Shadow treasurer Chris Bowen’s views on policy and regulation carry as much weight as anyone in Canberra at the moment, during this critical juncture for the financial services industry.
Since the swing away from the Liberal Party in former prime minister Malcolm Turnbull’s seat of Wentworth in October, industry and political pundits have begun to contemplate the possibility of a change in government. There will be a federal election soon – one must be held by May next year.
In Bowen, the financial services industry should expect a seasoned politician who has learned from the times he has locked horns with lobbyists. Bowen has seen and heard it all before. Specifically, he’s seen and heard it all from the financial planning lobby. If Labor does what many think it can do and wrests power away from the beleaguered Liberal Party early next year, Bowen will be the man in the hot seat, responsible for oversight of the regulators and possibly – depending on the timing – implementing the final report from the Hayne royal commission.
While Bowen was careful not to run ahead of Commissioner Kenneth Hayne’s recommendations, his comments in this exclusive interview with Professional Planner are particularly illuminating when it comes to the blurring of the lines of regulator responsibilities and the watching brief he’s keeping on vertical integration.
IMPLEMENTING HAYNE’S RECOMMENDATIONS
Matthew Smith: What would a pathway to implementation of the Hayne royal commission’s final recommendations look like, from a Labor government?
Chris Bowen: It’s hard to predict because we don’t know what he’s going to recommend. You could read the interim report in a number of ways. I’ve said this previously – and I say it carefully because I don’t want to be critical of the royal commissioner – but I think it would have been more prudent to have draft recommendations in the interim report because that way we could all see them, comment on them, point out potential unintended consequences, etc. It appears we won’t have that, so it appears that the final report will include recommendations that we’ll see for the first time – government, opposition, the sector, everybody…Again, that is what it is, and a government of either persuasion will implement the recommendations. I think that’s a given.
MS: Both governments would implement all recommendations in totality, is that what you think?
CB: I think so, yes. I think so. Following on from that, there are genuine questions around timing and implementation details. I would think it unlikely that [Hayne’s] recommendations would be so prescriptive that there wouldn’t be a good deal of work for a treasurer and a government to do around implementing them. From Labor’s perspective, we’d set up a treasury implementation taskforce, which I’d ask to consult closely with the sector about implementation details and timing, and manage any unintended consequences rather than rejecting the recommendations. I think almost everything should be manageable.
LESSONS FROM FOFA
MS: You’ve learned first-hand about the advice industry’s squeaky-wheel problem through the progress of FoFA; how aware are you of the industry’s stamina when it comes to clawing back concessions?
CB: Lawyers and lobby groups are perfectly entitled to put their case. But anybody who suggests that the industry is not in need of reform after the royal commission is kidding themselves and would get pretty short shrift in public debate, I would have thought. I’ll always consult with people about the impacts and my door will always be open. I obviously can’t speak for the current government; I’m making sort of a political observation. I think the government of either persuasion would implement the royal commissioner’s recommendations. I can only speak for myself and say we would but I predict that they would, too. But you’re right, I have the advantage now of not being as young as I once was and having been around the track a few times because, as you point out, I did FoFA [Future of Financial Advice reform].
MS: What did you learn from FoFA?
CB: To keep going. It’s easy to forget how controversial FoFA was when I did it. The financial planning industry was very angry with us, with me. I worked closely with financial planners and the various representative bodies but at the end of the day, we got it through. Yes, we made some concessions. I think most of those concessions…in hindsight, we may have made too many concessions, you could say that.
MS: Well, it’s not just me, the commissioner did point it out in his report.
CB: To that I would say fair enough, that’s a legitimate call for people to make. But at the time it was seen as particularly radical, particularly strong and we were fighting the Liberal Party which said, ‘Don’t do it at all’, and who then won [the election] and tried to water it down.
MS: When you say “keep going”, what do you mean by that?
CB: Well, these reforms are difficult and there are plenty of vested interests, which are loud. You referred to the squeaky wheels earlier so, yes, they are loud, vested interest. But the policy case for doing this stuff now is very, very strong…I think you could argue that FoFA’s been vindicated by history. At the time of FoFA, the financial planning industry had a friendly ear in The Australian Financial Review and The Australian. It was being painted that we’d kill the financial planning industry and nobody would get advice if they had to pay for it up front, which would be a poor outcome. Arguments were made that all the planners who’d done nothing wrong would have to all of a sudden change their systems. But we kept going.
MS: With the benefit of having been around the track a few times, what do you think about the estimates that one-third or more of financial planners will leave because of the new education standards?
CB: I’m not sure that will happen. And, again, those suggestions were made when we did FoFA. And I have had representatives of the sector in to see me a couple of weeks ago saying this or that will happen. And I said, ‘Yeah, yeah, you know, I’ve heard all that before.’
EDUCATION STANDARDS AND FASEA
MS: But if it does happen? If the majority of financial planners nearing retirement age leave the industry and many more who can’t get accreditation for prior study leave, too?
CB: Education standards are not something we’ve done, it’s the current government that’s done that and we don’t have a problem with it. I’ve always had the view, though, that education standards can be a proxy for inaction elsewhere. You can be very well-educated and have diplomas and be unethical. Or you can be very ethical and not have a diploma. All I’m saying is don’t confuse educational standards with ethical standards.
MS: If we’re talking about ethics and about leading by example, it’s fair to say the Australian political system is getting somewhat of a reputation. How important is it for politicians to lead by example on ethics and culture?
CB: Well, we need one more change of prime minister and then we need a long period of stability after that.
CONFLICTS AND VERTICAL INTEGRATION
MS: The finding that conflicts of interest are embedded in the culture of our financial institutions was a feature of Hayne’s interim report. To address this, does separation of product advice need to be legislated?
CB: To be frank, at the beginning of the royal commission process, you would probably have not predicted that he would recommend something like that, but by the end of it I think you’d have to say, ‘We’ll have to wait and see.”
MS: What’s your view on whether vertical integration should be legislated out of existence?
CB: Several banks are already doing it, of course. You’d have to say banks are reading the writing on the wall. I know Westpac has said it won’t but the others, by and large, have been.
MS: In your view, do you think that in order for that culture to be put right it needs to be legislated?
CB: I think this is an area where I would really be ill-advised to try to pre-empt the royal commission.
MS: You don’t have a view whether the culture you mentioned earlier can actually be changed without legislating?
CB: The royal commission has clearly traversed this area so it would be best to wait and see what it recommends first.
MS: Institutions are negotiating, in some cases, 20-year distribution agreements with vendors they’ve sold their wealth and asset management businesses to, isn’t this just vertical integration at arm’s-length?
CB: I think that’s a legitimate question but, again, this is why I was very cautious to start with because I really do want to see what he recommends first.
THE POLITICAL ENVIRONMENT
MS: How has the feeling within the Labor Party changed since the Liberal Party’s leadership spill in August
CB: You’d rather be in our position than in their position. You would have rather been in our position than theirs before they spilled and you’d rather be in our position than theirs after.
MS: Do you feel vindicated for having called for the banking royal commission from the start?
CB: Justification perhaps. It’s vindication in the sense that our policy concerns – our need for calling the royal commission – have been ticked by history. But I wouldn’t say vindication in some sort of brutal political sense. It was a tough decision to call for the royal commission and we didn’t do it lightly. We knew it would, at that point, be politically controversial and we knew that we’d receive all sorts of incoming criticism from the sector that we were creating uncertainty and that it’s bad for investment. But we thought it was justified. Not even we expected the scale, the speed, and the effect, of the findings. Within the first few hearings, basically, a chief executive had gone and a chairman was out the door. It surprised even me and I thought it was justified and necessary.
MS: What are your top takeaways from the royal commission hearings and findings?
CB: In a very broad sense, it’s just the fact so many people thought bad conduct was OK…nobody could listen to that audio of the kid with special needs being badgered on life insurance and think, ‘Yeah, this is OK.’ The question really became ‘How did we get here?’ The fact enough people thought this was all right, that’s what really saddens me, without getting into the specifics…I wish it had been done two years ago when we called for it because now the sector would be getting on with it in terms of implementing the recommendations and moving on.
REGULATION OF SUPERANNUATION
MS: With more than a third of all of Australia’s retirement savings in SMSFs, do you think there’s an argument to shift oversight from the Australian Tax Office, which is principally a revenue collection agency, to, say, an APRA-style of regulator?
CB: There’s speculation about that. When it comes to regulatory framework, I’ve seen it speculated that Hayne might recommend a specific regulator for superannuation, as opposed to self-managed super. [The speculation has been] to keep ASIC and APRA but remove superannuation from them and have just [one] regulator covering the field of superannuation regulation. But, again, I don’t know what will be recommended.
MS: Do you see value in having a separate regulator for superannuation?
CB: If I can talk more broadly on regulation… the ‘twin peaks’ model of regulation we’ve had historically, we’re all pretty clear about who does what; we’re all pretty clear about the traditional roles of each of the regulators. I think we’ve lost quite a bit of that through ad hocery. So, for example, BEAR [the Banking Executive Accountability Regime] has gone to APRA. Now, I think there’s at least an argument that BEAR sits better with ASIC, right?
MISALIGNMENT OF REGULATORS
MS: Any other examples where there’s a possible misalignment of regulators’ responsibilities?
CB: Another example would be APRA, which engages in macro-prudential regulation. I don’t quarrel with that but you could mount an argument that its [role should be] more macro than prudential, [worrying] about the health of the system and not one particular institution is usually an RBA [Reserve Bank of Australia] responsibility, not APRA’s. Now, again, I’m not quarrelling with APRA about it but I’m thinking, ‘Well, is it the case that interest rate movements don’t work as effectively these days so, in effect, the RBA and APRA are engaging in joint monetary policy through tweaking macroprudential?’ APRA’s role is actually the health of each institution. And, yes, it’s the health of the whole system, but if they’re tweaking it for macroeconomic management purposes, as a sort of de facto monetary policy, well, at least we need to have a discussion about it. So, yes, I think there’s been a blurring of the responsibilities between the regulators. Maybe the royal commission is an opportunity to clean some of it up if it recommends changes to financial system regulatory architecture. We’ll have to wait and see.
MS: Why do you think this blurring has happened?
CB: I think it’s just ad hoc. Maybe it’s been discussed in the Council for Financial Regulators but we don’t know because [that’s] a secret organisation that doesn’t put minutes out. There’s almost a self acknowledgment that there has been this blurring.
MS: A move to individual licensing has been talked about for a while. Can individual licensing be done under the current regulatory framework or does this need a rethink?
CB: I haven’t given it any thought, I’ll wait for the royal commission’s recommendations.
MS: The backlash from SMSFs and the local wealth management industry has been quite strong since Labor outlined its policy on imputation credits. Have any of the arguments swayed your view on the matter?
CB: I accept that SMSF groups have got a constituency they need to lobby for. They’re entitled to their own opinion but they’re not entitled to their own facts. The fact of the matter is that, firstly, pensioners are exempt from the change, so that’s just a black-and-white statement of fact, that’s not an area where we can argue about nuance – pensioners aren’t affected. Two-and-a-half million people receive a full or part pension. Society has decided that these people are the most vulnerable…We’ve means tested these people and decided, as a country, these are the people we have to support and they’re exempt from the change. I acknowledge [the roll back of] imputation credits affects SMSFs in quantum perhaps more than any other sector but highlighting the point that it’s low-income earners and retirees, or the pensioners, who will be most impacted is completely, utterly and totally wrong.
MS: What is at the centre of this debate in your mind?
CB: It is completely and fundamentally dishonest to use taxable income as the measuring stick here for this debate. In many cases [self-directed retirees] have a low taxable income because they’ve used tax concessions to get their taxable income down in some instances to zero or very low. That doesn’t mean they’re not high-wealth or indeed in some instances high-income. We have a concessionary superannuation system – as we should. We have things like dividend imputation refundability, and that means taxable income is a completely meaningless figure. On the broad topic of refundability, though, let’s be clear why we’re doing this. [Right now] $5.5 billion a year [is being paid out], growing probably to $8 billion because of the age of the population and behavioural impacts. We can’t afford this as a country. I mean, somebody’s got to call it out. We’re the only country in the world that does it and it’s the only refundable element of the personal income tax system. I mean, you can use negative gearing to get your income down to zero, if you’re a tradie you can claim all your expenses down to zero. But you don’t get negative income tax anywhere in the system except for refundability.
This transcript was edited for length and clarity.