New standards and ethics authority will make the banks’ day

Financial Adviser Standards and Ethics Authority is mainly aimed at stopping ALP getting a victory with banking inquiry.

The news that the Turnbull Government is about to appoint a Financial Adviser Standards and Ethics Authority is terrific, even if it is mainly aimed at stopping the ALP getting a victory with a banking royal commission.

According to reports this morning, the new body will be funded by the banks and AMP, which will make their day, and will be chaired by former NAB director Cathy Walter along with eight other independent directors.

Pressure on the Government to appoint a royal commission into the banks has been piling up lately, with lower house crossbenchers, Bob Katter and Andrew Wilkie introducing a bill, most of the Senate in favour, and a recent poll by The Australia Institute showing 68 per cent of Australian’s in favour as well.

It seems the Government is just one lower-house floor-crossing away from having a royal commission. Time to do something.

And as with housing and negative gearing, the Government is prepared to do almost anything to avoid handing Labor a policy victory, including creating a new permanent bureaucracy, complete with board and CEO, to oversee financial planners.

In fact the new FASEA body just jumps straight to the result of a royal commission without the expense and — for the banks, embarrassing revelations — of actually having one.

There’s not much doubt that a key recommendation of a banking royal commission would be to better enforce professional standards and ethics on financial planners employed by banks, since the main reason for having a royal commission has been a string of revelations about bad behaviour by bank advisers. So why not just skip that step and go straight to what a royal commission would probably recommend?

The proposed powers of the new authority haven’t been revealed, but it seems the new body will mainly look after education and ethical standards of financial advisers.

How that will sit alongside the licensing powers the Australian Securities and Investments Commission is unclear. Will FASEA take over licensing entirely? Or will advisers have to jump through two sets of hoops to get a licence, with ASIC and FASEA each having the power to cancel them for different reasons — ASIC for specific breaches of the law, and FASEA for failing to maintain softer education standards and breaches of ethical standards?

In any case, there is plenty of time to work out such details: education requirements for financial advisers don’t come in until January 2019 and the code ethics will not be in force until 2020 — unless they are brought forward.

Of course, a lot of this wouldn’t be necessary if the superannuation system worked properly, with better returns and savings simply rolled over into pensions at retirement.

One reason there is such a problem with advisers is that super fund members are able to cash out at retirement.

Typically what’s left after paying off the mortgage and paying for a holiday is taken to a financial adviser to be invested for a retirement income stream. Transaction costs and fees immediately eat into the capital, and often the assets that are bought are not appropriate for retirement and too risky.

In recent years, financial advisers have been getting a lot of work looking after pre-retirement self-managed super funds as well, but in many cases this just involves transferring the management of super to someone less qualified who charges more.

And one of the reasons people transfer their super into an SMSF is that super funds’ returns are too low, in turn because they are required to maintain unnecessarily high levels of liquid assets so that members can get their money out within three days, even though they are saving for 30-40 years, as I have argued here before.

So super fund returns are held back by liquidity requirements, encouraging more people to actually use that liquidity to take their money out and hand it to a financial adviser who knows less, operates — up to now — in a lax ethical and educational framework and charges more.

At first the Coalition Government was going to entirely repeal Labor’s Future of Financial Advice (FoFA) legislation that was aimed at lifting advice standards by banning commissions and imposing a duty on advisers to act in the best interests of their clients.

And now, having been blocked from doing that by the Senate crossbench, it has had a full epiphany and strengthened FoFA by imposing ethical and educational standards — to head off the same crossbenchers demands for a banking royal commission.

Oh, the long and winding road of politics.

Alan Kohler is Publisher of The Constant Investor: www.theconstantinvestor.com