Financial planners face grilling this week

Bankers expect a Spanish Inquisition on Monday when the financial advice industry fronts the royal commission.

New CBA CEO Matt Comyn. Picture: James Croucher

With apologies to comedy troupe Monty Python, almost every banker in the land expects a Spanish Inquisition on Monday, when the $4.6 billion-a-year financial advice industry will prostate itself before Ken Hayne’s financial services royal commission and beg for mercy.

Far from creating a platform for some kind of cross-selling nirvana, the industry’s product-driven — as opposed to service-based — culture has combined with poor professional standards, anachronistic, paper-based processes and a reactive mindset to produce a recurring governance nightmare.

“You ain’t seen nothing yet,” a senior banker deadpans, in reference to last month’s sensational round of consumer lending hearings.

The financial and reputa­tional cost to the big four banks from their advice arms has been ­immense.

ASIC deputy chairman and first-up witness Peter Kell, who will be followed by AMP group executive, advice, Jack Regan, is likely to present the latest ­figures.

As of last December, AMP, ANZ, Commonwealth Bank, National Australia Bank and Westpac had either paid out or offered customers $216m of an estimated $220m in refunds and interest for failing to provide general or personal advice to customers while charging them ongoing fees.

A further $51m in additional compensation identified in a 2017 ASIC report has been paid to victims of dodgy — or non-compliant — conduct by advisers to the end of February 2018.

The figure excludes about $80m paid under CBA’s other remediation schemes.

As for the cost of the industry’s complex and time-consuming remediation programs, where tens of thousands of customer files are re-examined, the total bill would be a large multiple of the $51m.

Hayne has a lot to get his head around.

In the past week, CBA and ANZ have entered into enforceable undertakings with ASIC over their fee-for-no-service conduct.

New CBA chief executive Matt Comyn yesterday had the dubious honour of inking his first EU, noting that the bank had self-reported to ASIC in 2014 that some customers had not received an annual review as part of their advice package.

About 62,000 customer files had been reviewed, and a refund program covering the period 2007-15 had resulted in payments of $88m plus interest to ­customers.

“We recognise the fact that we have failed customers in our advice businesses over the past decade,” Comyn said.

“These failures have resulted in a range of regulatory actions, including imposition of licence conditions and remediation ­programs.

“This is unacceptable and we owe our customers an apology for letting them down.”

The unfortunate confluence with the royal commission did not escape the CBA chief.

The commission, he said, would hear more about cases where the bank had failed its customers, and CBA needed to “listen and learn from what we hear”.

ANZ, for its part, was collared for the same conduct — failure to provide annual reviews to more than 10,000 Prime Access customers from 2006-13.

While last month’s consumer lending round of hearings heard many tales of similarly egregious behaviour, the difference this time is expected to be the scale of the damage wrought on the customer.

“In consumer lending, the impact on customers of the banks’ poor conduct was minimal,” Finance Sector Union national secretary Julia Angrisano said.

“The culture of the banks in this round of hearings will be at its worst and the impact will be significant. We’ll hear about customers losing their homes.”

It’s no exaggeration to say that the rolling scandals in the financial advice industry, particularly at CBA, laid the foundation for the royal commission.

While the key Future of Financial Advice reforms, imposing a duty to act in the best interests of customers and a ban on conflicted remuneration, became effective in mid-2013, it was a parliamentary committee’s review of ASIC that lit a bonfire under the industry.

The committee’s report excoriated CBA for misconduct by Commonwealth Financial Planning in 2006-10, with advisers found to have deliberately neglected their duties and placed their personal interests well ahead of customers.

Assets of clients with conservative risk positions were put into high-risk products without their knowledge and to the benefit of advisers, who received huge bonuses.

When the financial crisis arrived, savings and retirement nest eggs were wiped out.

For some of CBA’s rivals, the report of the economics references committee became a benchmark for swingeing reform programs.

The irony is that over the past five years, financial advice has come a long way from its antecedents as a poorly regulated cottage industry.

Deeply conflicted adviser remuneration has been replaced by a fee-for-service framework, although long-term arrangements under the old model have been grandfathered and are still in place.

A relatively uneducated workforce has been professionalised, and the distribution mindset from yesteryear has switched to a focus on the customer with all the attached FoFA obligations.

Perhaps most importantly, the industry has swung away from a reactive culture.

Its leaders are implementing systems and processes to detect poor conduct before it becomes entrenched at huge cost to the customer and the institution. This is critical for its future, and relies on a massive technology overhaul to dispense with paper and introduce fully digital ­systems.

As progress is made, artificial intelligence is introduced to enable adviser profiling and minimise the risk of rogue operators.

“If you compare the industry today to what it was like in 2013, it’s chalk and cheese,” a senior banker said. “But no leader would say that advice has arrived as a credible, well-governed industry.

“There’s a lot more to do in terms of artificial intelligence and people with judgment looking over customer files.”

Industry standards are also a moving feast, but they only go in one direction — higher. The legal requirements are probably the least of the advisers’ concerns, because ASIC often raises the bar.

While some institutions and advisers might be happy to merely comply with their understanding of the law, this could expose them to the wrath of a vigilant watchdog keen to minimise the scope of any regulatory arbitrage.

Then there’s the royal commission, which could raise the behavioural bar even higher by imposing its “community expectations” standard, as it did in consumer lending.

The major banks and AMP have no option but to go with the flow, with 44 per cent of advisers operating under a licence controlled by the nation’s top 10 financial institutions. “The biggest decision we make is to onboard an adviser,” one banker says.

“We have to stand behind their conduct, and the fee that they pay to us as a licensee is relatively low compared to our risk.”

As Kell hands over to AMP’s Regan on Monday, the industry will be dancing on eggshells.

There will be case studies for fees for no service (AMP, CBA), investment platform fees (AMP, CBA), inappropriate financial advice (ANZ, Westpac, AMP), and improper conduct by financial advisers (NAB, ANZ).

The disciplinary regime for the financial advice profession will also be examined (ASIC, the industry’s two professional bodies and Dover Group).

Many witnesses will emerge worse for their encounter with the forensic skills of senior counsel assisting Rowena Orr.

One executive protested ­yesterday that the error rate in financial advice stacks up well with the comparable figure for the medical industry. But that’s an argument that would not be well-received by Hayne.