We saw the enormous power of the mining sector when the foreign-owned mining companies forced the Rudd government to ignominiously back down on its super profits tax. For less than $20 million in an advertising and public relations campaign the miners secured for themselves tax savings of over $60 billion. The public interest was surrendered to the mining lobby. Now the banking lobby is well on the way to pushing aside the public interest again.
After a lengthy public enquiry and public discussion, the Gillard Government passed the Future of Financial Advice legislation (FOFA). That legislation was designed to legislate against the conflict of interest in the financial advising sector. The Coalition Government is now well down the track to restoring the privileged position that the financial advising sector held before FOFA. As Peter Martin in the SMH on 18 March put it ‘The government is removing the catch all requirement for financial advisers to act in the client’s best interest.’ The watering down of FOFA ‘will also re-allow sales commissions and other forms of conflicted remuneration where advice is general in nature.’
This is a dramatic wind-back of FOFA. It is done in the name of ‘reducing red tape’ but it will ensure a bonanza for the financial advising industry which the previous government set out to curb. The so called “red tape” is often where the public interest is expressed.
The growth of the Australian superannuation industry has become a honey pot which can now be more easily plundered. Last year the financial advisory industry pulled in funds of $21 billion from the super pool. With compulsory superannuation the super pool is growing rapidly. Last year it grew by $300 billion. Now Arthur Sinodinos, Assistant Treasurer and a former banker, is setting up the financial advising sector and the banks in particular to do even better in future.
Under FOFA the Gillard Government made substantial changes.
- Future commissions and other ‘conflicted’ payments were banned. (The Coalition will now allow commissions and allow conflicted payments on most products).
- A legal obligation was placed on financial planners to act in the client’s best interest. (The Coalition will allow this legal obligation to be narrowed.)
- A financial adviser who charges a continuing fee must obtain permission of the client every two years for the arrangement to continue. (The Coalition will remove this need for the client’s permission every two years.)
- The client must receive an annual disclosure of fees. (The Coalition will limit this to new clients only.)
The banks will be the major beneficiaries to these changes. They are finding the industry funds with their lower fees too competitive and bank profits and executive salaries clearly need boosting! Not surprisingly the bank public relations machines have been telling us every day in the media about the need to wind back FOFA and reduce red tape.
As Daniel Brammall pointed out in this blog on February 25, there are 18,000 financial planners in Australia and four out of five of these are owned by a bank or an insurance company. He said ‘The big end of town … has influenced the new government to the extent that the issue of conflicts has been quietly brushed under the carpet. Last week the Assistant Treasurer said “The current ban on conflicted remuneration captures a far wider range of circumstances than was originally intended and has resulted in significant compliance costs for industry. Here’s the point … many thousands of Australians collectively lost hundreds of millions of dollars – some of them their life savings – in collapses like Westpoint. Conflicts of interest were primarily behind it and the intention of FOFA was to avoid this ever happening again. However, the new government is dismantling the reforms because industry has convinced it that they cost too much. In doing so, industry has successfully transferred the cost to the consumer because without reforms that squarely address conflicts of interest, Westpoint will most certainly happen again.’
FOFA was designed to legislate against conflicts of interest in an industry riddled with conflict. FOFA is now being unwound.
It is reported that the government is planning to unwind FOFA by regulation rather than by legislation. It is suggested that the new regulations will be put to the Governor General and Executive Council on March 28, the day after parliament rises for a six weeks break. This means that parliament would not be able to disallow the regulations for at least six weeks.
This is a deplorable story of rent-seeking by lazy, but powerful vested interests. What a shoddy performance it has become. This heist may turn out to be even bigger than the miners’ heist a few years ago.
Public life and the public interest are being corrupted by the power of vested interests with their lobbying power. As Ross Garnaut puts it, this power has become a “diabolical problem”. One after another these powerful interests are corrupting public debate and putting their snouts deeply into the public trough… the gaming industry, the alcohol and hotel industries the polluters and the miners. The finance lobby now looks likely to become the most powerful and dangerous of all