A GUEST POST BY HARRY CHEMAY
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry certainly made for great theatre, at least for those who didn’t have to take the stand in front of Commissioner Kenneth Hayne, AC QC, the former High Court Justice and current legal academic.
Live streamed into offices and homes across Australia, Commissioner Hayne carried a detached, vaguely disinterested demeanour during much of the almost 70 days of hearings that spanned most of 2018. But disinterested he most certainly wasn’t, as he demonstrated emphatically on multiple occasions, cutting into testimony to probe, test and unhinge many an unsuspecting financial representative.
His formidable team, led by Senior Counsel Assisting Rowena Orr QC and Michael Hodge QC, methodically and with forensic precision, dismantled executive after executive. Many, previously impervious to the potential ramifications of their questionable past decisions, were reduced to sweaty puddles of meek capitulation by the end of their time in the stand.
The Australian banking, superannuation (Australia’s pension system) and financial services industry had never experienced anything like it. For the first time in living memory, here was a Royal Commission called into existence to inquire about misconduct across insurance, consumer lending, mortgage lending, pensions and financial advice.
And inquire Commissioner Hayne and his team did. The examination of Australia’s advice industry happened during a two week period in April, where stories of behaviour so egregious as to beggar belief made daily headline after daily headline.
Clients charged without the provision, or any reasonable prospect, of ongoing advice services. Clients encouraged by advisers to move from perfectly functionable defined benefit pension funds to Self-Managed Superannuation Funds, a type of defined contribution private pension operated by over 1 million Australians (typically as couples), that collectively hold over $750 billion of Australia’s $2.7 trillion in superannuation wealth.
Most troubling of all, admission by several platforms that ongoing advice fees were paid to advisers of deceased clients, clients who clearly did not need, nor could benefit from, the provision of further advice.
How did Australian advice fall into such a state? Well, it was a debacle twenty years in the making, as a series of bold takeovers in the early 2000s saw each of the nation’s four largest banks; CBA, NAB, Westpac and ANZ swoop on insurance and superannuation providers in a headlong rush to embrace the ‘bancassurance’ model of the time.
The catalyst was the introduction, in 1992, of compulsory employer retirement contributions, in the form of superannuation, for the vast majority of Australian workers. Banks saw the long-term shift from savings accounts (a key source of credit creation) to wealth and were determined to be a part of the growth.
By embedding superannuation funds into their operations, the ‘Big Four’ became wealth product manufacturers as well; not only did they run numerous superannuation funds for profit, but they also bought, built and ran asset management businesses, with almost all favouring active management despite the overwhelming evidence that large cap Australian funds have been serial underperformers relative to the reference S&P/ASX 200 benchmark index.
Not satisfied with manufacturing investment and superannuation solutions, the Big Four, together with former member-owned institutions turned listed wealth managers AMP and IOOF, came to dominate the advice space, running the licensed ‘dealer groups’ that employ the bulk of Australia’s 25,000-odd licensed financial advisers.
So there it was. An asset management, superannuation and advice solution all contained within the parental embrace of one of the six largest financial institutions in Australia, with their shareholders keen for an economic return on each and every business line.
But was it advice, in the sense of truly objective counsel in the best interests of the end client, or was it designed to deliver optimal outcomes to shareholders, through the vertical integration of in-house adviser, investment manager and platform?
That question was first posed amid the smouldering ashes of the Global Financial Crisis, after a series of high-profile collapses of financial advice firms connected, either directly or indirectly to one of the big six. In the most galling case, Storm Financial, an advice firm based in the state of Queensland, went under in 2009 resulting in the loss of some $3 billion impacting some 3,000 mum-and-dad investors.
An inquiry held in the wake of these advice disasters led to the introduction by the then Labor government of a series of changes dubbed the ‘Future of Financial Advice’ reforms (“FoFA”) in 2013, chief among them being a statutory requirement for all advisers, not just non-aligned ones, to act in the best interests of their clients.
A subsequent change in government led to a push by the financial industry, spearheaded by the banks, to water down these FoFA reforms, however they have remained broadly intact until the commencement of the Hayne Royal Commission.
Fast forward to 1 February 2019, with Commissioner Hayne delivering 1,069 pages of case studies, recommendations and appendices outlining some truly appalling behaviour by some of the, hitherto, most respected institutions in Australia.
Trust in advice has taken an almighty blow since the April revelations, with a recent survey of over 8,000 respondent ranking advisers in the distrusted range for the first time in the survey’s history.
Yet it need not have taken such a pounding, nor does the advice industry need to remain punch drunk on the canvas indefinitely.
I have opined over the years that advice in Australia could morph from a sales-based, transaction-focussed industry into a genuine profession in its own right, but it will take effort, goodwill and a genuine commitment to the highest standards of care, diligence and, yes, dare I say it, a devotion to duty not typically associated with financial advisers.
Now Commissioner Hayne has thrown down the gauntlet to the entire advice industry. In essence his advice recommendations revolve around clarity of purpose, intent and outcome.
He is recommending that all advisers be forced to declare their independence, or lack of it, prior to engaging a new client. This is going to be an awkward conversation for most advisers to have, given that some estimates put the number of advisers meeting the statutory definition of independence at fewer than 100 (Clover.com.au included) of the 25,000-odd advice providers in Australia today.
Commissioner Hayne is also recommending that clients gain far greater control of the ongoing services they retain and pay for, by making it a requirement of advisers for clients to sign-off annually on the fees they were charged for the prior year before being able to charge clients for the subsequent one.
And that goes to the heart of where things went wrong in the advice industry, and how Commissioner Hayne intends to set things to rights.
Hayne understands that most of finance operates on the back of two proverbs — ‘He Who Pays the Piper Calls the Tune’ and ‘There is No Such Thing as a Free Lunch'.
For too long the finance industry operated safe in the knowledge that clients were blind to the skewed incentives, misaligned interests and shareholder-centric business models of the major advice providers.
The Royal Commission may just be the spark that changes all that forever.
HARRY CHEMAY is the co-founder of Clover.com.au, a robo-adviser based in Melbourne, Victoria.