Statement to be around $26.8 billion in 2007-08. It also directs concessional contributions of around $60 billion largely into the hands of private sector financial institutions governed by trustee entities. In late 2007, the total system contained around $1.2 trillion.
Superannuation is a form of long‑term savings that is not generally accessible until at least age 55. Issues such as governance, dispute resolution and compensation, safety, diversified investment and operational costs are important concerns for this Government.
It is absolutely vital in our system that trustees are well placed to minimise problems before they occur and minimise the need for regulators having to embark on sometimes onerous or intrusive oversight. Prevention is the best form of cure.
The central question for all participants in our system, regardless of their particular interest, should be: 'what is in the best interests of the member and does it maximise their retirement income?'
There are several interlinked principles the Government has consistently outlined. They are worthwhile recounting because they will form the basis for how we examine issues going forward.
- Achieving higher retirement incomes over time through a combination of the age pension plus superannuation - set against a clear goal.
- Simplicity - each fund member should be able to understand the general features of the system and the particular features of their own fund.
- Safety and confidence - features to ensure people maintain confidence that contributions will be made, that their future income is not at risk, and that they can project the income available to them on retirement; On this point, I draw a distinction between the risk from theft and fraud and market-based risk in a defined contribution system.
- Choice and competition - the provision of a level of choice so that individuals can have input into selecting superannuation options that best suit their particular needs for retirement, whether it be a particular fund, investment category, lump sum or pension/annuity, or age of retirement.
There is a need to ensure a careful balance in a system which denies individuals the choice not to participate in the system but requires them to make what can be a range of complex choices within the system itself.
- Affordability - superannuation should be a cost effective savings vehicle with operating costs kept to a minimum.
- Improved incentives and equity - superannuation should be taxed in a fair and equitable manner, and the Government has committed to examining new ways to improve incentives to save, consistent with a responsible fiscal policy.
There are some further practical considerations I would add:
Increasing workforce participation
Given the recent high levels of employment and the significant skill shortages that have developed in sections of our economy, it is important to encourage Australians to participate in the workplace for as long as possible.
I am also conscious of the great pressure which fund administration systems, IT hardware and software have been under due to a number of recent policy changes, such as Better Super and the "anti-money laundering" changes.
I can assure you this is being taken into account in developing new policy and in considering other issues such as the automatic 'rolling together' of lost accounts.
Hopefully further changes can be made that further simplify the administration, operation and decision making for the entire superannuation system.
There are a number of policy areas in superannuation that are currently of interest to Government. These include:
- tax free superannuation lump sums for the terminally ill;
- the level of lost superannuation;
- the simplification of Product Disclosure Statements;
- maintaining superannuation as an allowable matter in awards;
- financial literacy; and
- the First Home Savers Account initiative.
I have also invited comments on governance issues in relation to self‑managed superannuation funds.
Self Managed Superannuation Funds
The Government is currently considering the submissions that have been provided on governance issues in SMSFs.
Firstly, I note that in looking at governance issues, I am not focussed on the SMSF segment alone.
This simply forms part of my broader focus on governance.
The SMSF segment is a robust, important and mostly healthy area of the market
However, results of a recent Australian Taxation Office (ATO) survey indicate that whilst the majority of the sector is well managed, a significant minority may not be. This material through my speeches and media commentary is well known, so I won't repeat it here.
Trustee responsibilities and knowledge
This information will help us identify risks in the population. I note that the previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities and education in 2005. However, these changes were not applied to the SMSF sector.
Because so many Australians will rely on self managed super funds for their retirement income, we need to ensure that SMSFs are subject to a strong governance system.
Trustees in the Australian system are the key guardians and decision-makers in our compulsory system. It is critical that they have the knowledge to undertake their duties and responsibilities in accordance with current law.
Fees and Charges
Many new SMSF trustees say that they believe running their own fund enables costs to be minimised, with the result that funds are more efficiently managed.
Costs will be incurred for the establishment of the fund as well as the ongoing administration and operation of the fund.
However, arguably those who wish to enter into SMSF arrangements may not be fully aware of the fees and costs incurred by an SMSF.
It is important that those recommending an SMSF provide effective disclosure, to ensure that those who wish to establish an SMSF are familiar with details such as the financial and time burdens and the amount of money they need in the fund to make it viable.
In conclusion, let me reiterate that the continuing strength of the financial planning industry is dependant on consumer confidence … confidence in their planners … confidence in their financial products … and confidence in the financial system.
Indeed, the Government reforms that I have outlined today will also assist in enhancing even further the strength, transparency and efficiency of the financial system.
The steps that your organisation is currently taking on qualifications and codes of conduct are also building confidence in the financial planning industry and I encourage you to further those endeavours.
These measures will form the critical part of your industry's work on promoting understanding and trust around your role in our modern financial system.
The prospects for the industry to grow and prosper are excellent and should be embraced by all in the financial planning industry.
Thank you for giving me the opportunity to speak to you on these issues. As a Minister I am excited about the scope for change and reform in these areas, which are such an important part of the Australian financial landscape.