There’s still much that is not known following the latest Cabinet reshuffle but one thing that’s clear is there will no longer be a separate ministerial role for financial services. That portfolio, and the oversight of ASIC, will fall with  new Treasurer Josh Frydenberg’s office.

How the portfolio responsibilities for financial services will be split up between Frydenberg, the assistant treasurer, Stuart Robert, and the assistant minister for treasury and finance, Zed Seselja, is not apparent.

Charter letters, which set out the responsibilities of ministers, have not yet been delivered ; however, it is understood these are in the process of being drafted. Meanwhile, the now former financial services minister, Kelly O’Dwyer, was named minister for jobs, industrial relations and women, on the weekend.

In one of her last interviews in her old portfolio, a responsibility she had held since 2016, O’Dwyer sat down with Professional Planner to discuss the role of policymakers before and after the royal  commission.

It’s no surprise Kelly O’Dwyer can get a bit defensive at suggestions the government isn’t doing enough to protect consumers and superannuation members from wrongdoing within the financial services system.

Election-spirited posturing aside, it was O’Dwyer, the Minister for Revenue and Financial Services, who stuck to her guns – and to the Liberal Party line – arguing that a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry would only serve to weaken the integrity of the country’s banking system. O’Dwyer continued sticking to this position, even as the inquiry’s brutal tone became plain for all to see.

O’Dwyer continues to defend all the actions she and the government have taken to ensure the integrity of the banking, wealth and superannuation system, of which there have been many: reforms to protect low-balance super accounts against excessive fees; formation of a one-stop dispute resolution scheme; legislation to require new education standards for financial advisers; progressing rules around life-insurance fees and remuneration; and strengthening the regulators’ powers, to cite a few main examples.

Yet, the longer the Hayne royal commission rolls on, the more it feels like additional oversight and policing at this time could amount to little more than window dressing for a system that may
itself be a bit bent out of shape.

This point is not lost on O’Dwyer, who’s not about to “rush to failure” as she puts it, by adding more regulation beyond what’s already in the pipeline before the royal commission has made its recommendations.

The squeeze

“I think governments need to be very responsible in the way they add regulation and legislation in this space,” O’Dwyer says, during a sit-down interview with Professional Planner at her central Melbourne parliamentary offices. “The royal commission provides us with the opportunity
to look at the industry in a holistic way. I’m going to wait for the findings before we announce what we’re going to do.”

But O’Dwyer knows she won’t have the luxury of waiting idly for the royal commission’s recommendations, which are due in February.

If the results of the late-July federal by-elections are to be read into at all, swings to Bill Shorten’s Labor Party could be an indication of voters’ broader discontent with big-end-of-town shenanigans dredged during the royal commission hearings.

O’Dwyer needs to be seen to be taking a stand against wrongdoing for the sake of the retirement and discretionary savings of all Australians; it’s no surprise she’s focusing her efforts at this stage on superannuation and, in particular, the erosion of member account balances.

“The Productivity Commission report is pretty compelling around the potential for Australians
to be ripped off within the superannuation system,” O’Dwyer says. “We know there are some very significant shortcomings in the structure of superannuation right now, which is one of the key reasons the government has embarked on a series of very significant reforms.”

The 3 per cent cap on superannuation fees O’Dwyer has championed is aimed squarely at smaller account balances and multiple accounts that financial services companies are draining.

The bill containing the 3 per cent cap would also ban exit fees when members close or roll over their accounts and institute the opt-in regime for new fund members under 25, allowing them to choose whether or not to take up group insurance.

Further, new rules relating to transparency, accountability and managing conflicts of interest
at the super trustee level would put some framework around where much of the industry
is already heading, although O’Dwyer says she’s been surprised at the amount of resistance the industry is putting up against formalising these new measures.

“It’s so interesting how the industry will come together to defeat increased transparency and accountability of funds as well as penalties for trustees, for instance, where they’re not acting in [support of] the best interests of members and increased power for the regulator,” she says. “I find it extraordinary that the industry would seek increased transparency and accountability from companies they invest in but would not want the very highest levels of accountability
in what is a mandated and compulsory system they operate in.”

Including the superannuation sector in the terms of reference for the royal commission
was “entirely the right thing”, O’Dwyer asserts.

“It would not be a proper look at our financial system without the super industry included…We’ve got to make sure people are not paying for dud insurance they can’t claim on and we have to make sure people who serve as trustees are of good character and are not conflicted when making decisions relating to member funds,” she says.

Nuanced on conflicts

When it comes to making a judgement call on business models and potential conflicts of interest within wealth management outside of superannuation, O’Dwyer is a bit more circumspect; for example, she offers a balanced perspective on vertically integrated wealth management businesses when pressed.

“There are benefits for consumers in terms of costs,” O’Dwyer says. “There are also problems in terms of related parties; if you don’t have proper conflict management, there could be issues.”
She quickly points out that banks aren’t the only ones that pursue the vertical integration model and that super funds should also be thinking about conflicts arising from product and advice.

“You have to weigh what’s in the best interests of members, so having really strong corporate governance requirements, strong laws and penalties for doing the wrong thing, and a regulator with powers to intervene, act and protect members’ money are essential.”

O’Dwyer’s pragmatism around product and advice is similar to the view of former Commonwealth Bank chief executive and incoming AMP chairman David Murray, who has been the most prominent supporter of institutionally owned distribution models at a time when most senior banking executives seem happier to keep their heads down on matters under the royal commission microscope.

Like O’Dwyer, Murray says substantial consumer benefits can be derived from vertically integrated business models because of their scale and access to capital. He also highlights that big institutions
can provide systematic and comprehensive customer remediation in the event of misconduct, where smaller businesses may not be able to do so. As an example, AMP announced in late July it would spend $290 million over three years on reparations for clients affected by advice highlighted during recent ASIC reviews.

It’s clear from the transcripts of the questions the royal commission QCs are asking central players such as ASIC that the institutional business model is being called into question but in lieu of a recommendation addressing that issue, O’Dwyer seems to think the challenges the segment faces are less systemic.

“We have seen reports from ASIC on this and they are doing further reports,” she says. “We have looked carefully both at what the conduct and prudential regulator state and where harm might occur. You need to get the framework right but people who want to do bad deeds will do them regardless of ownership structures. We have to make it as hard as possible for them.

“That’s why we have given additional powers to ASIC and [the Australian Prudential Regulation Authority] APRA, in particular through the product intervention power, so we’re making sure we can stop harm before it occurs.”

ASIC’s new product intervention powers enable the regulator to intervene when a product is identified as creating a risk; this aims to stop product manufacturers from shifting blame to product sellers, and vice versa, when something goes wrong, ASIC deputy chairman Peter Kell said at a recent forum.

FoFA’s failures

O’Dwyer acknowledges that the financial services and wealth management industry has had its fair share of opportunities to come together to solve the conflicts of interests that have led to unsavory advice outcomes.

“FoFA [Future of Financial Advice legislation] dealt with some of the conflicted remuneration, but not all. The people who should have stood up and taken control left it in the too-hard basket,” she says.

Carve outs and exceptions relating to a series of issues – from commission payments to best-interests duties – became a part of FoFA reforms. Critics say that led to a watering down.
Former ASIC state regional commissioner, now head of the UNSW School of Taxation and Business, Pamela Hanrahan, said at the Financial Services Council Summit in late July that the FoFA reforms failed to end grandfathered conflicted remuneration because of the actions of a self-interested industry.

The architect of FoFA, former Labor MP Bernie Ripoll, admits the intent of the legislation was
eroded by the industry’s 11th-hour lobbying.

O’Dwyer has upped the ante on reforms with the Life Insurance Framework (LIF) legislation, introducing new caps on the incentives paid to advisers for the sale of life-insurance products.
A cap of 60 per cent of the initial premium and 20 per cent of the ongoing commissions is still within its three-year transition phase under LIF; changes are due to go into effect in 2020.

“Government needed to step in and provide confidence in the sector after ASIC’s pretty
damning reports, which found there were clients who were being churned after 12 months in a particular life-insurance policy because of upfront incentives the industry gave itself to put someone
in another fund,” she says.

O’Dwyer’s insistence on not taking up any new reforms until she sees the royal commission findings won’t stop her from beating the drum about legislation she’s already brought in.

She makes no excuses for industry fallout from new education standards after legislation she introduced led to the establishment of the Financial Adviser Standards and Ethics Authority (FASEA).

“It’s essential to lift the standards for financial advisers so when individuals go to someone for trusted advice that person is acting in their best interests and is property trained to give advice,”
she says.

It’s widely acknowledged that older advisers will see the FASEA standards as a cue to retire
or step back from the industry but O’Dwyer sees the direction the authority is taking as necessary
for the industry’s evolution into a profession.

“I think people want to know they have good financial institutions and good regulators,” she
says. “We need good corporate citizens and good and effective regulators for people to have faith
in the system.”

Whether the behaviour of the financial services sector becomes a decisive election issue for a government that, in many people’s eyes, was a passive recipient, rather than a champion, of an explosive royal commission remains to be seen.

There is a joke going around that royal commissioner Kenneth Hayne is now the de facto Financial Services Minister in lieu of the portfolio’s lack of ministerial oversight. The industry will be waiting with baited breath to see who’s stepping up when the time comes to legislate on the royal commission findings in February next year.

Smith is the editor of Professional Planner’s print and digital platforms. He is an experienced financial journalist, editor and multimedia producer who has held senior editorial positions both in mainstream press and trade media.
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