Daniel Mulino:
Good afternoon. I’m here today to discuss some reforms that we’ve discussed at a roundtable with members of the financial services sector, as well as peak consumer groups, in relation to the collapse of the Shield and First Guardian Master Funds, which together saw around 12,000 consumers lose significant proportions of their life savings, over a billion dollars in all was lost.
And so today what we talked about was a range of things, including short‑term measures to make sure that the Compensation Scheme of Last Resort (CSLR) has the funds it needs to continue paying out to people who have lost all other options. And secondly, some medium and long‑term options to ensure that the CSLR is fit for purpose and that we deal with the risk of these major collapses happening in the future.
The first of those issues is to allocate the special levy for 25–26 of $47.3 million, which is essential in order to ensure that the CSLR can continue to pay out money to victims who have used up all other avenues.
I’ve decided to allocate that $47.3 million to all consumer‑facing sub‑sectors within the financial services sector, all 23 retail‑facing sub‑sectors. That’s a reflection of the fact that all of those sub‑sectors benefit from there being confidence in the financial services sector and appropriate consumer protection. It’s also a reflection of the fact that we need to allocate that broadly in order that it’s not overly burdensome on any particular sub‑sector.
Secondly, today I discussed with members of the roundtable, who were reflective of all of the different important parts of the financial services sector and key national consumer rights leaders, discussed ways in which we could look at reforming the CSLR to ensure that it is more sustainable going forward.
We looked at a wide range of options, including potentially bringing in other sectors that could contribute to the CSLR, and looking at the scope of the CSLR and the flexibility of the rules.
I will issue a discussion paper in February seeking comments on some of those concrete proposals that I flagged today at the roundtable.
Thirdly, and finally, we talked about the fact that we need to ensure that there are sufficient consumer protections in place that we stop these insidious industrial‑scale practices happening in the future. We need to ensure that we stamp out the abuse of mum and dad investors that we’ve seen in the First Guardian and Shield collapses.
And so today at the roundtable I discussed with finance sector leaders a range of options, including stronger regulation of the lead generators, including superannuation switching reforms, including stronger regulation of platforms and including a stronger regulation of managed investment schemes.
So, together all of these different reforms are critically important to ensure that mum and dad investors can invest with confidence and safety in our financial services and superannuation sector. So, happy to take any questions.
Journalist:
Dan, just talking to a few people out of the meeting, it sounds like one of the points raised was how self‑managed super funds can contribute going forward. Can you just sort of, just tell us how that conversation went?
Mulino:
So, the second issue that I touched on is the fact that we’re going to issue a discussion paper in February which will come out of the fact that I’ve now been briefed by Treasury as a result of them having conducted a post‑implementation review of the CSLR.
As part of that process, I’m going to look at other possible sources of funding. So, that would include the parent companies of financial advisors as one possible option. It would include a high‑risk MISs, and I know that some of the stakeholders may put to me the idea of SMSFs contributing, which is not something that’s possible at the moment. But I fully expect as a result of the consultation arising from that discussion paper that that will be one of the issues that we’ll consider.
Journalist:
And you mentioned sort of the announcement this morning around superannuation funds and all those other consumer‑facing sectors paying up, like the superannuation funds, the large upper regulated funds have sort of been one of the loudest voices the last few days, sort of saying, ‘We shouldn’t be included’, is that still the case today? Do you think there is some sort of middle ground that you reach with them, or is that – they just have to deal with it and go on being unhappy about it?
Mulino:
So, look, I think there’s a number of stakeholders who will have as their first preference not being included. But I think even amongst those stakeholders they would say, ‘If we are going to be included we want the scheme to be contributed to as widely as possible across the sector’, and so I think there’ll be a number of sectors who will say, ‘If we are to be included, we welcome the fact that all 23 retail‑facing sub‑sectors are included’.
I think it’s also critical to say that a significant part of the conversation today revolved around the fact that we need to stop these collapses happening. It’s important that we have a CSLR. It’s a really important consumer protection backstop, but potentially even more important is ensuring that mum and dad investors can invest in confidence, that we have the right protections and that we stop these collapses happening.
Journalist:
Where is the government at on the Netwealth request for assistance to pay back investors of First Guardian?
Mulino:
So, that’s at the point where I’m in discussions with Treasury around that. That’s a complex matter and there’s a range of regulatory obligations on me. So, Treasury is going to provide me with a briefing on that, and what I’ve indicated is that once I’ve received the full Treasury briefing I will then, as required by law, write to APRA, and I’ve indicated that I will table that letter in parliament.
Journalist:
You mentioned in some of the notes about the consumer protections about stopping inappropriate advice fees. How will that be applied and how will that actually – how will you move to prevent that?
Mulino:
Yeah, so, what I would say is that in that broader area of superannuation switching, I think that we need to step back and have a look and consider whether we need to put some sand in the wheels, much like we’re doing with scams and to positive effect in that area.
There is a really important policy objective within the superannuation sector of competition and choice, but there is also a need for protection. So, when it comes to superannuation account switching, I think we need to look at options like whether or not in some circumstances people need to be able to take their time and not be rushed, but we also need to be able to look at the appropriateness of different charging methodologies.
So, that’s not an area where any decisions have been taken, but I think it’s absolutely critical that we look carefully at that because it’s one of the links in the chain.
Journalist:
How comfortable are you with that sort of sand‑in‑the‑gears scenario because ostensibly it’s sort of restricting consumer choice, but on the other hand there’s, you know, bad outcomes? So how do you manage that trade‑off?
Mulino:
So, I wouldn’t say necessarily that it’s restricting choice. I would say that at the heart of the switching is a trade‑off, is a balance, where we do want people to be able to switch between different options. We want people to have choice. But I’m also very conscious that we need to ensure that people aren’t rushed.
And in a sense that’s very similar to the warnings that we give people in other contexts. It’s particularly important in light of the importance of the decisions they’re making. I think it’s a very risky and concerning situation where somebody might, after a half hour or hour conversation, end up shifting all of their life savings.
So, I think that people will still have choice. I think it’s a matter of reflecting the fact that in some situations we might need to turn up the dial on protection.
Journalist:
Why is that not a matter for lead generation and action towards them though because people are making these decisions on the phone with those people and they’re employing high pressure sales tactics?
Mulino:
So, we will be looking at lead generation and that is an important link. So we’ll look at range of options there, including, for example, whether the lead generators should be licensed, whether there should be certain disclosure requirements on lead generation. But acknowledging that it’s not a straightforward sector to regulate.
But it’s not just lead generation, because a lead generator will often hand somebody over to an advisor. So, it’s also important to look at that link. I think what came out of today’s discussion and what I think everybody agreed on is that, particularly with the really insidious industrial scale First Guardian and Shield behaviour, or at least what we’ve seen of it so far and it’s still being explored in the courts, but that very large‑scale industrial behaviour involves actions at range of elements of an ecosystem. It involves lead generation; it often involves inappropriate advice
It can involve insufficient due diligence by the platform. And we’ve seen a lot of behaviour that is still being explored in the courts but looks like it may be dodgy or fraudulent in the MIS itself. So we need to make sure that our regulatory response is holistic and deals with all those elements.
Journalist:
On the CSLR, you mentioned briefly this isn’t going to set a precedent for coming years, but with DBFO potentially in the works still and the new class of advisory provider coming to APRA‑regulated funds, is there any sort of inkling to have this develop in the future to super funds who now have that second tier of advisor contributing to the CSLR?
Mulino:
So, we’ll put out a wide range of options on the CSLR in February in that discussion paper. What I would say is that I think we can’t look at any of these issues in isolation. So we can’t look at the CSLR, we can’t look at consumer protection around these major MIS collapses, and we can’t look at the DBFO in isolation. This makes things more complicated, but I feel the only sensible way forward is to look at things in a holistic way.
So when I come to look at DBFO it will be in the context of the various reforms that I talked about today.
Journalist:
You’ve mentioned managed investment schemes a couple of times, like, do you have any more detail about what you’re thinking there for reform and to make that sort of environment safer? Like, you know, apparently according to ASIC what they review can be unilaterally changed without any further consultation with the regulator once it’s approved. Are you thinking of tightening that down?
Mulino:
So I don’t want to get into too much detail at this point other than to flag that we will be floating some serious options when it comes to the discussion paper next February. But what I can say is that some of the topics that we will be looking at would include the degree to which funds would need to report to ASIC, so that ASIC has more visibility, acknowledging that that’s a complex piece of work.
There have been suggestions around whether or not there needs to be governance reforms around related party dealings or dealings involving the responsibility entity of a MIS and other parties. And then there’s possibly also issues around capital holding requirements, which I’ve already written to ASIC on separately as a result of what I saw in the First Guardian and Shield collapses.
So there are quite a few issues that I think we will need to look at in relation to MISs.
Journalist:
What do you think of Diversa’s request for government assistance? Where do you stand on that?
Mulino:
So are you referring to the Netwealth –
Journalist:
No, to Diversa’s request.
Mulino:
Well look, I think when it comes to any of the platforms asking for assistance what I would say is that, look, we have a very established path for compensation of victims of these collapses. I would just take a step back and say, first and foremost ASIC has undertaken some very important and successful court actions and regulatory actions, the prime example of which is Macquarie agreeing to pay a substantial amount of compensation.
So ASIC is undertaking a range of actions against platforms but also financial advisors and other parties, including research houses. Some of those actions may lead to compensation. So that’s first and foremost.
Secondly, as a result of ASIC actions but also as a result of its own processes and fact‑finding, there’ll be a number of parties, a number of victims, who will be able to take actions through AFCA. And I very publicly stated that individuals should now lodge claims, if they feel have a claim, through AFCA. And AFCA has indicated that it will be doing all it can to accelerating and expediting its consideration of the large number of potential claims.
And then after that we have the CSLR, which is a really important backstop with up to $150,000 if somebody receives a successful AFCA determination but the party isn’t able to pay that.
So, I would say that that’s a very robust set of compensation mechanisms that we have for consumers. We’ve already seen a number of successes through those processes. And what I’ve done today in part is to ensure that the CSLR has the money going forward to be able to pay out, continue to pay out claims.
Journalist:
With the CSLR, I mean where do you think you are going on things like the but‑for clause, which sees people both return the capital and potential investment returns? Is that something that needs to be reined in, because it seems to be the people who are paying into the CSLR, I think it’s one of the reasons it’s got a bit out of control?
Mulino:
So I can flag, and I indicated at the roundtable, that I will include consideration of the but‑for test in the discussion paper in February. We will be looking at whether that’s appropriate for a scheme of last resort. I understand there are a lot of in principle arguments as to why that’s been there in the past, but in the current environment I think it’s worth looking at whether that’s appropriate.