Two radical legislative changes set to be rolled out in Australia – a market often seen as a bellwether for regulatory change in Asia – could have a knock-on effect on the region’s fund management arena.
From July 1, the nation’s A$1.5 trillion superannuation industry is to introduce a default scheme called MySuper in a compulsory government drive to engage Australians in their pension provision.
MySuper will have one diversified investment strategy with a streamlined fee structure, in an effort to make it simpler and cheaper. Previously disengaged citizens (primarily 20-40 years of age) had been defaulted to a workplace super plan, with various investment strategies ranging from conservative to balanced to growth.
Further, also from July 1 Australia will see the introduction of a fee-for-advice system on the back of the banning of commission payments to distributors under the Future of Financial Advice reforms.
This is a development that has been much debated in Asia, where the power of distributors is frequently regarded as contrary to the interests of retail investors, following mis-selling scandals that broke out in the wake of the financial crisis.
The UK’s Financial Services Authority banned commission payments from the start of this year, while the Canadian Securities Administrators are considering a similar scheme.
But while these two legislative reforms are generally regarded as progressive for long-term funds industry development in Australia, there are some sober voices.
Among them is John Brogden, CEO of Australia’s Financial Services Council (FSC) – a body representing retail and wholesale fund management firms, super funds, life insurers, advisory networks and trustee companies.
He argues that the costs of these schemes are not being fully factored in, estimating them at a combined A$1.5 billion.
On MySuper, he notes the implementation costs will be high, particularly for IT and back-office systems, which will flow through to end-consumers.
In fact, he does not see any cost-savings for three to five years. “The government was very keen for one product, one price,” he tells AsianInvestor on a recent visit to Hong Kong. “We originally argued this was absurd.
“Why would someone in a workforce of 10,000 pay the same as someone in a workforce of 10? The ability to provide the scale of services which will reduce the cost should flow on to consumers.”
As there will be only one strategy, Brogden is anticipating an increase in life-cycle funds – starting with an aggressive allocation and moving to conservative over time – which he notes have never been popular in Australia.
“That is the way of dealing with a very diverse workforce ranging from 16 to 60 years of age,” he notes. “That is changing the way people are looking at the industry. By forcing everyone to offer MySuper, it becomes very similar.”
In terms of fee-for-advice, Brogden notes that at present advice is only delivered at either end of the spectrum, via basic phone calls or high-end comprehensive advice.
“In the next couple of years, the capacity to provide that middle-market advice for millions of Australians is important, so a lot of [distributors] are gearing up to provide that,” he explains.
However, he predicts a reduction in the amount of financial advice delivered in Australia, at least initially, which would be similar to what has happened in the UK, which has reportedly seen a 25% drop in its adviser distribution network following its ban on commissions – hitting consumer access to advice.
“In the long term it will benefit consumers, but people will have a sticky shock when they think they can’t afford it. We think you will see a lower level of provision.”
He sees the country’s industry funds players, or not-for-profit, building their own advisory businesses, having been critical of the cost of financial advice previously.
Brogden believes this will spark M&A activity, leading to industry funds breaking the $100 billion barrier, with several others between $50-$100 billion.
He argues that, with compulsory contributions set to rise in increments from 9.25% to 12% of salary by 2021, and these latest reforms, the super industry is set to grow, doubling in size to $3 trillion by 2020 and $5.5 trillion by 2030.
He adds that owing to the limitations of the Australian marketplace, there will be an increasing need for super funds to reach out overseas, particularly in Asia. He points to AustralianSuper’s move to set up an office in Shanghai last year.
“The focus on Asia will grow significantly as the power and influence of superannuation gets larger,” he says.
While he concedes that superannuation fund providers are seeking to increase their internal expertise as they strive to make savings, he notes: “Regardless there will be more need for connection with Asia.”
One cause that the FSC continues to champion is an Asian funds passport, and Brogden points to the Asia Pacific Economic Cooperation (Apec) summit in Bali this October as a potential breakthrough.
He is hopeful ministers will sign off on a pilot scheme where the regulators of various Asian economies agree on a recognition programme for a particular test product. “China is not heavily involved in this yet, but when it is it will take off.”
Asked if he thinks the proposed cross-border mutual funds recognition scheme between Hong Kong and China could be counterproductive to an Asian funds passport, Brogden sounds an optimistic note.
“I do not think it slows [Asian funds passport] down,” he says. “If anything it indicates why there needs to be a multi-lateral agreement because people see the importance of the flow of funds around the region.
“We would be disappointed if China or Hong Kong decided that because they had their own relationship, they would prefer that to a multi-lateral arrangement.”