The Super Trap
There would be less need for a royal commission into financial services if we weren't forced to invest so much in superannuation. By Nick Cater
Ken Hayne didn’t waste a word in an admirably concise 641-word summary of his interim report into banking and finance. Sharp practices have been exposed, reputations broken and financial institutions humbled.
What’s lacking so far, however, is any explanation for why sections of the banking and finance industry went rogue in the first place. Why in this most heavily regulated sector, in which consumers have the power to take their business elsewhere in response to bad service, did the banking and finance companies get away with it for so long?
If the Royal Commissioner is to address this question in his final report, he much look to the underlying factors that drive Australian’s reliance on complex financial services, where the risks and benefits are frequently hard to understand.
Here are five places the commissioner should start looking:
1. Compulsory superannuation savings of 9.5 per cent of our wages distorts the demand for financial services. In theory, every Australian worker should be making rational judgements about where to put their money and how long to keep it there. But let’s be honest for a moment, how many of us actually put thought and time into this? And how man have the time and knowledge to do it properly?
2. Workers are more of less obliged to invest their money into financial products. Frequently it's not the best option. They might be better off paying down their own debt, for example. But that prudent decision is prohibited by law, while the interests of finance companies are protected.
3. There is a huge choice of funds, but competition in the superannuation sector is not efficient, because only some funds have default status. Default status amounts to free distribution of a financial product. Retail products need to incur distribution costs that the industry funds do not - either direct marketing and sales, or financial advice.
4. The uncompetitive and heavily distorted landscape has been poorly regulated, not because the laws were not in place - but because they were not enforced. The regulator has been focused on increasing the cost of distribution for products that are not default. They have been making it harder for Australians to receive cost-effective financial advice. This further benefits the industry funds. They will use lack of understanding of the fundamental economics of the market to push for further changes that make it harder to end up in anything but an industry fund.
5. In the non-superannuation financial advice space - the reality is the commissioner will tread more lightly because of the fears of tightening access to credit in the economy and general risks around the housing market.
Encouragingly, however, whatever his final recommendations, commissioner Hayne seems wary of piling on more regulations.
Banks are obliged by law to deal “efficiently, honestly and fairly” with their customs and much of the behaviour Hayne draws to our attention unquestionably fails that test.
“Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime,” says Hayne. “What would that gain?”
Quite so.