A financial services policy balancing act

The Government must pursue the doable priorities of product rationalisation and SuperStream or risk a policy implementation quagmire.

For most of the past decade the Australian financial services industry has lobbied successive governments on the issue of making adjustments to the tax system sufficient to allow people to be migrated out of costly and outdated legacy products without financial detriment.

Thus, there will be many in the industry who would have been disappointed to note a link being made between Government action on legacy products and the Cooper Review’s MySuper concept — it represents a dangerous combination of policy ingredients and, arguably, one that should be avoided.

The impact of legacy products on both consumers and financial services businesses has been an issue now handled by no fewer than five ministers.

It also represented one of the first issues discussed by the former Minister for Financial Services, Chris Bowen, when he assumed the portfolio from Senator Nick Sherry in August last year.

At that time, Bowen referenced the "lack of a mechanism to deal with old legacy products" and the consequent need for "a more streamlined approach to product rationalisation".

It says something about Bowen’s intentions that by the middle of last December he had released a proposals paper "as the next step in consultation with stakeholders on product rationalisation for managed funds and the life insurance industries".

In doing so, he described product rationalisation as being "a process of converting or consolidating products, such as managed fund or life insurance products, of a similar nature into a single product with equivalent features and benefits".

"The proposed product rationalisation mechanism offers a specific solution to the range of issues involved in the process of removing outdated products and transferring investors into newer and better products," Bowen said.

"Importantly, a proposed ‘no disadvantage’ test would ensure investors are not disadvantaged by product rationalisation."

Bowen’s proposals paper outlined proposed tax relief for product rationalisation and argued that the rationalisation mechanism would benefit investors by transferring them into modern products with superior features.

Responses to the Government’s proposals paper closed in late February this year, and nine months and one Federal Election later, the issue appears of be in danger of becoming unduly enmeshed in the debate and consultations flowing from the Future of Financial Advice (FOFA) reform proposals and the recommendations of the Cooper Review.

Given Bowen’s own analysis in August last year that the majority of legacy product issues relate to insurance and funds management products, roping the issue into the FOFA and Cooper proposals not only risks imposing further unwarranted delay, but also the creation of an overly complex debate encompassing unqualified stakeholders.

While some might argue that the MySuper concept represents the ultimate in product consolidation, this is a dangerous misconception.

If MySuper is to be debated at all, it must be debated as a single and separate issue — not something that would stand in the way of progress on crucial and self-evident initiatives such as product rationalisation and SuperStream.

Indeed, in circumstances where some leading industry figures have questioned whether MySuper can actually deliver the cost savings it promises and at a time when Federal politicians are demanding that major policy initiatives be subject to cost benefit analyses, there is good reason to keep MySuper out of the immediate policy mix.

The new Assistant Treasurer and Minister for Financial Services, Bill Shorten, has been frugal in his public utterances on his immediate priorities with respect to policy implementation, but things were expected to become clearer after an address to a Financial Services Council function in late October and during his opening of the Association of Superannuation Funds of Australia national conference in Adelaide.

Shorten has already indicated that the Government remains focused on simplifying the superannuation system but he clearly appreciates that the political realities inherent in a hung Parliament will limit the degree to which he can move.

In those circumstances, there would be many in the financial services industry who would be urging the minister to pursue the immediately sensible and doable: product rationalisation and SuperStream.

Between them, product rationalisation and SuperStream will simplify the operation of the industry and reduce costs to consumers and superannuation fund members.