Firstly let me say thank you for inviting me to talk to you today on superannuation and the role and responsibility of financial planners. It is fortuitous timing and I will speak plainly.
Some of you might have heard the quote by Oliver Wendell Holmes, a great American jurist, who said:
"Put not your trust in money, but put your money in trust."
As financial planners, you are for a great many people keepers of that trust.
However, in the last week or so, your entitlement to that trust which is so important, has been seriously questioned in the media.
I don't need to tell you that the survey of the quality of financial advice conducted by ASIC and the Australian Consumers Association has created a storm of controversy and has attracted significant attention.
This is at a time when the market slump has led to intense interest and scrutiny of the value to consumers of advice and whether the fees charged reflect the value for money that consumers expect.
It has highlighted questions directly of the industry, but also of the merits of introducing Superannuation Choice at this time.
I will return to the issue of Superannuation shortly, but I want to address up-front the issues raised by the ASIC/ACA survey, and the regulatory environment in which you operate.
Role of financial adviser
For the nation's retirement income objectives to be met, we need a strong, professional and dedicated army of financial planners and advisers to help consumers make critical decisions about their retirement plans and needs.
The Government is very conscious of the pivotal role that financial planners have in delivering the Government's retirement income objectives, and in educating consumers.
However, the results of the latest ASIC/ACA survey do raise concerns that must be addressed.
Leaving aside any arguments as to methodologies used and variations on the interpretation of the results by different parties, the results are as disappointing.
ASIC/ACA Survey Results
Two main issues have received the most public attention following the survey.
The first was the suggestion that advisers are putting their own interests ahead of the needs of their clients. Some have argued that advisers are recommending products that deliver high commissions to them, but may not be relevant to the needs and objectives of their clients.
This problem appears to be most acute when the risk profile of the plan was significantly out of step and higher than the relatively more conservative profile of the client.
It has also been pointed out that the survey results reveal a tendency for some advisers to produce generic, rather than tailor made plans for their clients, which also contain errors and a lack of attention to detail.
However, without wishing to down-play the significance of these findings, we do need to keep in mind few key points.
Like any survey, it is important not to succumb to sensationalist messages on the basis of a range of specific case studies. All professions have their bad apples, or under-performers and while the results are concerning, we should not paint the entire adviser profession with the same brush.
It is also critical to keep in mind that not all people require or even desire a comprehensive financial plan. While it is true that generic plans are not appropriate for everyone, it is also true that full and comprehensive financial plans may not be needed in all cases for every client.
In addition, consumers need to be aware that they cannot obviously expect a financial plan to suddenly somehow transform their financial position overnight.
It is simply not possible to deliver a sizeable retirement nest-egg without the necessary long-term planning and ongoing saving strategies that are needed to deliver very high incomes over an individual's retirement.
That said, the survey results have gained significant attention in the media and this has the potential to affect the level of consumer confidence in the financial planning industry as well as casting a shadow on the overall integrity of the financial sector for consumers in the retail market.
However, one of the keys to addressing these issues is obviously going to be the extent to which your industry can demonstrate in clear and precise terms, exactly how you will be responding to the issues raised in the survey.
One element is clearly going to be the response of the industry to heightened ASIC activities that it has signalled it will be conducting in light of the survey findings.
As you probably know, ASIC has already begun meeting with all firms who were assessed as providing `very poor' plans, and firms where more than one planner failed to provide an Advisory Services Guide.
I am advised that they will also be requiring some licensees to certify their compliance with the relevant legal obligations, including the `know your client' rule and commission disclosure.
In addition, ASIC will be following up specific licensees about their failure to adequately supervise advisers, and ASIC will be refining their industry information program to ensure firms are well and truly aware of the higher advice standards required under the FSR.
Importantly, in conjunction with this more targeted follow-up with the industry, ASIC have flagged that they will be holding discussions with industry on the best way to improve communication standards in plans.
FSR Act - Delivering a Framework
While the ASIC/ACA survey revealed that there are important lessons that need to be learned in some parts of the industry, the Government is confident that the legislative framework introduced in the Financial Services Reform Act will be an appropriate mechanism to help ensure that these lessons are heeded.
As you all probably know very well, the FSR creates a harmonised licensing, disclosure and conduct framework for all financial services providers and establishes a consistent and comparable financial product disclosure regime.
The objective is to benefit consumers of financial services through the introduction of a consistent framework of consumer protection.
In particular, the reforms significantly enhance the level and quality of information available to consumers. This will facilitate more informed decision-making and promote further competition between product providers and financial advisers.
The combination of the FSR's licensing, conduct and disclosure requirements, help deliver higher regulatory standards than those previously in place - across the board.
While the reforms commenced on 11 March 2002, there is a two year transitional phase which I know many in the industry will be using to make sure their house is fully in order by the time 11 March 2004 rolls around.
The Government is confident that it has achieved an appropriate `balance' with the FSR.
We have sought to impose strict obligations on product issuers and advisers, but at the same time have attempted to try and minimise the level of regulatory `overkill' that has been reported overseas such as in the UK. In an article on Tuesday 18 February by Matthew Lynn of the Age newspaper, some quite salient reminders of the dangers of over-regulation were made.
The article highlighted the fact that regulatory overkill can sometimes be more harmful to an industry, in terms of frightening consumers with continuous `alerts', and hampering industry growth with horribly detailed and cumbersome rules.
It is for this reason that we are confident that the FSR does hit the mark by giving consumers the protection they need, but at the same time giving industry the room and opportunity to grow.
The FSR framework squarely and directly addresses areas of concern raised by the ASIC/ACA survey.
In particular, the FSR requires the development of organisational capacity to deliver and monitor supervision and training. By requiring licensees to demonstrate these arrangements to ASIC, we can hopefully improve upon the quality control and appropriateness of advice that advisers are delivering to consumers.
The FSR's requirement that licensees demonstrate the attainment of relevant qualifications should also help to ensure that good quality advice is always provided. The requirement to demonstrate ongoing satisfaction of this will ensure that advisers' knowledge and skills will not be able to stagnate.
For all comers, whether they are stockbrokers, accountants or financial planners, the bar has been set at a more demanding level.
The disclosure of information about fees, charges, commissions and other potential conflicts of interest in an easy to understand manner is no longer a matter of `good practice' ideals or industry code. It is explicitly required of licensees under the law.
That is, all fees and charges of the adviser must be disclosed, any relationships or commissions from product issuers must also be disclosed, and the products themselves must have all their separate fees and charges fully disclosed.
I know that ASIC's Policy Proposal Paper which it released in December last year dealt with a range of additional details in relation to adviser disclosure. I understand that the paper, titled `Licensing - Adviser Conduct and Disclosure Obligations' is closing its consultation phase today, so if there are some additional comments any of you wish to make, you've got a few hours after lunch today to make them.
As an aside, while there appears to have been broad agreement about the nature and extent of adviser disclosure obligations, you would be aware that last year highlighted some significant differences of opinion amongst products issuers about the disclosure obligations attaching to superannuation and investment products.
Regulations proposed under the FSR, which would have provided greater detail about how disclosure might be made, were disallowed by the opposition parties.
It is hard to understand why, on the one hand, the opposition parties express concern about whether disclosure will be adequate and, on the other hand, move to defeat the disclosure requirements in regulations without offering an alternative proposal or model for disclosure.
Putting that aside though, I understand from ASIC that in follow-up consultations with some of the key product issuer groups, a consensus is beginning to emerge in relation to a form of standardised fee tables in line with the recommendations of Professor Ian Ramsey.
These discussions are continuing, and there are obviously still some areas of significant debate, but the Government is optimistic that these fruitful discussions will deliver a model of disclosure that can be agreed upon across the industry.
So, with the end of the FSR transitional period now only some 12 months away (on 11 March 2004), the results of the ASIC/ACA survey should be used as a catalyst for industry to meet the challenges posed by the survey, and where necessary rebuild the image of the profession in the eyes of the average consumer.
Indeed the ASIC/ACA survey and the FSR should serve as a rallying flag that all expert, professional financial advisers should and must embrace willingly.
In fact, as I have mentioned, this is now the law, and failing to embrace these changes will ultimately impact on an advisers' ability to continue to be allowed to operate. And equally importantly failure will not generate the public confidence that is necessary for the regulatory framework to operate.
FSR transitional issues, including Capital Gains Tax
In terms of smoothing the path to the FSR, my colleague, Senator Ian Campbell has committed to doing all things reasonably necessary to encourage and assist parties in the transition phase.
I am advised that Treasury and ASIC are continuing their efforts to reduce any uncertainty in the industry through a range of measures including further regulatory refinement.
As part of its efforts to inform and educate people about the effects of the FSR, ASIC has released a range of policy guidance and has also published responses to what it calls `frequently asked questions' on its website.
ASIC has also issued industry specific guides, and presented workshops on applying for an Australian Financial Services Licence. Much of this work has been undertaken in partnership with the FPA.
I understand that ASIC has also recently advised industry bodies and participants that it is willing to work more closely with smaller players to guide them through the licensing process.
I am also pleased to be able to announce here today that the Government has agreed to amend the income tax laws to allow an automatic capital gains tax (CGT) roll-over for financial service providers on transition to the financial services reform (FSR) regime during the transitional period.
The CGT roll-over will apply when an existing statutory licence is replaced by a licence under the FSR regime and when an intangible CGT asset is replaced by another intangible CGT asset.
The CGT roll-over will ensure that the capital gain or loss that would otherwise be made when an original statutory licence/replaced asset comes to an end is disregarded - recognition of the accrued gain or loss is deferred until a CGT event happens to the replacement asset.
Also, if the original asset was acquired before 20 September 1985, its pre-CGT status is attributed to the replacement asset.
The proposed amendments will remove any tax impediment for financial service providers who move to the FSR regime within the transitional period.
Legislation to implement the proposed amendments will be introduced as soon as practicable and will be developed in consultation with industry.
While all of the regulatory measures that the Government has put in place to deal with the financial product and advisory industry are important, they are only important to the extent that they help with the bigger picture.
That is, all of this is being put in place to help deliver a broader and more important policy objective, the opportunity for people to live more comfortably and securely in their retirement.
Superannuation
For many years, the Age Pension was the central means of providing retirement incomes for most Australians. However, while the Age Pension will always remain to provide an essential income safety net, superannuation holds the key to a significantly higher retirement income.
This is the main reason why superannuation is such a major focus of this Government.
The Government has worked to increase the accessibility and attractiveness of superannuation, as well as strengthen its safety, and increase the integrity of the system.
I am pleased to say that the current Australian retirement income system compares favourably with other developed countries.
The OECD stated in their recent economic survey of Australia that our Age Pension and superannuation systems combined, provide Australians, especially low-income earners, with income replacement rates above frequently-used benchmarks. These are expected to rise over time.
Nevertheless, the Government is not resting on its laurels, and a number of key reforms announced before the last election are still in the process of implementation. We will continue to make enhancements and improvements to what is essentially a sound system.
Regrettably, the Government's attempts to reduce the surcharge and introduce the co-contribution scheme are currently stalled in the Senate. This is an important package that provides real opportunities to improve retirement incomes for those who can afford to save more for their retirement and for those on low incomes who need help to do so.
Superannuation Choice
Of course, not all reforms will arise from new challenges or policies. For instance, the Government remains committed to enacting its choice of funds and portability policies. Choice, like many other initiatives has stalled in the Senate.
The first and most important point to make today is that choice is about delivering control into the hands of those with the greatest stake in superannuation - employees.
To suggest that Australian employees are not smart enough to have control over where they invest their superannuation is a furphy. The same employees seem to have little difficulty in operating bank accounts, investing in the share market and understanding more complex financial transactions, such as mortgages over their homes.
Why should Australians be refused the opportunity to choose the fund into which their compulsory super entitlements are paid? It should be a straightforward and basic right to be able to decide where to invest your own money.
So, what are the arguments against choice? Leaving aside the obvious vested interests that permeate this debate, the resistance to choice usually comes down to two main arguments.
The first argument is that the disclosure regime is not adequate to sufficiently protect and inform consumers in a deregulated environment.
The second argument is that employees and employers are not sufficiently informed about the regime to make it workable.
Let me deal with these points in turn.
The first point to make is that the current regulatory environment has not saved consumers from a slump in the market despite being charged high fees.
The simple fact is that at the moment some people out there are trapped in poorly performing funds chosen by their employer. They're stuck there and they can't change.
Choice will simply open the door to allow people the opportunity to change if they want, and clearly not everyone will choose to move funds.
However, giving people the Choice will inject greater competition into the system, leading to better services and placing downward pressure on fees and charges.
In relation to disclosure, as I mentioned earlier, while the FSR requires the full and complete disclosure of all fees, charges and commissions of an adviser, and the charges associated with superannuation products, the opposition parties in the Senate decided to disallow those regulations that would have delivered even greater comparability for superannuation products.
However, these issues are being worked through with industry and we are confident that a consensus will emerge in the very near future.
In relation to the argument that employees and employers are not ready for choice, we know the argument simply does not stand up to scrutiny.
Choice already works. Choice has been operating in Western Australia for four years and the Government is not aware of any evidence of mis-selling or churning of accounts.
The market has evolved to keep employer costs to a minimum. For example, the largest WA based super fund operates a clearing house for employers to make contributions efficiently and cheaply to multiple funds.
Employers that use the clearing house need only write one cheque and provide the details of the funds of which their employees are members.
Also, it's important to note that the Government has provided funding to the ATO to run an extensive education campaign on Choice of funds. In the 2002-03 Budget the Government allocated $28 million to the initiative, which will allow the ATO to develop a comprehensive communication strategy to inform and educate employees and employers.
The campaign will be designed to create awareness of the initiative and to give basic information on Choice through the use of a wide range of print and electronic media.
Given all the measures the Government has put in place, the mere fact that we are still having a debate about choice is in itself remarkable. The case for choice is overwhelming.
Most recently though, there has been come commentary that following the release of the ASIC/ACA survey Choice should not proceed. However this is a very curious train of logic. It suggests that consumers are best served by having no choice, and potentially being trapped in a poorly performing fund.
It is even more puzzling to hear people claim that until the problems raised in the ASIC/ACA survey are fixed, then people should continue to have no choice in their superannuation arrangements.
Proponents of this view must explain what they really mean. Are they really suggesting that it is preferable to let consumers languish in a fund with high fees and charges and poor returns? That is hardly much protection for a consumer.
As financial planners you can contribute to the success of Choice. What the Government expects of you is the diligent and competent provision of objective and professional financial advice to maximise investment opportunities for consumers.
Your industry plays a central and key role in the delivery of sound retirement income strategies. We need to work together to address the problems identified in the ASIC/ACA survey, and we need to you be out there educating and better informing consumers about their options and their choices.
Conclusion
It is often said that we live in uncertain times, this is also true of the economic environment. As JK Galbraith famously said "Genius is a rising market". It is much more difficult to operate in a challenging environment where there is pressure on returns in the market, and concerns about the international outlook more broadly, we should not forget the positives that we have in Australia.
We have the framework and the means to deliver a world class superannuation system. I am confident the financial planning industry has the capacity and the will to address shortcomings and to continue to play a critical role in the delivery of that system.
Thank you.