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Chapter 6 - The cost and accessibility of financial advice
This chapter examines the cost and accessibility of financial advice. Following
on from Chapter 4 the committee discusses the relevance of advice when making
investment choices within a fund. It reflects on barriers to the affordability of
superannuation advice caused by the breadth of application of the 'advice
provisions' in the Corporations Act 2001 (Corporations Act). It also
considers possible remedies to enable the legislative framework to achieve
greater proportionality between consumer protection and accessibility of
advice. Finally, the committee examines the problem of incomprehensible
disclosure documents provided by financial product issuers.
Licensing of advice
The Corporations Act stipulates that financial services businesses,
including those who provide financial product advice, must hold an Australian Financial
Services (AFS) licence.
Authorised representatives or employees of AFS licence holders (licensees) are
not required to hold a licence themselves. AFS licences are issued and
monitored by the Australian Securities and Investments Commission (ASIC), which
imposes a number of obligations on licensees and their representatives.
Individuals or entities that do not hold an AFS licence (or
representatives of non-licensees) are generally not permitted to provide
financial advice. One exception is accountants, who have been provided with an
exemption from the requirement to be licensed when providing advice on the 'establishment,
operation, structuring or valuation' of a self-managed superannuation fund
This is discussed in Chapter 8.
Definitions of advice
The Corporations Act describes the circumstances that constitute the
provision of financial product advice, split into two categories: personal
advice and general advice. Differing disclosure requirements under part 7.7 of
the act apply depending on whether advice is personal or general in its nature.
Those seeking to provide services that fall within the act's definition of
financial product advice are required to hold an AFS licence.
Under section 766B(1) of the Corporations Act, financial product advice
is defined as:
...a recommendation or a statement of opinion, or a report of
either of those things, that:
- is intended to influence a person or persons in making
a decision in relation to a particular financial product or class of financial
products, or an interest in a particular financial product or class of financial
- could reasonably be regarded as being intended to have
such an influence.
Section 766B(3) of the act defines personal advice as:
...financial product advice that is given or directed to a
person (including by electronic means) in circumstances where:
- the provider of the advice has considered one or more
of the person's objectives, financial situation and needs...; or
- a reasonable person might have expected the provider to
consider one or more of those matters.
Section 766B(4) defines general advice as: '...financial product advice
that is not personal advice.'
ASIC's policy statement on providing financial product advice indicates
that ASIC takes a number of circumstances into account when distinguishing
between personal and general advice, for the purposes of administering section
s766B(3)(b) of the Corporations Act. In the context of the evidence received
during this inquiry, the most significant of these circumstances include:
- whether personal advice was offered to the client or whether it
was requested, including requesting advice as to the decision a client should
- whether or not the adviser requested information about the
client's relevant personal circumstances; and
- whether the advice appears to be tailored to the client's
relevant personal circumstances.
The policy states that consideration of personal circumstances is
the critical factor:
If an adviser receives or possesses information about the client’s
relevant personal circumstances this does not, by itself, mean that any advice
given to that client is necessarily personal advice. Whether such advice is
personal advice will generally depend on whether the adviser has considered
(or whether a reasonable person might expect the adviser to have considered)
that information in providing the advice.
ASIC has distinguished between financial product advice and factual
information on the basis that financial product advice involves a qualitative
judgment, whereas factual information is objectively ascertainable.
Where the advice provided is only of a general nature, section 949A of
the Corporations Act stipulates that the client must be warned that the advice
has not taken into account their own objectives, financial situation or needs
and the client should consider the appropriateness of the advice in that light.
Further, in accordance with sections 941A and 941B the client must be provided
with a Financial Services Guide (FSG). The FSG is required to include
information on remuneration, commission and other benefits derived from the
provision of the advice.
Of greater concern to the industry has been the disclosure requirements
pertaining to the provision of personal advice. Once the provision of advice
enters the realm of personal advice, which is essentially the consideration of
a person's individual circumstances, the need to provide a Statement of Advice
(SoA) is triggered.
Under sections 947B and 947C of the Corporations Act the SoA
- the advice provided to the client;
- the basis on which the advice was provided;
- information about remuneration, commissions and other benefits
resulting from the provision of the advice; and
- any conflicts of interest that may be capable of influencing the
entity providing the advice.
A number of witnesses indicated that these disclosure requirements are
too onerous to be applied as broadly as they currently are.
The role and significance of financial advice on superannuation
The advent of Super Choice and the autonomy it has provided
superannuation fund members has brought greater attention to the role of the
funds and professional advisers in assisting consumers to navigate their way
through the options they now face.
While most participants in the inquiry agreed that fund members need
improved access to some form of straightforward guidance on superannuation, the
extent to which detailed personal advice was necessary to ensure optimal
retirement outcomes was the subject of dispute. Financial advisers in
particular tended to argue that a person's retirement income could be improved
with appropriate advice on investment strategies within funds, as well as assisting
clients with how best to integrate superannuation into their overall financial
affairs. Alternatively, industry superannuation funds in particular responded
that default fund arrangements are sufficient for the needs of most ordinary fund
members; therefore detailed advice on investment strategies is usually unnecessary
and not justified by the expense.
An examination of these issues provides context for the committee's later
discussion on facilitating the provision of accessible general financial advice
on superannuation in the context of financial services reform (FSR) disclosure
Background: the effect of choice
The implementation of Super Choice has provided consumers with greater
autonomy over their superannuation investment, which will potentially create a
greater demand for professional advice that is tailored to their own
Perhaps more significantly though, by allowing consumers almost unlimited
choice in the marketplace, the Super Choice regime has sought to encourage a
more competitive and efficient market in superannuation products. A notable
consequence of this competition is for product providers to offer a broader,
more diverse range of options to satisfy the requirements of the market, thus
adding to the complexity of the choice consumers face. For example, the
consumer advocate organisation Choice told the committee that:
...competition in financial services is about creating product
complexity and creating differentiation in products. That competitive trend is
the one that creates the need for advice. You cannot ask a consumer to choose
between 200 various investment options on a particular platform and know
exactly which one suits their interests.
It is those sorts of moves to try to bang on additional
services, to make the product have even more bells and whistles, that generate
the need for them to have advice on that product. Faced with 200 options, they
need advice on which particular investment option suits their stage of the life
cycle on the basis of where they are at that particular point in time. 
The opportunity to exercise greater choice on superannuation, combined with
the added complexity of that decision in a competitive market, has focused
attention on the importance of financial advice and the manner in which it is
Basic superannuation advice,
information and education
The committee notes widespread agreement across the industry over consumers'
need for at least basic professional guidance on superannuation-related
matters. Increased choice and complexity are salient factors in this, as
referred to above. Importantly, a worrying lack of financial literacy regarding
superannuation has also crystallised this view. Addressing this problem is
A lack of consumer engagement with and understanding of superannuation
has carried over from the previous employer-based, passive model of fund membership.
Understandably then, the vast majority of contributors to the inquiry agreed
with the general proposition that the provision of basic, limited advice on
superannuation would be beneficial to fund members. Moreover, there was a broad
level of consensus among industry participants that FSR had limited the
capacity of advisers and funds to provide this kind of cost-effective guidance and
education to consumers. The specific nature of the problems associated with the
FSR regime, the circumstances under which advice should be provided without
costly disclosure requirements, and possible reforms to alleviate current regulatory
impediments are examined later in the chapter.
In order to put the debate in context, the following sections identify
the major differences of opinion as to the extent of personal financial advice
that superannuation fund members require, or that may be practically offered on
a widespread basis.
Is individually tailored financial advice
As referred to by Choice above, one compelling reason for seeking professional
advice is uncertainty in the face of a complex decision. Mercer Human Resource
Consulting (Mercer) told the committee that 'many people are scared of making
their own decisions without getting advice, because the whole system is so
The committee also heard that the provision of personal financial advice
was essential to maximising fund members' retirement income. The most
contentious claims focused on the superior retirement income that could be
achieved by exercising member investment choice within funds on the basis of
personal advice, as opposed to remaining in the funds' often conservative default
option. Without criticising the adequacy or performance of default options
generally, SuperRatings told the committee that approximately 82 per cent of
Australians default on their investment and/or insurance structures.
However, the argument that it is beneficial to receive professional advice on
choosing an optimal investment strategy was made by a number of organisations.
Promina Financial Services, while also advocating the importance of
holistic financial advice, commented on choosing investment options:
...the majority of clients who do not seek financial planning
advice merely invest in the default investment option already set up for their
fund. While these investment options may have sound investment strategies, they
may tend to be quite conservative and may not allow a client to maximise the
full potential for their savings.
Financial Planning Association of Australia (FPA) drew attention to large
industry funds such as REST and HostPlus, which 'disclose that 99% of members
are invested in their default or balanced option, due to the apparent absence
of individual advice'. It suggested that this approach was detrimental to
members' retirement income:
Whilst in the current market returns on these funds have been
quite good it must be suggested that at least a percentage of those members
would have been better off having received advice and placed in less
conservative strategies such as Australian share funds or emerging market funds
where returns have been up to 50% higher in the current economic environment.
In these cases the benefits of receiving professional financial planning advice
would most likely result in a greater retirement payout.
In evidence to the committee FPA reinforced the view that assisting
choice through the provision of advice is generally preferable to remaining in
the default option:
There is a lot of evidence to indicate that a number of members
are simply not exercising choice or not necessarily thinking about their choice
and are opting into default funds which, for all intents and purposes, may work
in some circumstances but certainly do not necessarily, in our view, maximise opportunities
for members. For example, is there enough choice between a 20-year-old and a
50-year-old in their potential default strategy? Our proposition is that we
think too many people are going into default funds and not necessarily understanding
or making active choice ... If someone is not confident enough or does not have
enough information to make a decision, then advice might be able to help them
determine an appropriate investment strategy that is right for their needs.
While not supporting the provision of yearly advice, the Association of
Financial Advisers told the committee that there needs to be 'continual
contact' between advisers and their clients to 'keep clients focused on where
they started and where they need to be going, because there are lots of
distractions in terms of where they should be putting their money'.
It emphasised the net benefit of spending on advice: 'people who get advice
generally have far better outcomes than people who do not get advice, taking
into account the fees that they pay for that advice'.
In contrast, a number of contributors argued that detailed personal
advice is unnecessary for most superannuation fund members, given the adequacy of
funds' default arrangements. Members Equity Bank commented that arguments for
the provision of detailed financial advice had been exaggerated:
...for the vast majority of people, the financial advice that
they require is very basic. For ordinary working Australians, I am not sure
that there has been a case made out for the need for complex financial advice.
In his submission, Mr Peter Mair also countered the assertion that individually
tailored financial advice was critical:
There are, of course, few aspects of personal uniqueness that
have much practical bearing on the way retirees structure their affairs to
maximize their financial well being. Some plain advice aimed at the main demographic
segments, and made readily-available, could generally break the back of what
most consumers need to be told about superannuation and, so forearmed, they would
be less likely to be snowed by a self-serving adviser unfairly capturing their confidence.
Superpartners, a superannuation fund administrator, suggested that the
majority of members under their administration were justifiably content with
remaining in the default option:
...we deal with in excess of five million accounts and most of
our membership—in excess of 90 per cent—are really only interested in the
default option. That suits them very well. The performance of the default
option in most funds has been excellent, as you may have seen. Starting from
that perspective, most members of the funds are well served.
It also emphasised that remaining in the default option did not equate
with neglect by the trustee:
...the default option does not mean that there is a default of
monitoring. The default option, like any other option, under the management and
the trustee, must be regularly reviewed and monitored under its statutory
investment strategy. The default option is monitored by the trustee board’s
investment committee on monthly reports, consisting of asset rebalancing on the
advice of a professional investment consultant and other fund managers.
The Australian Council of Trade Unions (ACTU) commented that default
options are designed to be appropriate for all members:
The design of the default fund is supposed to suit anyone. It is
meant to be a ‘set and forget’ option—that is why it is the default fund. You
are meant to be able to enter it as a young person and leave it at retirement and
have had sufficient return on the investment. Now perhaps someone going for
growth in the early stages of their life, switching into the balanced fund in
the middle and then a more stable option at the end would end up with the same
account balance. But the idea of the default fund is to try to make it a set
and forget fund for people who do not wish to exercise that choice.
Industry Funds Forum (IFF) responded strongly to FPA's contention that
the default option left fund members worse off than had they received advice,
claiming that the argument is 'intellectually bankrupt' by relying on the
benefit of hindsight with respect to returns on recently well performing asset
It also noted the connection between the relative youthfulness of those funds'
membership and their preference for the default option:
...REST and HOSTPLUS are unusual funds in this important
respect—that is, the vast majority of their members are very young people. For
many it is their very first job and they are part-time and casual workers. They
earn modest incomes. Nine per cent of a modest income is a modest
superannuation amount accumulating in your early 20s or so to a modest
superannuation balance. Under those circumstances, most people do not have a
great engagement with their superannuation. I think we all know that is true of
the general population, but it is certainly true of young people who are
decades away from retirement and who have a very small amount of money in
superannuation. To expect that those people would seek out a financial advisor
is simply unrealistic.
Mirroring the view of Superpartners, IFF concluded that members of these
funds had not been neglected in the absence of personal advice:
...both those funds are very mindful of the composition of their
membership and have put a lot of effort into determining the default option,
knowing that many of their members will go into that option. The investment
performance of the default options of both those funds has been very good. If
you see all of that in totality, those funds have served their members
interests particularly well.
The committee is of the opinion that most fund members will not seek
individually tailored financial advice on superannuation, particularly on
choosing their own investment strategy. A combination of apathy, inertia and a
perception of those with low or moderate fund balances that the cost and effort
would not justify the benefits are the principal reasons. Also important is a
belief that the fund managers are experts and will do a good job. While the
committee acknowledges that there is merit in the argument that all members
would benefit to some extent from personal guidance on superannuation, the
reality is that people cannot be coerced into taking such an active role in
managing their superannuation affairs.
This consumer behaviour is not necessarily irrational; the performance
of default fund investment options has been good. Indeed, remaining in the
default option may be a conscious decision for many fund members. It is unsurprising
that largely disengaged consumers have no qualms about allowing funds'
financial investment specialists to set an investment strategy on their behalf,
at minimal cost. This is particularly self-evident when investment returns are
healthy. Whether the next downturn in the rate of investment returns triggers members'
interest in utilising professional advice to become more actively involved in
the management of their superannuation investments remains to be seen.
However the committee notes the concerns that were raised over some members
being inappropriately placed in conservative investment strategies. This
particularly relates to people who are not close to retirement and could potentially
benefit from a more aggressive investment strategy. Although funds with skewed
demographic characteristics are able to tailor their default options to cater
for their members accordingly, any superannuation fund with a single default investment
strategy is prone to attract such criticism. The committee draws no conclusion
on the financial benefits of balanced investment options compared with high
risk/high growth strategies. Rather, it notes the objection to leaving younger,
longer term, fund members in the same default option as near-retirees.
Health Super informed the committee that their default investment
strategies varied depending on the age of the member:
We ... have a life cycle default option, or strategy, that
effectively puts people in long-term high growth up until they are 50, when we
write to them to ask them if they want to change their investment option. If
not, we dial it down to medium-term growth, which is a 70 growth-30 defensive
split, until they are 60. If they then decide to stay in it beyond 60, it will
be dialled down to fifty-fifty.
The bulk of people do not make a member investment choice as
such, and that is still our experience to date. There are some people who are
financially astute who make that member investment choice, but I do not think
the vast majority do. We also looked at the demographic of our membership base,
and we believe that in the long term growth assets will outperform defensive
assets, hence the reason for establishing a life cycle default strategy.
The committee sees merit in Health Super's approach. Whether or not
superannuation fund members are actually disadvantaged by remaining in
'balanced' default options, a minor tailoring of default investment strategies
may negate a perceived need for advice on this aspect of superannuation. That
is, advice that fund members not within a normal investment cycle of retirement
could benefit from being in higher risk/higher growth options. This would
assist in guiding members in an appropriate direction without trying to
encourage the provision of costly financial advice that is unlikely to be
The provision of affordable limited advice
Despite the difference of opinion over the need for detailed
personalised advice and the adequacy of superannuation default options, there
was broad consensus over the inadequacy of the current regulatory arrangements
to allow for the provision of basic, limited advice on superannuation. The
overwhelming criticism of the present legislative framework for the provision
of financial advice is the breadth of the definitions of 'financial product
advice' under section 766B of the Corporations Act.
The committee heard that these legislative provisions had restricted fund
members' access to advice on issues where consumer protection should not, on
the face of it, be a serious concern. For instance, the Australian Bankers' Association
(ABA) offered the common view that the requirement for a SoA was triggered too
easily, especially when members are merely seeking information on their fund's
The advice regime has unnecessarily restricted the provision of
information and education on some financial products, where inadvertently the
consumer may provide some basic personal information, and therefore any
information provided to the consumer may be considered advice.
The committee was told that this problem has manifested itself in the
context of two types of consumer-adviser interaction:
advisers and their (potential) clients: due to onerous disclosure requirements,
licensed financial advisers are not able to provide cost-effective advice in
response to a straightforward client query; and
licensed entities and superannuation fund members: non-licensed entities
(mostly funds, but also accountants) are reluctant to provide information on
internal fund options and superannuation structures because of concerns over
providing non-compliant advice.
Both these scenerios turn on the wide spectrum of communications that may
be deemed to constitute 'financial product advice', with 'personal advice'
posing a particular problem for licensed advisers. According to many
contributors to this inquiry, the consequence has been that the FSR measures intended
to protect consumers have actually prevented them from accessing beneficial
free or inexpensive financial guidance from their financial adviser,
superannuation fund or accountant.
Advice from AFS licensees and their
Organisations representing licensed financial advisers told the
committee that the range of communications between advisers and their clients
that fall within the scope of 'personal advice' is too broad, triggering costly
disclosure requirements for even the most limited forms of advice. Consequently,
this is inhibiting the ability of licensed advisers to provide consumers with
affordable, basic advice on superannuation fund options.
There was particular concern that 'vanilla' advice on issues such as salary
sacrifice, co-contributions, consolidation of small account balances, insurance
structures and investment options was not being provided on the basis that it
would cost more to consumers than it is worth.
This cost, the committee was told, is directly attributable to the extensive
disclosure that must accompany personal advice.
The full gamut of disclosure requirements was generally supported where
advice recommends the sale of a product, for instance through a recommendation
to transfer an account from one fund to another. It was apparent through the
inquiry that there was little support for the same requirements to apply to
advice where consumer protection issues are not as relevant.
For example, SuperRatings told the committee that disclosure for simple,
non-sales advice is too onerous:
...the licensing requirements of the planners at the moment are
too onerous on simple stuff. Co-contribution, salary sacrifice, the investment
option and the level of insurance all fall under that category where you need a
complete 20-page or 50-page statement of advice to get any of that advice. We
are not talking about product advice there. I know it is individual advice, but
we are not talking about changing products; we are looking at what is in the
best interests of that particular member—whether they can improve their savings
or their risk position.
Some submitters used practical examples to demonstrate the nature and
extent of the problem. Mercer stated that the cost of straightforward advice
was prohibitive for many, with advisers often taking the decision to withhold
advice on the basis that it would cost the customer more than it is worth.
...there should be some greater flexibility. Somebody may come
along and say, ‘I’ve got $4,000 in this fund and I’ve $1,000 in this fund; what
should I do?’ If they go to a financial adviser, he will charge them $700
minimum to say, ‘Yes, I think you should put it all in that fund,’ by the time
he goes through and analyses all of the person’s individual circumstances,
which he is required to do. You cannot get it too far wrong if you have $4,000
in one fund and $1,000 in another. The client just wants a five-minute piece of
advice to verify that what he is planning on doing makes sense. He does not
want to spend $700.
Bendigo Financial Planning highlighted the case of a typical customer
...3-5 small existing policies totalling no more than $15,000
and has become frustrated with the lack of any meaningful service from any of
the super providers. The customer wants to know the most appropriate place to
rollover and consolidate their super and make future contributions.
Using this example, it outlined the costs associated with the SoA
The SOA must include comprehensive comparisons between each
"from" fund and the recommended "to" fund, clarifying and
explaining differences in costs, fees, benefits, Management Expense Ratios, terms
and conditions etc. The standard number of hours to complete any sort of meaningful
assessment is around 10-15. Consequently, to simply meet our costs the customer
would be required to pay between $1,500 and $3,000 for the work to be
completed. Our experience is that customers are not prepared to pay this.
Typically they are confused and can't understand why such a simple request can't
be satisfied with a simple solution.
Bendigo Financial Planning concluded that the regime was illogical and
detrimental to those it was intended to protect:
We have found that these customers, often seeing a financial
planner for the first time, lose confidence in the financial planning industry
and are bewildered as to how a regulatory environment has evolved where a
qualified professional financial planner cannot provide a solution to a simple
but important superannuation need.
Advice from non-licensed entities
The committee also heard that superannuation funds' ability to
communicate with their members about options within the fund, or respond to
members' enquiries was also hampered by the Corporations Act disclosure
requirements. These concerns are outlined below.
When does information become
Funds expressed uncertainty about exactly what information they could
provide to their members, thus tending to limit the provision of advice that
could be construed to take into account personal characteristics. The
Association of Superannuation Funds of Australia (ASFA) told the committee that
the legislative boundaries on advice remained unclear:
Despite numerous attempts at clarification by [ASIC] and others,
the boundaries between information, general advice and personal advice remain
uncertain. Notably, the definition of "financial product advice" is
very broad and captures a considerable portion of the communications between a
superannuation fund trustee and a member.
REST Superannuation described the effect on its communication with
...the financial services legislation has limited the way that we
and superannuation funds can communicate with our members because of the
potential for it to be construed as advice. We and many other superannuation
funds that I am aware of have taken a very conservative view in the
communications to our members because of the risks involved.
In particular, REST Superannuation noted the effect on young people with
low fund balances:
Approximately 75% of REST members are under 35 years of age with
an average account balance of around $3,500. This is not a traditional market
for financial advisers. Yet the importance of seeking basic advice on
investment choices and the value of making voluntary contributions early to
ensure an adequate level of income in retirement cannot be understated. The
limitations of REST’s licence restrict our ability to provide education to our
members that would assist in making basic decisions yet such early life
decisions have a strong impact on future savings. As the barrier to advice is
currently too high, members seek advice instead predominantly from family or
friends. As result, they may be ill-advised.
Industry Super Network, however, downplayed the restriction the advice
provisions had on funds providing basic information:
...funds should not be overly frightened of the regulation in
terms of what it prevents them from doing. Most funds want to act in bona fides
and give people basic information, true information about their fund. In most
cases I find it hard to read the regulations as preventing a fund from
adequately and forthrightly explaining their fund and the benefits of their
fund. Obviously, there are regulations around it. It is open, therefore, to
interpretation. ... But, by and large, I think the funds now can and do
communicate pretty well to their members the basics of how their scheme works
and how the system works.
Is facilitating a benefit
The committee also received evidence concerning the regulatory
impediments to funds offering their members superannuation benefit projections.
It is difficult for consumers to reach a decision on the right amount to
contribute to superannuation without an approximation as to how much will be
required to meet their desired retirement income objectives. To this end,
calculating projected benefits on varying contribution levels allows fund
members to determine appropriate contribution levels for their future needs.
Citing the Swedish government's 'orange envelope' model of pension
projections and UK funds' legislative obligation to provide annual projections,
ASFA suggested that annual benefit projections to members should be facilitated
to better 'plan for their retirement and encourage long term savings'.
However, ASFA claimed that benefit projections to members are hindered by legal
concerns over the provision of potentially misleading information:
Currently, ASIC Policy Statement 170 places strong restrictions
on the use of prospective financial information. These restrictions, combined
with concerns over future legal action by disgruntled members, results in the
provision of benefit projections by funds being rare.
Other funds expressed concern that their ability to provide projected
benefit calculators has been restricted by ASIC's determination that these
projections may constitute the provision of personal advice under section 766B
of the Corporations Act. ASIC's policy statement 167 states:
[PS 167.56] Calculators that provide financial product advice
are subject to the licensing provisions, unless an exemption applies. A
calculator involves financial product advice if it produces recommendations or
statements of opinion that are (or could reasonably be regarded as being)
intended to influence the user in making a decision about a particular
financial product or class of financial products: see s766B. Whether a
particular calculator involves financial product advice will, therefore, depend
on the facts of the particular case.
[PS 167.58] It is unlikely that a calculator will produce a
recommendation. However, a calculator may produce a statement of opinion that
is (or could reasonably be regarded as being) intended to influence the user in
making a decision about a particular financial product or class of financial
products. Therefore, in our view, it is likely that some calculators involve
financial product advice.
[PS 167.61] Calculators typically require the user to input
some information about their financial objectives, financial situation or needs
(eg information about their initial investment, investment timeframe, ongoing
investments, salary, age, attitude to risk). The calculator then uses this
information to generate a result. In doing so, the calculator has taken into
account at least one aspect of the user’s objectives, financial situation or
needs. For these reasons, in our view, the financial product advice provided by
many calculators is likely to be personal advice.
The Investment and Financial Services Association (IFSA) expressed its
concern over the regulatory treatment of projected benefit calculations:
It is a pretty sad situation. The industry got to a point about
12 months ago where we had to take calculators off our websites. These
calculators allow the individual to put in their own circumstances—they might
put in the rate of return, a cost structure, how long they will be
contributing, and their age—and the calculator then works out their result. But
we had the spectre of the regulator telling us that we cannot trust an
individual to pick some figures to put into the calculator. So they could do it
on their spreadsheet at home, but if Colonial First State put up a calculator,
to use an example, all of the input variables had to be governed by what the
regulator said. We are trying to give you advice to the effect that we need
some clarification on that front so the calculators can be done personally.
In a similar vein, the Corporate Superannuation Association argued:
...there should be a clearer delineation between personal advice
and simple arithmetic because there seems to be a lot of confusion in the minds
of the regulator as to what simple arithmetic is and what personal advice is.
Calculators are simply a method of working out compound interest
depending on what assumptions are plugged in. If you are a 55-year-old woman
and you want to work until you are 65, then the relevant period is 10 years. I
cannot see that if you plug 10 years as opposed to 15 years into a calculator
it is personal advice. It is just not. It is simply putting one of the factors
in the calculation necessary to produce the compound rate of return.
While the ABA acknowledged this position, it warned of the potential
pitfalls of benefit projections:
There are some advantages for consumers in providing benefit
projections. However, this could create an expectation from consumers that the
projection will be realised. Consumers tend not to understand the underlying
assumptions and parameters used in projections and the impact that a small
variation in an assumption can have on overall performance. Furthermore,
assumptions may not be borne out in practice for an individual member, so
disclaimers required would confuse and thereby limit the value of the
projection. While the ABA considers that the current restrictions on forecasts
are probably excessive, any form of standardisation is likely to cause
The problems associated with funds' projected benefit tools were
highlighted in June 2005 following ASIC's review of online superannuation
calculators. It found that putting the same data into 24 different online
calculators produced 'widely differing results'. While ASIC acknowledged that
differences may be reasonably attributed to factors such as variations in
assumptions or methodology, it deemed that consumers were not always provided
with the necessary supplementary information to interpret the results
Following this review and just prior to the introduction of Super Choice
on 1 July 2005, ASIC indicated it would provide conditional regulatory relief from
holding an AFS licence when enabling consumers to calculate projected benefits
using generic financial calculators. ASIC said:
The relief ... means that providers of superannuation
calculators, who meet certain minimum conditions, do not require an Australian
financial services licence with an advice authorisation and, if already
licensed, do not need to meet the advice conduct and disclosure requirements in
Part 7.7 of the [Corporations Act].
As a response to some of the problems identified by ASIC's review of
online calculators, the conditions attached to ASIC's relief include:
- it cannot advertise or promote financial products or be connected
to promotional material for a product;
the default assumptions must be reasonable;
- the user must be able to alter the default assumptions except
where statutorily fixed;
- a statement on the calculator's limitations and an explanation of
why the assumptions are reasonable must be included;
- an explanation that the results should not be relied on for making
a decision about a financial product and that professional financial advice
should be sought before doing so; and
- results should be expressed in today's dollars, or with an
explanation of the lesser real value of future dollars.
Given the criticisms of the regulatory approach to calculators aired
during the inquiry, whether or not this exemption is satisfactory in the
context of an existing member/fund relationship is uncertain.
Avoiding advice in the
Accountants were also of the opinion that the regulatory framework for
advice placed them in precarious situations when assisting their clients. This
concern is particularly relevant where accountants are providing broad
structural advice that incorporates some consideration of superannuation
structures, as opposed to advice on choosing products.
Indeed, CPA Australia suggested that the current arrangements were too
focussed on the product selling aspect of superannuation advice:
It is essential to recognise the difference between product
advice and structural and strategic advice in the area of superannuation. The
impact of the current definitions is that it is impossible to provide
straightforward information regarding the operation of superannuation outside
the systems that have been set up for selling financial products.
In providing appropriate and necessary consumer protection with
respect to financial products, current legislation means that strategic advice
relevant to the structure of superannuation is confused with recommendations as
to entering or exiting a particular superannuation fund.
It also complained that tax advisers were restricted from providing
advice on the taxation implications of superannuation:
...there will be tax advisers who are actually breaching the
FSRA licensing requirements because they will be talking about the
tax-effectiveness of superannuation. Anything that you say that could be seen
as an inducement or that could be used by an individual to make a decision
regarding how they may or may not spend their money is caught by the licensing
requirements. So we are in a situation where you cannot, as a tax adviser even,
talk about superannuation being tax effective in terms of deductibility issues
The consequence, according to CPA Australia, is the absence of complete
structural financial advice from one source:
...some structural advice is in FSR and some structural advice
is out and from the consumer’s perspective, they can come to an accountant and
get some advice about structural issues but they cannot get complete structural
advice. And if they go to the planners, they can get investment advice but they
cannot necessarily get the structural advice that goes with the other side of
We have created a problem where a consumer who is after
structural advice as to, ‘What are all my options?’ actually cannot get it from
any one source. What I have found with my clients is that a lot of them want to
get someone who can sit back and say, ‘From an independent perspective, forget
about investments or anything along those lines. These are the options that are
available to you and these are the structural issues that you need to think
about in terms of what needs to be factored into what is going to be right or
wrong for you’.
With respect to providing advice on self managed superannuation funds,
the committee discusses the regulatory exemption for accountants in Chapter 8.
Suggested regulatory changes
In suggesting regulatory changes to address the problems identified
above, the central theme of the evidence was the importance of achieving proportionality
between protection and accessibility. In other words, the benefits of consumer
protection via financial services reform should not be outweighed by any
consequential impediment to the provision of affordable, accessible and
beneficial financial advice. If the consumer interest is the principal intent
of FSR, then such a deficiency in cost/benefit terms is contrary to the purpose
of the reforms.
For example, REST Superannuation submitted that:
...the protection of the consumer is a very important aspect to
this. But if the protection of the consumer leads to the inaccessibility to the
service, then I am not sure that we have the balance right. You can protect the
consumer as much as you like, but if they cannot get access to the service as a
result then I think that is a suboptimal position for the consumer.
FPA also told the committee that the benefits to consumers of the
current disclosure regime were being outweighed by the costs associated with
compliance. It stated that the benchmark for FSR should be a net benefit to
consumers: 'while consumer protection will always be a key objective of
financial services regulation, any obligation must always pass a cost/benefit
A number of organisations emphasised the need for the Corporations Act disclosure
requirements to bear a more appropriate relationship to the circumstances in
which advice is provided. In essence this approach supported the current
disclosure regime where substantial, comprehensive, or product switching advice
is provided, yet advocated tailoring the regulations to enable less onerous
disclosure where the circumstances do not warrant the same vigorous approach to
In this vein ABA told the committee:
The ABA considers that the scope of ‘general advice’ is too
broad – there needs to be some proportionality for advice and greater
recognition of the value of the provision of information on some financial
products as improving the financial understanding of Australians. ...
The ABA considers that where a client sits down and goes through
a detailed financial plan with an adviser, taking into consideration the
long-term investment needs and circumstances of the client, then clearly the
advice regime should apply. However, we believe that the law should better
accommodate the provision of information on some financial products, even where
a consumer may provide some basic personal information.
From this perspective, many proposals focussed on identifying potential legislative
distinctions between the different scenarios in which fund members interact
with superannuation advice (or information) providers. Suggestions to
facilitate the cost effective provision of advice on superannuation are
The sales/advice distinction
One of the most frequent suggestions for appropriately circumventing SoA
requirements was to distinguish between advice that recommends the sale of a
product and advice or information that does not. For instance, ASFA argued that
any redefinition of advice needed to target 'genuine consumer protection
issues' such as where advice to switch funds or invest discretionary money is
In evidence it suggested that:
...any communication aimed at explaining internal features of
the fund should be permissible without such communications being considered
advice. I think that is probably where we would like to see the line drawn in
terms of funds being able to communicate with existing members about investment
choices or insurance features in particular, without that tripping them into
the advice space.
Mr Geoff Fry of AON Financial Planning and Protection Ltd commented that
'...where you don't make a recommendation or mention a specific product it
should be general advice'.
SuperRatings also supported separating advice on the basis of whether a
product shift is involved or not:
...we should have that sort of advice segmented away from
product changes so that, if you are trying to go from product A to product B,
it is a separate requirement that the planner must show is in the members best
interests. If the planner is simply trying to say, ‘You should be salary
sacrificing as opposed to paying after-tax dollars into your super fund,’ why
do you need a 20- or 30-page statement of advice?
It suggested '...drawing a line between intra-fund advice, or whatever
you want to call it, and actual switching as two separate parts of legislation
UniSuper was another fund that expressed the view that different
disclosure rules are required for advice that relates to intra-fund issues, as
opposed to switching advice:
We think there are transactional things that members do within a
fund. They are about moving an investment choice within their fund, putting in
fewer contributions, deciding to make co-contributions and potentially
splitting their contributions with their spouse—which are very different from
someone deciding whether or not they are going to move from one superannuation
fund to another. One is about the information and what is available to them
within the fund. The other is deciding between two distinct products. So the
advice required for those two distinct products does require full advice.
The Corporations Legislation Amendment (Simpler Regulatory System) Bill
2007 was introduced into the parliament on 24 May 2007 and passed on 21 June 2007.
It included a measure to:
...exempt financial services licensees from providing a
Statement of Advice in the circumstance where they provide personal advice
where that advice does not recommend a product and the adviser does not receive
any remuneration for providing that advice.
Instead, advice of this kind will be required to be documented in a
Record of Advice and made available to the client on request.
The committee also notes that in December 2005, a number of refinements
to FSR came in to force. These included amending the existing regime to allow:
- an exemption from providing an SoA where there is an ongoing
adviser/client relationship and 'there are no significant changes in the
client's personal circumstances or the basis of the advice since the last [SoA]
was given'; and
- certain general advice to be given without it constituting a
financial service and therefore requiring an AFS licence. This includes
instances where the advice is not personal advice and not about a particular
financial product and there is no benefit gained by providing the advice. It
also includes situations where the advice is not personal advice and where it
relates to advice given by issuers on their own products.
Commenting on the latter amendment ASFA wrote that while the change is
welcome, it is also limited in its effect:
The FSR refinement (regulation 7.1.33H) enabling product issuers
to discuss features of their own product without the need for a licence is of
some assistance. However, the concession does not extend to general education
about superannuation, for instance explanation of salary sacrifice. Further,
many superannuation fund trustees now hold AFSLs and are not able to use this
There remain other difficulties with the concession, as it is
often the administrator, not the trustee, who is discussing the fund's
features. Though should be given to extending the regulation 7.1.33H concession
to those authorised to act on behalf of the trustee as well.
Making a recommendation or identifying
The Corporate Superannuation Association proposed that a distinction
between making a recommendation and merely laying out options to clients be
The ACTU, however, warned that such a distinction would not lead to greater
clarity in a practical environment:
...drawing a line between advice and a recommendation may well
mean that you find yourself with the same grey area where it is difficult for
people to draw a line in a practical environment, when they are in the
workplace providing information about a particular fund or perhaps at a call
centre answering the calls that come in about a particular fund. It sounds
attractive but until you saw the regime I am not sure whether it would work or
Advice to broad categories or individuals
From the perspective of superannuation funds, concern over providing
targeted information to different categories of membership has hindered their
ability to provide members with more relevant information on superannuation. REST
called for a mechanism by which advice to broad demographic categories could
avoid triggering the personal advice disclosure requirements:
...if we know that they are a young person, are we taking their
personal circumstances into account in changing the communications that we give
to them? If there is some mechanism by which we are allowed—and any fund can do
this for whatever demographics are appropriate—to target a group and treat them
on a group basis and change the communications mechanism, whether it is the
content or the delivery style, without falling foul of the personal advice
regime, for the vast majority of people who would not ordinarily get advice
that is a path to a better solution.
UniSuper, however, suggested that using cameos may not always be
...if you characterise someone as a particular person—as you mentioned,
a 55-year-old single woman—they could require totally different pieces of
advice. It would depend on whether they worked full time or part time, what
their salary level is, what their expectations are about the rest of their
working life, whether they had been married—a whole range of things. Just
because someone has a couple of particular characteristics it does not at all
mean that they do not need particular advice. Our submission is that you should
be able to take those circumstances into account for transactional issues to
allow people to be able to make those decisions themselves.
Threshold for disclosure
Mercer suggested a legislative amendment 'to provide more flexibility in
the processes around providing advice in circumstances, for example where the
amount involved is below a specified limit or of a minor nature'.
In a similar vein, UniSuper suggested that a statement of advice should be
required for full retirement planning advice, but not for single transactional
HOSTPLUS indicated that:
A narrowing of the definition of personal advice would go some
way towards allowing us and our existing staff and existing resources to
provide that limited advice that is probably necessary for our members.
... a transaction based approach, is probably one that we ought
to be considering if somebody wants some basic advice on salary sacrifice,
rather than our having to get them to have a chat to a financial planner. We
think we have the capacity and we think our staff have the skill set to provide
that advice, but they are not licensed to do so.
The committee notes that the Corporations Legislation Amendment (Simpler
Regulatory System) Bill 2007 includes a measure to grant relief from the
requirement to provide a Statement of Advice with respect to advice on
investments below $15,000. For superannuation advice, the exemption is limited
to advice that recommends consolidating of investments or making additional
contributions. The advice will be required to be documented in a Record of
Advice, including charges and pecuniary interests relevant to the client as
stipulated in section 947D of the Corporations Act.
Tax deductible advice
Mercer suggested making the costs of financial planning advice tax
The ABA also made this recommendation:
The ABA recommends that disincentives for accessing financial
advice should be removed through providing a tax rebate or deduction for those
who seek professional financial advice in relation to superannuation and
retirement income products. This approach would acknowledge through public
policy the enduring importance of the service of financial advice.
ASIC told the committee that in some cases the concern over the advice
provisions is 'exaggerated'. It stated:
It is possible under the current regime that we administer to
provide information of a strictly factual kind. But we are well aware that in
some circumstances the environment in which information is provided is also an
environment in which advice is being sought or recommendations are being made.
It is that shift from the mere passage of information to engaging with the
particular needs of a particular person that attracts the personal advice
It further commented that re-working the boundaries may be of little
...there are many problems of perception out there. It is not
clear that drawing the line in another place would solve those problems. In the
regulatory business, there are always arguments about which things sit on which
side of the line.
ASIC also emphasised that its enforcement activity was mostly targeted
at where bad advice had been given:
...while there is a fair bit of anxiety in some parts of the
industry about this, our own interventions on advice have not terribly often
drawn on that fine distinction because our compliance and occasional
enforcement interventions have focused on where, in our view, manifestly bad
advice has been given. I think that suggests, at least to us, that the problem
that we have been concentrating on—which is the real quality of advice in
circumstances where a consumer or a group of consumers is actually going to
rely on that advice for making important decisions—have not pushed the envelope
as far as the distinction. I agree that quite a lot turns on it and that there
is still a fair bit of industry uncertainty, but as a matter of regulatory
practice we have not pushed hard on the line issue.
Choice cautioned against any loosening of the disclosure requirements at
the expense of consumer protection:
Some of the considerations under FSR like monetary limits on the
statement of advice are attempting to find ways to expand ... advice, but we
should not do it at the cost of consumer protection. A paper trail, whether it
is a statement of advice or some light version of a statement of advice, is
essential for consumer external dispute resolution schemes and for ASIC
determining a reasonable basis of advice.
The committee agrees with the general tenor of evidence indicating that
FSR disclosure requirements have limited the affordability and availability of
straightforward advice on superannuation. It believes that while the consumer
protection objectives driving the reforms are appropriate, the overall effect
of FSR limiting access to superannuation advice has exceeded any consequential benefit
The committee is aware of the importance of consumer protection in a
competitive financial services market, especially since the introduction of
Super Choice and the potential for financial planners to exercise greater
influence in the marketplace. However consumers are not protected by
professional advice being rendered unobtainable at a reasonable cost. From the
evidence gathered during this inquiry it is clear that consumers' access to
superannuation advice is being hindered in circumstances where consumer
protection ought not to be a major concern. This was aptly described to the
committee as 'vanilla' advice; guidance the FSR regime should not have been intended
to target in the interest of consumer protection. In short, reforms to protect
consumers have captured too many advice situations to the detriment of
Triggering disclosure through
The most pressing regulatory issue in the realm of superannuation advice
is that too many client/adviser communications necessitate the preparation of costly
disclosure documents that provide little protective value to the consumer, and
may be disregarded anyway because of their complexity and length. Unfortunately,
while this problem with the current disclosure regime is readily identifiable,
addressing it is a difficult task. ASIC commented that a reworking of the
legislative boundaries of what constitutes different categories of advice may
not necessarily solve these regulatory shortcomings. Instead, drawing the line
indicating where categories of advice start and finish in a different place may
simply shift the uncertainty elsewhere. ASIC also pointed out that its
enforcement activity had been targeted at poor quality advice, rather than instances
of non-compliance with SoA requirements. This suggests that advisers need not
be overly cautious when assessing whether or not their communications with a
client warrants providing an SoA.
However when confronted with the choice of being guided by a principles-based
approach such as this from the regulator or the black letter law of the
Corporations Act, licensees will inevitably err on the side of caution and meet
the disclosure requirements in situations where they feel the legislation may require
it. Accordingly, the circumstances in which the need to provide an SoA is
triggered by legislation should be amended.
The committee therefore supports the government's proposed measure to
exempt advisers from providing an SoA where personal advice is provided that
does not involve recommending a product or remuneration for the advice.
Although this exemption may not entirely alleviate the problem of
disproportionate disclosure requirements applying to 'vanilla' superannuation
advice, the committee is of the opinion that its effects should be assessed
before other legislative measures are considered.
The proposal to introduce a threshold for disclosure on a superannuation
investment of less than $15,000, where the advice recommends consolidating
investments or making additional contributions, is also supported by the
Facilitating information from
The committee also recognises the concerns that superannuation funds
have over the limits imposed on them by FSR. From their perspective, 'financial
product advice' as currently defined in the Corporations Act could potentially
capture instances that funds legitimately claim are related to providing
informative or educational material. Therefore, in addition to the problem of costly
disclosure requirements being triggered, funds have expressed concern that useful
superannuation-related information may not be provided at all by funds without
an AFS licence.
The committee reiterates that ASIC's evidence suggested that its
priorities did not lie with enforcing these provisions to their limits. ASIC
also assured the committee that factual information may be provided without
requiring a licence. However the committee again notes that superannuation
funds seeking to comply with the Corporations Act will naturally adopt a
conservative approach to the legal risks associated with communicating with
their members. Accordingly, two specific areas of uncertainty within the
industry ought to be dealt with through further regulatory guidance:
- the ability of funds to provide targeted information to different
categories of their membership; and
- the provision of benefit projections.
On the first matter, the committee is of the view that superannuation
funds should be able to provide material that is relevant to their members. At
present, funds appear to be uncertain as to whether providing targeted
information to their membership constitutes personal advice. The committee does
not believe that funds should have to provide exactly the same information to
every member in order to avoid being deemed to have provided personal advice.
For example, they ought to be allowed to communicate different information to their
younger members than they do to near-retirees. Given some uncertainty within
the industry, whether or not communications of a targeted nature would
constitute 'personal advice' under the Corporations Act is a matter that should
be clarified by ASIC.
The committee recommends that ASIC provides guidance to superannuation
funds on the provision of targeted communication to separate categories of fund
members, so called limited advice, without triggering the need for a statement
The committee also believes that the issue of online superannuation
benefit calculators requires further consultation and clarification. Even
though ASIC has provided regulatory relief for non-licensees to provide generic
online calculators, the committee still heard strong criticism on ASIC's
regulatory approach to this tool. The difficulty here stems from the fact that the
effect of a future superannuation benefit projection can range from being
either highly beneficial or extremely detrimental. While an accurate projection
can be very useful to assist with deciding on suitable contribution levels, an
inaccurate one may cause superannuation fund members to leave themselves
without the retirement income they had planned for.
ASIC's concerns over online calculators are shared by the committee.
Regulations pertaining to benefit projections must ensure they are not used as
promotional tools for superannuation product providers as this will inevitably lead
to the promotion of unreasonable expectations amongst consumers. Further, the
committee also questions whether consumers in general possess the requisite
financial literacy to use the tool and interpret its results in an appropriate
However the committee is of the opinion that further efforts are
required to facilitate superannuation funds' ability to offer its existing
members this facility. Having a grasp of the relationship between current
contribution levels and future retirement income is an important element of
superannuation-related financial decisions. Superannuation funds are an
appropriate entity to provide this information. However the evidence during
this inquiry suggested that funds view providing benefit projections within the
parameters set by the regulator as unfeasible. While the committee is not
convinced that ASIC's restrictions applying to online calculators are
unreasonable, any stalemate between the industry and the regulator is unhelpful
to fund members seeking guidance on their retirement income planning. The
committee therefore suggests that this matter be subject to further
consultation between the superannuation industry and ASIC, followed by the
provision of further regulatory guidance that reflects a suitable compromise.
The committee recommends that ASIC consult further with superannuation
funds on the provision of online calculators. Following this process ASIC
should provide additional regulatory relief that will better enable funds,
without undermining consumer protection imperatives, to use the generic
calculator exemption to provide benefit projections for their members.
Situations in which accountants are asked for advice on superannuation
are also causing difficulty. Accountants often have long and established relationships
with their clients; therefore explaining that certain advice on superannuation
must be provided by a separate financial professional can be problematic. This
is especially the case where superannuation advice is sought in the context of
a broader discussion of a person's overall taxation arrangements.
The committee recognises the difficulties in resolving this problem.
During the course of an accountant/client discussion on retirement planning the
line where structural financial advice creeps into the realm of financial
product advice is unclear. Any advice from an accountant to favour
superannuation over other investments for tax minimisation purposes appears to
fall within the scope of section 766B of the Corporations Act. On the face of
it, such advice seems reasonable for an accountant to provide, as long as specific
financial products are recommended.
Despite this, the committee is not of the view that accountants should
be exempt from holding an AFS licence when providing financial product advice. If
accountants wish to provide such advice, they should obtain a licence to do so,
as many already do. However the grey areas that clearly exist at present
warrant some attention from the regulator. The committee is of the opinion that
accountants ought to be able to offer advice on the tax effectiveness of
diverting discretionary monies into superannuation without requiring an AFS
licence. Therefore, the committee suggests that ASIC should provide accountants
with regulatory relief when recommending to clients that they alter their
superannuation contribution levels or consolidate superannuation investments
into an existing fund.
The committee recommends that ASIC should provide accountants with
relief from holding an AFS licence in circumstances where they advise clients
to alter their superannuation contribution levels or consolidate their superannuation
investments into an existing fund.
Comprehensible disclosure material
The committee has previously concentrated on whether disclosure material
ought to be provided at all in certain circumstances. However, another
important aspect of ensuring that consumers can readily access information and
advice on superannuation is the readability of disclosure material when it is
provided. Unfortunately, it was widely acknowledged through the inquiry that product
disclosure statements (PDS) are often not suitable for general consumption. This
is the focus of the committee's discussion in the following section.
Confusing material and the
conflicting purposes of disclosure
Although they may be legally compliant, PDS' that are long, complex,
difficult to compare and have key information lacking prominence, do not serve
the purpose of communicating effectively with consumers. The public is
overwhelmingly put off by such material and anecdotal evidence conveyed to the
committee suggested that they ordinarily do not read it. For instance, Superannuation
Complaints Tribunal representatives indicated that 'it is just too much to be
expected of [consumers] to read that sort of detail'.
It is a useful discipline for the organisation to go through of
course, but a member’s benefit is another thing. Certainly, anecdotally we
would be very surprised if many members read all the way through a PDS or even
a financial services guide.
The Institute of Chartered Accountants in Australia (ICAA) wrote:
For the product manufacturers the FSR requirements have led to
Product Disclosure Statements that, while providing and disclosing the mandated
information for the consumer, creates complexity and detail that are beyond
most consumers’ understanding. PDSs have become risk management tools – as a
result consumers are unable to effectively and easily understand the product
ASIC admitted that many product disclosure statements are inaccessible:
...product disclosure statements are not working as effectively
as we would like as consumer communication documents. I think I need to say
that there are plenty of examples of good product disclosure statements—and by
good I mean written with the consumer in mind, complying with the law, not
being unnecessarily lengthy and focusing on the quality of the communication
between product issuer and consumer. But it is also true, and we have said this
on a number of occasions, that we too, along with industry and consumers, are
concerned that there are too many documents which are too long, too confusing
and not doing the job of communicating as well as they might.
Some organisations submitted that concern over legal liability was outweighing
any motivation to provide consumers with readable material. In the context of
advisers meeting their disclosure requirements to their clients, ICAA:
FSR has seen the regulation of advice take a "black letter
law" approach which results in advisors adopting a checklist mentality to
ensuring that everything is covered, rather than to adopt a more preferable
IFF stated that:
...most issuers err on the side of caution to avoid liability
and include more rather than less information to mitigate a reasonable level of
risk. This encourages more than usual lengthy and unreadable documents that
are of little use or protection for the consumer. It also adds to costs, which
are passed on to the member. It ignores the core problem faced by all trustees,
which is the fact that members either do not read written disclosure material,
or if they do read it they are not sufficiently financially literate to
understand the information they have been given. 
What constitutes consumer-friendly
As demonstrated in the examples above, the committee received plenty of
feedback on what constitutes poor disclosure material from a consumer
perspective. However, it is more difficult to ascertain what would actually
constitute consumer-friendly disclosure material. For instance, what
information are consumers generally capable of understanding? Is the material
too complex to be approachable anyway? How much are they prepared to read?
Would they be any more likely to read five pages than ten, or twenty? What information
is relevant to them? Are certain formats more effective than others?
ICAA agreed that it would be 'prudent' to research the needs of
consumers in this area, but warned that financial illiteracy could affect the
usefulness of such research:
One of the challenges as to any research is for the consumer to
know what they are actually looking for in the first place. I think that, even
if you research this and ask them what they are after as to superannuation in a
PDS, a lot of consumers would not actually know the information they need to be
able to make an informed decision. I think that is probably one of the
challenges that we actually have. When, with the complexity of superannuation
and some other general investments, we say, ‘Can you understand this?’ the
response is, ‘I’m not sure why I need to understand this. What is the
information that is actually in there?’ I think that is part of the challenge
that the industry has.
Treasury indicated that it has not conducted research in this area as it
is the responsibility of the industry. Officers also suggested that the
research may not be useful:
Say you produced results on one or two formats. As soon as you
put them out and said, ‘This is a standardised format,’ the type of feedback
that you would be getting—and it is the sort of feedback that ASIC has got when
it has tried to put out guidance on fairly standardised documents—would be:
‘Well, that doesn’t fit these circumstances and that does not fit those
circumstances, so that is not really helpful to the industry.’ After all, their
job is to try to communicate with consumers. It is in their interests to
produce a document that is readable and friendly.
In response to a question on notice, Treasury confirmed that no publicly
available research had been undertaken in this area. It emphasised the
responsibility of product issuers to respond to the needs of their clients
within the requirements of the law:
Treasury does not have any specific information concerning the
results of consumer testing on the readability of product disclosure
statements. Feedback from industry and the Australian Securities and
Investments Commission (ASIC) suggests that there has been no research at an
industry level concerning what proportion of individuals can or cannot read disclosure
While Treasury has been informed that individual financial
service providers do test different versions of their disclosure documents on
consumers, the results of these tests are confidential and limited to the
documents of that particular firm. ASIC has not tested the readability of
product disclosure statements on consumers, but encourages the industry to
undertake this activity.
Ultimately, product issuers are responsible for ensuring that
their disclosure documents are presented in a clear, concise and effective
manner in accordance with the legislative requirement. Where disclosure
documents are not presented in this way, the effect may be that the particular
product is less attractive to consumers relative to other products, which is
contrary to the commercial interest of product providers.
ASIC suggested to the committee that, over time, the different
objectives of PDS' could be appropriately resolved through consultation:
...we have signalled our willingness to engage with the issuers
of documents to try to get to a point where we communicate to industry what it
is that would improve that as well as about the regime that we administer.
There are three purposes served by an ordinary product disclosure statement. One
is to actually market a product. One is to comply with the disclosure laws that
we administer. The third, and I do not want to be disparaging about this, is to
manage the liability of the issuer. In that environment, where there are three
potentially conflicting objectives in mind, I think it is not unnatural that it
has taken a time to get a degree of comfort on the part of industry and on the
part of the regulator about what is required. I am not sure that one can
legislate or change the legislative settings anymore than has been done, and I
am reasonably confident that, going forward, a good, focused, three-way
discussion between the regulator, industry and consumers will lead us towards
better disclosure documents.
Despite a lack of objective, empirical guidance in this area, two basic requirements
to improve disclosure material in PDS' have been identified. These are brevity
In December 2005 the government allowed financial product issuers to
supply a short-form PDS to satisfy the requirements of the Corporations Act. This
contains a summary of the information required in the PDS. However, product
providers still need to prepare an 'ordinary' PDS and make it available to
retail clients on request. The short version is an optional extra.
A short-form PDS is a preferable means by which to communicate with
clients. However from a legal perspective there is little incentive for issuers
to provide clients with a short form PDS given the potential for an increased
risk of non-compliance with disclosure regulations.
From a resources perspective, there is also little incentive to produce
a short-form document when the longer version is required anyway. On this
basis, Mercer Human Resource Consulting queried the likelihood of trustees
making use of this initiative:
...any Trustee who elected to prepare and distribute a
short-form PDS, would also have to go through the cost and time commitment to
develop and maintain a long-form PDS.
By ASIC's admission few issuers have taken the opportunity to offer
their clients the abbreviated version:
...there has been a relatively slow take-up of the short-form
prospectus provisions. However, that is also connected with refinements that
are coming up in relation to allowing for incorporation by reference of
information within prospectuses. Industry has indicated that it also needs
incorporation by reference to make the short-form prospectus measures work more
Industry Funds Forum wrote: 'IFF submits the short form PDS option has
failed to resolve [the] issues. The fact that only one short form PDS has been
issued speaks for itself'.
Unisuper implied that adopting a risk-averse attitude to short-form PDS'
was not in the consumer's best interest:
...anxieties about the legal risk inevitably come to bear, so I
suppose there is a bit of a reluctance to be the first mover in that area. By
and large I think we would be quite happy to put our toe in the water on things
like that, and in the advice area as well. If there is some ambiguity why not
exploit it in the interests of the consumer rather than erring on the defensive
all the time...
IFF emphasised that prominence of key information, rather than document
length, was the most important consideration:
We would prefer a more consumer-friendly FSR regime. That does
not necessarily indicate, as some of the submissions to the inquiry would have
it, that the disclosures currently provided should be stripped away and, to put
it baldly, that people have a much reduced amount of paper to read. We would
argue that the objective should be that important information should be
prominently and comprehensively displayed to members rather than start from a
proposition that we should get this down onto half a page of paper.
Industry Super Network warned that extra regulation in this area may not
Any apprehension and concern about the volume of material has to
be balanced against any apprehension and concern about what any new regulation
might do. It has not necessarily been the case that the situation has improved
when a new regulation replaces an old regulation nor can there be a presumption
that that would be the case. It is a very complicated area and it is difficult
to regulate adequately. Any re-regulation needs to proceed from very pure
motives and a very clear insight as to the national interest and interests of
Since 1 July 2005, in accordance with Corporations Amendment
Regulations 2005 (No.1), PDS' for superannuation products have been
required to include a standardised fees and costs template.
Previously, information on fees could be presented as issuers deemed
appropriate, making comparisons difficult. This measure was intended to address
Despite the change, the committee heard evidence that it is still
difficult to make fee comparisons between superannuation product providers. ICAA
...the issue of how fees are templated and provided needs to be
addressed more. It is almost impossible, basically, for the average consumer to
look through three or four PDSs and understand what the fees are.
Aside from fees, the government has not mandated that other information
needs to be presented in a standardised fashion within the PDS. ASIC told the
committee that extending mandated standard forms of disclosure would not
necessarily improve readability:
...historically, there have been some problems with the
consumer-effective mandated content or lengths ... the assumption on which we
are proceeding is that it is better if these things emerge over time. For
example, the old prospectus regime had a mandated series of disclosures, and it
was not always obvious that complying with those mandates was in the interests
of good or accurate communication. I do not think we see a case at this stage
for changing that fundamental setting.
It also contended that comparability was not always practicable:
The objective of comparability is not evenly achieved across the
spectrum. In some cases it is quite difficult for that to occur. We really need
to be talking about similar product types being offered to consumers whose
objectives are similar ... [W]e have asked ourselves whether there is a case
for a more standardised disclosure of risk, but that is something you would not
want to close down by standardisation because it is very particular to the
individual product and the individual issuer.
Similarly, the other leg of what we say is important here is for
people to understand in a clear way what they are buying and, given the variety
of products on the market, that is difficult to standardise. It would seem
better that we drive disclosure towards clear and effective communication of
what people are being offered, how much they are being asked to pay for it and
what risks are associated with it than to try and standardise those things in a
way that works in fees. It is unclear whether that would work as well outside
the fee area.
Consumers would benefit greatly from shorter, more comprehensible and
more comparable product disclosure statements. While the objective of more
consumer-friendly disclosure is not subject to disagreement, the means by which
it may be achieved are. Short-form PDS' have not worked because there is little
or no incentive for product issuers to supply one. Further, lengthy documents
are only problematic where their length itself makes the key information they
contain difficult to find. Achieving comparability through mandated
standardisation also has its deficiencies, as ASIC pointed out. Finding a one-size-fits-all
model that could be practically used by product issuers offering a diverse
array of financial products could potentially create more problems than it
The committee is of the view that the readability of PDS' could be
improved by ensuring that important information is prominently displayed, in
summary form, at the front of the document. This would enable those seeking to
make a comparison between products to do so without needing to endure rifling
through the entire document. The committee strongly encourages superannuation
product issuers to improve their PDS' in this fashion.
If this cannot be achieved by the industry of its own volition then it
should be mandated by government. In doing so, it would be advisable for
Treasury or ASIC to have undertaken market research on the readability of PDS'
to ascertain the most consumer-friendly way to present such material in a
standardised format. Such research should be conducted as soon as possible.
The committee recommends that the government conduct market research on
the readability of superannuation product disclosure statements with the goal
to introduce simple, standard, readable documentation.
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