The Collateral Benefits of the Super Fund Test.
The last frontier of conflicted injustice for consumers and financial advisers may be finally coming to an end with the Regulators now hellbent on holding Superannuation Trustees and Financial Advisers to account for the performance of product
Although we do not necessarily agree with the ASIC/APRA methodology with measuring performance, but it is a step in the right direction to expose and address two very serious flaws in consumer and Adviser protection that has flown under the radar for decades.
We are also hoping this will be the catalyst to enlighten and educate Canberra Bureaucrats on the difference between product manufacturing and financial advice and why they are diametrically opposed functions that need to be treated differently. This realisation should also have positive ramifications with how the CSLR funding model is calculated.
The conflicted role most Research Houses play in the advice industry should now come under the microscope after decades of avoiding scrutiny. The other calamitous consumer outcome needing scrutiny and resolution is the Managed Investment Scheme [MIS] legislation, both issues have been disastrous for consumer and Adviser protection and outcomes.
The participation of Research House input with both advice and product over the past 30 years has largely avoided accountability, their ‘all care but no responsibility’ approach when products fail is almost legendary. After taking a generous, conflicted fee to positively rate a [destined to be] failed product, they then strategically position themselves behind lawyers and disclosure statements for protection whilst Advisers are interrogated/persecuted by the Regulator and consumers mourn their losses.
We agree in theory with the Super Test direction BUT we strongly suggest Bureaucrats taking the opportunity to consult with the Advisory industry on how it should be structured and implemented. This collaborative approach by ASIC/APRA to pressure Super Trustees and Advisers into consumer centric outcomes is applauded but the flaws need addressing to be effective in our view.
Some background information.
There is currently a Treasury Enquiry into the relevance of the Managed Investment Scheme [MIS] to consumers for very good reason, this plays a significant role in the security of consumer savings and highly relevant to this paper.
This is an opportunity to address the ‘massive elephant in the room’ that has caused billions of losses for consumers since 1991 when the then known Australian Securities Commission [ASC] changed from the Prospectus assessment procedure to the current MIS regime.
When Politicians realised ASC were responsible for the contents of a Prospectus in 1991, they decided to protect ASC from litigation but in doing so inadvertently ‘threw consumers under the bus’. They replaced the Prospectus procedure with the flawed MIS system where they ‘register’ a PDS and issue a ‘caveat emptor’ warning to consumers. Naturally, consumers think ASIC has scrutinised the MIS business model/Directors giving them comfort the product is reasonable, but unfortunately for millions of consumers this is not the case. The MIS ‘tick the box’ exercise protects ASIC from potential litigation but consumers, particularly online investors are left critically exposed to fraud, flaws and manipulation without realising it until it is too late.
The recent Perth based Stirling First MIS failure is a recent classic example of a flawed product being registered for consumer use, retirees invested online with no professional advice and it collapsed resulting in the elderly residents losing life savings and their home. The irony is if they had sort advice from a professional Adviser, their PI Insurance would have protected their position.
What happens next is one of the greatest conflicts and threats to consumer security which will likely flourish within the Super Fund Test environment unless managed.
Since 1991 these less than perfect MIS structures enter the market but need traction/credibility to attract investor capital. These Managers then approach the Research House industry seeking to ‘buy’ a high rating to give consumers and Adviser’s comfort to use their product, you don’t need too much of an imagination to work out what happens next…..
What a recipe for disaster, clinically flawed products enter the market and the ‘dodgy’ Product promoters go ‘shopping’ for a high rating to attract consumer savings in a profoundly conflicted market environment.
Advisers have little choice but to rely upon Research Reports to justify product recommendations but if the product fails, ASIC immediately discounts the value of the Research Report and demands reasons why the product was approved. Attached is a list of products over the years that have failed BUT had a positive Research Rating that they had shopped around and paid for. Failed and frozen funds.
Product manufacturers paying Research Houses to rate their own product is a profoundly conflicted process which still extensively exists today. The only stakeholder that should be funding Research Houses are Advisers or non – conflicted clients, this ensures the Research House is always acting in the best interests of Advisers/consumers.
This practice is so widespread in the industry, we recommend legislation banning conflicted payments to protect all consumers and Advisers going forward. Government has banned all other conflicted renumeration impacting advice to consumers why is this allowed to happen?
A SOLUTION THAT WILL WORK.
Before any new MIS product is prepared or registered for market release its needs to be professionally assessed and rated for consumer consideration – Government can no longer deny this fundamental right for consumer security. Consumer protection is what every market stakeholder should be striving to achieve, without exception and with no excuse.
A perfect outcome for consumers and Advisers is ASIC using the Adviser Levy revenue to fund a panel of Research Houses [the panel] that rates all new MIS and current Super Fund products for consumer and Adviser direction before market release.
We suggest the panel should allocate a rating out of 10 for each product, 1 is poor and 10 excellent in the opinion of the panel. This will give consumers and Advisers a clear indication of a products worth before considering investing, the ‘caveat emptor’ approach will finally have some measurable substance for consumers and Advisers to assess and understand.
This fundamental failure of consumer protection can be levelled at all past politicians and Governments for not recognising and acting upon this critical issue for 33 years, despite numerous warnings from the AIOFP since 1998.
Peter Johnston
Executive Director
