What could be so urgent that the government needs to sneak it through by regulations rather than wait until the new Senate meets on July 7?
It’s the destruction of parts of Labor’s financial advice law. The government can’t wait until July 7, because the law will bite before then.
From July 1 banks will have to stop rewarding their financial planners and tellers for steering customers into the banks' own products. Not only that, financial advisers will be forced to tell their former clients exactly how much they are continuing to take from their accounts.
That’s why, just two days before the July 1 deadline, Finance Minister Mathias Cormann will ask the Governor-General to sign a regulation that purports to negate those parts of Labor’s law.
Of doubtful constitutional validity (regulations are meant to support the aims of laws, not negate them) it’ll stay in place until it is struck down by the High Court or struck down by the new Senate after it is sworn in.
The Senate will have 15 sitting days to disallow it after it is brought to its notice.In the meantime our banks will get breathing space.
And they need it.
On their own evidence they are woefully unprepared. Bank staff are paid in bonuses as well as salary. Part of determining those bonuses is sales - how many of the bank’s products they shift. The existing law bans sales-related bonuses from July 1. The banks have known about it for years. The Future of Financial Advice Act was introduced on July 1, 2012. But rather than prepare for the ban, they’ve lobbied against it.
At the Senate hearing in May, Diane Tate, the director of retail policy with the Australian Bankers’ Association, was gently asked whether banks were acting as if they expected the provision to be repealed.
“Banks have a choice to continue to operate in the way that they do,” she replied.
Senator Peter Whish-Wilson told her: “One thing I know corporations are really good at doing is managing risk.”
“You have not changed your compliance, from what I am understanding now, because you obviously have an expectation that these laws are going to be changed for you.”
She replied: “We do have an expectation, because we had bipartisan support prior to the last election that these things would happen. If they don’t happen, it just means that expedited and fast changes need to be made.”
It would be entirely possible, in fact desirable, for banks to reward their staff in ways that didn’t constitute commissions. That’s what the act intends. They could reward them on the basis of customer satisfaction, they could reward them on the amount of money they advised on, or both. But banks are desperate for this not to happen.
Recently, the ABC's 4 Corners program told the story of Noel Stevens. When Stevens was phoned by his local branch of the Commonwealth Bank and asked to switch his life insurance policy from Westpac to the Commonwealth he didn’t know that the teller received a referral fee of $444.60. The bank-employed financial planner received almost twice as much plus an ongoing commission.
When Stevens was diagnosed with pancreatic cancer and given six months to live the bank refused to pay. It said he had a pre-existing condition.
A judge later found the planner did not act in Steven's best interests. Commissions and kickbacks might have influenced the advice.
Commissions will continue under the changes the Coalition is planning to sneak through. So long as the commissions are part of a "balanced score card" of rewards and so long as the tellers are not making "recommendations" the banks will be in the clear.
But it’s easy to get confused.
In an ABC 7.30 interview last week the chief executive of the bankers' association, Steven Munchenberg, spoke at first as if he thought the changes would allow recommendations.
“They are broadly about making sure that staff in banks are able to recommend – not recommend – sorry I'll have to rephrase that because it's actually legally incorrect. Please don't use that,” he told reporter Greg Hoy. The correct term was general information rather than recommendation.
It’s beyond me why bank staff providing general information need to be rewarded for the number of customers whose life savings they switch across, although I am also easily confused.
The two other changes the Coalition intends to stop before they take effect on July 1 hit financial planners even harder. On the anniversary of each sale from which they are still getting a commission they will need to write to each customer and tell them how much money they are taking out of their account. They will also have to ask each customer for permission to keep taking it out. No permission, no more commission.
It’s a great thing for anyone who has ever been put into an investment product by a financial planner. It’s an appalling thing for financial planners, although I suspect their complaints have less to do with “red tape” than the amount of income they will lose.
But much of that income has already been lost. As July 1 approaches financial planners have been getting out and selling their practices for much less than the value of the ongoing commissions. They’ve taken the government at its word on commissions and taken a loss. In many cases the big firms and banks who have bought their practices cheaply will get the benefit of the Coalition's move to rescue ongoing commissions rather than the planners for whom the commissions were intended.
For a while at least. The Senate will most likely strike the regulations down and returns things to how they were. Which makes me wonder why the Finance Minister is bothering.
Peter Martin is economics editor of The Age.