The Rippoll Effect

The Parliamentary Joint Committee report into financial products and services paints a picture of how financial planning may develop in future. Three industry experts discuss how the industry could respond to “Bernie’s Blueprint”

Hoyle: On November 23, Bernie Ripoll finally tabled his report. His inquiry had been running for some months, there had been umpteen public hearings, 400 submissions, and the report distilled all of what he had heard and learned over that period into 11 key recommendations. Do you think it achieved what he said his objectives were at the beginning? Did it go far enough, or did it not go far enough in some regards? And do you think it’s a workable set of recommendations for the industry?

Knox: The points raised in the 11 recommendations are still at exploratory stage and, as a consequence, not a lot will have to change immediately, particularly the financial implications to the industry. So regrettably, it is a little bit much ado about nothing, although the recommendations themselves, I think, have a lot of merit to take further.

The fact these things are now on the table gives the opportunity for a lot of firms to take action, pre-emptive action, and we are definitely seeing that taking place with some of the better practices we deal with, where people are aspiring to address the issues that are raised.

Hoyle: Are financial planning businesses taking a bit of a punt that the recommendations are going to come into effect in some form in the future? What’s the risk of making changes to the way you operate your business today, based on something that might not happen?

Knox: The genie is out of the bottle, and people are talking about it, and it is a consumerdriven discussion. So people with good governance, who want to be in the industry for a long time, are seeking ways to make their business better, it’s as simple as that.

Mackay: We looked at these recommendations, and feel that planners who are putting their clients’ best interests first, who are not tied to product manufacturers, who are making advice that is in the best interest of their clients, irrespective of the financial products that they ultimately recommend, they’re finding that their business model will stack up.

I think the question you were raising [is about] pre-emptive action around the remuneration structure of advisers. Consumers are asking for, are demanding, change in that space, regardless of what the legislation is going to do. And therefore, smart business owners are looking at that.

Hoyle: Which of the recommendations, if any, ought businesses really pay close attention to? I mean, are there some in there that have potential to really change the way they do business?

Townsend: Well, they all have the potential. But as a general comment based on your opening remark, maybe I was expecting too much. I was a little disappointed. I would have said that after all the effort that was put in, it was distilled down to 11 small recommendations that…are very short on detail, and they’re very short on reasoning.

For example, the fiduciary duty recommendation, predominantly based on ASIC’s submission about a fiduciary-style duty, as they called it in the submission. ASIC never actually reasoned or detailed its reason why a fiduciary duty would assist. What is it about the fiduciary-style duty that guarantees some of the claims that ASIC made in its submission?

I mean, the ASIC submission was only about seven or eight paragraphs long, and none of it had any market research, survey material, even ad hoc discussion about why a fiduciary-style duty would result in a much better outcome for everybody. That lack of reasoning at that end seems to me to have been carried through, and there’s a lack of reasoning in the whole Ripoll inquiry as well.

Hoyle: Do you have a feeling for why there seems to be…a lack of detail, a lack of substance, in the recommendations?

Mackay: It was expected, when Ripoll went onto [the ABC TV program] Insiders and said that he wanted a consensus report. Who knows what happened in the committee room, in terms of the negotiations? But if a consensus report is going to be made, then it’s understandable that there’s going to be some areas where very strong views are held, and they’re going to be muted.

Similar to Peter, we were disappointed it didn’t go far enough. But it’s better than nothing. It’s started the journey, and you know, it’s not going to happen overnight, and I think, like Peter, we were overly ambitious as to what it potentially could achieve.

But by the same token, it was drafted by politicians who are trying to appease so many different market participants - the consumers who are so badly affected, and ASIC who’s trying to be the referee in the game, and then obviously all the participants who are in the financial services industry.

Townsend : You know [former British Prime Minister] Neville Chamberlain - appeasement never really helps, does it really? I agree completely. And you only have to look at the fiduciary-style duty issue and say, does anybody think they’re going to define the fiduciary duty so tightly that the banks’ planning divisions will have to be sold off because they won’t be able to comply with them? Do we think that that’s a likely possibility?

Mackay: Smart advisers are looking at their business model and saying, “Well, if this is what consumers are after, and this is what we will have in five years’ time, what’s the downside in doing it now?” What’s the downside in pre-empting that, and looking at their business model and creating that trust with consumers that their advice is the best they can give, and it is in the best of their [clients’] interests?

Townsend : One commentator has been reported in the early morning press as saying that the fiduciary duty is going to raise the cost of obtaining financial planning advice. What do you think about that?

Knox: I think it misses the mark totally, Peter, to be blunt. I don’t think there’s any [reason] to suddenly jump up and say, because you have to act in a more tightly-constrained fiduciary way, this will cost more. It’s absurd. If you’re looking after your client correctly in the first place, with all the right tenets of that, it’ll continue to cost what it costs right now.

Townsend : [There is a] question about whether or not the fiduciary duty is needed anyway, in the sense of what it will improve that isn’t there already. In the Basis Capital case, the decision by FOS [the Financial Ombudsman Service] set out very clearly the standards that FOS considers are appropriate for a financial planner, and those standards were high. In fact, high to the point where [financial planners] were quite surprised at how high the standard was that FOS expects.

Mackay: The need for having an explicit duty, fiduciary duty, is because while some would argue we’ve always had it…the fact [is] that there’s confusion within the industry and there should be something that everyone agrees with.

Townsend : Yeah, fair enough. I like the point about it being a simplification, if you like, and a codification of what it is that is required of a planner. And that will be very useful. But I’m a bit worried that that simplification will have an effect of, in a sense, reversing the onus of proof. Theoretically, a claimant has the onus to prove their claim.