Fears reform will cut innovation in super

THE government's planned reforms to financial advice and superannuation could ''crowd out'' innovation and lead to other unintended consequences, a funds management industry veteran has warned.

Jeremy Duffield, non-executive chairman of the Australian Centre for Financial Studies and the former head of Vanguard Investments Australia, said the funds management industry was at a watershed moment in its relationship with government, as Labor pushed forward with its Future of Financial Advice (FOFA) reforms and the Stronger Super changes recommended by the year-long Super System Review.

Mr Duffield, speaking at a Financial Services Council lunch in Melbourne on Friday, said he was concerned about the government ''trying to take hold of the reigns of industry innovation''.

''I worry about the rise of social engineering at the expense of free markets,'' he said.

The ''massive policy changes'' to super were an example of ''libertarian paternalism'' - in which consumers were steered to make good choices while still having access to a full range of options.

Mr Duffield said he was sympathetic to this approach and believed Labor was trying to do the best thing for super investors.

''However, I think it's one way to say I think consumers should have bounded choice, but it's another step entirely to say industry competitors can only compete in a certain way, ie, you can only offer default funds in this way, you can only sell products in this way, you must operate in this way,'' he said. ''At this point ? I start to get a little toey and concerned about collateral damage.''

The coming reforms include a rise in the super guarantee from 9 per cent to 12 per cent - which Mr Duffield supported - and MySuper, a plan to introduce low-cost, no-frills default super funds in mid-2013.

The government is still to announce key details on how MySuper will work - including how much flexibility funds will have in pricing MySuper products.

Meanwhile, the FOFA reforms - for which the first batch of draft legislation was unveiled last week - will ban conflicted financial planner payments such as commissions, place an onus on advisers to act in their clients' best interests and will require them to send new clients an ''opt-in'' notice every two years.

Mr Duffield, who founded Vanguard's Australian arm in 1996 and built it into an $80 billion operation, said he was worried about ''unintended consequences'' of the reforms, such as greater concentration in the financial planning industry. ''[And] I am concerned whether the government appreciates what taking years-plus to debate and implement improvements to the super system does to the innovation efforts of private sector players,'' he said.

''To what extent does government innovation crowd out industry innovation? Industry cannot move forward with certainty while future rules and requirements are debated.''

A spokesman for Assistant Treasurer Bill Shorten said the government was ''determined to plug the leaks in super due to excessive fees and costs''. He said the reforms had already prompted innovation in simple low-cost super products.