Financial advisers in Australia have been given a roasting in a Royal Commission report for conduct that “ignored the most basic standards of honesty”.
The Royal Commission has been investigating the activities of Australia’s big banks, superannuation funds, wealth managers and insurers all year and made its interim findings public on Friday.
In the report, commissioner Kenneth Hayne reserved some of his harshest words for the financial advice sector, though not before lambasting the whole financial services sector for conduct which had brought major public condemnation.
Greed is bad
In outlining why the whole industry had a problem, the report states clearly: “The answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty.
“Banks, and all financial services entities recognised that they sold services and products. Selling became their focus of attention. Too often it became the sole focus of attention,” the report said.
During the commission’s hearings, instances of overcharging for financial advice, charging for not providing financial advice and charging clients who were dead became commonplace, causing the report to focus heavily on the culture, management and conduct of this sector of the market.
Dishonesty
Hayne’s report pointed out: “Charging for doing what you do not do is dishonest. No-one needs legal advice to tell them that.”
In comments that may be familiar to industry participants around the world, the report went on to state: “Advisers often treated ongoing service arrangements as though they were nothing but trail commissions for the advice that had already been given.
“In some cases, advisers continued to charge ongoing service fees even though the client was dead and had died years earlier.
“Clients seldom complained about being charged for nothing. They did not complain because the fees they paid were charged invisibly.
“Whether the conduct is said to have been moved by ‘greed’, ‘avarice’, or ‘the pursuit of profit’, it is conduct that ignored the most basic standards of honesty.
“The licensees did nothing to stop it and they took the proceeds.”
Tougher rules coming
In a pointer to where its final recommendations may go, the Royal Commission also said its investigations had found that the financial advice industry relied too much on automatic periodic payments, such as sales commissions and adviser service fees.
“Some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services; some licensees and advisers did not keep adequate records to enable monitoring and analysis; and some licensees did not develop and enforce effective monitoring and checking procedures to prevent systemic failures,” the report stated.
It also lamented that, to date, no-one has been subjected to any formal public process of investigation, finding and punishment for this conduct.
“Only at the last minute before the [Royal Commission] hearings began, did enforceable undertakings yield public (and then very limited) formal acknowledgement from entities that [the regulator] Asic had ‘concerns’ about their conduct and that those concerns were ‘reasonably held’.
“Even when the commission was taking evidence about the issue, the licensees had not made good their defaults by compensating all their affected clients,” the report stated.
Government promises action
The final report of the Royal Commission is due by 1 February 2019, and from the tone of this interim report it seems likely the inquiry will recommend some sweeping changes to the financial advice industry in Australia.
Australian Treasurer Josh Frydenberg said in response to the report that the government is committed to taking strong action to reform the financial sector, looked forward to receiving the commission’s recommendations and promised to act on them.
“The interim report and the Royal Commission’s hearings to date make clear that some financial institutions have fallen far short of treating Australians honestly and fairly,” he said.
