Analysis
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Commissioner Kenneth Hayne has shown all through his royal commission he's not one to mince words.
When it came to the financial planning industry, he was blunt and to the point.In his interim report, he said two themes emerged: dishonesty and greed.
And that was just the start. The report said:
- Charging for doing what you do not do is dishonest.
- Giving advice that does not serve the client's interests but profits the adviser is equally dishonest.
- No matter whether the motive is called 'greed', 'avarice' or 'pursuit of profit', the conduct ignores basic standards of honesty.
- Its prevalence and persistence require consideration of the issues of culture, regulation and structure.
The charging of "fees for no service" was an issue which dominated the royal commission's look at the financial planning industry.
According to the Australian Securities and Investment Commission (ASIC), the big four banks and AMP have agreed to repay $216 million to 306,000 customers.
Commissioner Hayne was in no doubt why it happened.
"The root cause was greed; the greed of both licensees and advisers," he wrote.
"Licensees treated the provision of ongoing services as a matter of no concern to them."
As the royal commission revealed, even when people died, fees continued to be taken out of their accounts — sometimes for years.
In his report, Justice Hayne noted: "Even in those cases, the licensee did not terminate the adviser's contract for dishonesty."
And why didn't clients, or their representatives, complain about fees being taken from accounts on which no service was provided?
"They did not complain because the fees they paid were being charged invisibly," he wrote.
And what were the banks, AMP and others doing to stop this behaviour?
Nothing, according to the commissioner.
"No-one has been subjected to any formal public process of investigation, finding and punishment for this conduct," he wrote.
"Only at the last minute, before the royal commission hearings began, did enforceable undertakings yield public (and then very limited) formal acknowledgement from entities that ASIC had 'concerns' about their conduct and that those concerns were 'reasonably held'.
"Even when the commission was taking evidence about the issue, the licensees had not made good their defaults by compensating all affected clients."
Not just 'a few bad apples'
Front and centre at the royal commission has been the performance of ASIC in not stopping the bad behaviour.
"Regulatory responses focused on the remediation of specific instances of poor advice, rather than seeking to identify root causes within institutions and the industry," Commissioner Hayne wrote.
"That set the tone for future approaches to misconduct by financial advisers, that is, to compensate customers according to arrangements negotiated with ASIC while requiring few changes to the business itself."
And the commissioner went further, noting ASIC has not taken any steps to prosecute any institution for breaching its obligation to tell the regulator within 10 days of the discovery of bad advice or other wrongdoing.
(According to data from the regulator, the banks took an average of four-and-a-half years.)
And Commissioner Hayne pointed out ASIC has not used its civil penalty provisions in the five years before the head of its financial advisers team gave evidence at the royal commission.
The Financial Planning Association and the Association of Financial Advisers also copped a serve over their inability to stop the bad behaviour of their members.
According to Commissioner Hayne: "Neither plays any significant role in maintaining or enforcing proper standards of conduct by financial advisers."
And on that score, he has shot down the argument often used by bank bosses, and others, that "it's only a few bad apples".
"Preventing improper conduct (and promoting desirable conduct) is a central task of management at every level: from the most junior supervisor to the most senior executives and the board," he wrote.
'Advisers should not be rewarded by commission'
At the heart of the problems in the financial planning industry is the conflicted payment model where advisers are paid to sell products rather than advice.
Commissioner Hayne's view is blunt.
"Sales staff can be rewarded by commission; advisers should not be," he said.
And while moves have been made to get rid of conflicted payments, Commissioner Hayne said there are too many exceptions — relating to insurance in particular.
He questioned whether the Future of Financial Advice (FOFA) reforms, introduced by the previous Labor government in response to the collapse of Storm Financial, have done their job.
"The legislative solution was not to eliminate conflicts, but to regulate them. Has this been successful? Is this the right solution?" he wrote.
As part of FOFA, many trailing commissions were grandfathered, as planners sought to protect their revenue base.
Commissioner Hayne said that cannot be justified.
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