This month’s royal commission hearings could provide a clear demonstration of why new advice laws benefit practitioners as much as they benefit consumers.
Next week the steely gaze of Commissioner Kenneth Hayne will turn to financial advice as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry conducts its first public hearings into financial planning and wealth management.
The witness list for the hearings, which run from April 16 to 27, focuses on financial planning licensees owned by major institutions (the big four banks and AMP). It will also hear from two industry associations (the Financial Planning Association of Australia (FPA) and the Association of Financial Advisers (AFA)), a regulator (the Australian Securities and Investments Commission (ASIC)) and, perhaps oddly, only one independently owned licensee (Dover Group).
The inquiry will concern itself with “the conduct of financial services entities that provide financial advice to consumers, including the treatment of consumers, compliance with the law and community standards and expectations, and the sufficiency of the current legal and regulatory structure”.
"This inquiry must cover a lot of ground in a very short period of time."
That’s quite a wide-ranging brief, in keeping with the general nature of this inquiry, which must cover a lot of ground in a very short period of time, and the financial planning community might be hoping to get off relatively lightly. Of 3071 public submissions received by the inquiry (at the time of writing), 5 per cent relate to advice, general insurance and intermediaries. It means it’s received a maximum of 154 submissions on advice, compared to 2119 on banking and 276 on superannuation.
Even so, it’s unlikely that financial planning will get an easy ride, if the experience of the mortgage broking industry is anything to go by. Representatives of National Australia Bank, Commonwealth Bank and its subsidiary Aussie Home Loans, ANZ and Westpac endured a torrid time as the inquiry spent two full weeks picking over the practices (and malpractices) of brokers and lenders. It wasn’t a pretty sight.
There will be some unexpected twists and turns as the financial advice industry is slowly turned over. This inquiry has proven to be adept at turning up the most inconvenient pieces of evidence, and the coming two weeks will feature more of those moments when witnesses find themselves at a loss to explain how or why something happened.
"There is a big difference between mortgage broking and financial planning."
But there is a big difference between mortgage broking and financial planning, and that difference can be summed up in the Corporations Amendment (Future of Financial Advice) Act, or FoFA; and the Corporations Amendment (Professional Standards of Financial Advisers) Act.
For all the fuss FoFA caused and for all of the opposition to it in development and implementation in 2012, and for all of the angst that has been created around professional standards legislation introduced last year, these may yet turn out to be the financial planning industry’s best friends during two weeks of royal commission testimony. They are substantial and far-reaching legislative responses to many of the issues that the inquiry raked over in mortgage broking.
A significant number of those related to the conflicts of interest that arise when an intermediary – a broker – is notionally acting on behalf of one party – a borrower – but is paid by another party – a lender.
These conflicts are exacerbated by the nature of the payments, namely, commissions. The more a borrower borrows, the more the intermediary is paid upfront. And the longer it takes the borrower to reply the loan, the longer the broker’s commission trail lasts. The upshot is borrowers sometimes are encouraged to borrow more than they need to or should, and are encouraged to do so for terms that might make the repayments seem manageable in the short term but in fact serve to extend the broker’s income and add considerably to the borrower’s total interest cost.
The inquiry also found incidences of outright fraud, and of lenders manifestly failing to check the veracity of loan applications lodged by brokers.
Forward-thinking mortgage broking businesses have been preparing for years for what they describe as their “FoFA moment” – the day that commissions are banned and conflicts of interest are addressed.
FoFA went further than just banning commissions (both upfront and trails) for financial planners, of course. It also introduced measures such as opt-in, which requires clients regularly and formally to agree to continue to receive advisers’ services. If clients fail to opt in, advisers cannot continue to deliver services, and can’t continue to be paid for doing so.
A good number of the 154 submissions received by the inquiry are sure to cover issues related to or caused by advisers’ conflicts of interest. Others will relate to issues that arise from a continued lack of a compulsory code of ethics for all advisers. And there will be incidences of fraud and outright roguery.
Keep an eye out for an examination of how licensees are skirting the no-commission rules, and how volume-based payments are still prevalent in the system (albeit under other names), despite also being outlawed.
Financial planners and licensees can point to something far more concrete: the law.
But unlike mortgage broking, where the inquiry was asked repeatedly to accept as a defence claims that lenders’ and brokers’ practices have been “fixed”, or “don’t work like that any more” (or in some cases, that whole sections of written procedure manuals were simply ignored), financial planners and licensees can point to something far more concrete: the law.
The full effects of FoFA still have not been felt throughout the advice industry, and the full impact of professional standards legislation is still years away – the final deadline in the legislated timetable is January 1, 2024. Nevertheless, both pieces of law represent real and meaningful changes to an industry that was for decades benighted by conflicts, malpractice and self-interest.
The inquiry may pick off some old scabs and expose some new wounds. But it should also acknowledge the material steps already taken to raise standards and overcome conflicts, and to better protect the consumers of financial advice.
It also may serve as a practical demonstration of how laws that raise standards and ban the worst sorts of behaviour and structures can work just as effectively in favour of financial planners themselves.
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