The job of a lifeguard isn’t an easy one. There’s a huge expanse of beach, an unknown number of swimmers with an equally unknown level of swimming ability, and ever-changing surf conditions, which a lifeguard is trained to recognise and respond to.
To help the lifeguard be effective, they put flags on a “safer” part of the beach, and the swimmer then decides if they like the conditions, and want the oversight and inferred protection of the lifeguard. This is not dissimilar to investing, and the role of our corporate regulator, ASIC.
Following the global financial crisis and recent advisory scandals which saw thousands of investors lose nest eggs adding up to billions of dollars, there was a call for government intervention to do more to protect investors. FOFA (Future of Finance Advice) was born specifically to improve the “flags” and conditions reporting. Soon after, David Murray’s Financial System Inquiry was conducted to examine what broader changes needed to be made to ensure our financial system was positioned to best meet Australia’s evolving needs, and support our economic growth over the next decade.
One of the key recommendations from the Inquiry included corporate regulator ASIC being granted new powers. Effective from mid-2016, one of these powers would allow certain investment products to be banned or modified, and investor warnings slapped on a range of complex and risky financial products in the same way as the graphic warning on cigarette packets.
ASIC chairman Greg Medcraft said banning financial products would be rare, but their new powers could be used to put pressure on financial product providers to “lift their game”.
As it currently stands, there are regulatory protections in place to help safeguard retail investors. In particular, the “flags” oblige financial service providers to provide a product disclosure statement (PDS) which must include a summary of the risk level of an investment option.
However, a PDS does not need to be provided to investors who are classified as “sophisticated or wholesale investors”. To be classified as a sophisticated investor, an individual needs to have net assets of at least $2.5 million or a gross income of at least $250,000 for each of the last two financial years.
While this may have been a high threshold back in the 90’s when the asset and income tests were set, they are now outdated and in dire need of review.
The resources boom saw many of those employed in the mining industry earning in excess of $250,000 a year, and the interest rate cuts over the last decade have seen house prices surge. While these individuals may meet the necessary thresholds, it doesn’t automatically translate to investment acumen. Many individuals whom the safeguards were meant to protect are now able to be classified as a “sophisticated investor” and they’re starting to swim outside the regulatory flags in droves.
As interest rates remain low and investors chase higher yielding, (and likely) higher risk investments, some argue that financial product providers should be required to clearly inform investors of the possible risks regardless of their investor status.
This is where ASIC’s new powers could come into play.
ASIC could use their powers to impose conditions on risky investment products such as restricting access, requiring investors to obtain financial advice before they could invest or slapping warnings on product disclosure statements and prospectuses for example telling investors, “Your capital is at risk.”
The Consumer Action Law Centre welcomed the government’s decision to increase ASIC’s powers. “A product intervention power will enable ASIC to amend or ban harmful financial products where there is risk of significant consumer detriment. When enacted, ASIC will be able to respond quickly when consumers are at risk, and intervene before harm has occurred,” says Consumer Action chief executive Gerard Brody.
ABA chief executive Steven Münchenberg has said the banking lobby is looking forward to working with the government and other stakeholder on the details on the reforms, but emphasised the need to “strike the right balance” between consumer protection and product innovation. After all, some swimmers enjoy their patch of beach and the challenges of the waves.
Balancing the competing objectives to successfully deliver these ambitious reforms will require political mastery. But given the political football financial services reform has become, it is unclear whether the leadership and bipartisan support needed to pass these likely controversial reforms will ever materialise.
