Underinsurance and access to quality, affordable financial advice have been identified as significant consumer issues by the David Murray-led Financial System Inquiry (FSI).
The FSI has released its Interim Report, highlighting nine priority issues facing the financial system. Included among these issues is the broad heading of ‘Consumer outcomes and conduct regulation’, which covers Australia’s disclosure regime, access to quality, affordable financial advice, and underinsurance.
The Interim Report sets out a range of policy options to address each of these issues, and seeks further industry stakeholder input, in the form of second round submissions, by the end of August.
Speaking at the National Press Club in Canberra after launching the Report, FSI Chair, David Murray, said the report presented the Inquiry’s views on the objectives of the financial system and the principles that should guide its development.
“It discusses the financial system from nine different perspectives and makes 28 observations about how the system is working. These observations reflect the Inquiry’s current judgments, based on available evidence.
We welcome additional evidence from interested parties to support, challenge or give context to these observations
“We welcome additional evidence from interested parties to support, challenge or give context to these observations,” Mr Murray said.
“Throughout the report, we canvass possible options for change. These options are not draft recommendations. We’ve generally identified a broad suite of options rather than selecting a single preferred solution. We’ve included the option of no change in each case because we want to be sure that any change we recommend will deliver a better balance of policy outcomes than the status quo.”
The policy options that are likely to have the greatest bearing on financial advisers and the life insurance industry are summarised below…
Underinsurance
‘The decision to insure is a personal choice, meaning there will always be a level of non-insurance or underinsurance,’ the FSI states in its Report. ‘However, insurance can mitigate the risk of significant loss and financial hardship for consumers. In addition to the negative effect of non-insurance or underinsurance on the consumer where they suffer loss, costs can be passed on to Government and the non-government organisation sector, particularly in the case of natural disasters.’
The Report suggests that the information available on the extent of underinsurance is limited. Similarly, the FSI is seeking an agreed measure of what level of insurance is desirable.
Specifically, the FSI asks:
- Does Australia have a problem with underinsurance that warrants some form of policy response?
- How does Australia compare internationally on adequacy of insurance coverage?
- Has the issue of underinsurance been increasing over time?
- What evidence and data are available to support a conclusion about our level of underinsurance?
- What evidence and data are available to assess whether more granular risk-based pricing will lead to exclusion or further underinsurance?
- If warranted, what are possible approaches to lessen the existence of, or mitigate the impact of, underinsurance?
Quality financial advice
The FSI Report argues that financial advice is becoming increasingly important, particularly in light of mandated superannuation, the increasing number of consumers entering retirement and the complexity of some financial products. However, the FSI believes the main issue with financial advice is the variability in its quality.
According to the Report, there are a number of policy proposals that could serve to improve the quality of advice.
The FSI has asked whether the Government should:
- Raise minimum education and competency standards for personal advice (including particular standards for more complex products or structures, such as SMSFs) and introduce a national examination for financial advisers providing personal advice
- Introduce an enhanced public register of financial advisers (including employee advisers) which includes a record of each adviser’s credentials and current status in the industry, managed either by Government or industry (Note: this is among the requirements agreed with the Palmer United Party to in relation to the Government’s Future of Financial Advice amendments, see: Palmer Deal Secures FoFA Amendments).
- Enhance the power of the Australian Securities and Investments Commissions (ASIC) to include banning individuals from managing a financial services business
However, the FSI has acknowledged that it is challenging to increase the quality of advice and make it more affordable and accessible, because the cost of regulation and compliance will ultimately be passed on to consumers.
As a result, the Inquiry is also seeking feedback on:
- What opportunities exist for enhancing consumer access to low-cost, effective advice?
- What opportunities are there for using technology to deliver advice services and what are the regulatory impediments, if any, to those being realised?
- What are the potential costs or risks of this form of financial advice, and what measures could be taken to mitigate any risks?
Finally, the FSI has questioned:
- Whether there is a case to more clearly distinguish between independent and aligned advisers, and what options exist for doing this?
- Whether the Government should rename general advice as ‘sales’ or ‘product information’ and mandate that the term ‘advice’ can only be used in relation to personal advice.
Disclosure regime
As highlighted by the Report, the previous focus of consumer protection from inappropriate financial products or services was via the regulation of disclosure, rather than the products themselves.
The Report states: ‘The disclosure regime was implemented as a principles-based approach to allow maximum flexibility for product issuers. However, it has subsequently been driven by an industry culture of legal compliance, rather than a focus on how best to inform consumers. This has resulted in lengthy and complex documents, rather than short, targeted documents that highlight product features, risks and rewards.’
Some alternatives for removing disclosure requirements are proposed by the FSI, including:
- Regulating product features
- Introducing more default product designs, similar to the MySuper default superannuation funds
- Subjecting product issuers to distribution requirements to promote provision of suitable products to consumers
- Giving ASIC product intervention powers
Vertical integration
The Interim Report noted that Australia’s wealth management sector has undergone considerable consolidation since the previous financial systems review, the Wallis Inquiry.
‘Competition in the wealth management sector appears to be focused more on securing distribution channels and improving product features, rather than reducing fees,’ the Report says.
No specific policy options or issues have been identified in relation to vertical integration, however the FSI said it would welcome stakeholder views on competition issues in the broader wealth management sector.
To access a copy of the FSI Interim Report, click here.
