tag:theconversation.com,2011:/global/topics/financial-planning-2330/articlesfinancial planning – The Conversation2023-08-07T13:59:23Ztag:theconversation.com,2011:article/2100832023-08-07T13:59:23Z2023-08-07T13:59:23ZHow to build financial resilience: insurance and retirement savings are the most effective tools in South Africa – study<figure><img src="https://images.theconversation.com/files/540162/original/file-20230731-248519-drtf0d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Employment and education increase financial resilience.</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>Imagine you’ve found yourself in a difficult financial situation and needed to raise R40,000 (more than US$2,000) on the spot. Where and how would you raise these funds? Or what if a financial emergency has just taken a grip of your household? Which resources would you draw upon to address the problem?</p>
<p>If these scenarios ring true, you’re not alone. Many households are struggling to cope with unexpected financial expenses as interest rates and costs of living rise. With the global economy recovering from the impact of the COVID-19 pandemic, <a href="https://www.worldbank.org/en/publication/wdr2022/brief/chapter-1-introduction-the-economic-impacts-of-the-covid-19-crisis">developing countries</a> have been worse off. As many as <a href="https://openknowledge.worldbank.org/entities/publication/a40366b3-55db-51f2-95e6-14dffb1ce744">64% of households</a> reported a decrease in income. And South Africa was no exception.</p>
<p>A <a href="https://www2.deloitte.com/za/en/pages/consumer-industrial-products/articles/state-of-the-south-african-consumer.html">recent study</a> found that 61% of South Africans were financially stressed and struggled to meet their basic financial commitments due to a shortage of money. Further, close to 40% of respondents believed that their financial situation had worsened since 2022. </p>
<p>This points to a need for financial resilience.</p>
<p>Financial resilience is the ability to withstand and recover from financial shocks, such as an unexpected expense in a time of crisis. To understand the state of financial resilience, and the financial resources that build financial resilience, <a href="https://www.emerald.com/insight/content/doi/10.1108/IJBM-01-2023-0053/full/html?skipTracking=true">we studied</a> a nationally representative sample of 4,880 South African households across nine provinces.</p>
<p>We have been researching financial planning in South Africa and are interested in the gender dynamics in household savings. Our research found that women were, in general, more likely than men to be financially vulnerable. We also found that insurance and retirement savings were the most effective tools for increasing financial resilience.</p>
<h2>Measuring resilience</h2>
<p>We constructed an index to measure financial resilience. It was made up of the availability of savings, insurance, credit and retirement savings. Access to these instruments is a financial safety net that one can rely on in times of need. We considered access to both formal and informal sources of finance for savings, including banks, non-banks, informal savings clubs and savings at home. </p>
<p>We also included in our analysis credit from banks, non-banks, informal credit providers, and family or friends. Insurance encompassed both life and medical insurance. Finally, we examined retirement savings as contributions towards compulsory retirement funds (such as pension or provident funds) and/or voluntary retirement annuity funds.</p>
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<a href="https://theconversation.com/retired-women-in-south-africa-carry-a-huge-burden-of-poverty-177379">Retired women in South Africa carry a huge burden of poverty</a>
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<p><a href="https://www.emerald.com/insight/content/doi/10.1108/IJBM-01-2023-0053/full/html?skipTracking=true">Our research</a> also sought to examine the demographic and socioeconomic factors that could explain the differences in the levels of financial resilience between households.</p>
<h2>What we found</h2>
<p>Overall, we found low levels of financial resilience across the sample. Surprisingly, we found that insurance is the greatest contributor to building household financial resilience, followed by retirement provisions, savings and credit. However, we found that a gender gap in financial resilience exists, with men being more financially resilient than women. </p>
<p>We also found that the demographic and socioeconomic characteristics that are common between men and women also differentiate their resources levels in building financial resilience. In other words, some demographic groups have better access to financial products than others. For example, men between the ages of 45 and 59 have the highest levels of financial resilience compared to women across all age groups. Since men have <a href="https://www.statssa.gov.za/?p=14606">higher rates of labour market participation</a> and <a href="https://www.imf.org/en/Publications/fandd/issues/2020/03/africa-gender-gap-access-to-finance-morsy">greater access to financial services</a>, they also accumulate more wealth and have greater financial security.</p>
<p>On the other hand, when race is considered, we found that black and white men were more financially resilient than their female counterparts. White women remained more financially resilient than black women. Black women need to contend with the double burden of race and gender to overcome financial vulnerability.</p>
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<a href="https://theconversation.com/91-of-sub-saharan-african-workers-dont-save-for-old-age-why-thats-a-problem-and-how-to-fix-it-204766">91% of sub-Saharan African workers don't save for old age: why that’s a problem and how to fix it</a>
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<p>We also observed a gender gap in financial resilience, in favour of men, across urban and rural areas (such as farming areas and traditional villages). Financial resilience was highest among people residing in urban areas. Households in rural or farming areas tend to be <a href="https://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/---sector/documents/publication/wcms_437194.pdf#page=3">excluded from mainstream financial markets</a>, which makes it difficult to build financial resilience.</p>
<p>We found that access to economic and education opportunities increased financial resilience for women. Women with jobs and those with tertiary education were more financially resilient than their male counterparts. This reiterates the importance of women having independent access to income as it improves their economic bargaining power.</p>
<h2>How to improve resilience</h2>
<p>To improve the ability to withstand financial shocks, a few key interventions are necessary. </p>
<p>First, the uptake of life and medical insurance is strongly connected to financial resilience and can help South African households overcome an unexpected crisis. Further, policies aimed at building reserves in savings and enhancing access to credit facilities among vulnerable households can improve levels of financial resilience and economic security.</p>
<p>Since we also established that retirement provisions are a driver of financial resilience, premature access to retirement savings should be discouraged. Particularly if it’s consumption driven. The new two-pot <a href="https://www.liberty.co.za/media-insights/what-you-need-to-know-about-the-two-pot-retirement-saving-system#:%7E:text=In%20the%20new%20two%20pot,of%20withdrawing%20from%20these%20savings.">retirement saving system</a> – which proposes that a portion of retirement benefits can be withdrawn prematurely – may be helpful in the short term. But it could lead to financial vulnerability during one’s retirement years. </p>
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<a href="https://theconversation.com/south-africa-needs-to-be-creative-to-avoid-falling-off-the-retirement-cliff-72825">South Africa needs to be creative to avoid falling off the retirement cliff</a>
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<p>Second, evidence of a gender gap in financial resilience calls for the design of gender-inclusive policies and interventions. More specifically in the access and use of financial services. Current practices of charging higher interest rates to those who are financially excluded typically disadvantages women as they have less access to financial services than men. Eliminating this policy can contribute towards improving access to financial products in a way that’s both gender-neutral and equitable. </p>
<p>In addition, racial and geographic location gaps in financial resilience are underpinned by gaps in access to financial services. This needs to be considered in national policies, such as the <a href="https://www.fsca.co.za/Documents/FSCA%20Financial%20Inclusion%20Strategy.pdf">financial inclusion strategy</a>, with clear targets set for closing such gaps. </p>
<p>Exposure to economic risks, whether anticipated or unexpected, is a reality we must all contend with. The ability to withstand and overcome these risks is a good indicator of financial resilience. Having adequate and equitable access to financial products and services remains the cornerstone of financial resilience.</p><img src="https://counter.theconversation.com/content/210083/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Access to economic and education opportunities increases women’s ability to withstand and recover from financial shocks.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraAbdul Latif Alhassan, Associate Professor in Development Finance & Insurance, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1997392023-02-14T05:19:07Z2023-02-14T05:19:07ZAustralians need good financial advice more than ever to pay for soaring interest rates. Here’s how to get it<figure><img src="https://images.theconversation.com/files/509902/original/file-20230213-14-8wn940.png?ixlib=rb-1.1.0&rect=485%2C676%2C3245%2C1556&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Hundreds of thousands of us who took out fixed-rate mortgages in 2020 and 2021 are about to be hit with <a href="https://www.smh.com.au/politics/federal/fixed-rate-mortgages-will-tip-over-a-16-500-cliff-20230213-p5ck44.html">massive</a> increases in payments. </p>
<p>After nine successive interest rate increases and at least <a href="https://theconversation.com/rba-warns-of-at-least-2-more-interest-rate-rises-in-coming-months-as-the-economic-outlook-worsens-199272">two more</a> to come, those of us on variable rates will soon be paying as much as <a href="https://theconversation.com/higher-interest-rates-falling-home-prices-and-real-wages-but-no-recession-top-economists-forecasts-for-2023-198975">A$1,000</a> a month more. </p>
<p>With such an uncertain economic outlook, should we switch our super fund’s investment strategies from “growth” to “conservative”? Should we rent rather than buy while home prices fall?</p>
<p>We need answers to our financial questions – but they’re now much harder to get. </p>
<p>Five years ago, Australia had 28,000 financial advisers. Today there are <a href="https://images.theconversation.com/files/509921/original/file-20230213-24-rpgcnn.PNG">16,000</a>. That’s according to a <a href="https://treasury.gov.au/review/quality-advice-review">review of financial advice</a> commissioned by the previous government and released by the Albanese government last week. </p>
<p>Thousands of advisers are <a href="https://www.afr.com/companies/financial-services/financial-adviser-workforce-set-to-halve-by-2023-20210409-p57hsg">leaving the industry</a> each year. The ones that remain are charging far more than they used to – $3,710 is said to be common, up 48% in five years, and enough to turn many people away.</p>
<p>So how did it come to this? And what does the new report recommend we do to make it easier for more Australians to get good, more affordable financial help? </p>
<h2>Fixing rorts, where even dead people paid a price</h2>
<p>This is a story about how Australia, under successive Labor and Coalition governments, let aiming for what’s perfect get in the way of what’s good. Up until I read the <a href="https://treasury.gov.au/review/quality-advice-review">Quality of Advice Review</a> last week, I was guilty of doing it too.</p>
<p>For years, I argued we should make financial advice <a href="https://www.smh.com.au/opinion/the-fee-we-pay-when-we-dont-know-were-paying-a-fee-20140111-30ndn.html">perfect</a>: delivered by genuinely professional advisers, who weren’t receiving kickbacks from firms wanting access to our money. I also argued we should pay for that advice in full upfront, because, whatever the cost, the advice will save us money in the long run.</p>
<p>We needed to do something. Back before a series of explosive <a href="https://www.abc.net.au/news/2014-05-05/banking-bad/5433156">Four Corners</a> reports and the 2019 <a href="https://www.royalcommission.gov.au/banking/final-report">Hayne royal commission</a> into the financial services industry, advisers and the funds they pushed us towards sucked money out of our accounts and presented us with options that made money for them – rather than us.</p>
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<a href="https://theconversation.com/royal-commission-scandals-the-result-of-poor-regulation-not-literacy-99441">Royal commission scandals the result of poor regulation, not literacy</a>
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<p>The consequences were shocking. Dead people were being charged for financial advice, and even for life insurance. Gym instructors and other “<a href="https://www.smh.com.au/entertainment/books/how-the-banks-went-bad-and-what-can-be-done-about-it-20190819-p52igw.html">introducers</a>” were used to lure people into products that charged unnecessarily high fees. </p>
<p>The professionals we now call investment advisers used to be called insurance salesmen. They were paid through commissions to beguile us into signing up for products that charged high fees and paid them high <a href="https://www.smh.com.au/opinion/the-fee-we-pay-when-we-dont-know-were-paying-a-fee-20140111-30ndn.html">ongoing commissions</a>.</p>
<h2>Unintended results of tougher standards</h2>
<p>Ahead of the Hayne royal commission, things began to change. </p>
<p>The Rudd Labor government outlawed commissions and introduced legislation requiring advisers to “<a href="https://www.theage.com.au/business/financial-advisers-super-slice-to-get-axe-20100425-tlod.html">place clients’ interests ahead of their own</a>”. After winning government, the Coalition <a href="https://www.smh.com.au/business/banking-and-finance/how-the-coalition-ran-interference-for-the-banks-20180425-p4zbjz.html">tried to undo</a> the changes, before adopting <a href="https://cdn.treasury.gov.au/uploads/sites/1/2019/02/FSRC-Government-Response-1.pdf">just about the lot</a> after Hayne reported.</p>
<p>It’s now illegal for financial advisers to accept commissions (although mortgage brokers and people who sell insurance still can) and illegal to offer advice that isn’t in the “<a href="https://www.afr.com/companies/financial-services/the-four-things-hayne-changed-20200129-p53vnr">best interests</a>” of the customer taking almost everything into account. This makes it all but impossible for bank tellers and super funds to offer advice.</p>
<p>So I have been having second thoughts about the arguments I once made for no commissions, best interests, and lots of disclosure documents – especially after reading the <a href="https://treasury.gov.au/review/quality-advice-review">Quality of Advice Review</a>. Ironically, its release was largely drowned out by coverage of Australians’ growing financial stress.</p>
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<p>The report’s author Michelle Levy is a <a href="https://www.allens.com.au/people/l/michelle-levy/#:%7E:text=About%20Michelle%20Levy,and%20industry%20and%20corporate%20funds.">senior lawyer</a> and expert on superannuation, life insurance, distribution and financial services law. </p>
<p>As well as being a partner at Allens, she’s also a parent – and knows more than most how vile predatory financial advisers can be.</p>
<p>During the royal commission, we heard about a man with Down syndrome who was signed up for life insurance over the phone, even though he lived on a pension, had no dependants and could not afford the premiums. </p>
<p>In her review, Levy discloses that she has a daughter who, “like this gentleman”, lives with a disability and has bank accounts, but does not know the difference between $10 and $1,000, does not know how to use a credit card, or what superannuation is.</p>
<p>Levy writes that her daughter ought to be able to rely on her bank and super fund to assist her. </p>
<p>She says by stopping firms from providing advice that isn’t perfect, we’ve inadvertently stopped our financial institutions from providing advice that is “good”. We have made it hard for human beings to help each other.</p>
<h2>Why ‘good’ might be a better benchmark than ‘best’</h2>
<p>So Levy wants to allow super funds and banks to offer advice which is “<a href="https://treasury.gov.au/review/quality-advice-review">good</a>” but isn’t comprehensive, in the same way as sales assistants are able to offer advice on clothes and mechanics are able to offer advice on cars.</p>
<p>Good advice does not mean “okay advice” or “good enough” advice, she says. </p>
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<p>It is unlikely to be good advice to recommend a poorly performing superannuation product. It will not be good advice to recommend that a person who is unable to pay their mortgage open a term deposit. </p>
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<p>If the advice isn’t good, the full force of the existing law will come down on the person who provides it (the maximum penalty for an individual is $1.11 million). But it needn’t be comprehensive; not every piece of financial advice needs to be a lifetime plan.</p>
<p>What Levy is proposing, and what the government is now considering, is more subtle than what we are doing at the moment – which is simply banning self-interested parties from giving advice. </p>
<p>Levy wants to allow the self-interested to give advice, while ensuring it “also serves the interests of their customers”.</p>
<p>In the meantime, if you are in serious financial difficulty (rather than simply needing advice) the <a href="https://ndh.org.au/about-national-debt-helpline/contact-us/">National Debt Helpline</a> is one of a number of places that can help. You can request a free, confidential meeting with a financial counsellor on 1800 007 007.</p>
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<a href="https://theconversation.com/why-would-you-dump-a-requirement-for-financial-advisers-to-give-advice-thats-in-their-clients-best-interests-193719">Why would you dump a requirement for financial advisers to give advice that's in their client's best interests?</a>
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<img src="https://counter.theconversation.com/content/199739/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Five years ago, Australia had 28,000 financial advisers. Today there are 16,000. So where can you get financial advice? A new report offers a good answer – and it’s something I used to argue against.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1937192022-12-14T19:02:55Z2022-12-14T19:02:55ZWhy would you dump a requirement for financial advisers to give advice that’s in their client’s best interests?<figure><img src="https://images.theconversation.com/files/500950/original/file-20221214-16-i1dktw.jpg?ixlib=rb-1.1.0&rect=0%2C431%2C4000%2C1814&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The findings about advisers in the landmark 2019 financial services royal commission couldn’t have been more stark.</p>
<p>Time after time financial advisers <a href="https://www.royalcommission.gov.au/banking/interim-report">were found to have</a>:</p>
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<li><p>lacked skill and judgement</p></li>
<li><p>proposed actions that benefited the adviser</p></li>
<li><p>been unwilling to find out whether poor advice had been given</p></li>
<li><p>been unwilling to take timely steps to put bad advice right.</p></li>
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<p>The result was a series of radical, but long-awaited changes in the industry, ranging from mandating a bachelor’s degree to enforcing ongoing professional development to introducing a legally-enforceable code of ethics. </p>
<p>Around <a href="https://www.rainmaker.com.au/media-release/australias-financial-adviser-numbers-in-2024">10,000</a> of the industry’s 25,000 advisers left, most retail banks offloaded their advice arms, and the median annual fee for ongoing advice climbed 40% from A$2,510 to <a href="https://www.ardata.com.au/wp-content/uploads/2022/05/AFALandscape2022-AB_R2.pdf">$3,529</a>.</p>
<h2>‘Best interests’ or ‘good advice’?</h2>
<p>In response, ahead of this year’s election the then financial services minister Jane Hume commissioned a <a href="https://treasury.gov.au/review/quality-advice-review">quality of advice review</a>, which is due to hand its final report to the new financial services minister Stephen Jones on Friday.</p>
<p>Ahead of its final report the review has published 12 <a href="https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf">draft proposals</a> intended to make advice more affordable and accessible.</p>
<p>One of them would replace the present requirement for advisers to give advice that is in their clients “<a href="https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/acting-in-the-client%CA%BCs-best-interests/">best interests</a>” with advice that is merely “<a href="https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf">good advice</a>”.</p>
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<p>If that is what the review recommends, and if the recommendation is adopted, while stand-alone financial planners would still be required to provide advice that was in their client’s best interests (because of their code of ethics) banks, super funds and other providers would be able to give a lesser standard of advice.</p>
<p>The core justification is reducing “<a href="https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf">regulatory complexity and burden while improving the quality of advice</a>”. </p>
<p>While it would certainly aid in reducing the compliance burden, and would make advice more accessible, it isn’t obvious that it would improve the quality of advice.</p>
<h2>Poorly defined</h2>
<p>The best interests duty requires advisers to put the client’s interests first, to make sure the advice is right for each particular client, and to warn the client if the advice is based on insufficient information.</p>
<p>“Good advice” is defined simply as advice “reasonably expected to benefit clients”. Unless better defined, it will be a definition that leaves a lot to interpretation. </p>
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<a href="https://theconversation.com/adviser-reforms-will-undermine-a-royal-commission-recommendation-192325">Adviser 'reforms' will undermine a royal commission recommendation</a>
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<p>What banks and super funds believe they “reasonably expect” to be best for their customers, might not necessarily align with what’s best for their customers.</p>
<p>While removing red tape is important, removing regulations that require advisers to act in their clients’ best interests might not be in their clients’ best interests.</p>
<p>On Friday Stephen Jones will have to begin to consider whether “good advice” is good enough. It’s not a decision he should take lightly.</p><img src="https://counter.theconversation.com/content/193719/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ama Samarasinghe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>On Friday the government will receive a report likely to recommend a requirement for advice in a client’s “best interests” be replaced with a requirement to give mere “good advice”.Ama Samarasinghe, Lecturer, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1923252022-10-25T01:32:03Z2022-10-25T01:32:03ZAdviser ‘reforms’ will undermine a royal commission recommendation<figure><img src="https://images.theconversation.com/files/489948/original/file-20221017-15-q746s6.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4896%2C2462&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>If you were facing open-heart surgery you’d want to know your surgeon was qualified. Or, if you were going to court, that your lawyer was specialised in the relevant area of law. </p>
<p>Should you expect any less from a financial adviser, with whom you may entrust your life savings and financial security?</p>
<p>Even before the revelations of the <a href="https://www.royalcommission.gov.au/banking">Hayne royal commission</a> into misconduct in financial services, the need for greater professionalisation of financial advisers was acknowledged. </p>
<p>In 2017, the Turnbull government <a href="https://ministers.treasury.gov.au/ministers/kelly-odwyer-2016/media-releases/higher-standards-financial-advisers-commence">made reforms</a> that included a code of ethics, a requirement to pass an exam, and the need to hold a “relevant degree” – meeting <a href="https://fas.treasury.gov.au/">Financial Adviser Standards</a> set by Treasury and covering 11 knowledge areas (see table below).</p>
<p>This has been expected of new financial planners since 2019. Those already in the business have until 2026 to comply.</p>
<p>But now the federal government is considering watering down these standards. </p>
<h2>Broader ‘pathways’</h2>
<p>A Treasury <a href="https://treasury.gov.au/sites/default/files/2022-08/c2022-306020-consult-paper.pdf">consultation paper</a> proposes to waive the requirement for advisers with at least ten years’ experience and “a clean record of financial
practice”. This will fulfil Labor’s <a href="https://www.moneymanagement.com.au/news/financial-planning/labor-govt-would-abandon-uni-requirement-advisers-10-years">election promise</a> to create an “experience pathway”.</p>
<p>The paper also proposes lowering the degree requirements for everyone else. </p>
<p>Instead of an approved degree having to cover 11 knowledge areas, it will only have to cover five – dropping the areas of superannuation, retirement, estate planning, insurance, investments and financial plan construction. </p>
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<p>The intention, the consultation paper says, is “that a broader range of degrees become eligible as entry pathways to the financial advice profession”. </p>
<p>The motivation for this isn’t spelled out, but is almost certainly due to a huge decline in the number of financial advisers – by almost 40% in the past three years, according to <a href="https://www.rainmaker.com.au/media-release/australias-financial-adviser-numbers-in-2024">Rainmaker Information</a>, a research company that specialises in the financial services industry. </p>
<p>But it’s hard to see how the move will help the industry become a profession, with similar standards to the rules that regulate doctors, lawyers or accountants.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-are-we-teaching-in-business-schools-the-royal-commissions-challenge-to-amoral-theory-110901">What are we teaching in business schools? The royal commission's challenge to amoral theory</a>
</strong>
</em>
</p>
<hr>
<h2>Regulatory ‘tsunami’</h2>
<p>Rainmaker’s report, <a href="https://www.rainmaker.com.au/media-release/australias-financial-adviser-numbers-in-2024">published last month</a>, says the number of financial advisers in Australia has declined from 26,500 in 2019 to about 16,700.</p>
<p>In February, the Assistant Treasurer and Minister for Financial Services, Stephen Jones (then still the opposition spokesperson), blamed this decline on a poorly managed “<a href="https://www.ifa.com.au/news/31121-stephen-jones-lays-out-transition-arrangement-plans-for-advisers">tsunami of regulatory changes</a>”.</p>
<figure class="align-center ">
<img alt="Assistant Treasurer and Minister for Financial Services Stephen Jones addresses parliament on August 2 2022." src="https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491497/original/file-20221024-21302-hpn8qj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Assistant Treasurer and Minister for Financial Services Stephen Jones addresses parliament on August 2 2022.</span>
<span class="attribution"><span class="source">Mick Tsikas/AAP</span></span>
</figcaption>
</figure>
<p>Some, such as the degree requirement, predate the Hayne royal commission. Others stem from it. </p>
<p>The <a href="https://www.afa.asn.au/">Association of Financial Advisers</a>, which represents several thousand advisers, says extra compliance imposed by the Australian Securities and Investments Commission following the royal commission has “<a href="https://www.news.com.au/finance/money/financial-advisers-leave-sector-in-droves-due-to-unfair-regulatory-compliance-burdens-consumers-pay-more/news-story/acbdd3392dcf0bc592836b022a310906">broken</a>” the industry.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/asic-now-less-a-corporate-watchdog-more-a-lapdog-167532">ASIC, now less a corporate watchdog, more a lapdog</a>
</strong>
</em>
</p>
<hr>
<p>One directly affecting incomes is the ban (since January 2021) on receiving ongoing commissions from companies for selling those companies’ super, investment and insurance products. </p>
<p>Banning these payments, known as “<a href="https://www.canstar.com.au/superannuation/grandfathered-commissions/">grandfathered commissions</a>”, was a key recommendation of the banking royal commission. They had been worth <a href="https://www.ifa.com.au/news/29820-asic-report-reveals-impact-of-commission-ban">$800 million</a> to financial advisers the previous year. </p>
<p>Incomes will be reduced further if the government proceeds with a proposal to ban <a href="https://www.afr.com/companies/financial-services/insurers-industry-funds-at-loggerheads-over-adviser-commissions-20220627-p5awym">commissions on life insurance</a> sales.</p>
<h2>Specialist knowledge needed</h2>
<p>Reducing degree requirements will somewhat reduce the burden now faced by financial advisers. The question is whether it will offset the other factors that make the job unappealing.</p>
<p>Lowering education standards will certainly do nothing to give the community more confidence in the industry.</p>
<p>Given the increasing complexity of financial products and the connection of the different advice areas, specialist knowledge is increasingly needed. </p>
<p>When recommending insurance cover, for example, an adviser must know more than just the types of cover and products. There are rules around beneficiary nomination, which is also part of estate planning. There are options to pay for insurance from your superannuation, which may affect your retirement balance. There are different tax consequences for different options.</p>
<p>Cutting back educational requirements in these areas is unlikely to improve the overall quality of advice.</p>
<p>Hitting the brakes on professionalisation exposes clients to greater risk and lays the foundation for another royal commission into financial services. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/do-no-harm-isnt-enough-why-the-banking-royal-commission-will-ultimately-achieve-little-116076">'Do no harm' isn't enough. Why the banking royal commission will ultimately achieve little</a>
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</em>
</p>
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<p>In <a href="https://www.royalcommission.gov.au/system/files/2020-09/fsrc-volume-1-final-report.pdf">his final report</a>, Commissioner Kenneth Hayne endorsed the 2017 educational reforms. The “prevention of poor advice begins with education and training”, he stated, adding:</p>
<blockquote>
<p>I believe that, as they come into effect, the new education requirements will improve the quality of advice that is given, and improve the way that financial advisers manage the conflicts of interest with which they are faced.</p>
</blockquote>
<p>Watering down these education requirements as proposed will not improve the quality of financial advice. It will only slow the path to professionalising the industry.</p><img src="https://counter.theconversation.com/content/192325/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gurbinder Gill does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Lowering education standards for financial adviser will do nothing to give the community more confidence in the industry.Gurbinder Gill, Teaching Scholar, Financial Planning - Department of Accounting, Faculty of Business and Law, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1704702021-12-26T20:27:49Z2021-12-26T20:27:49ZShould I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself<figure><img src="https://images.theconversation.com/files/430648/original/file-20211107-17-1ax4spl.jpg?ixlib=rb-1.1.0&rect=9%2C4%2C2994%2C1985&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>At a certain point in life, many wonder what’s better: to pay off the home loan ASAP or top up your superannuation?</p>
<p>If your emergency cash buffer looks OK and you have enough to cover you for around three to six months if you lost your job, the super versus mortgage question is a good one to ponder. There’s no one-size-fits-all answer.</p>
<p>On the face of it, there’s a compelling case for building up your super; you can take advantage of the <a href="https://moneysmart.gov.au/budgeting/compound-interest-calculator">magic of compound interest</a> (and, potentially, some <a href="https://moneysmart.gov.au/grow-your-super/super-contributions">tax breaks</a> as well) – all while interest rates on mortgages are low. </p>
<p>If you’re getting <a href="https://www.superannuation.asn.au/media/media-releases/2021/media-release-29-june-2021">8% compound interest on super</a> and paying only 3% on your mortgage, building up super might seem a good option. </p>
<p>But financial decisions are about psychology as well as numbers. Much depends on your debt comfort zone.</p>
<p>It’s best to seek professional assistance from a <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">financial counsellor</a> or adviser. But here are some questions to consider along the way.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-your-ex-may-be-able-to-claim-half-your-superannuation-even-if-you-arent-married-169465">Why your ex may be able to claim half your superannuation, even if you aren't married</a>
</strong>
</em>
</p>
<hr>
<h2>1. Am I ‘on track’ to have enough super upon retirement?</h2>
<p>Use the government’s Moneysmart <a href="https://moneysmart.gov.au/retirement-income/retirement-planner">retirement planners</a> or your super fund’s calculator to check. </p>
<p>If it’s looking sparse – perhaps due to career breaks or part-time work – you might consider <a href="https://www.ato.gov.au/individuals/super/growing-your-super/adding-to-your-super/salary-sacrificing-super/">salary sacrificing</a> extra into your super (on top of what your employer already puts in there). </p>
<p>An additional A$50 a week, for example – even just for a few years – can help remedy your meagre super projections. </p>
<p>According to <a href="https://moneysmart.gov.au/grow-your-super/super-contributions">Moneysmart</a>:</p>
<blockquote>
<p>The payments, called concessional contributions, are taxed at 15%. For most people, this will be lower than their marginal tax rate. You benefit because you pay less tax while you boost your retirement savings […] The combined total of your employer and salary sacrificed concessional contributions must not be more than $27,500 per financial year.</p>
</blockquote>
<p>Try the <a href="https://www.industrysuper.com/understand-super/salary-sacrifice-calculator/">Industry Super</a> or <a href="https://moneysmart.gov.au/grow-your-super/super-contributions-optimiser">Moneysmart</a> calculators to see how much extra you’d have at retirement if you salary sacrificed into super for a few years. Consider seeking advice from your super fund on your super investment options and Age Pension entitlements.</p>
<p>You might also consider an after-tax <a href="https://www.ato.gov.au/individuals/super/growing-your-super/adding-to-your-super/personal-super-contributions/">personal super contribution</a> (that is, putting extra money from savings or from your take-home pay into super). The contributions may be <a href="https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/claiming-deductions-for-personal-super-contributions/">tax deductible</a>, but even if not, the returns in super are tax friendly.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A middle aged couple do financial planning together on a laptop." src="https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Are you ‘on track’ to have enough super upon retirement? Use online calculators to find out.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>2. What about the pension?</h2>
<p>Are you expecting a full Age Pension? To find out if you’re likely to qualify for one, use an <a href="https://www.superguide.com.au/in-retirement/age-pension-calculator">online calculator</a> or ask your super fund. People with “too much super” don’t get the pension (although most retirees get some part pension). For some, the more you put into super, the <a href="https://grattan.edu.au/wp-content/uploads/2020/03/Grattan-Institute-sub-balancing-act-retirement-income-review.pdf">less you get in Age Pension payments</a>. </p>
<p>For single homeowners, the total asset threshold for a full Age Pension is $270,500 (including super but excluding your main residence), while the part-Age Pension threshold is $593,000. For couple homeowners, the combined total asset threshold for a part-Age Pension is $891,500 (also including super but excluding the main residence).</p>
<p>If you’re on a median income and your super balance is predicted to land between the lower and upper asset thresholds for the pension, <a href="https://grattan.edu.au/wp-content/uploads/2020/03/Grattan-Institute-sub-balancing-act-retirement-income-review.pdf">some models predict</a> that for every extra $1,000 put into super at age 40, you would only be around $25 per year better off in terms of retirement income (due to the tapering off in eligible Age Pension income). </p>
<p>For people on low incomes, extra super contributions may not be the answer at all if the result is more financial stress during your working life and immediate housing security risk. </p>
<h2>3. If I retired with a mortgage, could I cope?</h2>
<p>Many people end up retiring earlier than planned, due to health or other issues.</p>
<p>If you were still paying off your mortgage at retirement, would you feel comfortable about that? Or would it be a source of worry?</p>
<p>Traditionally, most people enter retirement having paid off their home loan but now <a href="https://theconversation.com/more-people-are-retiring-with-high-mortgage-debts-the-implications-are-huge-115134">more are approaching retirement</a> with some mortgage remaining. It might not be the end of the world if you had $100,000 left on the mortgage when you stop working. After all, most people can draw out <a href="https://moneysmart.gov.au/retirement-income/super-lump-sum">some (or if over 60 potentially all) of their super</a> tax free at retirement to pay off mortgage debt. Doing so carries risks but for some people it could even increase their Age Pension entitlement (as your primary residence is exempt from pension assets tests while super is not). </p>
<p>The wealth accumulation in superannuation is going to outpace the interest on a mortgage in most cases for some time, even after you retire. Even so, you might feel it’s worth making the last vestiges of your debt go away in retirement so you can stop worrying about it.</p>
<figure class="align-center ">
<img alt="An older same sex couple laugh together in the garden." src="https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">If you and your partner retired with a mortgage debt, would you feel OK about that or would it be a source of worry?</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>4. Will the choices I make today cost me later – and am I OK with that?</h2>
<p>Australian property values have skyrocketed and many have borrowed more to pay for renovations. The full “cost” of a renovation may not be apparent at first. </p>
<p>The true cost of a $150,000 renovation over the next 20 years could be more like $700,000. How? Well, if that $150,000 was put into a balanced allocation in super for a couple of decades, it would likely grow to be about $700,000. That’s compound interest for you. You’d hope to get that in capital gains from the renovation.</p>
<p>But it’s never just about the finances. The extra mortgage might be worth it because it paid for a home that brings comfort and joy (as well as the capital gains).</p>
<p>Likewise, paying off your mortgage ASAP might mean forgoing the extra you’d get if you’d put it in super. But for some, wiping out a mortgage will be worth it to be debt-free. Perhaps after the mortgage is gone, you can maximise salary sacrificing into super until retirement, while also reducing your tax bill. </p>
<h2>At least do the sums</h2>
<p>There’s always more than one solution. To know what’s right for you, you’ll need to get advice for your personal circumstances. </p>
<p>But it’s good to look at where your super is now and where it’s heading, and <a href="https://www.canstar.com.au/home-loans/debt-income-ratio/">calculate your debt-to-income ratio</a> (debt divided by income). It’s often used to guage how serious (or not) your debt is. Lenders and regulators might consider a debt-to-income ratio over <a href="https://www.apra.gov.au/sites/default/files/2021-09/Quarterly%20authorised%20deposit-taking%20institution%20property%20exposure%20statistics%20-%20Highlights%20June%202021.pdf">six times your income to be “high”</a>, but your personal debt comfort zone might be much lower. </p>
<p>Emotions play a bigger part in financial planning than many like to admit. Desire to pay off a mortgage quickly can be influenced by how you were raised, feelings of anxiety and stigma that often come with debt, and Australia’s cultural bias toward debt-free home ownership.</p>
<p>Depending on circumstances though, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. At least do the sums, so you can make an informed choice.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/my-super-fund-just-failed-the-apra-performance-test-whats-next-166956">My super fund just failed the APRA performance test. What's next?</a>
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</em>
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<p><em>Correction: an earlier version of this article included a specific amount that can be withdrawn from superannuation at retirement, however this changes depending on retirement age so it was removed.</em></p><img src="https://counter.theconversation.com/content/170470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Di Johnson has received research funding in the past from the Financial Planning Education Council (FPEC), and contributed to projects partly funded or supported by financial planning industry partners. She is a Fellow of the Higher Education Academy, an academic member of the Financial Planning Association (FPA), a member of FPEC (Australia), the US Academy of Financial Services (AFS), and the Economics Society of Australia (ESA) including the Women in Economics Network (WEN). This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>Depending on circumstances, it may be time to re-think the bias to paying down housing debt over wealth accumulation in super. At least to do the sums, so you can make an informed choice.Di Johnson, Lecturer in Finance, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1616742021-06-13T20:06:43Z2021-06-13T20:06:43ZIs it worth selling my house if I’m going into aged care?<figure><img src="https://images.theconversation.com/files/405528/original/file-20210610-39379-d3pfs8.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C998%2C661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-real-estate-sign-board-text-1779607850">Shutterstock</a></span></figcaption></figure><p>For senior Australians who cannot live independently at home, residential aged care can provide accommodation, personal care and general health care.</p>
<p>People usually think this is expensive. And many assume they need to sell their home to pay for a lump-sum deposit.</p>
<p>But that’s not necessarily the case. Here’s what you need to consider.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/so-youre-thinking-of-going-into-a-nursing-home-heres-what-youll-have-to-pay-for-114295">So you're thinking of going into a nursing home? Here's what you'll have to pay for</a>
</strong>
</em>
</p>
<hr>
<h2>You may get some financial support</h2>
<p>Fees for residential aged care are complex and can be confusing. Some are for your daily care, some are means-tested, some are for your accommodation and some pay for extras, such as cable TV.</p>
<p>But it’s easier to think of these fees as falling into two categories:</p>
<ul>
<li><p>an “entry deposit”, which is usually more than <a href="https://www.health.gov.au/sites/default/files/documents/2020/06/eighth-report-on-the-funding-and-financing-of-the-aged-care-industry-july-2020-eighth-report-on-the-funding-and-financing-of-the-aged-care-industry-may-2020.pdf">$A300,000</a>, and is refunded when you leave aged care </p></li>
<li><p>daily “<a href="https://www.myagedcare.gov.au/aged-care-home-costs-and-fees">ongoing fees</a>”, which are $52.71-$300 a day, or more. These cover the basic daily fee, which everyone pays, and the means-tested care fee.</p></li>
</ul>
<p>To find out how much government support you’ll receive for both these categories, you will have a “<a href="https://www.myagedcare.gov.au/income-and-means-assessments/#aged-care-home">means test</a>” to assess your income and assets. This means test is similar (but different) to the means test for the aged pension.</p>
<p>Generally speaking, the lower your aged-care means test amount, the more government support you’ll receive for aged care.</p>
<p>With full support, you don’t need to pay an “entry deposit”. But you still need to pay the basic daily fee (currently, <a href="https://www.myagedcare.gov.au/aged-care-home-costs-and-fees">$52.71</a> a day), equivalent to 85% of your aged pension. If you get partial support, you pay less for your “entry deposit” and ongoing fees.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-to-check-if-your-mum-or-dads-nursing-home-is-up-to-scratch-123449">How to check if your mum or dad's nursing home is up to scratch</a>
</strong>
</em>
</p>
<hr>
<h2>You don’t need a lump sum</h2>
<p>You don’t have to pay for your “entry deposit” as a lump sum. You can choose to pay a rental-style daily cost instead.</p>
<p>This is calculated as follows: you multiply the amount of the required “entry deposit” by the maximum permissible interest rate. This rate is set by government and is currently at <a href="https://www.health.gov.au/sites/default/files/documents/2021/03/schedule-of-fees-and-charges-for-residential-and-home-care-schedule-from-20-march-2021_0.pdf">4.01%</a> per year for new residents. Then you divide that sum by 365 to give a daily rate. This option is like borrowing money to pay for your “entry deposit” via an interest-only loan.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"626991737660010501"}"></div></p>
<p>You can also pay for your “entry deposit” with a combination of a lump sum and a daily rental cost.</p>
<p>As it’s not compulsory to pay a lump sum for your “entry deposit”, you have different options for dealing with your family home.</p>
<h2>Option 1: keep your house and rent it out</h2>
<p>This allows you to use the rental-style daily cost to finance your “entry deposit”. </p>
<p><strong>Pros</strong></p>
<ul>
<li><p>you could have more income from rent. This can help pay for the rental-style daily cost and “ongoing fees” of aged care</p></li>
<li><p>you might have a special sentimental attachment to your family house. So keeping it might be a less confronting option</p></li>
<li><p>keeping an expensive family house will not heavily impact your residential aged care cost. That’s because any value of your family house above <a href="https://www.health.gov.au/sites/default/files/documents/2021/03/schedule-of-fees-and-charges-for-residential-and-home-care-schedule-from-20-march-2021_0.pdf">$173,075.20</a> will be excluded from your <a href="https://www.servicesaustralia.gov.au/organisations/health-professionals/services/aged-care-entry-requirements-providers/residential-care/residential-aged-care-means-assessment">means test</a></p></li>
<li><p>you can still access the capital gains of your house, as house prices rise.</p></li>
</ul>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Lease sign on front fence of house" src="https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405552/original/file-20210610-15-3u26en.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Renting out your house can be an option.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sign-lease-front-old-residential-house-1492504154">from www.shutterstock.com</a></span>
</figcaption>
</figure>
<p><strong>Cons</strong></p>
<ul>
<li><p>your rental income needs to be included in the means test for your aged pension. So you might get less aged pension</p></li>
<li><p>you might need to pay income tax on the rental income</p></li>
<li><p>compared to the lump sum payment, choosing the rental-style daily cost means you will end up <a href="https://www.smh.com.au/money/super-and-retirement/seek-help-when-weighing-up-how-to-pay-for-your-aged-care-20191202-p53g16.html">paying more</a> </p></li>
<li><p>you are subject to a changing rental market.</p></li>
</ul>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/home-owning-older-australians-should-pay-more-for-residential-aged-care-131565">Home-owning older Australians should pay more for residential aged care</a>
</strong>
</em>
</p>
<hr>
<h2>Option 2: keep your house and rent it out, with a twist</h2>
<p>If you have some savings, you can use a combination of a lump sum and daily rental cost to pay for your “entry deposit”. </p>
<p><strong>Pros</strong></p>
<ul>
<li><p>like option 1, you can keep your house and have a steady income</p></li>
<li><p>the amount of lump sum deposit will not be counted as an asset in the pension means test.</p></li>
</ul>
<p><strong>Cons</strong></p>
<ul>
<li><p>like option 1, you could have less pension income, higher age-care costs and need to pay more income tax</p></li>
<li><p>you have less liquid assets (assets you could quickly sell or access), which could be handy in an emergency.</p></li>
</ul>
<h2>Option 3: sell your house</h2>
<p>If you sell your house, you can use all or part of the proceeds to pay for your “entry deposit”.</p>
<p><strong>Pros</strong></p>
<ul>
<li><p>if you have any money left over after selling your house and paying for your “entry deposit”, you can invest the rest</p></li>
<li><p>as your “entry deposit” is exempt from your aged pension means test, it means more pension income.</p></li>
</ul>
<p><strong>Cons</strong></p>
<ul>
<li>if you have money left over after selling your house, this will be included in the aged-care means test. So you can end up with less financial support for aged care.</li>
</ul>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-adds-value-to-your-house-how-to-decide-between-renovating-and-selling-140627">What adds value to your house? How to decide between renovating and selling</a>
</strong>
</em>
</p>
<hr>
<h2>In a nutshell</h2>
<p>Keeping your house and renting it out (option 1 or 2) can give you a better income stream, which you can use to cover other living costs. And if you’re not concerned about having access to liquid assets in an emergency, option 2 can be better for you than option 1.</p>
<p>But selling your house (option 3) avoids you being exposed to a changing rental market, particularly if the economy is going into recession. It also gives you more capital, and you don’t need to pay a rental-style daily cost.</p>
<hr>
<p><em>This article is general in nature, and should not be considered financial advice. For advice tailored to your individual situation and your personal finances, please see a qualified financial planner.</em></p>
<p><em>Correction: this article previously stated the amount of lump sum deposit will not be counted as an asset in the aged-care means test, as a pro of option 2. In fact, the amount of lump sum deposit will not be counted as an asset in the pension means test.</em></p><img src="https://counter.theconversation.com/content/161674/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Colin Zhang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>You may not need to sell the family home before entering aged care. There are other options.Colin Zhang, Lecturer, Department of Actuarial Studies and Business Analytics, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1253872019-10-17T10:28:08Z2019-10-17T10:28:08ZHow much do you need to retire? £10,200 a year at a minimum<figure><img src="https://images.theconversation.com/files/297466/original/file-20191017-98674-p303kv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The earlier you start saving for retirement, the better.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Retirement is changing. Following more than a century of increases in life expectancy, one in every five people in the UK <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/articles/overviewoftheukpopulation/august2019">is 65 years and over</a>. This ageing population presents some big challenges, not least when it comes to financial planning.</p>
<p>To provide people with a sound basis on which to make decisions about the kind of life they want in retirement – and how much they will need to pay for it – colleagues and I have spent the past year and a half working out <a href="https://www.retirementlivingstandards.org.uk/developing_rls_research_report.pdf">two different levels of retirement living standards</a>. We’ve spoken to 250 people, building on our <a href="http://www.minimumincomestandard.org/">wider research</a> into what income is required for people to meet their material needs and participate in society.</p>
<p>For single retirees who want a minimum standard of living – to meet their basic needs and have a little left over for fun – we estimate that they need an annual income of about £10,200. For what people would consider a comfortable retirement, where you have more financial security and flexibility, they need an annual income of £33,000. </p>
<p>To work this out, our research asked a series of groups to discuss and agree detailed lists of goods and services that are needed to live at each living standard. This is not just what is needed, but how long each item lasts, where it would be bought and the kind of quality it is reasonable to expect.</p>
<h2>Three different living standards</h2>
<p>If you are a single retiree, we calculate that you’d need to spend about £10,200 to have a minimum standard of living. As well as covering essential needs such as shelter and groceries, this includes £15 to eat out once a fortnight as well as £10 a month for a takeaway. It is based on buying reasonably inexpensive clothing at supermarkets and cheaper high street shops, but looking after your feet with good quality shoes. </p>
<p>It includes the cheapest contract smartphone, an entry level laptop and the internet, all of which allows you to participate in the world and not feel excluded. It doesn’t include a car, but does include a budget of £20 for social activities each week as well as two short UK holidays each year.</p>
<p>This minimum living standard provided the starting point for discussions with groups about what higher standards would include. We asked members of the public to agree the key features of two living standards above the minimum, which were then discussed by our group participants.</p>
<p>A moderate retirement living standard is where you “know full well you can always maintain [the] minimum”. But is also about having greater freedom to do more of the things that you would like to do. As one participant put it: “You need to plan, but you don’t have to think about every penny.” </p>
<p>With this in mind, groups agreed that at this level a single retired person would need £20,200 a year. This includes a budget of £75 each month to cover eating out, takeaways and coffee and cake while out shopping. It also includes the cost of a pre-paid funeral plan – something not included at the minimum – as it was important for them to avoid being a financial burden on family and having peace of mind that this cost was covered. As one retired man put it, “having enough to bury yourself” is crucial. </p>
<p>A moderate standard also features a car, a £60 a month Sky package and £35 for social activities each week, all of which give greater choice and flexibility than at the minimum. Holidays at this level are a holiday in Europe each year as well as a UK city break.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/297342/original/file-20191016-98640-5pp64v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Pensions and Lifetime Savings Association</span></span>
</figcaption>
</figure>
<p>Groups described the next level up from this as a comfortable retirement living standard. This is a standard that allows flexibility, particularly in terms of financial security and having the opportunity to help others. People were clear that retiring at this level would mean peace of mind, with a financial buffer so that if, for example, your fridge stopped working you could replace it without worrying about making spending cuts elsewhere. A single retiree would need £30,000 a year to achieve this.</p>
<p>Being comfortable in retirement means being able to do a lot of what you want to do, but groups were clear that this was not about limitless choice or unfettered spending. There was a clear sense that you were likely to be able to retire at this standard as a result of careful financial planning and that maintaining this level in retirement would require the same approach.</p>
<p>At this level, groups decided that a single retiree would need £50 a week for eating out, takeaway and more spontaneous spending such as lunch out after shopping. It might include help around the house, such as a gardener to cut the grass in the spring and summer and a window cleaner once a month. Holidays at this level add up to three weeks in Europe each year, and critically at this level, groups included a budget of £1,000 each year for helping others.</p>
<h2>Starting point</h2>
<p>These three levels provide a starting point to think about both what we want life to look like when we retire – and how much is needed to cover it. They’ve already been adopted by a number of high-profile pension providers <a href="https://www.retirementlivingstandards.org.uk/">and advisers</a>, and we hope they will become an accepted element of pension planning.</p>
<p>Considering the full new state pension <a href="https://www.gov.uk/new-state-pension/what-youll-get">is currently £8,767.20</a>, which you only get if you’ve made national insurance contributions for 35 years, it’s incredibly important to think about the future and plan accordingly. The earlier you start the better.</p>
<p>At the same time, we should not lose sight of the growing number of people already retired that do not have enough to meet <a href="https://www.jrf.org.uk/file/52023/download?token=W-sBJuOp&filetype=full-report">their minimum needs</a> – materially, socially, emotionally and psychologically. Society – and government – must step in to help them, as well as encouraging and making it easier for people to better financially plan for their futures.</p><img src="https://counter.theconversation.com/content/125387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matt Padley received funding for this project from the Pensions and Lifetime Savings Association. The research on the Minimum Income Standard is funded by the Joseph Rowntree Foundation. </span></em></p><p class="fine-print"><em><span>Claire Shepherd received funding for this project from the Pensions and Lifetime Savings Association. The research on the Minimum Income Standard is funded by the Joseph Rowntree Foundation.</span></em></p>That’s to meet your basic needs and have a little leftover for fun.Matt Padley, Research Fellow, Centre for Research in Social Policy, Loughborough UniversityClaire Shepherd, Research Associate, Centre for Research in Social Policy, Loughborough UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1034312019-01-17T19:12:40Z2019-01-17T19:12:40ZThe financially well-off defy the stereotypes. They include retirees, and mortgagees<figure><img src="https://images.theconversation.com/files/254278/original/file-20190117-24625-15wjzvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Financial well-being isn't always where you expect to find it, in part it depends on attitude.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Financial well-being is hard to get a handle on.</p>
<p>That’s because it’s a mix of how people feel and how they objectively are.</p>
<p>And it’s multifaceted, including things such as spending, saving, investing, borrowing, and insuring, and competing goals that involve trade-offs, such as whether to spend or save.</p>
<p>To help, the Melbourne Institute and the Commonwealth Bank have pulled the dimensions together in a collection of measures we think are the first of their kind: the <a href="https://fbe.unimelb.edu.au/newsroom/cba-melbourne-institute-financial-wellbeing-scales">Reported and Observed Financial Well-being Scales</a>.</p>
<p>The results released this week show most Australians are doing OK. They report no difficulty paying necessary expenses, can cover unexpected expenses, and feel on track to provide for their financial futures. However, a substantial minority struggle. </p>
<p>As expected, people’s income, assets, and home ownership play big roles in their financial well-being. But their attitudes, capabilities, and behaviour are probably even more important, meaning good financial well-being is possible even at modest levels of income and wealth.</p>
<h2>Two ways of examining well-being</h2>
<p>Adapting definitions that have been proposed for Australia and elsewhere, we define financial well-being as the extent to which people both perceive and have </p>
<ul>
<li>financial outcomes in which they meet their financial obligations</li>
<li>financial freedom to make choices that allow them to enjoy life</li>
<li>control of their finances, and</li>
<li>financial security</li>
</ul>
<p>now, in the future, and under possible adverse circumstances.</p>
<p>To construct the scales, we sieved through 33 self-reported survey measures and 17 bank-record measures that captured different elements of our definition. Formal analyis resulted in our two distinct but related scales.</p>
<p>The first, which we call the CBA-MI Reported Financial Well-being Scale, uses people’s answers to 10 survey questions about how they feel; about things such as dealing with their expenses, building up savings, and control over their finances.</p>
<p>The second, which we call the CBA-MI Observed Financial Well-being Scale, uses data from people’s bank records about their balances, payment problems, and ability to cover unexpected expenses.</p>
<p>The two scales move together. People with high levels of financial well-being on one scale tend to have high levels on the other.</p>
<p>However, the two scales are distinct and capture different aspects of well-being, complementing each other and jointly providing a fuller picture than either could alone.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=382&fit=crop&dpr=1 600w, https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=382&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=382&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=480&fit=crop&dpr=1 754w, https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=480&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/254272/original/file-20190117-24622-8qacip.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=480&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://fbe.unimelb.edu.au/newsroom/cba-melbourne-institute-financial-wellbeing-scales">Melbourne Institute - Commonwealth Bank</a></span>
</figcaption>
</figure>
<hr>
<h2>What do the measures tell us?</h2>
<p>On average, Australians enjoy moderate to high levels of financial well-being, but many experience problems. About a quarter of people report difficulty meeting their necessary expenses, and more than a third report not being able to handle a major unexpected expense or not having enough money for future financial needs.</p>
<p>When it came to characteristics associated with financial well-being, we find that people who earn more and own more assets enjoy higher well-being on average. Home-owners, healthier people, and married couples also tend to have a higher financial wellbeing. But within these categories financial well-being can vary.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-single-women-are-more-likely-to-retire-poor-51126">Why single women are more likely to retire poor</a>
</strong>
</em>
</p>
<hr>
<p>Both measures of well-being are higher for people who balance their spending and savings, have strong savings habits, always pay their credit card balances, sacrifice for the future, and actively plan and budget.</p>
<p>And there are surprises. </p>
<p>Retirees and older people tend to enjoy higher financial well-being than younger people, contrasting with the view that retirement is accompanied by financial distress.</p>
<p>People with high mortgage debt and large housing costs also experience higher levels of well-being, although this may be associated with the wealth that is associated with their homes.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">Why we should worry less about retirement - and leave super at 9.5%</a>
</strong>
</em>
</p>
<hr>
<p>The strong agreement between the two scales reassures us that they are indeed measuring financial well-being. However, the scales sometimes diverge, particularly when measuring the financial well-being of people with complex financial situations, including immigrants and business owners. </p>
<h2>Improving financial well-being</h2>
<p>The low levels of financial well-being experienced by some Australians are a cause for concern. Our measures can help identify these people and their circumstances. </p>
<p>More importantly, they tell us that people in similar circumstances can experience very different levels of financial well-being, telling us there is considerable scope for improving outcomes. </p>
<p>And the strong associations of well-being with financial attitudes, capabilities, and behaviours — all characteristics that can be changed — point to promising avenues for interventions.</p><img src="https://counter.theconversation.com/content/103431/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David C. Ribar receives funding from Commonwealth Bank of Australia. He is affiliated with the Melbourne Institute: Applied Economic & Social Research at the University of Melbourne. </span></em></p><p class="fine-print"><em><span>Nicolás Salamanca receives funding from Commonwealth Bank of Australia. He is affiliated with the Melbourne Institute: Applied Economic & Social Research at The University of Melbourne.</span></em></p>Two new measures of financial well-being contain surprises and show many people believe they are doing better than you might think.David C. Ribar, Professorial Research Fellow, The University of MelbourneNicolás Salamanca, Research Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1039982018-09-28T08:45:52Z2018-09-28T08:45:52ZRoyal Commission shows banks have behaved appallingly, but we’ve helped them do it<p>The term deposit has matured. Initial scepticism over the timing, scope, and overall need for a royal commission into financial services has transformed into deep concern about the culture and practices in one of our most important industries. </p>
<p>Malcolm Turnbull, the (perhaps not coincidentally) ex-prime minister, admitted it had been a “<a href="http://junkee.com/opposed-banking-royal-commission/155546">political mistake</a>” to delay the royal commission by nearly two years. </p>
<p>None of the major banks have escaped the Commission’s ire. </p>
<p>Perhaps that’s because none of them have had an incentive to behave better. There’s been little financial reward for being the bank to improve.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commissions-damning-report-things-are-so-bad-that-new-laws-might-not-help-104058">Banking Royal Commission's damning report: 'Things are so bad that new laws might not help'</a>
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<p>Australian banks generate the <a href="http://www.rba.gov.au/publications/bulletin/2017/mar/pdf/bu-0317-6-returns-on-equity-cost-of-equity-and-the-implications-for-banks.pdf">second-highest returns on equity in the world</a>, and so far none has been keen to let those returns go. </p>
<p>In his interim report, Royal Commissioner Kenneth Hayne <a href="https://theconversation.com/banking-royal-commissions-damning-report-things-are-so-bad-that-new-laws-might-not-help-104058">pilloried them</a> for their greed, putting profits before customers. He hinted that submissions he has not yet fully examined may uncover even more misconduct.</p>
<h2>Conflicts in providing credit</h2>
<p>Are loan providers offering customers what’s best for them, or what’s best for the bank? </p>
<p>A disproportionate share of loan products recommended by mortgage brokers working for firms affiliated with banks are produced by other firms affiliated with those banks.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-for-all-its-worth-the-banking-royal-commission-could-hurt-a-generation-of-battlers-103943">Vital Signs: for all its worth, the banking royal commission could hurt a generation of battlers</a>
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<p>Mortgage brokers currently help originate more than half of all new loans. They operate under an opaque commission structure with rewards that are unlikely to align with the customer’s best interests. </p>
<p>A change to up-front, transparent commissions should be mandated, and enforced by the Australian Securities and Investments Commission. </p>
<h2>Irresponsible Lending</h2>
<p><a href="https://download.asic.gov.au/media/2243019/rg209-published-5-november-2014.pdf">ASIC guidelines</a> merely require banks to offer customers products that are “not unsuitable” for their needs. </p>
<p>The guidelines allow banks to do things such as using rough guides for household expenditure rather than individually examining the circumstances of each borrower. </p>
<p><a href="https://www.afr.com/personal-finance/westpac-not-an-irresponsible-lender-20180920-h15o6z">Some have argued</a> that this is a better practice than making inquiries of borrowers, who are likely to exaggerate their ability to repay loans. But it runs the risk of constituting a dangerous form of financial advice.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-liar-loans-undermine-sound-lending-practices-87073">How 'liar loans' undermine sound lending practices</a>
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<p>If a loan is recommended to a customer, they might infer from that the bank has deemed it as being appropriate for their needs, rather than merely “not unsuitable”. </p>
<p>In several instances detailed to the commission, customers borrowed as much as they have been to allowed by banks, only to later blame the banks for not protecting them from themselves.</p>
<p>Banks also argue that there is a trade-off between obtaining accurate documentation and processing loans quickly.</p>
<h2>Reformed?</h2>
<p>Inadequate internal processes have led to customers being offered products that they can’t use, such as financial advice for dead people, or insurance that’s impossible to claim against. </p>
<p>These failings have been rightly condemned by the commissioner, even if they might not have affected a significant portion of the banks’ clients.</p>
<p>Ahead of the report, the banks have been trying to <a href="https://www.afr.com/business/banking-and-finance/financial-services/westpac-warns-staff-on-culture-as-banks-brace-for-hayne-pain-20180927-h15y1c">pre-empt its findings</a> by arguing that their primary focus has moved from “sales” to “service”.</p>
<p>They say their internal processes have already improved, and bad apples weeded from the staff.</p>
<h2>It’s our fault, too</h2>
<p>Commissioner Haynes said that one obstacle to greater consumer power is an alarming lack of financial literacy among consumers, which has also been unearthed by the commission. </p>
<p>Banks exploit our loyalty, our inertia, and our inability to negotiate. </p>
<p>They also help exacerbate these things, by offering too many products that are too hard for the average person to compare.</p>
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Read more:
<a href="https://theconversation.com/financial-literacy-is-a-public-policy-problem-84695">Financial literacy is a public policy problem</a>
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<p>If we educated ourselves, many of the problems identified by the Royal Commission would disappear.</p>
<p>Making public the actual interest rates paid on our loans, the fees paid to advisers and brokers, and consumer credit scores would help as well. </p>
<p>But it will only help us if we are willing to help ourselves. </p>
<p>The community rightly expects a lot from banks, but a second thread running through the Royal Commission’s interim report is that but we need to expect more from ourselves as well.</p><img src="https://counter.theconversation.com/content/103998/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Grant does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The banks get most of the blame in Commissioner Hayne’s explosive report, but there’s some for us as well.Andrew Grant, Senior Lecturer, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/694212016-11-25T06:13:26Z2016-11-25T06:13:26ZBanking inquiry findings – ask the wrong questions get the wrong answers<p>This week, Australia hit a new low point in the politicisation of banking regulation. </p>
<p>In a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review/Report">report</a> into the four major Australian banks, the members of the House Standing Committee on Economics were hopelessly divided along party lines about the answers given to them by the bank CEOs.</p>
<p>The <a href="https://theconversation.com/big-four-bank-chiefs-face-parliamentary-committee-experts-react-66400">grilling</a> of the Big Four CEOs was less Stalinist show trial, than an episode of Australia’s Got Talent. It was, as ex-CEO of ANZ said, “<a href="http://www.theaustralian.com.au/business/financial-services/banks-have-no-case-to-answer-former-anz-ceo-mike-smith/news-story/901e86bdab70480960864ca9281b3447">a bit of theatre</a>”. If it wasn’t such an important topic, the whole episode would be farcical.</p>
<p>The members of the government committee tried their best and have produced a set of ten recommendations, some of which are sensible but others betray a naiveté.
For example, in Recommendation 2:</p>
<blockquote>
<p>The committee recommends that, by 1 July 2017, the Australian Securities and Investments Commission (ASIC) require Australian Financial Services license holders to publicly report on any significant breaches of their licence obligations within five business days of reporting the incident to ASIC, or within five business days of ASIC or another regulatory body identifying the breach. [In particular,] the consequences for those senior executives and, if the relevant senior executives were not terminated, why termination was not pursued.</p>
</blockquote>
<p>A significant breach in banking, if detected within five days, would almost certainly result in someone, somewhere getting fired pretty quickly. It’s the misconduct that is not detected for years (such as fraud in financial planning) that really causes the problems for bank customers.</p>
<p>The banks may not even be aware of these issues, even the committee acknowledged this:</p>
<blockquote>
<p><a href="CBA">The Commonwealth Bank of Australia</a> was unaware of serious misconduct – including fraud – in its financial planning division prior to a whistle-blower going public in 2013.</p>
</blockquote>
<p>But the problem goes much deeper than the committee members falling out over what to do - they weren’t even looking in the right place. The committee members were asking the wrong questions of the wrong people, and as a result, the got the wrong answers and made the wrong recommendations.</p>
<p>Section 198A of the Australian Corporations Act clearly <a href="http://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors">states</a> that:</p>
<blockquote>
<p>The business of a company is to be managed by or under the direction of the directors.</p>
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<p>So, if the buck stops with the board, why did the committee not question the senior directors of the big banks, in particular the chairmen, <a href="http://aicd.companydirectors.com.au/%7E/media/cd2/resources/director-resources/director-tools/pdf/05446-3-13-mem-director-gr-role-of-the-chair_a4-web.ashx">senior independent directors</a> and chairs of risk committees? </p>
<p>This is precisely what parliamentary committees into various cases of misconduct in the UK banking system did, such as with <a href="https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/inquiries1/parliament-2015/review-failure-hbos-15-16/">HBOS</a>, <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/treasury-committee-publishes-libor-report/">LIBOR</a> and <a href="http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56i.pdf">Northern Rock</a> scandals. The <a href="https://www.oireachtas.ie/parliament/media/committees/inquiryintothebankingcrisis/02106-HOI-BE-Report-Volume1.pdf">Irish parliament</a> did the same for the directors of their largest banks. And, as a consequence of some very brutal questioning, several chairmen and CEOs of these banks fell on their swords.</p>
<p>The House Committee has been very insistent about “<a href="https://au.news.yahoo.com/thewest/a/33311538/banks-must-be-more-accountable-review/#page1">naming and shaming</a>” lower-level executives who commit misdemeanours, why not directors also?</p>
<p>For one thing, it is easy to name the directors of banks. As their roles, responsibilities, CVs and sometimes pictures appear every year in their company’s annual reports. We know how long directors have been in their various roles and, through commentaries in reports, what they are collectively thinking and what remuneration they are receiving.</p>
<p>Australian CEOs come and go, at <a href="http://www.gillianfox.com.au/why-does-australia-have-the-worlds-shortest-ceo-tenure/">increasingly shorter intervals</a>. But once appointed, directors tend to hang around for some time, often the only constants in a long-running scandal.</p>
<p>Perhaps an example might help.</p>
<p>Just this month David Turner, the chairman of the CBA, announced his retirement. In his last (and only) media interview Mr Turner decried the “Trumpism” that was causing “<a href="http://www.afr.com/business/banking-and-finance/cba-chairman-david-turner-on-remuneration-diversity-and-his-legacy-20161104-gsi9rq">bank bashing</a>” in Australia and in an echo of President-Elect Trump himself, blamed the victims:</p>
<blockquote>
<p>“And why don’t we like it? Because there’s some element of life that we feel is slightly unequal, that we’re not totally happy about, and here’s a part that, [banks are] a perfect target.”</p>
</blockquote>
<p>The only admission from Mr Turner was that “maybe” the bank had been slow to pick up the financial planning scandal in 2014. </p>
<p>A look at Mr Turner’s tenure as a director at CBA might give a clue as to why his testimony to a committee in parliament might give some insight into improving the regulation of banking. </p>
<p>David Turner, a chartered accountant by profession, was first appointed a director of CBA a decade ago. In that time, he has shared the boardroom with two CEOs, Sir Ralph Norris and now Ian Narev. In 2010, Mr Turner was appointed chairman and will pass that role onto Ms Catherine Livingstone, another chartered accountant, on New Year’s Day 2017. </p>
<p>Mr Turner’s elevation to chairman occurred at an interesting time. It was just two months after CBA, along with the other Big Four banks, settled a long-running case with the New Zealand Tax authorities for tax avoidance. It was <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">collectively the biggest such fines</a> in Australian banking history, CBA <a href="http://www.asx.com.au/asxpdf/20091223/pdf/31my1km4ttyf7m.pdf">coughed up</a> some NZ$264 million as part of it.</p>
<p>In his role as chairman, Mr Turner could not be held to blame for this fine for misconduct, but as a director Mr Turner had signed off on annual reports that insisted that CBA had nothing to answer for in relation to court actions. This was despite that fact that the appeals by CBA and others had been knocked back by <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">lower-level courts on several occassions</a> A capacity for not smelling the wind appears to be a necessary attribute for a CBA director.</p>
<p>Mr Turner may have been unlucky, but the New Zealand scandal was not the last that came up at CBA board meetings.</p>
<p>In 2008, CBA acquired Bankwest, a subsidiary of the failing Lloyds bank in the UK. Since then, the bank has been mired in fraud allegations, as customers alleged in a parliamentary inquiry that they were <a href="http://www.smh.com.au/business/comment-and-analysis/cba-threw-its-customers-under-the-bus-20151116-gl0411.html">thrown under the bus</a>. In an echo of the New Zealand case, the bank’s 2016 Annual report, stated the bank expected class actions to be discontinued.</p>
<p>In 2013, whistle blower Jeff Morris brought to the attention of the media the now-famous scandal at <a href="http://www.sbs.com.au/news/article/2014/07/04/explainer-what-commonwealth-bank-has-done-and-how-you-can-fix-it">Commonwealth Financial Planning</a>. In 2014, CBA instituted a compensation scheme, which today is still mired in controversy over CBA <a href="http://www.abc.net.au/news/2015-11-17/cba-flags-long-wait-for-compensation-over-poor-planning-advice/6949712?pfmredir=sm">dragging its feet</a> in paying out customers.</p>
<p>In 2008 a Queensland financial planning firm, Storm Financial, went into liquidation and it was discovered that CBA and most of the other big banks had been lending money to customers to invest with <a href="https://www.themonthly.com.au/issue/2011/february/1299634145/paul-barry/eye-storm">Storm</a>. In 2012, CBA agreed to pay <a href="http://www.smh.com.au/business/banking-and-finance/cba-to-fork-out-136m-in-storm-compensation-20120914-25xan.html">compensation</a> of A$136 million to customers over the Storm collapse. In 2016, the Storm scandal is still alive but <a href="http://www.financialstandard.com.au/news/view/86704577">running out of steam</a>.</p>
<p>In 2014, CBA fessed up to the fact that it had been charging customers for financial advice that had not been given, but as ASIC found this year, the bank has <a href="http://www.afr.com/opinion/columnists/the-banks-get-another-black-mark-20161027-gscdbj">not been very forthcoming</a> in providing customers with compensation. Of course, CBA can truthfully argue that <a href="http://www.afr.com/opinion/columnists/the-banks-get-another-black-mark-20161027-gscdbj">all the other major banks are also avoiding it</a>.</p>
<p>The start of 2016 brought an even bigger scandal at <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm">Comminsure</a>, CBA’s Insurance arm, in which sick and dying customers were refused payouts for their illnesses. This was despite the fact that Mr Turner had <a href="http://www.australianbankingfinance.com/banking/cba-saddened-and-disappointed-by-new-scandal/">told shareholders</a> at the previous AGM that “we learnt our lessons from the financial advice situation”.</p>
<p>The final indignity for Mr Turner before retirement was, after having handsomely rewarded CEO Ian Narev with an industry-leading pay packet of some A$12.3 million, the bank’s remuneration report <a href="http://www.smh.com.au/business/banking-and-finance/commbank-caves-in-to-pressure-pulls-plan-to-pay-ceo-ian-narev-a-culture-bonus-20161108-gsl2ly.html">was knocked back by its shareholders</a>. Last year Mr Turner earned considerably less than Mr Narev, but nonetheless <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/2016-asx/2016_Annual_Report_to_Shareholders_15_August_2016.pdf">took home</a> a not insubstantial A$800,000.</p>
<p>While there is no way that Mr Turner can be seen to be involved personally in these scandals, he has been a director and chairman throughout this period. And the questions he and other directors have to answer, is why did they not see these scandals coming and when the scandals erupted, why did the CBA board have to be dragged kicking and screaming into compensating their customers?</p>
<p>Nor is Mr Turner alone in presiding over disasters. The directors of all of the Big Four banks have, as the House Committee report shows, had their own scandals of tax avoidance, bad financial advice and accusations of market manipulation.</p>
<p>Unfortunately, there is no forum, other than a bank’s AGM, where such questions can be posed and answers demanded.</p>
<p>CEOs are only passing through but directors are there for the long-haul. A CEO, such as Ian Narev cannot reasonably be held responsible for the actions or non-actions of his predecessors but as their direct employers, directors can be questioned as to performance of executives and actions taken or not taken to control staff. </p>
<p>Next time, if there is a next time, the senior directors of the Big Four banks should be requested to attend the committee. Furthermore they should be questioned as a group over two days so that better use can be made of the time available and truly systemic issues can be investigated.</p>
<p>And if a Banking Royal Commission is instituted, the terms of reference should include questioning the key directors in every bank. That will make them sit up and think in the meantime.</p><img src="https://counter.theconversation.com/content/69421/count.gif" alt="The Conversation" width="1" height="1" />
Members of House Standing Committee on Economics should be asking the directors of Australia’s Big Four banks (not the CEOs) different questions, if they really want the right answers.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/573062016-04-11T14:27:57Z2016-04-11T14:27:57ZThe bitter-sweet ads designed to win back trust in financial services<figure><img src="https://images.theconversation.com/files/117840/original/image-20160407-16260-h5kum8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>How do you win the trust of consumers when the recent history of your industry is punctuated by <a href="http://www.ft.com/cms/s/0/ebb83a38-f7fa-11e5-96db-fc683b5e52db.html#axzz44qyeQ9lf">insurance mis-selling scandals</a> and the <a href="http://www.theguardian.com/business/2012/aug/07/credit-crunch-boom-bust-timeline">global financial crisis</a>? Add to that widespread disinterest in and <a href="http://www.bbc.co.uk/news/uk-23548745">limited understanding of your products</a>, which are largely to do with debt, death, disability and deferred happiness rather than living in the now, and you can sense the challenge facing those with the task of marketing financial services and making them appealing.</p>
<p>Historically the names and symbols of those in the financial services business helped anchor complex and intangible products to recognisable words and concepts. Financial institutions were “provident”, “prudential” or “mutual”, and were created to “<a href="http://www.scottishwidows.co.uk/about_us/who_we_are/index.html">secure provisions for widows</a>” (Scottish Widows) or “<a href="http://heritage.aviva.com/our-history/companies/p/provident-mutual-life-assurance-ltd/">for the purpose of affording clerks and others provision for old age</a>” (Aviva). Financial brands used images of strength, stability and prudence: the beehive was common as a symbol of industry, thrift and regeneration. Ironically, <a href="http://www.ft.com/cms/s/0/2abdeb34-fda8-11e1-8e36-00144feabdc0.html#axzz44qyeQ9lf">Northern Rock</a> the bank whose collapse signalled the onset of the financial crisis in the UK was distinctly rugged-sounding.</p>
<p>Today, one of the most recognisable symbols is the galloping black horse of Lloyds Banking Group, inherited from a 17th-century City of London <a href="http://www.lloydsbankinggroup.com/Our-Group/our-heritage/the-black-horse/">goldsmith</a>. Lloyds, founded in 1765, celebrated 250 years with a television advert featuring not mortgages or banks but the horse itself, as we follow it <a href="https://www.youtube.com/watch?v=f6eZ3WQCjhA">grow from a foal to a stallion</a>, representing centuries of corporate history and the various stages of our own lives: birth, friendship, love, loss and change. </p>
<p>The bank’s current advert features the horse once more, galloping to the emotive soundtrack of Tears for Fears’ Mad World through a more human-centric life alongside the slogan: “<a href="https://www.youtube.com/watch?v=siBRvC9YSc4">For your next step</a>”, for which Lloyds itself adds that it will “be by your side”. These slogans are repeated in its billboard advertisements which bear captions that range from the predictable – starting a business, buying a home – to the less saccharine, such as “I don’t love you anymore” above a parting couple, or a widow’s goodbye.</p>
<p>What’s implied here is that endings, as well as beginnings, are also times that bring the need to re-visit financial plans. Known as <a href="http://www.acrwebsite.org/volumes/6966/volumes/v16/NA-16">negative emotional appeal</a>, this approach is actually characteristic of financial services providers, government public information broadcasts, and the sorts of charitable appeals that try to shock would-be donors into action. </p>
<p>The reason this approach is considered appropriate for the finance industry is because consumers are not only generally unaware of the sorts of financial products available: they are also unaware of the sorts of problems those financial products are designed to solve. The answer is to use graphic or sensational images or “straight-talking” to stimulate recognition of the circumstances, and therefore the need, that is the first stage towards making a purchase. </p>
<p>Although the use of technology is new, the message is a very familiar one. In the 1990s the now-defunct Allied Dunbar produced the memorable “For the life you don’t yet know” campaign based on the lyric “There may be trouble ahead” from Irving Berlin’s “Let’s face the music and dance”. </p>
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<p>The campaign shared similar objectives captured in their respective taglines “for the next step” and “for the life you don’t yet know”. The message is one of building a lasting relationship with your financial provider to cope with life’s fluctuating fortunes.</p>
<p>Today’s marketers have coined the term “event-based marketing” to describe the process whereby key events in the lives of customers are identified as a trigger for specific marketing activities. Financial planners have long understood the life events that trigger the need for new, or a revision of existing approaches, to finance. All financial planning is undertaken from the perspective of what is known about current and future priorities.</p>
<p>Some viewers will undoubtedly be left with a warm, fuzzy feeling – something that <a href="http://www.thefreelibrary.com/Advertising+likeability+and+its+effectiveness.-a0256603006">research suggests</a> can transfer into a favourable attitude towards the brand – but it’s unclear how exactly Lloyds is the “hero” of the commercial, nor how viewers will respond to an ad that contains positive and negative elements. If Lloyds’ objectives are to rebuild trust in a battered brand then the campaign may well have some impact. But we have yet to see if consumers see fit to put their faith in Lloyds to help them through life’s fluctuating fortunes.</p><img src="https://counter.theconversation.com/content/57306/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy Froggett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How do you sell something that solves a problem customers don’t know they have?Timothy Froggett, Senior Lecturer and Course Leader for Marketing, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/452622015-07-30T05:17:03Z2015-07-30T05:17:03ZDanger strikes when foolish humans are left in charge of their financial futures<figure><img src="https://images.theconversation.com/files/90157/original/image-20150729-30889-305smd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Humans are irrational. Superheroes also.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/ontilnow/2584846077/in/photolist-4Wq1FF-5mshaL-4WpZvg-vc2bW-vc1Ff-vc26v-vc2b4-hzqmeg-vc222-3zwHUL-df5MWz-EAs9K-EApHs-4og55F-ndFvxi-q4VEiw-7adXJi-oVm4GS-df5t5j-vc21c-vc2cx-7bkZst-dfN8kD-vc2af-5vAsHA-3R2yJB-2VsXEM-vc24n-vc22P-vc256-6GrWCP-vc2da-vc23m-vc27a-vc1Cz-qVa4C-vc28z-t4rqp-6gE17e-vc29s-2Qmd2t-vc1wi-5iWxgn-5vAtYf-ASbRc-vc1Ag-dr2BYs-vc1xZ-4WERAy-vc1tz">Santi Molina</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Much standard economics research is based on the <a href="http://www.forbes.com/sites/peterubel/2014/12/15/is-homo-economicus-a-psychopath/">“homo economicus”</a> decision-maker. This is an entirely rational being. An unbiased, unemotional, non-psychological maximiser of the expected usefulness of things and events. Furthermore, this perfect decision-maker is far-sighted, and has complete self-control.</p>
<p>If that seems instinctively problematic, then you’ll be pleased to know that <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1011976">behavioural economics</a> research instead recognises that real-world “homo sapiens” decision-makers are <a href="http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/perceived-and-actual-risk-in-financial-markets-insights-from-emotional-finance/20048">not fully rational</a>, are biased, are emotional satisfiers. Furthermore, such decision-makers are myopic, and lack self-control.</p>
<p>For a long time though, policy-makers have based policy on that “homo economicus” model, not least in the world of financial decision-making, such as investing, saving and pensions. On this basis, there has been a move to give more financial responsibility to individuals.</p>
<h2>Benefits trap</h2>
<p>In the world of pensions, this has meant moving from <a href="https://www.gov.uk/pension-types">defined benefit to defined contribution</a> schemes. In defined benefit, you know what you will end up with and it’s up to your employer to dictate the amount of pension contributions and how the fund should invest those contributions. In defined contribution, the onus is very much on the employee to decide how much to save each month and how to invest it into assets like shares which introduce an element of risk. </p>
<p>The “homo economicus” approach is a normative (prescriptive) model: it prescribes how the perfect decision-maker should behave. Given this approach, those defined contribution schemes make sense. The fully-rational all-calculating, unemotional employee chooses their optimal pensions-saving plan. They use sophisticated techniques to calculate the correct balance between monthly consumption and savings for future retirement from monthly salary.</p>
<p>In contrast, the “homo sapiens” approach is a positive (descriptive) approach. It describes how people actually behave in the real world, given their psychological and behavioural biases and emotions, limited rationality, myopia, and lack of self-control. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/89902/original/image-20150728-3945-gku6iq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Worth a gamble? Pensioners are not as risk averse as we might think.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/kulor/4783406145/in/photolist-8hGcZK-3MoYY-crBXBQ-2M8Fg-5hUVq-dqivjt-9xKNji-7aoopD-4mDFSA-5nxCAW-9fnuM6-8LdNa2-7gcUX1-pubEP8-6wGrcB-achTD2-iLyUjZ-iLzsFy-52DnyL-3htGEn-6apYQd-bnaxKU-2KDGyy-6WoEqh-8LgSay-6vsdU2-achUiv-9gTvap-58F1kk-okbX94-c226ZY-47qmTe-92qCsX-5ouMU6-2W2FF6-aceyT3-6apT7L-F88b8-m1oCgZ-oBsZah-9S3fbN-8fJpJW-JLayz-4MzySv-oZNwhU-ayESs3-58Ukm3-pBpuxe-qzsT34-pCGEji/">James Broad</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>This behavioural economics approach reveals the dangers in passing the responsibility to employees: a danger of insufficient pension-provision as myopic actors, lacking self-control and having limited financial literacy, spend too much today and save too little for retirement. Indeed, <a href="http://www.cengage.com/search/productOverview.do?N=16+4294922239+4294951890+24+4294945305&Ntk=P_EPI&Ntt=467522150824510151739903143944995312&Ntx=mode%2Bmatchallpartial">Lucy Ackert and Richard Deaves argue</a> that employees who are required to manage their own retirement accounts through a defined contribution scheme are not like other investors. They are drafted in for the job, and it is reasonable to assume that they would suffer from cognitive biases and limited financial literacy compared to other, professional, investors.</p>
<p>It was this conclusion that led behavioural economists Richard Thaler and Shlomo Benartzi to develop a practical tool to encourage saving for retirement. <a href="https://faculty.chicagobooth.edu/Richard.Thaler/research/pdf/SMarTJPE.pdf">This tool is known as SMART</a> (save more and retire tomorrow).</p>
<h2>Control</h2>
<p>Behavioural economists argue that, when faced with a lack of self-control, humans need – and indeed demand – control mechanisms to be imposed upon them. Think of Christmas Club savings plans, and fitness and diet clubs such as weight-watchers which involve people voluntarily submitting to institutional control, because they are aware that they lack self-control. We also hear this week that addicted gamblers can apply to get themselves <a href="http://www.independent.co.uk/news/uk/home-news/glasgow-gambling-addicts-will-be-able-to-ban-themselves-from-bookmakers-in-new-scheme-10420002.html">barred from their local betting shops</a>.</p>
<p>Again, the argument is that they are being invited to substitute external control for a lack of self-control. </p>
<p>In the world of pensions, defined benefit imposes control on imperfect individuals. We haven’t entirely left workers to fend for themselves as we move to a defined contribution model. The slow <a href="http://www.thepensionsregulator.gov.uk/employers/your-step-by-step-guide-to-automatic-enrolment.aspx">introduction of auto-enrolment</a> has helped to offer some external control to nudge people towards a sensible approach to retirement saving.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=143&fit=crop&dpr=1 600w, https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=143&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=143&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=180&fit=crop&dpr=1 754w, https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=180&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/90120/original/image-20150729-30862-pb8lyx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=180&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This little piggy went to a financial advice seminar.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/swister/273156173/in/photolist-q8ZPc-9VCdNY-9VCcWs-bxDtd3-9VzKTc-cBD6Bh-7dzuyM-uRvi5f-cBD7FA-bmm6Up-bxDiow-bmm9MT-7AV3c5-fKu9zW-fKu9zy-4J4gTR-9ehVno-bgfshg-4zmP7W-8WAnHa-ahtNwe-4wysGz-ahwWjs-s5Zddj-c3sJ8W-9K2QYL-953fxF-cZ3a4m-63Nrwr-bgftmn-fKcyFM-5vWWWG-n7quSS-9VByc5-9VyHut-9VBzSG-7vGDW4-v6Mvtd-4NbDCB-czM6g-74H2vZ-fKu9B3-v8Av53-9VyNgZ-95SrE8-fKu9zd-dXpA6W-5Eut7k-bgfz6X-9dJaDZ">swister_p</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>But the good news stops there. Besides the move towards defined contribution, a recent disturbing development has been the <a href="http://www.moneysavingexpert.com/savings/pension-freedom">move towards pensions freedom</a> as workers approach retirement. Once you reach the age of 55, you are no longer tied into a given regular pension payment in retirement; you have the freedom to take your pension pot and spend it any way you desire. You can even spend it all immediately: the “Lambhorgini” or “World Cruise” decision. So, in addition to insufficient savings for retirement along their lifetime career, what they have saved can now be blown at 55 years old. </p>
<h2>Making sense of it all</h2>
<p>Maybe you’re thinking that 55 year-olds are more responsible than 25 year-olds? Well, there is a body of research which investigates the effect of ageing on financial decision-making and <a href="http://crr.bc.edu/wp-content/uploads/2015/01/IB_15-1-508.pdf">which questions that idea</a>.</p>
<p>Some interesting research by Professor Bruine de Bruin emphasises the complex behavioural factors affecting decision-making in old age. Her work demonstrates that, as people age, they become better able than youngsters to engage in emotion-control. <a href="http://business.leeds.ac.uk/about-us/article/professor-bruine-de-bruin-receives-grant-to-improve-decisions-for-people-of-all-ages/">Their cognitive abilities, however, decline</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=510&fit=crop&dpr=1 754w, https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=510&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/90122/original/image-20150729-30875-1bx7cj7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=510&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Generation gap.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/environment/2167097486/in/photolist-4iuWzL-hqPmA-ccEAh-KpP9H-5ANXTQ-6KoWMY-57Sn9k-aebtF2-o2YUob-vdqKYY-q3mYje-cEwUnU-5d57Wv-8tXYQN-6bph8Y-4KYwcS-dZRjFE-vQZPX-d1gbfG-g2ZVPj-dVTENx-gYd692-4LLZ1o-eLJ1eC-gYdcYp-eia6LD-bmDEtv-2L1s8J-773JFo-kutVKK-dXGqj6-81ZmVj-ocaYPY-gYdpkd-QtVDP-jLfEvp-4A2qTa-qsFZPG-6y2Q5k-6HMBr1-dHS6XC-6sUKBE-aCMJRE-8DEEi-6yVmG-52VLb-hVfsV-52VL7-6ovjvS-7mHMzs/">xflickrx</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p><a href="http://www.bbc.co.uk/news/business-31867788">Fears are building</a> that pension freedoms could lead to a generation of pensioners who <a href="http://www.bbc.co.uk/news/business-32087038">face the dangers</a>
of their pension pots running out during their retirement years. <a href="http://www.ilcuk.org.uk/index.php/news/news_posts/press_release_new_pension_freedoms_pose_significant_risk_of_consumer_detrim">According to the International Longevity Centre UK</a>, this may result in “reduced financial resilience during retirement”.</p>
<p>The changes have also <a href="http://www.ft.com/cms/s/0/b1fb7b12-2f90-11e5-8873-775ba7c2ea3d.html#axzz3h64R4h8Z">introduced more complexity</a> at a time when evidence should be pushing us towards simplification. Take <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/214406/WP109.pdf">Rob Hardcastle’s 2012 report</a> for the Department of Work and Pensions: he argues that, faced with complex financial decisions, people tend to rely on heuristics (rules of thumb), which can lead to bad decision-making. He also argues for keeping pensions as simple as possible. </p>
<p>Just as the government imposes more complexity in pensions, it is ironic that in the past years, it has commissioned a series of <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191721/sergeant_review_simple_products_final_report.pdf">reports into “Simple Financial Products”</a> in order to encourage long-term savings, and which appear to recognise the lessons from behavioural economics that complexity, combined with psychological biases, emotions and lack of self-control, has reduced saving, and increased myopia. Freedom is an appealing idea, but handing over complete liberty in retirement planning to us poor, imperfect decision-makers is a huge risk that has implications for the country as a whole – and not just for the individuals forced to trade-in a used Lamborghini to heat their house through the winter.</p><img src="https://counter.theconversation.com/content/45262/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Fairchild does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Let’s face facts. Behavioural finance shows you are not to be trusted with your retirement planning.Richard Fairchild, Senior Lecturer in Corporate Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/383592015-03-04T03:11:49Z2015-03-04T03:11:49ZTo clean up the financial system we need to watch the watchers<figure><img src="https://images.theconversation.com/files/73719/original/image-20150304-31825-itfaoj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Who's watching Australia's financial regulators?</span> <span class="attribution"><span class="source">Cobalt123/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Scandals involving Australia’s financial advice sector and the regulation of it have continued into another month, the latest chapter of which has involved <a href="http://www.brisbanetimes.com.au/business/banking-and-finance/forgery-sackings-and-millions-in-compensation-nab-under-fire-over-financial-planners-20150220-13kdjk.html">NAB’s financial advice</a> division.</p>
<p>But this is not the first time NAB has attracted attention for its behaviour and the oversight of it.</p>
<p>There was the time when the Australian Investments and Securities Commission (ASIC) allowed NAB to review and <a href="http://www.canberratimes.com.au/business/banking-and-finance/asic-allowed-nab-to-check-and-alter-media-release-into-banks-wealths-navigator-errors-20150220-13kfnn.html">massage ASIC’s own media statement</a> about NAB <a href="http://media.canberratimes.com.au/business/businessday/secret-files-expose-nab-6281323.html">malfeasance</a>. </p>
<p>And the controversy when it was discovered senior lawyers from NAB had been allowed into ASIC, to work, observe, and no doubt given the chance, to advise, caution and warn. Followed by ASIC stating, on the record, that no NAB lawyers were allowed to infiltrate and contaminate its policy development branch. Only to be made fools of by their own evidence, that in fact <a href="http://www.smh.com.au/business/banking-and-finance/watching-the-watchdog-secondments-spell-trouble-at-asic-20150224-13n6xb.html">NAB lawyers were present and working in the policy formulation space at ASIC</a>.</p>
<p>Only when the problems at NAB were revealed was the public informed NAB had sacked 37 senior advisers for <a href="http://riskinfo.com.au/news/2015/02/24/37-nab-advisers-shown-the-door/">“failing to meet standards”</a>.</p>
<h2>ASIC captured?</h2>
<p>ASIC’s remit is to enforce proper market conduct and ensure consumer protection. ASIC has failed to do this, seemingly working to accommodate the perpetrators of consumer abuse – banks - at the expense of their victims – bank customers. ASIC’s documented failings are now so numerous that it can be argued, I think compellingly, that this is part of a pattern of “<a href="http://www.wsj.com/articles/regulatory-capture-101-1412544509">regulatory capture</a>”.</p>
<p>Regulatory capture gave rise to the <a href="http://www.hsgac.senate.gov/subcommittees/investigations/media/senate-investigations-subcommittee-releases-levin-coburn-report-on-the-financial-crisis">market misconduct and consumer abuse</a> that was rampant in the United States, in the lead-up to the sub-prime disaster. The sub-prime industry was the one that gave us those market misconduct gems: “low-doc”, “no-doc”, “LIAR” and “NINJA” loans. The sub-prime disaster then metastasised into the global financial crisis, the repercussions of which are still being felt.</p>
<p>We have our own troubled crop here in Australia, sowed by bad seeds, that have left the financial advice industry bereft of credibility, and in crisis. When failed ethics were not profitable enough, financial advisers <a href="http://www.theage.com.au/business/banking-and-finance/nab-scandal-rogue-financial-planners-given-latitude-by-lack-of-regulation-20150227-13qd3n.html?">committed outright forgery</a>. And when whistleblowers told ASIC, it did nothing. In fact, only when these scandals were reported on by Fairfax journalist Adele Ferguson, did ASIC start to take serious steps. This is regulatory capture preceding regulatory forbearance.</p>
<p>Why does all of this matter? Because good financial advice is vital for the efficient allocation of savings into the most deserving investments, which in turn is the best way to ensure economic growth and the prosperity of Australia and its people. This industry is too much in the national interest not to function properly. And if need be it must be protected from itself.</p>
<p>Actions stemming from parliamentary oversight – calls for a Royal Commission - have been neutered, and fallen prey to party politics. The Senate’s <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC">report into ASIC</a> and Commonwealth and Macquarie ran to over 600 pages. It came down strongly in favour of a Royal Commission. The dissenting opinion ran to six pages – 1% of the report. It was the dissenting view that the Abbott government adopted, when it <a href="http://www.canberratimes.com.au/business/banking-and-finance/forgery-sackings-and-millions-in-compensation-nab-under-fire-over-financial-planners-20150220-13kdjk.html?skin=text-only">declined</a> to appoint a Royal Commission.</p>
<h2>Fixing the problem</h2>
<p>One potential solution to this Gordian Knot – an enfeebled, suborned and possibly collusory regulator, answerable to a legislature crippled in its responses by party politics – is the proposal by the <a href="http://fsi.gov.au">Financial System Inquiry</a> for the establishment of a Financial Regulator Assessment Board (FRAB). </p>
<p>A similar body - the <a href="http://www.bankofengland.co.uk/financialstability/Pages/fpc/default.aspx">Financial Policy Committee</a> - was established in the UK, in response to the disastrous failings of the UK’s financial regulators. Is it a success? It’s too early to tell.</p>
<p>The FRAB would be a council of the wise, not connected to ASIC (or APRA – the FRAB would cover both), and whose job it would be to evaluate ASIC’s and APRA’s performance, and make recommendations for improvements. The beauty of the proposal is that the board, not beholden to government, would evaluate the performance of the two regulators, and offer ongoing guidance as to where they fall short. </p>
<p>The FSI report states:</p>
<blockquote>
<p>“The Assessment Board should have a diverse membership to avoid being unduly influenced by a particular group; … and suggesting that the Board be supported by a separate secretariat within Treasury. A diverse membership would also help ensure a balance of views and deal with potential conflicts involving individual members.”</p>
</blockquote>
<p>Such a board, operating at arms length from the major protagonists, wouldn’t fall within their zone of influence or intimidation. It would be capable of steering, in this case ASIC, into confrontation with the industries it regulates, if confrontation is needed – as surely with hindsight, it was.</p>
<p>Most of the details in the proposal are sketchy. There will be pushback from the industry and, as suggestions have it, there already is from both regulators. But if that pressure can be resisted, then the government could clean up the cleaners, and in the process remove responsibility to an independent board of oversight. And if that is achieved, there is a better chance of ensuring the efficient functioning of this vital part of the economy.</p>
<p>What is pretty much assured is that an ongoing system of “watching the watchers” has a strong potential to improve what we have now. The Brits recognise this, we should too. Certainly, it couldn’t make things any worse.</p><img src="https://counter.theconversation.com/content/38359/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andy Schmulow is affiliated with: Legislative advisor to Fiona Patten, MLC, Victoria. Legislative advisor, Australian Secular Party.</span></em></p>The clear case of regulatory capture in Australia’s financial system is grounds for a new oversight body.Andrew Schmulow, Senior Research Associate, Melbourne Law School, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/362082015-01-15T00:12:55Z2015-01-15T00:12:55ZWhy we still don’t expect financial planners to sit an exam<figure><img src="https://images.theconversation.com/files/68986/original/image-20150114-3859-1ys0q2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Financial planners may be considered professionals, but there's no national exam to put them through their paces.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>While financial planning is on the pathway to <a href="http://www.gowerpublishing.com/pdf/SamplePages/Conceptions-of-Professionalism-CH1.pdf">professionalism</a>, its education standards continue to be the subject of much discussion – and for good reason. </p>
<p>The current standards set by ASIC mandate a comparatively low level certification program that can be completed in just days. This is clearly inconsistent with the notion of a profession and is certainly not congruent with the complex financial market, product, legal, business and behavioural knowledge and skills a modern planner requires.</p>
<p>Recent key national reviews acknowledge this and have all recommended increasing education standards to bachelor degree level. These include the <a href="http://fsi.gov.au">Financial System Inquiry</a>, The <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Financial_Adviser_Qualifications/Report">Parliamentary Joint Committee on Corporations and Financial Services Inquiry</a> and the Australian Financial Services Licence Industry Working Group. </p>
<p>It is also worth noting that some segments of the industry and some professional associations already have degree level education requirements for membership/employment and ongoing continuing professional development. </p>
<p>So where is ASIC on this and why have the current low standards persisted? </p>
<p>Well, they have tried to raise them. In June 2013 ASIC <a href="http://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-212-licensing-training-of-financial-product-advisers-updates-to-rg-146/">proposed</a> to enhance its guidelines for training of financial advisers in various ways, but this did not progress. </p>
<p>ASIC’s preference is for the introduction of a national exam which it first <a href="http://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-153-licensing-assessment-and-professional-development-framework-for-financial-advisers/">raised</a> in April 2011. The issue was <a href="http://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-212-licensing-training-of-financial-product-advisers-updates-to-rg-146/">raised again</a> last year when ASIC suggested that a national exam “may replace any obligation to do a training course”. </p>
<p>The original model was for the test to take the form of an online three-hour exam both for new advisers and for existing advisers (to be repeated every three years). </p>
<p>More recently, ASIC Chairman Greg Medcraft restated this preference as a fundamental component of <a href="http://www.afr.com/p/opinion/asic_chair_says_set_exams_for_planners_KsJkyswSVengfHmYAmzY6K">his vision</a> for financial advisers where the industry sets the competence levels. This is a departure from ASIC’s earlier proposals, and would see ASIC test competencies by overseeing the exam. </p>
<p>As a result, ASIC is positioning itself to move away from the education/training side of the current regulatory regime, where it has largely failed to deliver an appropriate framework. </p>
<p>This leads to the question of whether requiring advisers to undertake an exam every three years would improve adviser competence and lead to better quality advice.</p>
<h2>Simple in theory…</h2>
<p>The advantages of a single national exam are drawn from the potential efficiency of it – one instrument that can be completed online, give some indication of adviser competence, and provide a clear pass/fail measure that could be easily benchmarked. It is also a simple measure for consumers to utilise. </p>
<p>But the proposal does also raise a number of concerns.</p>
<p>Financial planning contains a diverse array of knowledge and skill areas (eg economics, investment, tax, legal, retirement, estate, insurance, risk, business, behavioural and client engagement ). It is hard to imagine how any reasonable measure of competence could be drawn from one online exam covering all of these. </p>
<p>At the same time, it is difficult to assess “soft” skills in a test or exam, yet they are a key part of effective financial advice.</p>
<p>The licensing regime currently requires planners to be RG146 accredited only in the areas which they provide advice. And exam would therefore need multiple modules or versions to allow for various permutations. </p>
<p>The logistics of implementing the exam for somewhere between 18,000 and 30,000 individuals would be complex and suggests a sophisticated examination regime and significant effort in educational design to ensure the integrity of the instrument and its outcomes.</p>
<p>There are few examples of doing this in related professions (law, accounting, nursing, teaching, medicine) with most professions opting for a continuing professional development model.</p>
<p>The problem with the national exam is therefore simple – who pays?</p>
<h2>…Difficult to deliver</h2>
<p>To do it well, given the scale and complexity of advice, would come at significant cost. With ASIC’s budget being cut and industry suggesting it is not willing to fund it, it’s unclear how it would be achieved, particularly given concerns about the educational efficacy of it as proposed. So it appears it is unlikely to be implemented as ASIC has suggested. </p>
<p>Rather, the proposal should be seen as part of a broader framework that builds on existing elements such as higher education degrees in financial planning, professional associations and the Professional Standards Councils framework. </p>
<p>Proposals to restrict who can call themselves a financial planner/adviser (including draft legislation) and a compensation scheme add further to the options. </p>
<p>What might seem like an easy fix (just make them all do a test), is likely to be little more use in and of itself as RG146. However, as part of a broader professional framework a national exam may have a role to play. This could be for a more specialised purpose such as verifying currency of knowledge (given the continuous changes to taxation, superannuation and other relevant laws) than what ASIC envisages. </p>
<p>Other elements such as enforceable codes of conduct, complaints systems and compensations schemes would form the broader professional environment and assessment of competency. This would create a level and robust playing field for financial advice and should go some way to building consumer confidence in the sector.</p><img src="https://counter.theconversation.com/content/36208/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Brimble receives funding from Commonwealth Office for Learning and Teaching - Fellowship Grant.
Mark Brimble is a member of the Financial Planning Association, a Fellow of Finsia, a CPA and Chair of the Financial Planning Education Council. Mark is also a member of the Australian Financial Services Licence Industry Working Group. </span></em></p>While financial planning is on the pathway to professionalism, its education standards continue to be the subject of much discussion – and for good reason. The current standards set by ASIC mandate a comparatively…Mark Brimble, Discipline Head of Finance and Financial Planning, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/344862014-11-23T19:12:07Z2014-11-23T19:12:07ZFOFA fiasco: no quick fix for the advice industry<figure><img src="https://images.theconversation.com/files/65248/original/image-20141123-1049-1ndzk3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Senator Jacqui Lambie has voted against changes to the Future of Financial Advice reforms.</span> <span class="attribution"><span class="source">Alan Porritt/AAP</span></span></figcaption></figure><p>Last week brought the latest instalment in the continuing Australian financial planning industry saga. Senators Jacqui Lambie and Ricky Muir blocked the Abbott government’s <a href="http://www.comlaw.gov.au/Details/F2014L00891/Explanatory%20Statement/Text">rollback</a> of some of Labor’s Future of Financial Advice (FOFA) reforms.</p>
<p>The proposed changes to FOFA watered down some of its more controversial aspects. They included the provisions establishing a “best interests” duty for financial planners and restrictions on conflicted remuneration. Other rollbacks included changes that required fee disclosure statements and the obligation for clients paying ongoing fees to “opt in” by written consent every two years. </p>
<p>The Abbott government maintained the reforms were merely to streamline regulation, prompted by the need to reduce bureaucracy and red tape. However, the recent and continuing <a href="http://www.smh.com.au/business/timbercorp-victims-set-to-sue-financial-planners-while-liquidator-presses-for-loans-to-be-repaid-20140810-102gco.html">financial planning scandals</a> made such streamlining politically unsustainable.<br>
So we are back to Labor’s original FOFA legislation. But where does this leave the financial planning industry and the thousands of Australians in need of financial advice?</p>
<p>There are claims within the financial planning industry the blocking of the regulation will cause further <a href="http://www.theage.com.au/business/banking-and-finance/fofa-reforms-senate-shock-spurs-financial-adviser-scramble-20141119-11q2te.html">instability</a>. This is as firms scramble to meet the FOFA requirements, particularly those relating to fee disclosure and opt in obligations.</p>
<p>Yet FOFA has been law since 1 July 2013, so it is difficult at first glance to understand why the blocked rollback would significantly impact the industry. </p>
<p>It seems that large sections of the industry have been operating on the basis the coalition’s FOFA rollback changes would become law. </p>
<p>It is a view reflected by the Australian Securities and Investments Commission. It <a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2013-releases/13-355mr-asic-update-on-fofa/">said</a> in December 2013 it would take a “facilitative” approach to FOFA enforcement in light of the proposed changes and would</p>
<blockquote>
<p>“not take enforcement action in relation to the specific FOFA provisions that the government is planning to repeal”.</p>
</blockquote>
<p>After the reforms were disallowed in the Senate, ASIC said this week it would take a “<a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-307mr-disallowance-of-fofa-regulations/">practical and measured approach</a>” to administering FOFA as it now stands. The regulator says it recognises that compliance with FOFA will require systems changes for many Australian financial services licensees. This facilitative approach to FOFA compliance will continue until 1 July 2015. </p>
<p>It seems unlikely there is any need for panic within the industry as there is still some time before ASIC will enforce FOFA compliance. Nonetheless, those licensees who deferred making costly system changes in line with Labor’s legislation may now find themselves having to make those changes rapidly in a highly uncertain regulatory environment. </p>
<p>In the long run, this situation is likely to lead to less affordable financial advice for Australian consumers. </p>
<p>Despite the reform rollback not going ahead, there still isn’t an easy solution for the financial advice industry. The unchanged legislation now retains greater consumer protection. But it does <a href="http://www.theage.com.au/business/comment-and-analysis/fofa-doesnt-clean-up-the-financial-advice-minefield-20141121-11riwk.html">little to address </a>what many regard as the fundamental cause of the poor reputation of the Australian financial planning industry – the need to raise the professional, ethical and educational standards of financial advisers. </p>
<p>While consumers will get some greater level of protection through increased fee disclosure, this comes at a price. This protection also relies on consumers taking the time to read and understand the disclosures made by their financial planners. Financial planners can continue to give poor quality advice. What will change is increased upfront fees and greater disclosure around these fees resulting in higher costs. There will be less scope for scaled advice which was part of the Abbott government reforms. </p>
<p>FOFA still fails to set educational or professional standards for financial planners. Until industry entry standards are lifted, FOFA will not deliver accessible financial advice for the Australians who need it.</p>
<p>Absent an urgent rethink by the Abbott government on FOFA, after last week’s events it seems the goal of access to affordable and trustworthy financial advice for Australian consumers is more elusive than ever.</p><img src="https://counter.theconversation.com/content/34486/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker has previously received research funding from the Institute of Chartered Accountants in Australia. She is affiliated with Chartered Accountants Australia New Zealand.</span></em></p>Last week brought the latest instalment in the continuing Australian financial planning industry saga. Senators Jacqui Lambie and Ricky Muir blocked the Abbott government’s rollback of some of Labor’s…Julie Walker, Associate Professor in Accounting , The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/341712014-11-20T10:45:06Z2014-11-20T10:45:06ZWhat are the costs of Detroit’s rise from bankruptcy?<p>Earlier this month, we learned that the biggest municipal bankruptcy in history would also be among the swiftest. </p>
<p>The emergency manager for Detroit filed for bankruptcy in the summer of 2013 without a friend in the world. The city’s restructuring plan had no creditor support. The filing was met with hostility from elected city officials and residents. The Michigan and federal governments both ruled out any possibility of financial help. </p>
<p>Fast forward to today: the federal bankruptcy court recently entered an order <a href="https://www.kccllc.net/detroit/document/1353846141112000000000018">officially confirming</a> Detroit’s adjustment plan. Poised to reduce its debt by more than US$7 billion, Detroit’s final plan was supported by nearly all its creditors, including bondholders and retired workers. The state of Michigan ultimately put in money (with significant strings attached), as did an array of third-party sources, such as the Ford Foundation. Participants and observers have used <a href="http://www.freep.com/story/news/local/detroit-bankruptcy/2014/11/07/rhodes-bankruptcy-decision/18648093/">revelatory words</a> to characterize this outcome: Remarkable! Miraculous! Unprecedented! Creative!</p>
<p>Will the ends justify the means used to get there? History will be the judge, of both ends and means, but here’s a snapshot of how it looks right now. </p>
<h2>The means: short but not sweet</h2>
<p>Detroit’s swift trip through bankruptcy was made possible by the confluence of two factors. First, Michigan’s governor, Rick Snyder, installed an emergency manager under a controversial, and possibly unconstitutional, state takeover statute that <a href="http://www.theatlantic.com/politics/archive/2013/05/does-michigans-emergency-manager-law-disenfranchise-black-citizens/275639/">affects</a> a large percentage of African Americans who live in Michigan. The emergency manager’s limited term created an incentive for a shorter stay in bankruptcy. By its structure, too, the takeover law allows the emergency manager to make more streamlined decisions, operate more quickly than ordinary operations of city government would likely permit. </p>
<p>These factors could not have produced a confirmed timetable without the federal judges overseeing Detroit’s bankruptcy exercising a level and type of control unprecedented in the history of municipal bankruptcy, potentially beyond the constitutional boundaries of federal courts. Much of the court’s activity happened behind closed doors, increasing the potency of any anti-democratic critique of Detroit’s overhaul. </p>
<p>Critics usually decry decisions of so-called activist judges made after hard-fought adversarial processes. Less discussed are situations in which the power of the court is enhanced by avoiding litigation and reaching deals, as in this case. As one might expect, the settlement required parties to waive their rights to appeal key issues, such as the treatment of public pensions in bankruptcy. Detroit’s bankruptcy produced a precedent of a different sort: the implementation of judicial oversight that, in ways large and small, affects the timeline for Detroit’s bankruptcy exit and the blueprint for its future. </p>
<h2>The ends: not yet time for a victory lap</h2>
<p>Will people think the result is worth these sacrifices? Detroit’s restructuring helped make Governor Snyder one of Governing Magazine’s <a href="http://www.governing.com/poy/poy-rick-snyder.html">public officials of the year</a>. But what lies ahead is hard to say. </p>
<p>In the corporate context, at least, faster restructuring is associated with a greater likelihood of a <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=887523">return to financial distress</a>. A financial expert appointed by the bankruptcy court, Martha Kopacz, found Detroit’s plan feasible, albeit barely so. She suggested that the speed of the case may have <a href="http://www.detroitmi.gov/Portals/0/docs/EM/Bankruptcy%20Information/M.%20Kopacz%20Expert%20Report%20to%20Judge%20Rhodes%20071814.pdf">undercut feasibility</a> to some extent. </p>
<p>The negotiated cuts are certainly <a href="http://www.nytimes.com/2013/06/15/us/detroit-financial-problems.html?_r=0">more modest</a> than the emergency manager’s original proposal circulated before the bankruptcy. Are the savings enough to give the city a fighting chance? Richard Ravitch, a New York politician and businessman <a href="http://www.freep.com/story/news/local/detroit-bankruptcy/2014/11/17/richard-ravitch-detroit/19149687/">tapped</a> first to serve as a behind-the-scenes consultant to the bankruptcy court and then to be a senior advisor to the panel that will oversee Detroit’s fiscal decisions, says that its difficulties are much, much worse than New York City’s in the 1970s. Detroit Mayor Mike Duggan’s task, says Ravitch, is Sisyphean, like rolling a rock up a hill just to have it roll down again. </p>
<p>Emergence from bankruptcy is a breakthrough but just the beginning of a journey to try to conquer problems <a href="http://www.freep.com/article/20140223/OPINION05/302230041/Sugrue-Trickle-down-urbanism-won-t-work-Detroit">decades in the making</a>. In addition, the emergency manager and his team put the restructuring plan in place, but elected officials will have to implement it, subject to some <a href="http://www.freep.com/story/news/local/detroit-bankruptcy/2014/11/10/detroit-financial-review-commission-appointees/18822451/">oversight</a> by a new financial review commission. Although those officials told the court during the confirmation process that they support the plan, it took barely a business day for fractures to emerge publicly. </p>
<p>Mayor Duggan and Detroit’s Corporation Counsel have been arguing in court and the media that the city <a href="http://www.freep.com/story/news/local/detroit-bankruptcy/2014/11/12/duggan-bankruptcy-fees/18889949/">cannot afford</a> the professional fees incurred during the bankruptcy if it is to improve services for residents. That argument generates more than a little awkwardness when, just days earlier, the bankruptcy court ruled the city’s plan was feasible. </p>
<p>As for creditor outcomes, no one was immune from sacrifice. Retirees are taking sizable hits, especially to health care. Financial creditors have accepted far less than the face amount of their debt. The creditors getting the lowest return – civil rights claimants, personal injury claimants, lessors and counterparties to contracts the city is breaking – didn’t settle, lacking an organized way to negotiate collectively with the city (an official committee that would have represented their interests was disbanded by the judge in early 2014). These claims are a small fraction of Detroit’s overall debt, but quite substantial from the perspective of the people seeking payment. </p>
<p>It may be years before we know whether Detroit has truly turned the corner. But we can say right now that the methods used to get this far, this fast, were costly in more than money.</p><img src="https://counter.theconversation.com/content/34171/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Melissa B Jacoby does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Earlier this month, we learned that the biggest municipal bankruptcy in history would also be among the swiftest. The emergency manager for Detroit filed for bankruptcy in the summer of 2013 without a…Melissa B Jacoby, Professor of Law, University of North Carolina at Chapel HillLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334712014-11-04T22:25:36Z2014-11-04T22:25:36ZNational financial planning register will just list problem, not solve it<figure><img src="https://images.theconversation.com/files/63281/original/m4kttng7-1414645927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A national financial planning register is unlikely to prevent future scandals similar to those of the Commonwealth Bank</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Under changes proposed by the government, financial planners will be required to register with the Australian Securities and Investment Commission from next March. They will need to provide details of their educational qualifications, experience and any complaints lodged by clients.</p>
<p>The government has made determined efforts to wind back red tape through the amendments to the Future of Financial Advice reforms. However, a register will just create further compliance requirements without being of much benefit for clients. Until reforms are made to better align interests between adviser and clients, we will not see any real change within the industry.</p>
<h2>A register is unlikely to weed out rogue advisers</h2>
<p>A register is unlikely to overcome the problem of identifying “rogue advisers”. This issue has continued to plague the industry because of the failure by ASIC and financial services firms to tackle the systemic conflicts of interests between planners and clients. The successful performance of individual planners is still directly related to a product sales culture.</p>
<p>While the register is a step in the right direction, it will be valueless without strict registration requirements and enforcement. Currently, the registration requirements are vague and the corresponding penalties for any breach are very unclear. </p>
<p>If removal from the register is the only penalty, it may give the impression the government is assuring the community that registered advisers can be trusted to give appropriate advice. This is unlikely to actually be the case.</p>
<h2>Challenges to industry reform</h2>
<p>The difficulty for clients is finding an adviser who is committed to their best interests. No legislation, education qualifications or experience can overcome a culture of “product selling”.</p>
<p>What is needed is a client-centred industry. Both individual advisers and their organisations need to work in a culture where ethics and professionalism are valued, maintained and delivered. This requires a huge cultural shift from product advice to strategy advice. </p>
<p>While education goes part of the way in achieving this goal, fundamentally this must come from the licensees and advisers themselves. The problem is complicated by six large licensees controlling 80% of the financial advice industry. Many clients fail to appreciate that if you seek advice from one of these large institutions, most likely your funds will be placed in their internally branded products. </p>
<p>The industry is further complicated by the variety of individuals giving unregulated financial advice. In direct real estate investing, advice on gearing, investment returns and taxation is often freely given with little controls or oversight.</p>
<p>The proposed register will not overcome this problem since real estate salespersons are not considered financial advisers and are not included in its scope.</p>
<p>So is it possible to gain truly independent and transparent advice? In the current environment this is difficult and perhaps word of mouth and personal recommendation is still the client’s best friend.</p>
<h2>When a registration system works</h2>
<p>There are examples of registers that have been successful in improving standards across an industry. The Tax Agents Register is administered by the Tax Practitioners Board and has very specific education and professional registration requirements. Registration must be renewed every three years. </p>
<p>Tax agents must provide evidence of professional indemnity insurance and the professional development undertaken during the period to maintain their registration. Any non-compliance results in removal from the register and hence the inability to practise. </p>
<p>A similar regime would need to be applied to the financial planner register if it is to have any credibility. </p>
<p>Current indications are that the register will include any complaints or offences committed by the adviser. However, what the industry needs is for these advisers to be struck off the register and unable to practise. </p>
<p>The whole success of the register will also be dependent on the funding and resources allocated to ASIC to monitor and continually update the register. Without ASIC’s active involvement, the register will not be credible and is likely to become a “toothless tiger”. What consumers don’t need is just another list of financial advisers which offers no real value.</p><img src="https://counter.theconversation.com/content/33471/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sharon Taylor does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Under changes proposed by the government, financial planners will be required to register with the Australian Securities and Investment Commission from next March. They will need to provide details of…Sharon Taylor, Senior Lecturer, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/335482014-10-29T19:12:47Z2014-10-29T19:12:47ZDo the crime, do the time? Not if you’re a banker in Australia<p>Recently, the head of the Australian Securities and Investments Commission, Greg Medcraft, called Australia a “paradise” for <a href="http://www.theage.com.au/business/australia-paradise-for-whitecollar-criminals-says-asic-chairman-greg-medcraft-20141021-119d99.html">white-collar criminals</a>. Soon after <a href="http://www.watoday.com.au/business/asic-backflips-on-criminals-paradise-comments-20141022-119v22.html">he recanted</a>, claiming he didn’t want the country to become a haven for financial fraudsters. This rephrasing likely followed when Finance Minister Mathias Cormann <a href="http://www.abc.net.au/news/2014-10-22/red-faced-over-white-collar-criminals/5834540">leaned on Medcraft</a>.</p>
<p>The mass media has done an admirable job bringing the CBA financial planner scandal to light, forcing ASIC to finally investigate, the Senate to inquire and the CBA to apologise and provide compensation. Despite this, frauds like these are <a href="http://www.abc.net.au/news/2014-10-24/cba-whistleblower-jeff-morris-discusses-financial/5840536">universally downplayed</a> as isolated events, perpetrated by “bad apples” in an otherwise trustworthy FIRE (finance, insurance and real estate) sector. </p>
<p>Australia’s economic history shows otherwise. Our past is littered with a surprisingly large number of control frauds, which government and regulators have done next to nothing to prevent and rarely prosecute. The mounting frauds appear emboldened by deregulation and liberalisation of banking and finance. </p>
<p>The following table provides an overview of the major frauds committed by the FIRE sector in recent decades.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The term “control fraud” refers to the systematic, highly damaging, institution-driven and directed nature of the fraud, in contrast to common low-level frauds. The weapon of choice is accounting.</p>
<p>William K. Black’s book <a href="http://www.amazon.com/The-Best-Way-Rob-Bank/dp/0292754183/ref=dp_ob_title_bk">The Best Way to Rob a Bank Is to Own One</a> provides an excellent account of regulatory public executives who, during the United States Savings and Loan crisis in the 1980s, actively protected the worst fraudsters in the industry, while damning “mum and dad” investors. Black later developed the <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590447">concept of control fraud</a>, whereby executives use the institution they manage as the mechanism to commit fraud.</p>
<p>Control frauds typically involve a four-part strategy: exponential loan growth, lending to uncreditworthy borrowers, extreme leverage and minimal loss reserves (plus obnoxious pay packets for bank CEOs). The obvious presence of these four elements in Australia’s banking system demonstrates the risk to stability which lies at the centre of finance.</p>
<h2>Why fraud goes undetected</h2>
<p>Australian economist Phillip J. Anderson documented in his book on <a href="http://www.amazon.com/Secret-Life-Real-Estate-Banking/dp/0856832634">US real estate cycles</a> from 1800 to 2008 that fraud is never detected by the mainstream for two reasons. The first is that FIRE sector executives and managers are extremely powerful politically, financially and legally, so few will tangle with them. Secondly, during economic booms, the public is typically too self-centred to care, as long as the predations don’t affect the majority.</p>
<p>ASIC refuses to investigate the control frauds, instead choosing to offer up a number of excuses: lack of funding, jurisdictional boundaries, ineffective laws and so on. Thankfully, 20-year veteran financial consumer activist <a href="http://www.bfcsa.com.au/index.php/about-bfcsa/about-denise-brailey">Denise Brailey</a> does what ASIC declines to do on a A$400 million dollar budget. Brailey, a criminologist, has helped unearth and sue control frauds and recalcitrant state governments over the years.</p>
<p>According to Brailey, Australia has two major control frauds rapidly growing without restraint: a <a href="http://www.smh.com.au/business/watchdog-asleep-on-australias-subprime-scandal-20131024-2w323.html">subprime mortgage scandal</a> and debenture-funded pyramid business scams. The former is similar to the US subprime mortgage scandal. Brailey estimates these control frauds could each cause over A$100 billion in losses. Brailey has warned ASIC about these control frauds for over a decade. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Chris Daniel/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
</figcaption>
</figure>
<h2>Paradise untouched</h2>
<p>It has never been a better time to be a criminal, as long as you’re a white-collar criminal in the FIRE sector. Bankers involved with the CBA financial planning scandal have <a href="http://www.smh.com.au/business/comment-and-analysis/the-response-to-the-commonwealth-financial-planning-scandal-shows-banks-really-are-above-the-law-20141026-11c13d.html">still managed to advance their careers</a> and win bonuses.</p>
<p>History enlightens us, which is why the history of control frauds isn’t taught anywhere. Political and economic elites want the public kept blind to the plague of theft they’ve been engaged in. In Australia, this history is left to individuals like <a href="http://www.bfcsa.com.au/">Denise Brailey</a> and <a href="http://www.bankvictims.com.au/dr-evan-jones">Evan Jones</a> to tell, whose work was used in my recently published <a href="http://www.worldeconomicsassociation.org/files/Bubble_Economics_Egan_Soos.pdf">book</a>, co-authored with Paul D. Egan.</p>
<p>The disparity between white and blue-collar criminals has never been larger. If I defraud my neighbour of $10,000, I’ll be charged, prosecuted and sent to jail for years. In contrast, a <a href="http://www.bfcsa.com.au/index.php/scams/hall-of-shame">banking executive</a> who robs borrowers and loots or destroys untold billions of dollars is praised by politicians, business groups, the mass media and the economics profession for “wealth creation”.</p>
<p>Australia’s credit-based banking system, liberated from responsibility by deregulation, self-regulation, de-supervision and de facto decriminalisation, has and will inevitably continue to generate toxic and recurring control frauds. The FIRE sector cannot be allowed to profit from control fraud. Government has a civic obligation to prosecute those who perform criminal acts on innocent parties. We know this as the rule of law.</p>
<p>Academia could offer an independent voice against these control frauds, but the legal and economics professions are mute before the FIRE sector, which employs many directly and indirectly. As Black documented, mainstream economists have intentionally ignored the dangers of control frauds, proclaiming that “private market discipline” and “rational agents” can prevent frauds from even occurring: “the market knows best” line of fallacious reasoning.</p>
<p>The full extent of these control frauds is yet to be revealed as the government, regulators and external dispute resolution organisations (RBA, ASIC, APRA, ATO, AFP, Treasury, FOS and COSL) resolutely refuse to investigate. Meantime, control frauds are free to weave a trail of forced bankruptcies, homelessness, poverty, desperation, depression and suicide.</p>
<p>History shows government only acts when the predations of control frauds break in the mass media. The two largest control frauds, the debenture-funded pyramid business scams and <a href="http://fsi.gov.au/files/2014/09/Banking_and_Finance_Consumer_Support_Association.pdf">subprime mortgage scandal</a>, are running rampant. Unfortunately, government will only grudgingly do something when the number of victims climbs far enough that they become too visible to openly ignore – but, by then, it will be too late. </p>
<p>Nevertheless, a Royal Commission is necessary to shine a light on the transgressions of the FIRE sector.</p><img src="https://counter.theconversation.com/content/33548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Soos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Recently, the head of the Australian Securities and Investments Commission, Greg Medcraft, called Australia a “paradise” for white-collar criminals. Soon after he recanted, claiming he didn’t want the…Philip Soos, Researcher, School of International and Political Studies, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/319582014-10-03T04:18:25Z2014-10-03T04:18:25ZA new regulator and new players - pressure mounts on financial planners<figure><img src="https://images.theconversation.com/files/60625/original/2dzpzqx5-1412227000.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Finance Minister Mathias Cormann has rejected calls for government supervision of planners</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The Australian Bankers’ Association and Financial Services Council announced this week plans to establish an industry-led regulatory body for financial planners. However, whether such a body will be effective in lifting the beleaguered reputation of the industry remains questionable.</p>
<p>It is already facing numerous challenges.</p>
<p>Australian real estate agency Ray White recently said it would establish a wealth management arm to extend its existing mortgage broking business. <a href="http://www.smh.com.au/business/banking-and-finance/ray-white-move-into-financial-planning-advice-raises-concerns-20140917-10i5xt.html">This announcement</a>, along with the news that several other players are considering moving into financial planning, raises concerns about the quality and independence of the financial advice provided under such an arrangement. </p>
<p>These concerns are hardly surprising given the recent scandals at the wealth management arms of large and respected Australian financial institutions, the Commonwealth Bank and Macquarie Bank. Indeed, a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC/Final_Report/%7E/media/Committees/Senate/committee/economics_ctte/ASIC/Final_Report/report.pdf">Senate Committee</a> in 2014 described the behaviour of some advisers at Commonwealth Financial Planning Limited, part of the Commonwealth Bank Group, as “unethical, dishonest, well below professional standards and a grievous breach of their duties”. </p>
<p>If the Commonwealth Bank and Macquarie Bank can’t manage to provide good quality financial planning advice then what can the public expect from a sales-based organisation like Ray White? </p>
<p>When reviewing the recent government-driven changes to the financial planning industry, it seems likely Ray White is just the first of many new industry entrants. </p>
<h2>Ongoing reforms to the industry</h2>
<p>Successive governments have tinkered with the financial planning industry. The stated goal has been to improve access and affordability of financial advice to retail clients. </p>
<p>Reforms started with the Financial Services Reform Act 2004 and have continued through to the recently implemented Future of Financial Advice (FoFA). Regulators have enshrined the term “financial planner” in law, established a “best interests” duty for planners to their clients and banned conflicted remuneration for financial advice to retail investors. </p>
<p>One key change introduced post-FoFA has been the concept of “scaled advice”. Scaled advice is advice that is limited in scope. It emerged as a response to the historically high costs of financial advice. Individuals were also wanting to obtain advice on specific issues and didn’t want to be forced to pay for a comprehensive financial plan. </p>
<p>Subject to a number of disclosures and with client agreement, a financial adviser can now provide advice on a single issue such as retirement planning. </p>
<p>Scaled advice is subject to the same best interests duty as comprehensive advice and ASIC has issued a number of regulatory guides on the topic. </p>
<p><a href="http://www.aph.gov.au/DocumentStore.ashx?id=69847564-0217-459f-b0ff">A report </a>prepared for the Industry Super Network predicts financial advice costs will fall as a result of these reforms. There will be a shift towards less costly scaled advice and fees for complex advice will be more transparent. </p>
<h2>More changes, more market players</h2>
<p>These reforms are also responsible for encouraging new market entrants. Now that advice can be given on specific issues, wealth management divisions of organisations like Ray White can find synergies with their business to provide advice on property investment.</p>
<p>Again the conflicts are still obvious. However, though the extent and price of the financial advice may fall, it shouldn’t mean that quality does too. As the Australian Securities and Investments Commission <a href="http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg-244-published-13-December-2012.pdf/$file/rg-244-published-13-December-2012.pdf">RG244</a> points out, all financial advice is scaled in scope - it’s just a question of how the scaling is achieved. </p>
<p>To ensure that advice quality does not fall further with the influx of new entrants to the market, higher educational and professional training standards for planners must be established. Currently, the low <a href="http://www.asic.gov.au/asic/asic.nsf/byheadline/Regulatory+guides?openDocument#rg146%E2%80%8E">RG146</a> standard required means that in some cases new financial planners receive less education and training than hairdressers. </p>
<p>Continuing professional development requirements have also fallen short. <a href="http://www.smh.com.au/business/banking-and-finance/penske-file-exposed-macquarie-groups-cheat-sheet-made-public-20140919-10j8yu.html">Recent revelations</a> of exam cheat sheets used for in-house professional development exams at Macquarie Wealth suggest these requirements are far from stringent. </p>
<p>Consumer confidence has already been shaken and the financial planning industry needs to lift its game if it is to expand as predicted. </p>
<p>An initial step has already been made with the industry recognising it has a problem.</p>
<p>The Australian Bankers’ Association and Financial Services Council initially lobbied for the establishment of an independent statutory body to regulate the industry. Both argued that self-regulation is no longer a credible option. </p>
<p>Finance Minister Mathias Cormann rejected the idea. The banks are now left to pursue the establishment of an industry-led body to set and monitor professional standards for the financial advice industry. </p>
<p>It seems at least there will be some improvement in oversight of the industry’s professional standards. However, there are plenty of uncertainties. </p>
<p>New market entrants facing similar conflicts between remuneration and advice will add further pressure on the industry. An industry-led regulatory body may also not have the same incentives to increase training requirements for planners. What is certain is the level of education and ethical training required for planners needs to increase in order for the industry to avoid further scandal.</p><img src="https://counter.theconversation.com/content/31958/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker has received funding from the Institute of Chartered Accountants in Australia. She is affiliated with the Chartered Accountants Australia and New Zealnd.</span></em></p>The Australian Bankers’ Association and Financial Services Council announced this week plans to establish an industry-led regulatory body for financial planners. However, whether such a body will be effective…Julie Walker, Associate Professor in Accounting , The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/305192014-08-17T20:25:09Z2014-08-17T20:25:09ZMillions of households are missing out on good financial planning<figure><img src="https://images.theconversation.com/files/56582/original/8ygszkrq-1408076898.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite the fact that Australians are getting wealthier, financial literacy is not increasing at the same rate.</span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>The wealth profile of Australian households has changed phenomenally over the past 25 years, according to a <a href="http://www.fundingaustraliasfuture.com/sites/fundingaustraliasfuture.com/files/papers/Australian_Household_Sector_Finances.pdf">recent paper</a> from the Australian Centre for Financial Studies. Thanks to increases in asset prices and the introduction of compulsory superannuation in 1992, most households are much wealthier than those of previous generations. Total household wealth in 2013 reached A$6,689 billion, six-and-a-half times the level of household wealth in 1988.</p>
<p>From an aggregate point of view, as RBA data shows below, the net wealth trend line has been positive and increasing with one noticeable blip – the global financial crisis in 2007-08. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=238&fit=crop&dpr=1 600w, https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=238&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=238&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=299&fit=crop&dpr=1 754w, https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=299&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/56576/original/t9y8ht9g-1408070072.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=299&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>As of the end of 2013, dwellings comprise more than half the value of household assets (54%); superannuation and life policies account for a further 25%; with consumer durables (such as motor vehicles and household furnishings) at 3%. This provides an interesting contrast with 1988, where again dwellings accounted for around half the value of household assets (51%); superannuation and life policies 17%; and consumer durables 10%.</p>
<p>While the value of assets has gone up, so too has household debt. In 2013, total household liabilities, mostly debt, stand at around half (49%) of the value of household financial assets, or around one-fifth (21%) of total assets. So, for every dollar in debt, households have, on average, about $2 in financial assets and around $5 in total assets. </p>
<p>This compares to the situation in 1988, when total household liabilities stood at around one-third (33%) of the value of household financial assets, or around one-eighth (13%) of total assets. In 1988, for every dollar in debt, households had, on average, about $3 in financial assets and around $8 in total assets. </p>
<h2>By age and income</h2>
<p>While overall household wealth is increasing, there are some very marked variations when the data is segmented by age and income levels.</p>
<p>An examination of net wealth by age group reveals a lifecycle pattern to consumption. This is well expressed by the figure below, which provides an excellent stylised view of the use of financial assets as a means of smoothing consumption through the lifecycle. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=347&fit=crop&dpr=1 600w, https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=347&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=347&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=436&fit=crop&dpr=1 754w, https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=436&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/56577/original/kt925q5k-1408070132.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=436&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Source: Corrigan and Matterson (2009)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Assets are accumulated through the use of human capital from the beginning of a working life. Debt is used to supplement income to further finance assets, which is then paid down pre-retirement. Net wealth is then expended in retirement. </p>
<p>In retirement, the capacity for an individual to support oneself through human capital is much reduced. Therefore, households need to ensure sufficient financial resources have been accumulated for consumption for discretionary purposes – especially in the more active early retirement phase – and to cover the potential increase in health-care costs in the later stages of retirement. </p>
<p>Just as Australians have been consolidating their wealth, a second major trend has been the rise in longevity. Life expectancy for men has risen from around 65 in the early 1900s to around 85 today. While increased wealth bodes well for financial well-being in retirement, steps must be taken to preserve and protect retirement savings to last for what can be around 20 years on average, after the completion of working life.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=287&fit=crop&dpr=1 600w, https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=287&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=287&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/56578/original/f7csvq86-1408070203.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Household net worth by age profile ($’000, mean value, Australia, 2011-12).</span>
<span class="attribution"><span class="source">Reserve Bank of Australia, 2013</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>A skewed distribution of net wealth</h2>
<p>Within a defined contribution superannuation system, the need for both advice and products to assist consumers to manage investment and longevity risk to ensure a comfortable and self-reliant retirement is a priority.</p>
<p>However, for some households, managing wealth is not an issue. Australia, as in many OECD countries, has a skewed distribution of net wealth, with the bulk being held by a relatively small number of households. The wealthiest 20% of households hold around 61% of total household net worth, averaging $2.2 million per household.</p>
<p>On the other hand, the poorest 20% of households account for just 1% of total household net worth in Australia, with an average of about $31,000 per household. Mean household net worth in Australia for the period 2011-12 was around $728,000 (consisting of $858,000 assets and $130,000 of liabilities). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=142&fit=crop&dpr=1 600w, https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=142&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=142&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=179&fit=crop&dpr=1 754w, https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=179&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/56581/original/7kj39ynk-1408076145.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=179&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">ABS, 2013</span></span>
</figcaption>
</figure>
<p>So not everyone in Australia is getting wealthier. Many households face financial exclusion where:</p>
<blockquote>
<p>Individuals lack access to appropriate and affordable financial services and products - the key services and products are a transaction account, general insurance and a moderate amount of credit.</p>
</blockquote>
<p>A 2013 Australian <a href="http://www.financialliteracy.gov.au/media/465159/nab_csi_measuring_financial_exclusion_in_australia_2013.pdf">study</a> found that 18% of the adult population were either fully excluded or severely excluded from financial services in 2012. Just over 1% of adults were fully excluded – they had no financial services products – and almost 17% of adults were severely excluded in that they only had one financial services product.</p>
<p>In all, this means more than three million Australians are either partly or fully financially excluded. </p>
<h2>What do Australians need from financial services?</h2>
<p>Despite the fact that Australians are getting wealthier, financial literacy is not increasing at the same rate. There is a gulf between what households actually do and what may be in their best interests to do. The complexity of the problem means that households need assistance in making these decisions. </p>
<p>The need for guidance is so critical that it must be available in multiple forms. In addition to traditional financial advice, embedded product and/or technology-based guidance may help nudge households toward better decisions.</p>
<p>Households are also exposed to a multitude of financial-related risks – market inflation, longevity, health, leverage and climate risks to name a few – which are simultaneously dynamic, complex and can manifest over different time horizons. In addition to improved guidance, households need a more complete menu of solutions to help manage these risks.</p>
<p>To make this guidance and risk management as effective as possible for households, they require a complete set of financial “building blocks”. Without these, some household risks loom large: for example, longevity risk remains a real consideration for households, increasingly so as the population ages.</p>
<p>Furthermore, there is an implicit assumption that all Australians have equal access to, and benefit equally from, the financial system. This is not the case. Large segments of the population suffer from financial exclusion: they have either limited or incomplete engagement with critical channels of the system. Measures specifically targeted at closing these gaps should be a priority.</p>
<p>Finally, to facilitate the innovation required to meet these challenges, regulation must be flexible, responsive and oriented towards meeting the needs of households. One immediate reform would be to promote further innovation in the area of retirement income products.</p>
<p>Building a financial system that serves Australian households requires a range of approaches if we are to build an inclusive and more equitable society.</p><img src="https://counter.theconversation.com/content/30519/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deborah Ralston does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The wealth profile of Australian households has changed phenomenally over the past 25 years, according to a recent paper from the Australian Centre for Financial Studies. Thanks to increases in asset prices…Deborah Ralston, Professor of Finance and Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/246162014-03-26T03:55:30Z2014-03-26T03:55:30ZThe one certainty of financial advice is unfettered fees<figure><img src="https://images.theconversation.com/files/44750/original/3tp2bh6x-1395797069.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The path to good financial advice is littered with fees.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com">Shutterstock</a></span></figcaption></figure><p>One of the main arguments made by Australia’s banks for the watering down of Future of Financial Advice (FoFA) reforms is that it would reduce the cost of financial advice to consumers.</p>
<p>Specifically, the banks want “general advice” to be exempt from the rules prohibiting conflicted remuneration - in other words, commission.</p>
<p>The presumption is that the cost of financial advice is too high. But what are the costs? The short answer is it varies, depending on the complexity or amounts involved. </p>
<p>At a minimum, a client may expect to pay about A$1,500 for a comprehensive personal financial plan and more likely $3,000 or more. Then, an agreement may be put in place to charge an amount for an annual review and monitoring services (in other words – a retainer). </p>
<p>Let’s take an example where a consumer has a relatively small sum of $5,000 to invest. Under the law, a financial adviser is required to treat the consumer for “personal advice”. This means taking into account the person’s details, risk profile and objectives and then completing a “statement of advice” which may run to some 15 pages or more. </p>
<p>To comply with the Corporations Act, the adviser may need to spend some 4 hours or more to complete the task to the required degree. If an adviser charged $150 per hour (cheap by all accounts) then the cost of providing the service would be about $600 or 12% of the investment amount. If the hourly rate was $300 then the amount would be $1,200 or 24% of the invested amount. </p>
<p>Such cost levels are obscene when considered as a percentage, and have made financial advice inaccessible for people with small amounts to invest.</p>
<p>Prior to July last year, advisers often received commission payments from product providers allowing them to waive or reduce the upfront fees charged for advice. From July 2013 financial advisers were banned from receiving commissions for new advice, in order to ensure the advice was not biased. </p>
<p>A recent example of the effect of the ruling is when a member of an industry superannuation fund retired and wanted to commence a pension from his fund and was charged $1,500 for a financial plan just to make a change to his circumstances. Such a fee can be explained by the rules of compliance under which financial advisers must operate.</p>
<h2>The case for simplification</h2>
<p>So, in such a context, the government’s proposal to simplify things by reducing the compliance rules makes sense. The new regime would allow some advisers to waive the normal requirements of giving objective advice after considering the consumer’s circumstances by allowing “general advice” to be offered instead. </p>
<p>This means the financial adviser will not have undertaken an account and have recorded all details of the consumer’s personal circumstances, and the recommended investment product will not necessarily be selected for a specific purpose that meets the consumer’s investment objectives. The advice is “general” so it may not be specific for purpose.</p>
<p>The upshot of all this is that some advisers will change their way of doing things to comply with the rules for providing general advice, so they will not be required to complete a client risk profile or produce a time consuming statement of advice. And the benefit to be derived is the payment by way of commission. </p>
<p>In the earlier example of the investment of $5,000, a commission of 3% or $150 may seem to be a saving to the consumer compared to paying $600. But, if the investment was $20,000 then the commission would be worth $600 without the adviser having to comply with the personal advice requirements. If the investment amount was $50,000, then the commission amounts to $1,500. At that level, we might as well return to the old days when selling a product was the objective.</p>
<h2>Ongoing commissions are still rife</h2>
<p>There is another aspect to financial advice costs that is overlooked in the current debate on whether to wind back parts of FoFA.</p>
<p>The costs of financial advice also extend to the costs applied against the consumer’s investments. Such costs are invariably based on a percentage of the amount invested. In other words, a commission form of fee is involved. </p>
<p>To illustrate: a consumer invests $100,000 via a product provider into an administration platform and then spreads the risk of investment among four or five investment managers. There are a number of costs involved. </p>
<p>The first is an administration fee charged by the platform provider. This is based on a percentage of the amount of funds invested, say 0.8% pa. There may also be a member fee of say, $10 per month. Then the funds are invested with a range of fund managers who charge a fee based on the size of the investment. </p>
<p>Such a fee can range from a conservative 0.4% to 2.2% or more and some may even include a performance fee as an extra reward to the fund manager for exceeding a performance target. </p>
<p>Another level of fees that may hold back the performance of the consumer’s investment is an adviser’s ongoing fee. Again, in some instances this is also levied by means of an asset-sized fee up to 1% for various adviser services, although some advisers levy a dollar amount for such service rather than an asset-based percentage.</p>
<p>There are many stakeholders involved in the current debate about financial advice fees and commissions – consumers, advisers, regulators and product providers. Notably, the first three are opposed to the changes currently being considered by the government.</p><img src="https://counter.theconversation.com/content/24616/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren McKeown is affiliated with a company that holds an Australian Financial Services Licence.</span></em></p>One of the main arguments made by Australia’s banks for the watering down of Future of Financial Advice (FoFA) reforms is that it would reduce the cost of financial advice to consumers. Specifically, the…Warren McKeown, Teaching fellow , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/110492013-01-07T03:43:57Z2013-01-07T03:43:57ZAccountants going ape over APES 230<figure><img src="https://images.theconversation.com/files/18347/original/xxmgn46q-1354672061.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian accountants are concerned new industry standards which ban "conflicted remuneration" such as commissions on insurance in in conflict with financial planning legislation.</span> </figcaption></figure><p>Right now, the Australian accounting industry is in uproar about financial planning. The new standard APES 230 Financial Planning Services, issued by the Accounting Professional and Ethical Standards Board last month, has generated huge concern within the profession. </p>
<p>The controversial issue in APES 230 is the banning of conflicted remuneration such as commissions on insurance and percentage based fees on investments. APES 230 has limited grandfathering provisions for the new rules, with compliance required by 30 June 2018. </p>
<p>This is inconsistent with the recent Future of Financial Advice (FoFA) legislation which permits the continuity of asset fees (except on gearing) and commissions on life insurance (except on certain insurance policies in superannuation funds). </p>
<p>The APES standard binds members of the three Australian accounting bodies CPA Australia, ICAA and IPA. In other words, APES 230 sets a different, higher standard for accountants who also provide financial planning advice versus financial planners with no professional accountancy qualification. </p>
<p>The APES Board justifies its position on conflicted remuneration as in the “best interest” of the client, stating in an <a href="http://www.apesb.org.au/uploads/apesb-230-ed-july-2012/apes-230-ed-explanatory-memorandum.pdf">APESB explanatory memorandum</a> that: “threats to the fundamental ethical principles of integrity, objectivity, and professional competence and due care arise from receipt of conflicted remuneration”. </p>
<p>This is despite FoFA legislation already establishing a statutory fiduciary duty for financial advisers requiring them to act in the best interests of their clients. </p>
<p>The APES Board was established by CPA Australia and the ICAA in 2006 to set the code of ethics and professional standards for Australia’s professional accounting bodies. Development of APES 230 commenced in 2007 with the first exposure draft issued in 2010. </p>
<p>Submissions to the APESB from the three professional accounting bodies recommended that APES 230 follow the FoFA requirements. The first tranche of FOFA legislation commenced on 1 July 2012 with a voluntary compliance period until 1 July 2013, aligning with the commencement date of APES 230.</p>
<p>The FoFA reforms are aimed at improving the trust and confidence of Australian retail investors in the financial planning sector. Apart from the “best interest” duty, FoFA also enshrines the term, “financial planner” with <a href="http://www.wealthprofessional.com.au/article/financial-planner-financial-adviser-to-be-enshrined-in-law-146817.aspx">recent draft legislation</a> providing that only those fully licensed and authorised to provide personal financial advice can call themselves a financial planner or financial adviser.</p>
<p>Licensed financial planners hold an Australian financial services licence. Many accountants also complete the necessary qualifications to become a licensed financial planner. However, not all licensed financial planners complete accounting qualifications. It’s not surprising then that many in the accounting world are claiming that APES 230 will impose significant differential costs on accountants who also provide financial planning advice, or those who partner with financial advisers. </p>
<p>The IPA has already indicated that it will not promulgate APES 230 but will instead develop its own <a href="http://www.publicaccountants.org.au/library/media-releases/media-release-ipa-stands-ground-over-apes-230">standard</a> consistent with FoFA. There are also <a href="http://www.moneymanagement.com.au/news/accounting/apes-230-challenge-cpa-australia-and-ipa-members">rumours of a possible legal challenge</a> to the standard.</p>
<p>The furore within the accounting fraternity is not as self serving as it might appear. The FoFA reforms have dramatically changed the financial planning industry in Australia and financial advising is a major revenue source for many accounting firms. For these firms APES 230 represents a costly add-on to the existing significant costs of FoFA implementation, placing them at a disadvantage in the financial advising marketplace. At the same time, there appears to be little benefit to the retail investor who is unlikely to understand the difference between a licensed financial planner who is also an accountant and one who is not. </p>
<p>A longer term consequence of APES 230 is the likely separation of financial planning and accounting professional services. Membership of an accounting body now brings with it the obligation for members providing financial advice to use “non-conflicted” or fee-for-service remuneration models, an obligation not imposed on non-member licensed financial planners. The higher “best interest” standard on financial advising contained in APES 230 may simply mean fewer accountants in the future.</p><img src="https://counter.theconversation.com/content/11049/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker is a Fellow of the Institute of Chartered Accountants in Australia and has in the past received research grant funding from the Institute of Chartered Accountants in Australia. She is currently a member of the Education Board of the Institute of Chartered Accountants in Australia.</span></em></p>Right now, the Australian accounting industry is in uproar about financial planning. The new standard APES 230 Financial Planning Services, issued by the Accounting Professional and Ethical Standards Board…Julie Walker, Associate Professor in Accounting, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/52992012-02-21T19:39:37Z2012-02-21T19:39:37ZFinancial advice reform: have we learned enough from Storm?<figure><img src="https://images.theconversation.com/files/7789/original/jfq47ghx-1329451844.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Founder of Storm Financial, Emmanuel Cassimatis, speaks before a parliamentary inquiry.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>When <a href="http://news.theage.com.au/breaking-news-business/storm-financial-collapse-plan-outlined-20090810-ef9y.html">financial planning firm Storm Financial</a> collapsed with $3 billion in investment losses, many of its investors were left destitute.
A parliamentary joint committee inquiry into the company’s demise was conducted in response and, in 2010, then Financial Services Minister Chris Bowen announced a series of sweeping reforms aimed at giving greater protection to retail investors.</p>
<p>The Future of Financial Advice (FOFA) reforms are due to come into force on July 1, 2012. The proposals are intended to minimise conflicts of interest and restore confidence in the financial advisory sector. The proposals include: a ban on commissions and rebates on a prospective basis; a requirement for clients to opt in for advice every two years; a duty for financial advisers to act in their client’s best interests; a ban on percentage-based fees on geared products and portfolios; allowing superannuation funds to provide simple intra-fund advice at minimal or no cost to members; and further powers for the Australian Securities and Investments Commission (ASIC) to act against unscrupulous advisers. </p>
<p>The fundamental purpose of the proposals is to prevent consumers from suffering investment loss arising from inappropriate advice. The most devastating example is attributed to Storm, where about 4000 clients suffered losses estimated to be $3 billion. The advice was based around “double gearing” - by borrowing against the client’s house and then using margin lending to invest heavily in the sharemarket. The undoing of this strategy was the global financial crisis when share values fell heavily and the lenders called in loans – both against the shares and against the client’s house. Yet Storm had complied with procedural requirements of the law at the time. The model used by Storm could exist in the future for some clients, except for a modification to the remuneration method. </p>
<p>Where Storm’s advice model came unstuck was when they applied a similar strategy to a large number of clients, where it was argued that the advice was not appropriate in many sets of circumstances. The proposed “best interests” provision is a change from the current law as the adviser will be required to put the client’s interests first and above the adviser’s own interests. This is a laudable and ethical move, but can this be enforced? Under the best interest duty, an adviser is required to only give advice that is appropriate for the client. This will replace the current rule, which states that an adviser must provide a “reasonable basis for the advice”. In describing the best interest provision, the term “reasonable” is used a number of times, which indicates that subjectivity of what is reasonable will be the order of the day.</p>
<p>The current rules would have ruled out the Storm advice for a number of clients as the advice would have been deemed not to have been reasonable given the circumstances of each client. This matter is currently before the court under existing legislation. However, it may have been appropriate for some clients and under the new rules the same strategy could be appropriate for some particular clients as well. The Storm disaster is seen as the reason behind the changes to the laws governing investment advice. </p>
<p>Under the proposals, a financial adviser that charges fees for ongoing advice will be required to send a notice to the client requesting the client to agree to renewal of the service contract, otherwise the adviser must cease invoicing the client. Such a proposal adds costs to the operations of a financial planning practice, yet is designed to ensure that clients do not pay for any services that they do not receive. It is a worthy addition to the objective of consumer protection. </p>
<p>However, the FOFA reforms reinforce an inconsistency in the intent of the proposals. The proposal to allow intra-fund advice by institutions and superannuation funds reflects a conflict of interest, as the advice can hardly be seen as independent. When a member of a fund seeks advice from the fund in which they are a member, it is extremely unlikely that the member will be advised to invest elsewhere, other than in the same fund. With intra-fund advice encouraged by the proposals, this is likely to result in limited advice provided to consumers, which is not focused on the whole of the client’s needs but solely on their superannuation fund interest pertinent to that particular superannuation fund. This proposal is likely to push consumers more towards limited and conflict-ridden advice than that which existed before. </p>
<p>Furthermore, the advice offered by intra-fund means is generally paid for by the fund out of charges levied for the administration of the fund. Yet the banning of an alternate form of remuneration for advice in the form of commission is also seen as inconsistent. The allocation of payment for advice offered by superannuation funds is not declaredm yet the commission paid by retail investors is declared to the consumer. So, on the one hand, the proposals are aimed at seeking independence and objectivity; on the other, the institutions – banks and industry superannuation funds - control much of the product manufacture, distribution and the associated advice offered to consumers. </p>
<p>The enhancement of ASIC’s powers will capture all financial advisers (including those who are salaried employees), whereas at present, only those who are known as “authorised representatives” are known to ASIC. This will enable ASIC to ban employed advisers who can move from employer to employer under the current arrangements. </p>
<p>It might be said that the government has missed an opportunity to break the nexus between the manufacturers, distributors and advisers, but instead has provided a means of reinforcing the integration of product and advice and conflict of interest. It may be argued that this reinforcement of a conflict of interest scenario is a trade-off with the breaking of the up-front and trail commission element of the current situation, eliminating many independent advisers under the argument that a reduction of costs to retail consumers will benefit their superannuation balances in the long run. Overall, it is seen as a win for the institutions and the industry superannuation funds.</p><img src="https://counter.theconversation.com/content/5299/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren McKeown is a Certified Financial Planner who advises clients on investment and superannuation matters. The licensee is not associated with any bank or industry superannuation fund.</span></em></p>When financial planning firm Storm Financial collapsed with $3 billion in investment losses, many of its investors were left destitute. A parliamentary joint committee inquiry into the company’s demise…Warren McKeown, Teaching fellow , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.