Looking through the mists of caution necessary in an interim report, the Financial System Inquiry’s first effort is a damning assessment of how the financial system works for consumers.
And that's especially interesting at the moment coming from a former managing director of the Commonwealth Bank of Australia, David Murray.
Two observations stand out: that the current disclosure regime for financial products doesn't work and the retirement phase of superannuation “does not meet the risk management needs of many retirees”.
Until Labor’s Future of Financial Advice legislation, which the Coalition is now partially dismantling, Australia’s financial services regulation was based entirely on disclosure.
But as the FSI interim report observes, that has resulted in complex and lengthy documents that don’t help consumers understand anything, and impose significant costs on the industry. In other words it’s a total failure and hasn't helped anyone.
“Over the past decade, industry and government have made efforts to improve the quality of disclosure documents. However, a culture of legal compliance, rather than a focus on how best to inform consumers, continues to influence the design of disclosure documents.”
The interim report then goes on to torpedo the government’s opposition to FoFA and thrust of its amendments to it.
Immediately after observing that the disclosure regime is too complex and costly, the report says that consumers need access to good advice. The implication is that this is the alternative -- the key to overcoming the failures of the disclosure regime.
But: “Many consumers consider that their advice needs are currently unmet.”
Why? Because of “varying standards of advisor competence” and “the impact on conflicted remuneration structures”.
It concludes: “At times, consumers also lack access to affordable advice. In addition, some submissions question whether general advice is properly labelled and whether consumers understand its nature, given general advice often includes sales and advertising information.”
There it is. The Murray inquiry is, in effect, supporting the FoFA legislation without directly saying so - yet.
In the section on retirement the interim report is even clearer. It observes that the framework designed to help Australians save for retirement -- the superannuation guarantee system, including defaults for those who don’t engage with it -- “ceases at retirement”.
Retirees then make critical once-a-lifetime decisions regarding when and how to drawn down their savings, and how to manage all the risks involved, such as inflation and longevity.
It says: “Many retirees are unprepared for these decisions.”
The inquiry’s members clearly lean towards some form of compulsory pension.
“Australia is unusual in not encouraging its citizens to use income streams with longevity protection in retirement.”
The problem is that there are a number of regulatory barriers in the way of this.
Most of the observations in the interim report are “motherhood” statements, but the ones about how Australians are treated in saving for retirement and what happens once they get there are pointed and sharp.
Let’s hope they survive into the final recommendations, and then the government takes some notice of them.