The federal government's Future of Financial Advice reforms, which have just been passed by parliament, provide the right balance between appropriate regulation of the financial services sector and empowering investors and consumers.
The long-awaited and much debated industry-led reforms are now law. It hasn't been easy and nor should it have been. The changes are significant, transforming the way things have been done for the past 30 years.
For the first time since spruikers called round to sell life insurance at the front door, the weight of balance has been reset to the centre. Consumers will now be more in control of their financial security and preparation for retirement, and professionalisation is now achievable for many of those participating in the financial services sector.
In principle, FoFA is about having the best interests of the consumer at the heart of the advice model. Advisers must put the best interests of their clients first. It is about setting new standards of service and removing conflicted remuneration by banning the payment of sales commissions. Once again, customer needs will be at the centre of advice and security -- giving consumers more control of their funds.
These substantial reforms could not have been possible without the industry itself. The financial services sector has worked hard through its professional bodies to drive change over many years. And the credit to them is well deserved.
The potential of the industry was the subject of Mark Johnson's report, "Australia as a financial centre: building on our strengths", completed in November 2009. At the time, the report determined that the nation had possibly the most efficient and competitive financial sector in the Asia-Pacific region. The report panel also identified that there were opportunities to expand trade in financial products and to capitalise on the benefits for consumers of financial services and for the workforce.
More work needs to be done in this area, but now that the FoFA reforms have been passed, the building blocks are in place and we can now go forward. It won't just be the consumers and the financial services sector that benefits, but the economy at large.
With survey results from the Australian Securities & Investments Commission showing that up to 80 per cent of Australians had never used a financial adviser, more has to be done to shift this stubbornly low participation rate. Increasing the number of people seeking advice will also boost financial literacy, the key to making sensible investment decisions.
With the superannuation guarantee rising from 9 per cent to 12 per cent over the coming years, the amount of money pooled in retirement funds will also grow from $1.3 trillion to $3 trillion over the next decade, and to $5 trillion over the following one. This much bigger pie creates more opportunities and options for the superannuation industry, but will also require better protection for consumers.
The nation is in a unique position within the Asia-Pacific, with the chance to be a leader in financial services. We are not trying to compete on the same global footing as Singapore, London or New York, but we don't need to when we can be their equivalent in our own back yard. We have the experience, we have the skills, we have the credibility, and now with FoFA we have the legislative and cultural shift to match.
There are many great features of this once-in-a-generation change to our financial services sector and our ability to save for retirement.
For me, the single greatest outcome of these revolutionary changes comes with the increased levels of financial literacy that follows a global financial crisis, a major inquiry into some of Australia's worst collapses, and a reformed regulator in ASIC. That the industry is also willing to make the change is significant.
Financial literacy will remain the first and last defence against the erosion or complete loss of our life savings. There are just too many tragic stories of those who have struggled and lost the battle to understand financial services for this issue to be ignored.
Nothing, not even the best laws and the best regulators, will protect us and our hard-earned savings better than a basic understanding of personal finance. A healthy level of scepticism towards the complex and mysterious financial products available among today's sophisticated offerings is essential.
FoFA has provided the necessary underpinning for a regulatory framework to protect consumers and ensure the growth of the next generation of a professional financial services sector. The consumer needs to do the rest.
The simplest rule of all carries the single best weapon: buyer beware!
And remember to ask the simple questions: if it's too good to be true then it probably is, and if you don't understand it don't buy it.
Governments will always continue to improve systems to protect consumers through laws and regulations, but the greatest protection will always rest with you -- the informed consumer.
10 July 2012