Are we financially literate? – Should governments protect the vulnerable, the greedy, the reckless?

About 15 years ago, a major mortgage company that was based in Victoria went broke. It had offered its investors ridiculously high interest rates for short term deposits, then loaned long at rates that their mortgagees would never be able to repay. Many Seniors put most of their savings with them, and they lost it all.

At the time, I was Chairman of National Seniors Australia and was inundated with calls from angry members who wanted me to get their money back and put in jail all the bad guys who had caused them to lose their money.

I decided to call the Prime Minister and have a chat about what could be done to relieve the obvious distress that many were suffering. In his usual courteous way, John Howard listened carefully and then said, “Everald, I can’t legislate to stop people from being stupid and greedy.”

I realised then that I should have thought about that before I called him, but we constructively chatted about what could be done to protect the innocent rather than greedy, and agreed that financial literacy was a vital element of education that was missing from society, particularly among the elderly.

All of this highlighted two main problems. Firstly, there are too many greedy people who want to earn quick and easy money, and they invest recklessly. Secondly, there were some Financial Advisers who recommend insane investments mainly because they would receive very large commissions for doing so, and further commissions every time they were able to convince their clients to reinvest when the term was up.

This particular disaster, plus other similar ones that followed, especially when the Global Financial Crisis occurred in 2008, caused governments to legislate to have tighter controls and reporting requirements for Financial Advisers. The most recent legislation was brought in by the Gillard Government, and it was called The Future of Financial Advice or FOFA.

Now, the Abbott Government has announced that it will reform that legislation, which it feels is too restrictive and cumbersome for the efficient organisation of financial markets. Most older Australians are considerably concerned about these changes which they feel will water down essential protections, and National Seniors Australia has, quite rightly, taken-up the cause very strongly and persistently on behalf of its members.

This protest should be taken seriously as the situation is sufficiently volatile for it to cause Tony Abbott to be leading a one-term government. So, the implications are worth some pondering for a while.

A problem that all governments have, not just the current one, in looking at financial matters is that they take advice from the finance industry while having only token consultations with consumers.

When it is an investment matter, they talk to banks and brokers. If it’s superannuation, they talk to the large industry and retail funds. I know of this because I have been a member of advisory panels set-up by governments on financial matters over a period of four decades, and I have always been part of a small minority of those who were representing consumers, outnumbered by a ratio of around ten-to-one.

Now, I have no problems in governments listening to what banks want to do, as I am a shareholder in all four of Australia’s major banks and I want my dividends to increase, but I also want consumers to be listened to. However, we are ignored massively and this must change.

From discussions with a wide range of Seniors who are determined to protect their life savings, I find that the key issues are these.

Investors want their financial planners to be obligated by law to obtain their written permission every two years to continue or not with their agreed level of fees and commissions. The currently proposed new legislation removes this obligation and is clearly wrong. After all, everyone has the right to change their insurance policies every year. They must be entitled to do likewise with their financial advisers.

Another proposed legislative change will make it easy for financial advisers and planners to avoid legal action by investors over the losses they incur. While I basically object to people going to Court over losses in investments, because all investors must accept the possibility that they may lose their money at any time, they do need some capacity to sue corrupt entities like Storm Financial and obtain justice.

There is a strong tendency for financial advisers to recommend investments that earn them the highest commissions. We need legislation that sets a ceiling on what fees and commissions can be earned and which requires a disclosure of those fees and commissions to clients.

The powerful question relates to how it can be assured that advisers act in the best interests of their clients, not themselves. Proposed legislative changes give an unacceptable leniency in how to determine the best interests of a client. This is not good, as the needs vary from one person to another and each one has different financial imperatives. Rather than change legislation, it will be best to encourage banks and other financial institutions to create new financial products for the Ageing, as most Seniors want to invest in products that will guarantee them a reasonable financial return for the term of their life expectancy. There are very few investments that meet this need.

If the proposed changes do become law, there will be a very considerable backlash from Seniors, many of whom will decide to handle their investments without seeking financial advice, and this will lead to many more personal disasters.

I will do my best to encourage the four banks in which I am an investor to voluntarily break with any such legislation and guarantee their customers the security they want and deserve through the provision of innovative investments of integrity and security.

The bank that takes this initiative will earn a lot of money.