The Royal Commission's long awaited final report into misconduct in the Banking, Superannuation and Financial Services Industry was delivered by commissioner Hayne on Monday afternoon. The report is far reaching and covers many aspects of financial services, delivering it’s recommendations in different sectors, with the section on financial advice running for around 100 pages. In the coming days, we will unpick the report, specifically the areas concerning financial advice, to try to understand the 10 individual recommendations included that relate directly to financial advice. We will add to this analysis from our data archives, to help determine the potential material effect that actioning the recommendations will have on advisers and the implications for their businesses, their clients and the financial advice industry as a whole.
In his introduction to the section on financial advice, Hayne noted:
“Three different issues have emerged in connection with the provision of financial advice. The first is ‘fees for no service’: ongoing advice fees charged when no advice was given to the client. The second is that clients have often been given poor advice that has left them worse off than they would have been if proper advice had been given. The third is the fragmented and ineffective disciplinary system for financial advisers.”
Noting that each of these issues has its roots in the history of the financial advice industry, he continues:
“Expressed in a single sentence, that history tells the story of an incomplete transformation – from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice. I say ‘incomplete’ because I do not believe that the practice of giving financial advice is yet a profession”.
His 10 recommendations regarding Financial Advice are an attempt to tackle the problems he sees negatively effecting the industry regarding;
- Ongoing fee arrangements,
- Lack of independence,
- Quality of advice,
- Conflicted remuneration and
- Professional discipline of financial advisers.
Potentially the most immediate material concern for advisers are the recommendations around changing the ways they are remunerated. Going to the heart of the “poor advice” issue, Hayne has pointed to adviser so-called conflicted remuneration – inparticular grandfathered commissions and insurance commissions, recommending they both (eventually) be reduced to zero. This would, in the comissioners eyes, help ensure advice clients get the best advice for their individual situation and help thwart the temptation for advisers to use products that give them the most commission.
Needless to say, if these two proposals were enacted, they would significantly effect a large proportion of adviser revenue streams and force a re-think in the fee structure of many firms businesses.
The report also recommends new standards of professional discipline for advisers and licensees, including reference checking and information sharing by concerned parties, and increased compliance around reporting and misconduct by financial advisers. Also recommended is a new disciplinary system that:
- requires all financial advisers who provide personal financial advice to retail clients to be registered;
- provides for a single, central, disciplinary body;
- requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and
- allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body
Hayne stated that the aim of the disciplinary system is to ensure that advisers who engage in misconduct face appropriate consequences, and that where appropriate, the consequences imposed on advisers extend beyond their association with a particular licensee. He noted that the current disciplinary arrangements were undertaken by different sections of the industry: licensees, ASIC, membership associations and the newly formed FASEA and that to be effective, “a coherent system of professional discipline must be established for financial advisers”.
The commission also mooted changes to commissions relating to mortgage broking, while not specifically concerned with advice, these changes would implicate around 25% of financial advisers who do deal in this area. Specifically, the recommendation states that:
“The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.”
Significantly, this is one area where the government has been cool regarding the commission’s recommendation, but if enacted, it would change the nature of borrowing for millions of Australians and have far reaching effects on advisers currently engaged in provision of these services.
What Is Your (re-)Action?
In total, the commission’s recommendations will have serious implications for the revenue models of financial advisers, forcing many to restructure not only their fee arrangements, but also their entire business models. Revenue and cost pressures will demand advisers ask themselves “what is my ideal client?”, “what are my strengths?”, “who do I partner with to reduce costs or achieve scale?”, “how can I exit clients I can no longer afford to service?” and “what is my strategy?”.
We will talk more in depth in the coming days about these issues, so stay tuned!
If there is anything else advisers would like us to explore or comment on, we welcome suggestions and feedback in the comments section of this article.