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Abbott's rush to cut red tape may pose threat to clients

'Red Tape Day' or Repeal Day is designed to cut $1 billion in red tape annually.

'Red Tape Day' or Repeal Day is designed to cut $1 billion in red tape annually. Photo: Virginia Star

Legislation designed to weaken financial services reforms will be snuck through Parliament on Wednesday before the launch of the Abbott government's twice-yearly ''Red Tape Day'', or Repeal Day, which is designed to cut $1 billion in red tape annually.

The screaming hurry to introduce the amendments will also see them tabled as regulations in both houses in the next few weeks. This is despite the potential for litigation and the spectre of a motion being passed to disallow them.

Given the heated debate these proposed amendments have caused - and their potential impact - it is hard to understand why they aren't delayed and considered in David Murray's Financial System Inquiry.

The Abbott government's plans to cut red tape in the financial services industry by diluting the former Labor government's Future of Financial Advice (FOFA) reforms has become a political football in the past few months.

There is no question there is too much red tape in this country and the decision to repeal most of the 8000 ''redundant'' regulations and laws is positive. But sneaking in amendments to FOFA reforms on the grounds it will reduce red tape for business - $190 million a year - when there hasn't been a proper detailed analysis on the consumer impact smacks of policy on the run.

A submission by Industry Super Australia cites analysis by Rice Warner Actuaries that estimates the changes will cost consumers twice as much over the next 15 years.

The analysis estimates that over the next 15 years the benefits of the FOFA reforms are $6.8 billion, compared with the cost to industry of $2.4 billion. ''This saving is consistent with another estimate of $6.6 billion in annual commissions paid by super members and consumers of financial products per year prior to FOFA,'' according to Rice Warner.

In addition, the Rice Warner research predicts by 2027 the FOFA reforms ''will boost Australians' savings under advice by $144 billion, reduce the average cost of advice from $2046 (before the reforms) to $1163 and double the provision of financial advice from 893,000 pieces to 1.88 million pieces''.

The FOFA reforms were introduced by the former Labor government to reduce the risks of another Storm Financial, Opes Prime or Westpoint collapse.

Since 2006 there have been more than $6 billion of financial advice collapses, affecting more than 120,000 Australians.

These collapses resulted in a number of parliamentary inquiries. The overwhelming theme was that conflicted remuneration structures, in terms of commissions and other inducements, influenced the behaviour of financial advisers. When this was combined with advisers not having to act in the best interests of clients it became a toxic cocktail that played heavily in the collapse of these institutions.

While the FOFA reforms did not address the conflicts of interest of vertically integrated institutions, such as banks owning wealth management arms which manufacture the products and use planners, it did try to ban commissions. Given the banks own or are affiliated with up to 80 per cent of financial planners in this country it is no surprise they have been lobbying so heavily to wind them back.

The amendments proposed by Assistant Treasurer Arthur Sinodinos allow the vertically integrated model to flourish by allowing commissions to be charged for general advice. This is a potent advantage for the banks as it allows their army of bank tellers to flog the products and collect commissions.

According to Industry Super Australia, the amendments allow the return of commissions in 10 ways, most of which could be paid for personal advice and for advice on superannuation including MySuper, leveraged funds and complex products. ISA also makes a strong argument that the proposed amendments ''dilute the best interests duty so that it would be possible to meet the test without acting or even considering the client's best interests''.

If this is right, and there is every reason to think it is, then the Coalition should slow down and do more research on something that could have a profound impact on the country's $1.8 trillion retirement savings. There is no legislation in the world that can eliminate scandals, but amendments that reintroduce the conflicted remuneration model that has long fuelled boiler-room cultures should be admonished.

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