Post-Hayne, the long-term future of the financial services industry looks more professional, more independent and more strictly regulated, with more power in the hands consumers.
If the Royal Commission’s recommendations are implemented, the industry will have to adjust to tougher and more strictly enforceable industry codes, a continuing shift to fee for service remuneration and the end of all conflicted remuneration.
There will be no more set and forget advisory arrangements, with consumer required to renew service arrangements annually.
The chief executive of the Financial Planning Association, Dante De Gori, says: “I think you will see most financial planning businesses, both big large as well as small, being more independently run, I mean definitely independent of product. My prediction is that there will not be an ongoing service fee arrangement in place but rather people will just pay for advice when they need it and there will be a small group that will have advisors on a retainer for their portfolio and investments.”
De Gori believes that if the recommendations are adopted it will bring the financial planning and mortgage broking sector even closer. “The financial planning sector will be a true profession. It will operate on a pure fee for service model, even though there was no recommendation to separate the institutions or the product manufactures from the advice providers,” he says.
The Royal Commission report says the misconduct it investigated was “in almost every case driven not only by the relevant entity’s pursuit of profit but also by individual’s pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place.”
Hayne says incentive, bonus and commission schemes through the financial services industry have measured sales and profit, but not compliance with the law and proper standards.
“The interest of client, intermediary and provider of a product or service are not only different, they are opposed. Too often, conflicts were resolved on favour of the entity, adviser or intermediary and against the interests of the client,” the report says.
“Too often, financial services entities that broke the law were not held to account. Misconduct, especially misconduct that yields profit, is not deterred by requiring those who are found to have done to do no more than pay compensation.”
SMSF Association chief executive John Maroney says: “We fully support increasing professionalism. We think that is moving along well but we think that this will give everyone involved in financial services a very big kick along to accelerate the process.”
Jonathon Steffanoni, principal consultant, legal and risk at QMV, says: “In 10 years, if we are looking at the superannuation industry we are certainly going to see a continuation of the trend of consolidation. The Productivity Commission report on competition and efficiency certainly highlighted some measures which will facilitate further consolidation.”
One critic of the Royal Commission report is Mark Crosby, professor in the Faculty of Business and Economics at Monash University. Crosby says: “What is missing in my mind, and what I am surprised has not come out of Royal Commission, is the fact that there is no one responsible for protecting consumers, there is no agency for consumers.
“It sort of falls between the cracks of APRA and ASIC and others. A lot of the products that have been sold in the past in the past have been unnecessary and consumers have had nowhere to go when they had problems.”
Some of the key recommendations that will transform the industry include:
Advice. The report includes recommendations to improve disclosure about lack of independence and the repeal of all grandfathering provisions covering conflicted remuneration.
It recommends that where ongoing fee arrangements are made, they must be renewed annually by the client and the services the client will receive must be put in writing each year.
It suggests that ASIC should consider further reducing the cap on commissions in respect of life risk insurance products, with the cap ultimately being reduced to zero (under current rules, the cap will go down to 60 per cent of the first year’s premium by 2020).
And it wants a future review body to look at whether remaining exemptions to the ban on conflicted remuneration are justified. Areas covered by the exemption include general insurance products and consumer credit insurance.
Mortgage brokers. The report has called for a complete re-shaping of the mortgage broking industry, with a move from commissions paid by lenders to fees paid by borrowers.
Deloitte banking and capital markets partner, Simon Pelletier, says there is no doubt that there will be fewer mortgage brokers if the proposed changes go ahead.
Super. Trustees of registrable superannuation entities (APRA regulated funds) should be prohibited from assuming any responsibilities other than those arising from or in the course of its performance of the duties of a trustee of a super fund.
No advice fees should be deducted from a MySuper account.
A person should have only one default super account. Systems should be put in place for ‘stapling’ a person to a single default account.
The regulators. The ‘twin peaks’ model of financial regulation should be retained, but with some adjustments. The law should be amended to ensure APRA and ASIC co-operate and share information to the maximum extent possible. Both regulators should be subject to regular capability reviews and a new independent oversight body should be established to assess the regulators’ effectiveness.
APRA should adjust its approach to prudential supervision to build a supervisory program focused on building culture that will mitigate the risk of misconduct. The prudential regulator’s role in overseeing superannuation should be adjusted. APRA should retain its current functions, including responsibility for the licensing and supervision of superannuation entities (RSEs) but this power should be shared with ASIC.
ASIC should focus less on enforceable undertakings and infringement notices, and look more at the use of court action to determine the consequences of a contravention.
Compensation of scheme of last resort. Hayne reiterates the Murray Inquiry recommendation that a compensation scheme of last resort be established to provide compensation to consumers whose financial institutions can’t or won’t pay compensation awarded in dispute settlements. Dispute resolution services and consumer groups have been calling for this for a long time but the Government has been hard of hearing so far.
Industry codes. The Royal Commission envisages that industry codes will be subject to ASIC approval and participation will be mandatory. More code provisions will be enforceable.
