By Alex Dunnin
IT may come as a surprise to most super fund members and investors, but the financial services firms you trust with your money are under no obligation to treat you fairly.
A simple fairness test was the “missing link” that might go a long way towards preventing investment disasters, said Jeremy Cooper, deputy chairman of the Australian Securities and Investments Commission.
He said it was this lack of a basic fairness law that had forced the Government over the years to create arrays of complex, special laws and regulations.
The irony was that it had made superannuation and investment hard to understand and costly to administer even though many of these special rules didn’t work properly. Cooper has announced ASIC’s new “between the flags” initiative designed to show consumers how to look for reasonably sound investments, while avoiding ones that are more likely to get them into trouble.
He said consumers would not be banned from investing in high-risk schemes, but they needed to understand that, like when you ignored the advice of the lifesavers at the beach, bad things were more likely to happen.
“You could get into a whole argument about what’s between the flags and what isn’t. [But] the idea is that you’re welcome to swim outside the flags but as you do, the risk complexity of the products increases,” he said.
Reinforcing Cooper’s concerns, the UK already has such a law called the Treat Customers Fairly (TCF) principle which is an overriding requirement governing all contracts and relationships between financial services firms and their customers.
It works like the fairness test that underpins industrial relations laws in Australia.
The big question is what we would mean if we say something is unfair. Probably things such as an adviser recommending investments that are clearly too complex for a novice customer, or when they put clients into super funds that simply pay high commissions.
Cooper’s ideas about fairness tests are not new, but neither is resistance to them. Earlier this year when a survey by the consumer group CHOICE and a Productivity Commission review lead to calls for laws banning unfair contracts, the Australian Banking Association immediately dismissed these suggestions as de facto price controls.
Cooper said the fundamental problem is that firms can treat customer in ways that are perfectly legal, but “nevertheless the outcomes for the customer remain, what you might call, unfair”.
Comments that fairness tests should be written into financial laws come just at the time when the Government has unveiled major initiatives to resolve chronic problems in how super funds disclose their fees and describe their products.

Additional reporting by Michael Hobbs, a journalist at the Rainmaker Group. Alex Dunnin is the group’s director of editorial and research.