Australia is unequivocally open for business. It is open for funny business.
Camouflaged in an abstruse release from the corporate watchdog last Friday was notice that QFS 150 had been withdrawn. This document was so dry you would be reticent to read it with a gun to your head.
Its effect however is dramatic. It is the latest in a series of moves by the government to strip away investor protections and pave the way for the Boiler Room Nation.
Until now, there had been two kinds of investors: “sophisticated” investors with $10 million in their superannuation accounts and “retail” investors – everybody else, that is, whose advisers have to provide minimum levels of disclosure and statements of advice.
Their super, in other words, could not be targeted for high-risk financial products.
Now banks and boiler rooms can chase anybody with “a certificate from a qualified accountant stating they have net assets of $2.5 million” as a sophisticated investor. It has gone from $10 million in net assets in a super fund to $2.5 million in net assets all up. In other words, if you can find an accountant willing to sign a form saying your house is worth $2.5 million, congratulations, you are a sophisticated investor.
This captures a lot of people in the leafier suburbs of Sydney or Melbourne, and for that matter anybody with a willing accountant and a pen. Unfortunately, such people do not have the same armoury of lawyers to sue when things go pear-shaped.
According to the Tax Office, there are 974 sophisticated investors. Shortly, there will be hundreds of thousands. There are now 540,000 self-managed super funds in Australia. Make no mistake, the banks will target them. They know what you are worth and, with AMP and Macquarie, they control 80 per cent of the financial product platforms.
Adviser: “Do you want to be a sophisticated investor or do you want to be a chump?”
Client: “Er, sophisticated investor.”
Adviser: “Great, get your accountant to sign this. We have a special situation for you; it’s an option over a CFD of a synthetic CDO. Back up the truck. The limited recourse loan over the partly paid option is capital-protected. You can’t go wrong.”
This is not just a boon for the banks and the other fee-hogging passengers on Australia’s superannuation gravy train; it is a gift for yours truly. Already, we have a stack of finance sector scams two feet thick on the desk. We will need a $2.5 million storeroom just to house the impending avalanche of claims.
Good old Joe Hockey will really have some poor people on his hands now. Forget petrol. Half the middle class might as well put a down-payment on a new rickshaw.
OK, that is a spot of poetic licence, but the reality is that people will lose their life savings as a result of this furtive policy change.
Why do it then? We can only speculate, but it is notable that Macquarie said yesterday it would write to 160,000 clients to tell them they can have their investments reviewed back to 2004. (This relates to the bank being pinged by ASIC for “enforceable undertakings” as a result of an 80 per cent failure in compliance by advisers in the wealth division).
Only three weeks ago at its annual meeting, they put the number of clients affected at just 87,500. Either this 82 per cent increase in the bank’s client base in three weeks will catapult it to No.1 institution in the galaxy by year’s end or someone erred.
Unlike most institutions, which had kept to the $10 million sophisticated investor guidance, Macquarie had already been slotting its retail clients over to sophisticated status. Whispers from the bank yesterday had it that the Financial Ombudsman Service – which is funded by banks on the basis of how many complaints they get – may now accept that clients dudded by poor advice will be treated as “sophisticated” if they had been already rendered “sophisticated”.
Ergo, the Silver Donut may be off the hook for its compliance implosion. The impact of the ASIC changes, however, extends well beyond this one bank.
A SUPER FEE FAILURE
This week, a research paper arrived from Sydney Uni. Funded by the McKell Institute, it found that workers who saved through a “not-for-profit” industry fund might have twice as much money at retirement as those who had invested in a “for-profit” retail fund. We are talking $400,000 versus $800,000 over 50 years.
This schism in performance between the two sectors comes down pretty much to fees. Excessive fees have been instrumental in driving the flight of savings from institutions to self-managed super. And it is no wonder, if half of your life savings are being chewed up in charges.
Thanks to institutional greed, Australia’s superannuation system is failing its citizenry. Even industry funds, at half the price, are still far too expensive, given their scale. A tender process, such as that adopted by Chile, would bring price competition and cut fees in half again. Because the government in this country has proved to be craven in the thrall of the banking and super lobby, real reform is but a faint hope.
However, annual fees for the default funds in Chile are now equivalent to 0.20 per cent of funds under management per year (compared to an average cost of 0.9 per cent in Australia for industry funds).