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 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.
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.
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, i.e. you can only offer default funds in this way, you can only sell products in this way, you must operate in this way," Mr Duffield said. "At this point ... I start to get a little toey and concerned about collateral damage."
The 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 like 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 the Assistant Treasurer, Bill Shorten, said that 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.
Frequently Asked Questions about this Article…
What are the main superannuation and financial advice reforms being proposed?
The article describes two main reform areas: the Super System Review’s Stronger Super changes including MySuper (low-cost default super funds) and a planned rise in the super guarantee from 9% to 12%; and the Future of Financial Advice (FOFA) reforms, which would ban conflicted payments like commissions, require advisers to act in clients’ best interests, and force advisers to send new clients an opt-in notice every two years.
What is MySuper and how could it affect everyday investors?
MySuper is a government-backed plan to introduce simple, low-cost, no-frills default super funds expected in mid-2013. For everyday investors it aims to lower fees and simplify default options, but details such as how much pricing flexibility funds will have are still to be announced.
How will the FOFA reforms change financial adviser payments and obligations?
Under the FOFA reforms outlined in the article, conflicted payments like commissions would be banned, advisers would be legally required to act in clients’ best interests, and advisers must send new clients an opt-in notice every two years — measures intended to reduce conflicts and improve client outcomes.
Why do some industry veterans worry the reforms could 'crowd out' innovation?
Jeremy Duffield, a funds management veteran, warned that large, prescriptive policy changes and government-led “libertarian paternalism” could limit how industry competitors innovate. He argues lengthy debate and strict rules may prevent private-sector players from moving forward with certainty and could stifle new product development.
Could the reforms have unintended consequences for the financial planning industry?
Yes. The article notes concerns that FOFA and other reforms might lead to greater concentration in the financial planning industry or other unintended outcomes, such as limiting how firms compete or forcing a narrower set of product and distribution models.
How does the proposed super guarantee increase affect my retirement savings?
The government plans to raise the super guarantee from 9% to 12%, which Jeremy Duffield supported. In simple terms, higher employer contributions should increase the amount going into many workers’ super accounts over time, boosting potential retirement savings.
Who is Jeremy Duffield and why do his views on super reforms matter?
Jeremy Duffield is non-executive chairman of the Australian Centre for Financial Studies and the founder and former head of Vanguard Investments Australia, which he grew into an $80 billion operation. His experience in building a major funds manager gives weight to his concerns about how policy changes could affect industry innovation and competition.
What is the government’s response to concerns about fees, costs and innovation?
A spokesman for Assistant Treasurer Bill Shorten said the government is determined to plug the ‘leaks’ in super caused by excessive fees and costs. The spokesman also noted the reforms have already prompted innovation in simple, low-cost super products, signaling the government believes the changes will benefit investors.
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