The Future of Super

As I mentioned in last week’s blog on the recent Intersekt conference, there was an interesting panel discussion on Superannuation – interesting not just because of the topic, but also because it was about the only session I attended at the conference where there was some real disagreement among the speakers. Just goes to show how sensitive and contentious Super has become – and this was not even a discussion about the Royal Commission!

L to R: Peter Stanhope, Carla Harris, Greg Einfeld, Jon Holloway. Moderator Erin Taylor. (Photo sourced from Facebook)

The protagonists were Jon Holloway (Zuper), Carla Harris (Longevity App), Peter Stanhope (GIG Super) and Greg Einfeld (Plenty Wealth).

With around $2.7tn in assets under management, we were told that the Australian model for state-sponsored, privately funded retirement planning is the envy of the world. Yet we also heard that it has been so badly executed at home that we are in the midst of a huge shift in our attitudes towards this defined contribution scheme. And this is not just about disruption or technology – there are serious concerns that many Australians are not willing and/or able to set aside enough assets to provide for their retirement living; that the system is being rorted via skewed tax rules, gender-based wage disparity and expensive management fees; and that there is an overall lack of investor education, interest and engagement.

But for context, and in Super’s defence, the system has helped to make Australians a lot wealthier (along with property), and rank higher than Switzerland for median wealth. And as The Economist recently reported, for good or for bad, Super means that Australia does not have as heavy a state pension cost as most of the OECD.

Some of the issues facing the industry, as outlined by the panel include:

  • the changing definition of “ordinary Australians” (who are they? how is this even defined?)
  • the changing nature of work (the gig economy etc.)
  • the need for Open Super Data (to make choice and switching easier)
  • redefining “retirement” (given we are living longer beyond the traditional working age)
  • addressing gender imbalance in wages and contributions
  • redundant marketing imagery used by much of the Super industry
  • why the audience is under-educated and under-engaged on this topic
  • too little industry competition (although the regulator APRA is known to favour consolidation of smaller funds which are not sustainable)
  • the advice delivery channel needs to change, as does access to, and choice of, products and providers
  • the technical infrastructure is not fit for purpose for things like custody and administration (still living in the 80s?)
  • tax planning (a key rationale for how super is managed is determined by tax minimization)
  • generational change (linked to changing work patterns)

The panel discussion was followed by a fireside chat between Kerr Neilson of Platinum Asset Management, and Simon Cant of Reinventure. According to Mr Neilson, the key structural changes facing the industry are a direct result of financial planning advice becoming less profitable: no more trailing commissions (probably a good thing?); fewer advisors in the market (due to increased professional education requirements) with a resulting shift to accountants; and even robo-advice is not truly scalable. Meanwhile, for anyone watching their Super balance and returns, beware the Trump knock-on effects of trade tariffs and interest rates – this will require greater asset diversification, and robust currency risk management, to take advantage of new investment opportunities.

Next week: What they should teach at school

Intersekt Festival 2018

This year’s Intersekt Festival, held in Melbourne last month, was put together in quite challenging circumstances, given some of the recent events within key industry body FinTech Australia, the primary event host. It was a credit to all involved.

Not surprisingly, given some of the regulatory and industry changes underway in Australia, the key themes included: Open Banking and access to data: Trust in the banking and financial services sector (thanks to the Royal Commission, and the APRA report on the CBA); Data Privacy; Payments and the NPP; Comprehensive Credit Reporting and predatory lending practices; and Equity Crowdfunding. And of course, a little bit about Blockchain, Cryptocurrencies and Security Tokens.

There was a lot of discussion on “Trust”, especially in the age of Uber and Airbnb – how have these marketplaces managed to earn so much public and consumer trust in such a relatively short time? Yet as consumers, we obsess about Open Banking vs Data Privacy,  while banks themselves appear to be more infatuated with their Net Promoter Score…. whereas “Trust” is clearly a huge issue. In the case of the banks and the fall out from the Royal Commission, there was a discussion about whether our key financial institutions have come close to losing their social license to operate.

Meanwhile, with the prospect of self-sovereign digital identity becoming a practical reality (fuelled by blockchain, decentralisation and trust-less protocols and standards), there is a demand for cross-functional  (and cross-border) solutions for KYC/AML processing and identity management. But a lack of mutual regulatory recognition or harmonization (as opposed to “mere” industry standards) plus a diversity of business models confounds regulatory harmony, often within a single jurisdiction, let alone across multiple markets.

When it comes to payments and the NPP, it’s clear that regulation lags technology. For example, despite the existence of a (complex and somewhat uncertain) licensing regime for purchased payment facilities, APRA has only licensed one such PPF – PayPal. As former ASIC Chairman, Greg Medcraft once observed, by the time the NPP is fully operational, Blockchain will have gotten there long beforehand. And given the preponderance of stored value cards, digital wallets, peer-to-peer crypto exchanges, and multiple overseas and cross-border mobile payment apps, the respective regulatory roles of RBA, APRA, AUSTRAC, ATO and ASIC need to be clearly defined and set out.

On the topic of data protection and “big data”, there was a lot of discussion about getting the balance right between privacy and innovation. One the one hand, industry incumbents should not be allowed to use their market dominance to resist open banking and stifle the emergence of neo-banks; but on the other, there is a need to shelter the forthcoming consumer data right (CDR) from potential abuse like predatory lending (e.g., not simply define the CDR standards by reference to existing banking products and services) – mainly because the CDR is designed to empower consumers (not embolden the industry), and it is designed to be sector neutral (i.e., equally applicable to utilities, ISPs, telcos, insurance firms).

Other topics included SME lending, where new, tech-driven providers are not only originating new loans, but also refinancing existing businesses as the big 4 banks are seen to withdraw from this market; home loans (where technology is driving new loan origination, funding and distribution models); social impact (“FinTech for good”); equity crowdfunding (and the role of STOs); insurance (creating a decentralised market place) and Superannuation (which prompted perhaps the most contentious panel discussion – more on that to come!).

If there were any criticisms of the conference, based on local and overseas delegates I spoke to, they related to the length (was there enough content to sustain nearly 3 days?); the need for clearer roles and participation by the major and regional banks; the absence of investors (despite a speed-dating matching event….); and a desire to see a broader range of speakers and panelists (too many of the “usual suspects”?).

Next week: The Future of Super

 

 

 

Banks under the spotlight (again)

About 6 months ago, I posted a blog on the current state of banking and financial services. It was published before the proceedings at the Royal Commission got underway, and since then we have heard a litany of complaints of malpractice and other inappropriate behaviour by some of our major financial institutions. We have also seen the publication of the Prudential Report into the CBA, commissioned by APRA. But despite the horror stories, is anyone really surprised by either of these findings?

Image: Jacob Edward; Source: Flickr; Some Rights Reserved

Some have suggested that our banking culture is largely to blame – but to me, that is somewhat simplistic, since I don’t think that the culture within our banks is so very different to that of other large companies or statutory corporations. (But I will explore this topic in a future blog.)

We have a love-hate relationship with our financial institutions, especially the 4-pillar banks. The latter have continued to be regarded as some of the most stable, profitable and prudent banks in the world – they are probably among the top 30 banks globally based on their credit ratings. Moreover, during the GFC, it was largely agreed that, despite their participation in complex financial products such as mortgage-backed securities, collateralized debt obligations and credit-default swaps, the big 4 banks helped to prevent a total meltdown in the local capital markets because they had reasonably strong balance sheets, and they worked closely with the RBA to avert the full effects of the GFC.

In fact, so enamoured are we of our banks that, despite the Royal Commission, the banks will not face significant regulatory reforms. One economist at a major fund manager I spoke to suggested that even an in-coming Labor Government would have to confine itself to some sort of bank tax. Anything that would undermine the 4-pillar policy (such as increased competition, rationalisation or foreign ownership) would likely be seen as unacceptable in the current political environment. In addition, since the financial sector makes up such a significant part of the market capitalization of the Australian stock market, most voters hold shares in the banks, either as direct or discretionary investments, or through their superannuation fund. Impacting the financial performance of the banks will have a knock-on effect for customers and shareholders alike.

Despite the relative strength of Australia’s financial services regulatory regime, it’s clear that part of the blame for the current malaise lies with the regulators themselves. None of the transgressions complained of at the Royal Commission or uncovered by APRA’s report on CBA suggest that new regulation is needed (unless we are talking about structural reforms…) In the wake of the GFC, and in line with global banking standards, banks have had to adjust the levels of risk-weighted capital they hold, and meet more onerous compliance costs – as well as rein in riskier lending practices. Yet, it feels like the regulators have not been as vigilant or as pro-active as they might have been – or there is such a “checklist” mentality towards compliance and risk management that banks and their regulators have lost sight of the substance of the law, not just the form.

Having read the APRA report on the CBA, there are a number of issues which need to be addressed, as I suspect that they are replicated (in whole or in part) among the other major banks:

  • All of the incidents covered by the APRA report occurred since the GFC – so, maybe increased compliance obligations are not the answer to these problems, but better supervision and enforcement?
  • Technology is only mentioned about a dozen times in the report – and technology was placed very low in the organizational framework for CBA’s Better Risk Outcomes Program (BROP) – yet banks are increasingly becoming technology businesses
  • Decision-making was seen as being too slow and too reactive, in part due to a collegiate and collaborative environment (surely, the signs of a positive culture?)
  • I would suggest there was a lack of external or independent input at the executive and even board level, and an over-reliance on in-house technical experts – especially in the areas of IT and risk
  • Further, the typical silo structures within large, complex organisations like banks, are the result of an over-emphasis on products and processes, rather than on customers and outcomes. To quote the APRA Report:

“…too many handoffs between silos and layers, with accountability often not clear enough and agreements hard to reach…”

  • Equally, a lack of delegation (especially to front line and customer facing staff) only compounds the lack of empowerment, accountability and transparent decision-making

Despite the strength of the 4-pillar banks and the market share they command, they face disruption and disintermediation from digital platforms, Blockchain technology, decentralized applications, P2P solutions and challenger brands. In fact, banks will increasingly become the digital custodians of our financial data – we will end up paying them to manage our data (rather than simply charging us transaction fees). Banks will also need to restructure their products and services around our personal financial needs and obligations according to our stage of life and other circumstances (rather than simply selling us products), along the lines of:

  • Essential – housing, living, education, health, retirement
  • Mandatory – superannuation, taxes
  • Discretionary – investments, holidays, luxuries

That way, banks will also have a much better “whole of client” view of their customers, rather than the current product bias.

Next week: Culture Washing

 

 

 

More musings on ICOs and cryptocurrencies

In the same week that SEC launched a spoof ICO (was anyone really fooled?), I attended two informational sessions about cryptocurrency that revealed much about the ignorance, greed, fear and misinformation that continues to plague this new asset class. Thank goodness that rational thinking still prevails…Much of the public dialogue around Blockchain, bitcoin and cryptographic assets has been along the lines of:

1. Everyone and their dog is trying to sell ICOs; so

2. FOMO is driving trading momentum; but

3. Price volatility deters many institutional investors; while

4. Regulators don’t really know what, where or how to regulate the industry.

But out of this uncertainty, clarity will emerge in the form of a new asset class, with appropriate regulatory structures, disciplined markets, and sophisticated investment products.

The first session I attended, described as a “Beginners’ Guide to Cryptocurrency”, felt a bit like one of those “get rich quick” seminars, where greedy (but unsuspecting) punters are sold the dream of timeshare apartments and highly leveraged equity warrants. While I can’t blame the audience (some of them knew no better), I would take issue with the presenter – the CEO and founder of a company in the process of launching an ICO. Admitting that they had limited technical knowledge of Blockchain, cryptocurrencies and token sales, the presenter also revealed limited knowledge of securities regulations and tax legislation when it comes to crypto and ICOs.

Meanwhile, the second session I was invited to attend (featuring representatives from brokers, exchanges, fund managers, Blockchain platforms and compliance experts) was far more informed. Even though some of the topics covered are still full of hypotheticals, the speakers all gave credible accounts of their respective positions. Compared to the first session, this forum gave me far more confidence that there are experts out there who know what they are talking about.

When it comes to cryptocurrencies and digital assets, I think the a reason why regulators, policy makers, traditional capital markets and advisers are often bamboozled is this is the first asset class in decades (if not centuries) that has not relied on a trickle down effect (in terms of production, distribution and exchange). In theory, anyone with access to Satoshi’s white paper, and who was capable of deploying the open source code, and who maintained a suitable CPU could have started mining, accumulating and trading bitcoin – and all without leaving their own home. And while it still forms a small proportion of total global capital assets, this industry has grown exponentially in less than 10 years.

Having developed the technology, identified the value proposition and established the asset class, the industry is now waiting for the appropriate regulatory tools so it can get on and build the infrastructure – from security tokens to atomic swaps, from Blockchain interoperability to custody solutions, from robust wallet integration to self-sovereign digital identity management.

Next week: Fear of the Robot Economy….