Drastic changes to the financial advice industry in Australia have been recommended in the long-awaited Royal Commission report into the financial services sector published on Monday.
Commissioner Kenneth Hayne took a hard line on both financial advisers and financial institutions after a decade of scandals in the industry.
Among the report’s recommendations, it proposes a more active role for clients in agreeing fees with their adviser and greater detail on what is being paid for. As well it suggests the government implement a better system for reporting adviser misconduct.
The commissioner said no adviser should be allowed to use the words, or describe themselves as, ‘independent’, ‘impartial’ or ‘unbiased’, since in Australia advisers are never independent.
End of the trail
Hayne has also pushed for the abolition of grandfathered commissions – the system that allowed financial advisers to keep applying fees based on old agreements.
“Financial advisers commonly received a combination of upfront and trail commissions: upfront commissions when the product was sold, and trail commissions in subsequent years,” Haynes added while proposing a ban on these types of commissions including ‘on-going fees’.
“The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing,” he said.
Better discipline
Under the recommendations, financial advisers will also be forced to have their references checked and to abide by information-sharing protocols.
Additionally, Hayne suggested the creation of a single disciplinary body after deeming the existing ones as “fragmented” and their scope “unsatisfactory”.
The new body would be in charge of overseeing the financial advice industry, of collecting misconduct and “serious compliance concerns” reports both from firms and from clients.
Professionalism needed
These recommendations, Haynes said, will make financial advice a profession, since he believed it was not one as of yet. This failure he put down to the great conflict of interests plaguing the Australian financial advice landscape, where too often advisers are more likely to sell products than care for their clients’ interests.
The Royal Commission also noted financial advisers had been paid more than A$6.1bn (£3.4bn, $4.4bn, €3.8bn) in commissions by insurance companies connected with the sale of life insurance products in the last five years.
“So long as advisers stand to benefit financially from clients acting on the advice that is given, the adviser’s interests conflict with the client’s interests,” Hayne said in his report.
Next steps
Commenting on the report, Australian treasurer Josh Frydenberg said: “Too often the conduct within our financial institutions has been in breach of existing laws and fallen well below community expectations. The price paid by our community has been immense and goes beyond just the financial”.
“The government is confident that the actions announced today will put in place the legislative framework necessary, providing the regulators with the powers and the resources to hold those who abuse our trust to account. In doing so the community’s trust in our financial sector can and will be restored.”
The Australian government took on board every single recommendation made in the report and has pledged to implement them in tandem with other financial bodies.
“Commissioner Hayne has called out the clear need for change,” said Matt Comyn, chief executive of the Commonwealth Bank of Australia (CBA), one of the banks recommended for criminal prosecution.
“The Royal Commission has been a thorough and valuable process for everyone – bank customers, financial services institutions, regulators and policy makers. It has highlighted failings both in our business and across the wider financial services industry. As challenging as the Royal Commission process has been, CBA will be a better bank as a result.
“We are addressing past failings, implementing important changes and improving our processes to ensure we remain focused on what is best for our customers. We are implementing stronger policies and processes, including a new Code of Conduct. There is still much work ahead to earn back trust, but we are determined to restore broad respect and support for the important role that a major financial institution like CBA has to play in our economy and community,” Comyn said.
Similarly the main regulator, the Australian Securities and Investment Commission (Asic), said it would undertake an internal consideration to start working with the government and other institutions to implement the recommendations made by Haynes.
“Asic notes the serious matters referred by the Royal Commission of possible breaches of financial services laws. Consideration of these matters will be prioritised,” said James Shipton, Asic chair.
“Asic looks forward to working with the Parliament, the Government and other regulators to implement the reform agenda to ensure a fair, strong and efficient financial system for all Australians. In coming weeks, Asicwill release an update. This will outline the actions Asichas already under way and the further steps it will implement moving forward to continue to strengthen our governance, culture and practices, and realign our enforcement and regulatory priorities.”
Who will pay?
While everyone has made the recommendations a priority, it is still not clear how they will be enacted; how much this will cost and where the money will come from.
It is most likely that the changes proposed by Haynes will burden on the clients themselves even though, as the treasurer said, they have been abused and played too many times by ‘unprofessional’ financial advisers.
