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This article discusses the main impacts of the Ripoll, Henry, and Cooper reports on financial advisers and the advice industry. It covers changes to the accountants exemption and SMSFs, disclosure requirements, superannuation contribution caps, competency education, and more.
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Ripoll, Henry and Cooper- impacts on advisers and advice Graeme Colley National Technical Manager May 2010 www.ing.com.au
Government enquiries: • Ripoll • Johnson • Henry • Cooper
Main Impacts • Ripoll • Impact on the accountants exemption and SMSFs • Disclosure • Retail or wholesale clients • Henry • Changes to superannuation contributions • SG • Contribution caps; and • Low income earners • Cooper • Structure • Competency • Education • Regulation and education
The future of financial advice • The future of financial advice • Ban on conflicted remuneration structures • Adviser charging regime • Statutory fiduciary duty • Other initiatives
The future of financial advice • Chris Bowen released “The Future of Financial Advice” on 26 April 2010 • Provides details of the Government’s proposed response to the Ripoll Inquiry’s (PJC Inquiry into Financial Products and Services) recommendations • Government’s response guided by two overriding principles: • Financial advice must be in the best interest of clients • Financial advice should not be put out of reach of those who would benefit from it • Legislation required to implement these reforms • Government has indicated it will consult with stakeholders
Ban on conflicted remuneration structures • The Government has proposed a prospective ban on: • All commission payments from any financial services business, relating to the distribution and provision of advice for retail financial products • Any form of payment relating to volume or sales targets relating to the distribution and provision of advice for retail financial products • Percentage based fees can only be charged on ungeared products or investment amounts • Ban applies to all financial products (including managed investments, superannuation and margin loans) but does not initially apply to risk insurance • Further consultation is expected around potentially extending the ban to risk insurance • The ban does not initially apply to soft-dollar benefits • Further consultation will be undertaken around the best way to ban material soft-dollar payments • These measures proposed to apply from 1 July 2012
Adviser charging regime • A new regime for charging of adviser fees • Will, in part, override the proposed operation of the IFSA Super Member Charter and the FPA Financial Planner Remuneration standard • Advisers will be required to agree their fees directly with clients • Charging structure to be disclosed in a clear manner • Adviser charges to be disclosed in dollar terms • Fees can be deducted from the client’s investment • Initial fees can be charged upfront or a “payment plan” • Initial fees could be paid over an extended period • Ongoing fees require express annual renewal by the client • These measures to apply from 1 July 2012
Statutory fiduciary duty • Statutory fiduciary duty for AFSLs and authorised representatives requiring them to act in the best interests of their clients • In no circumstances is it permissible for advisers to place their own interests ahead of their clients’ interests • Will include a “reasonable steps” qualification • Allows an adviser to take “reasonable steps” to discharge their duty • Will not require an assessment of every single product in the market • If an adviser cannot recommend a product that is in the best interests of the client from their own APL then the fiduciary duty may require them to search beyond the APL or advise the client to see another adviser • This measure to apply from 1 July 2012
Other initiatives • Accountants licensing exemption on SMSF advice to be removed • Expansion of intra-fund advice measures to include: • TTR • Intra-pension advice • Nomination of beneficiaries • Super and Centrelink payments • Retirement planning • FSGs to more effectively disclose material restrictions on advice, any potential conflicts of interest and remuneration structures • Enhanced powers for ASIC in relation to licensing and banning of individuals • Expert review of the need for a statutory compensation scheme
Rumours that did not eventuate • Adding the value of your home to your assets when working out your age pension entitlement • Death taxes (taxes payable by an estate) • Land tax payable on your family home • Ending dividend imputation • Immediately increasing the GST • Abolishing tax free super for over 60s • Any other major changes to the age pension
Proposals post Henry review - super • Increase SG rate to 12% • Raise the maximum SG age from 70 to 75 • Low income earners Government contribution • Maintaining the higher concessional contribution cap
SG changes • Increase age limit for SG from 70 to 75 • Incrementally increase the SG rate to 12%, starting in 2013/14
Case study – higher SG • Jerome (25) starts working on 1 July 2010 • He earns $45,000 which increases at 4% (3% CPI plus 1% for pay raises) until he turns 65 when it flattens out • Jerome’s super returns 7% pa (3% income which is 20% franked and 4% capital gain) • He makes no contributions other than SG How much more will Jerome have in his super account if SG increases as proposed?
Low income earners government contribution • From 1 July 2012, the Government proposes to make a contribution for low income earners to compensate for contributions tax • For those with adjusted taxable income up to $37,000, the government will make a contribution equal to the lesser of: • 15% x SG contributions • $500
Case study – government contribution • Joe works for Tick Tock Pty Ltd earning $28,000 pa • His SG contributions total $2,520 ($28,000 x 9%) • The Government will make a contribution of $378 ($2,520 x 15%) to compensate Joe for his contributions tax paid
Higher concessional contribution cap • From 1 July 2012, the higher concessional cap for those 50 or older ($50,000) is set to end. • This cap is proposed to be implemented permanently • From 1 July 2012, it is only available to those with under $500,000 in super
Higher concessional contribution cap Given the $500,000 account limit: • Advisers may recommend delaying large non-concessional contributions until after retirement • Less aggressive portfolios may be used to keep under the limit • Clarification is needed as to: • When the limit will be applied (start of financial year?) • Whether the limit is to be indexed • How DB accounts and SMSFs will be valued
Case study – higher concessional cap • Stephanie (50) is a self employed choreographer with no super savings • From 1 July 2010 she intends to make the maximum concessional contribution to super each year until she retires at 60 • Stephanie’s super returns 7% pa (3% income which is 20% franked and 4% capital gains) How much more will Stephanie have in her super account if the concessional cap remains at $50,000 as proposed?
Case study – higher concessional cap Note – Stephanie is restricted to the lower cap once her balance exceeds $500,000
What is MySuper? • MySuper is a proposal from the Cooper Super System Review • Proposal is not yet final • Final report to be delivered to the Government by 30 June 2010 • Requires Government acceptance of the recommendations and legislative reform to be effective • Designed to provide a simple, cost-effective super product for those members invested in the default option in their current super fund • Replaces the “universal” part of the choice architecture model outlined in the Review’s interim report of December 2009 • No change to member choice-of-fund • MySuper is NOT a single national default fund • The Panel is not recommending such an outcome
Key elements of MySuper • MySuper structure • MySuper trustee duties • MySuper investments • MySuper insurance • MySuper fees • MySuper and advice • MySuper as a default employer super fund • MySuper retirement benefits • MySuper e-super functionality
MySuper structure • MySuper can be offered by any super fund provider • Intended that existing default fund or default investment option can be modified to conform with the MySuper product requirements • It will be possible for a member to have part of their super in the MySuper product and the balance in other investment options • Easy switching between MySuper and other options • Individual members cannot be offered more than one MySuper product (by a super provider) and they can only be defaulted into a single MySuper product • There will be situations where a mastertrust has multiple MySuper sub-funds for different employers • Reduced disclosure requirements
MySuper trustee duties • Optimising investment performance and overall cost to members • Trustee to have a clear and transparent justification for both the investment strategy and the overall cost and net return to members • Scale • Trustee to form the view on an annual basis that its MySuper product has sufficient scale to provide optimal retirement savings for its members • Only alternative is to merge with other funds if scale insufficient • Diversified asset allocation / single investment strategy • See next slide
MySuper investments • A single, diversified investment strategy designed to suit members as a whole • Appropriately diversified allocation of growth and defensive assets • May be a lifecycle strategy • Trustees to disclose targeted level of return with an indication of risk and volatility • Eg. Target of X% above inflation with a likelihood of a negative return once every Y years • To include reference to the maximum potential loss that could be reasonably expected • Emphasis on low cost, but not at the expense of investment returns
MySuper insurance • Compulsory insurance • Death cover would have to be offered on an opt-out basis • No minimum default or maximum levels specified • Trustee best placed to judge • Optional insurance • TPD and/or Income Protection (Salary Continuance) insurance would both be optional • Premium can not include or fund a sales commission or like payment • The trustee could pay brokerage for services rendered by a broker or agent on a fee for service basis
MySuper fees • No mandated overall fee cap • No entry (contribution) fees • Exit fees can be charged on a cost-recovery basis • Buy and sell spreads can be charged provided they are closely linked to costs incurred and they are paid to the fund • Switching fees can be charged provided they are paid to the fund • Restrictions apply to performance based fees • All fee schedules and discounts are to be explicit and not subject to negotiation or rebates • The Panel is considering whether the same MySuper product could be offered at different price points to different employers • To reflect differences in scale
MySuper and advice • No bundled personal advice (except for intra-fund advice) • MySuper funds must provide “free, quality information” on the fund’s website • MySuper funds must provide intra-fund advice • Cost of intra-fund advice can either be shared across the MySuper membership or charged to those who use the service • Fees for advice (outside intra-fund advice) would be on a fee-for-service basis • Negotiated between member and adviser • Paid from the member’s account • Payments for advice would require express annual renewal • No upfront or trail commission • No shelf-space or volume rebates
MySuper as a default employer super fund • Only MySuper products could be a “default” super fund for the purposes of either the Superannuation Guarantee Act or Modern Award requirements • Choice-of-fund will continue to allow employees to opt-out of the employer-chosen default fund
MySuper retirement benefits • Compulsory provision of forecasts of retirement benefits • Reference to model proposed in ASIC’s Consultation Paper 122: Superannuation Forecasts • MySuper funds to offer a post-retirement product • Either on its own or in conjunction with another product?
MySuper e-functionality • Member disclosure requirements minimised • Comprehensive information to be made available online • MySuper members could opt-in to electronic statements • PDS’s available online • SuperStream proposals for electronic administration to apply
Other Employer Super advice issues • Award Modernisation and super • Employers can generally no longer freely choose a default super fund for their employer contributions • Default funds are specified in Modern Awards (since 1 January 2010) • The eligible default fund can still include any fund to which the employer was making super contributions for the benefit of employees before 12 September 2008 • Award Modernisation does not override employee choice • The default fund nominated in the Modern Award will only apply where a member has not nominated a choice fund • Obvious impact on employer super advice • ING has a range of adviser and employer support materials to assist
Other Employer Super advice issues • Government response to Ripoll recommendations • “The Future of Financial Advice”, 26 April 2010 • Prospective ban on “conflicted remuneration structures”, including commissions and any form of volume based payment (including shelf-space fees) • Introduction of “adviser charging regime” • Requires clients to agree to fees and to annually renew • Introduction of a statutory fiduciary duty for advisers • Advisers required to act in “best interests” of clients • Includes a “reasonable steps” qualification to discharge duty • No expectation of review of every single product available • Expansion of intra-fund advice • TTR, intra-pension advice, nomination of beneficiaries, Super and Centrelink, retirement planning etc • Legislation to be released following industry consultation • Expected commencement 1 July 2010
Superstream Current problems Lack of data industry standards Multiple technology platforms Manual processes continue with some No true member identifier Employers required to make contributions to many funds No alignment of contribution and pay cycles Rollovers made difficult
Superstream • Improving data quality • Better use of technology • E-commerce solutions • Use of TFN as primary identifier • Easier consolidation of multiple member accounts • Simpler rollovers and consolidations
