James Kirby: Risk of bad behaviour by banks by no means eliminated after royal commission

In leaving banks to continue ‘vertical integration’ — where they try to be one-stop shops — the risk of bad behaviour has by no means been eliminated.

Commissioner Kenneth Hayne makes his opening statements. Picture: AAP

Has the Hayne report offered a future where the financial advice scandals of the recent past might not happen again?

Answer: Probably.

The report has zoned in hard on three areas — ‘fees for no service’, commissions — especially in the insurance sector and a ‘coherent’ system of discipline for financial advisers. If fully taken up by the government, Hayne’s recommendations should cut out the vast bulk of bad behaviour in these sectors. But in leaving the banks to continue in the business of ‘vertical integration’ — where they try to be ‘one-stop shops’ — the risk of bad behaviour has by no means been eliminated.

Hayne has offered clean cut solutions to troubled dimensions of the system which have triggered the greatest anger such as charging fees to the dead and the seeming inability of the current system to halt the most outrageous violations of financial advice standards.

• On fees-for-no- service

Under the Hayne model a major change would be delivered where financial advisers will have to tell clients what they ‘will’ be doing for them rather than the current arrangement which is based primarily on disclosure. Hayne calls the current system backward looking. He also recommends that every year an adviser must offer an estimate of the fees which ‘are to be charged. Hayne says the prospect that clients of the future might be charged fees for no service should be eliminated under this scheme.

• On Commissions

Importantly Hayne has sought to bring the insurance industry into the same legal system that will cover financial advisers. A series of Hayne recommendations combine to end the exemptions relating to commissions the insurance industry has enjoyed. Specifically, a system of ‘caps’ currently in place for insurers should be reformed by bringing the caps to zero. Hayne allows that a current examination by the Australian Securities and Investments Corporation should be allowed to finish its work on this issue first.

As widely expected Hayne has also urged the repeal of the disgraceful extension of ‘grandfathering arrangements’ which are still running five years after so-called Future of Financial Advice reforms were mean to ban all financial advice commissions. The report also recommended a transition to a new scheme among mortgage brokers where they would no longer receive commissions from industry, rather the individual client would pay the broker for services provided.

• On tied financial advisers

Every adviser who is not genuinely independent should be ‘outed’ under a brutally simple suggestion from Hayne which is that under the law an adviser will have to give to the client a written statement explaining simply and concisely why the adviser is not independent, impartial and unbiased. Under the current system independent advisers can promote their independence, but ‘tied’ advisers who have connections with banks or insurers are not forced to explain their position to clients.

• On Rogue financial advisers

Hayne wants a serious overhaul of what he calls the ‘fragmented’ system at present where a range of bodies police the advisory system. Hayne wants every advisor to be registered in order to give advice and in a substantial upgrade of existing laws he wants advisers as a condition of their licence ‘to report serious compliance concerns’.

Against the backdrop of a very contentious effort by the government to impose new standards on advisers, Hayne calls for a single central disciplinary body for financial advisers

Certainly, the advice industry needs these changes: As an industry it has fallen in low in the public estimation as the twin evils of unbridled greed and poor education standards combined in recent years to create a rotten model which is going to take years to unwind.

Early response to the report last night was cautiously positive from the advisory industry. Dante De Gori the CEO of the Financial Planning Association of Australia said he saw few surprises in the report and agrees with the main recommendations on fees for no service, insurance commissions and tied advisers. However De Gori questioned whether the sector needed a new disciplinary body to manage adviser behaviour.

Until now most investors have assumed that financial advice should not cost much — ironically the truth is that it should cost plenty. Providing quality advice cannot be done cheaply. Post-Hayne we are more likely to see a boon for top financial advisers, especially independent boutique advisers. At the other end of the spectrum the spread of low-touch robot-style generic advice will most likely multiply as new investors come into the market wary of the generation which prompted the Royal Commission in the first instance.