Time we lifted the lid on these sheltered workshops

April 23, 2018

Australian Conservatives Senator Cory Bernardi’s long-standing calls for financial literacy to be a key part of educating our children have been backed up by the current Royal Commission into the banking industry.

Adam Creighton writes in today’s The Australian newspaper:

"If the royal commission into misconduct in finance continues to throw up evidence like last week’s, what looks like an increasingly ironically named “financial services” industry should brace for major change.

Let’s hope Kenneth Hayne’s recommendations, due in February, don’t include another layer of complex, box-ticking regulations, which benefit regulators and the compliance industry. What’s needed are a few simple rules that limit financial institutions to banking or insurance or funds management.

So-called vertical integration — allowing banking behemoths to Hoover up other financial firms — has been a disaster here as it has been around the world. The benefits of one-stop shops seem meagre in light of the sorts of disastrous shopping sprees customers have been unwittingly taken on, and the market and political power such huge firms necessarily amass.

In the rush to condemn firms for lying to regulators and charging fees to dead people for no services — following a litany of more run-of-the-mill rip-offs — it’s important to remember government is ultimately to blame. It’s the naivety of politicians and regulators that has permitted fund managers, insurance companies and banks to morph into highly tuned cross-selling machines.

It’s the direction of at least 9.5 per cent of most people’s wages and salaries into stocks and bonds, by compulsory superannuation, that has created the multi-trillion-dollar honey pot for financial adviser and fund managers.

Calls for greater levels of training for financial advisers appear to overlook that if financial advisers were trained in financial economics, they’d advise clients not to take their advice, the bulk of which, as billionaire Warren Buffet observed recently, leads to worse returns for most people than if they had simply invested in a basic index fund.

It’s the misplaced belief that “more powers” for regulators will change the underlying incentives of the industry, which feature a raft of hidden privileges and moral hazards. Giving ASIC more powers won’t matter much without the will to use them. The commission has highlighted the limits of APRA and ASIC, whose incentives, like regulators everywhere, are primarily to not rock the boat. The contrast with the lawyers assisting Hayne — Rowena “shock and” Orr and Michael Hodge — is stark. They probably aren’t seeking higher paid jobs with financial firms later in their careers, which has given them greater scope to be tough.

It is also the naive belief that competition in financial services will produce good outcomes for customers, much as the butcher, baker and candlestick maker do for their customers.

Such cookie-cutter arguments ignore a sad fact: we can all compare meat and bread, but financial literacy is woeful, creating the perfect environment for exploitation."

To listen to a highlight from Senator Bernardi’s weekly podcast urging government to include financial literacy training in schools, click here.

To subscribe to his Weekly Dose Of Common Sense podcast, click here.

To listen to this week's Weekly Dose of Common Sense podcast, click here.

The read Adam Creighton's full article, click here.

Picture: Commissioner Kenneth Hayne

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