In his report on the Financial Systems Inquiry (FSI), David Murray highlighted the growing need for a major overhaul of the financial advice sector, a move which could help consumers have more confidence when planning for their financial situation retirement.
Of the 44 recommendations, 28 would affect the superannuation industry and retirement income. So, what are the key points you need to know, and how will they affect you?
More power to ASIC
Giving more power to the Australian Securities and Investment Commission (ASIC) would be the first move to hold financial planners more accountable. Currently, ASIC can only take action after it has been determined there has been a breach of the law, but new powers would enable the body to investigate planners, companies and their products. This means it can stop any practices and products, which would be damaging to consumers, before they are sold or implemented. This of course will only work if ASIC is provided more funding as recommended by the FSI report.
Greater consumer understanding
A greater consumer understanding of financial products and services, including insurance and financial planning products is also a key recommendation. Clearer guidelines and product disclosure statements would help people avoid being sold products which they don’t need, understand or which are flawed.
Minimum education standards for planners
Part of being able to deliver a stronger and more-trustworthy financial planning sector is to implement a requirement for minimum education standards for financial advisers. There is a huge discrepancy between the current minimum education required and that undertaken by advisers who are members of a professional body.
For more detail on the current education undertaken by financial advisers, read our article, Financial adviser register changes.
The report also calls for a change in the culture of wealth and planning divisions, particularly within the large financial organisations, such as the Commonwealth Bank.
“Since the GFC, a persistent theme of international political and regulatory discourse has been the breakdown in financial firms’ behaviour in failing to balance risk and reward appropriately and in treating their customers unfairly”.
However, culture should not be created by imposing penalties on those who do wrong, “industry should raise awareness of the consequences of its culture and professional standard,” the inquiry reports.
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The term ‘general advice’ is deemed to be misleading, as advice is still advice, general or not. To enable consumers to gauge the true value of the advice they are being given, advisers and mortgage brokers should also be required to disclose the ownership structure of their business, clearly stating any companies to which they are aligned.
Commissions on life insurance policies come under fire with the inquiry asking for a change to the law. It recommends that where lucrative upfront commissions are charged, they should not be allowed to exceed the alternative ongoing commissions.
It is also advocated that superannuation should be paid as a regular retirement income rather than a lump sum. Unless requesting to opt out, consumers will receive their super via a product similar to an annuity, which may mean that the accrued balance not only lasts longer, but continues to earn, reducing the need to claim an Age Pension.
While the FSI recommendations go a long way towards addressing fundamental flaws in the financial planning sector, those looking for an immediate improvement in retirement planning advice may be disappointed. David Murray made it clear when delivering his recommendations that this was a report for the Government, not a Government report.
Treasurer Joe Hockey has stated that he will not rush a response to the report of the 12-month inquiry, giving March as his deadline for consideration and review.
Would such recommendations, if implemented, give you a greater feeling of confidence in the advice provided by financial planners? Do you think they will prevent a repeat of the Storm Financial collapse and the Commonwealth Bank financial planning failures?