It was nice to receive an early Christmas present from Prime Minister Malcolm Turnbull: the announcement that his government will establish a Royal Commission into Banking, Financial Services and Superannuation.
It’s disappointing to note that the prime minister was moved to announce this only after the chief executives and chairs of Australia’s four major banks requested that a “properly constituted inquiry” into the sector be conducted.
The inquiry will be reasonably broad, as it will cover not only banking and financial service providers, but also superannuation. Any reforms that come out of it will, in effect, be the third attempt to reform the financial services industry.
The first involved the passing of the Future of Financial Advice legislation. It was meant to be a major step in cleaning up financial services. At the heart of the FoFA reforms was the ban on conflicted remuneration/commissions applying to all financial product advice, and the best-interests duty, which requires advisers to put the best interests of their clients first.
The second attempt was legislation passed in 2016 titled Professional Standards of Financial Advisers, which established a standards body, and the requirement that all new financial planners from January 1, 2019, be degree qualified, undertake a professional year, and pass an exam.
Despite the previous attempts of governments to reform the financial services sector, and have it focus on providing professional advice to benefit clients, rather than being a distribution channel for financial service companies, it is clear there is still a long way to go before the industry can be regarded as truly professional.
Why another attempt is necessary
My assertion that the royal commission is needed, despite the reforms already introduced, is based on my experience with a client who asked me to review a financial plan another professional planner gave her.
The client was a lady in her 50s who had made it clear that one of her primary aims was to own her own home, as she was renting. She was earning a salary in excess of $100,000 a year, and had more than $400,000 in cash and liquid assets.
The Statement of Advice she received from the first planner recommended that she not purchase a home, invest $100,000 in managed funds held on a wrap investment platform, and use the rest of her cash to buy an investment property.
In addition, the adviser arranged for her to take out life, total-and-permanent disability and income protection insurance inside superannuation, and had her take out the same insurance with the same levels of cover personally.
The problem with this advice is that the client could’ve only ever claimed on one income protection policy. This means the adviser managed to receive large commissions from two such policies, while the client would only ever be covered by one. Plus, the adviser stood to receive commissions from the client buying an investment property.
My fervent hope is that one of the major outcomes of the royal commission will be, if not a ban on financial institutions owning advice companies and having in-house advisers, then at least a requirement that advisers must use approved product lists mandated by the professional standards body, the Financial Adviser Standards and Ethics Authority. At a minimum, the mandated products would include only investment grade and above managed funds rated by professional ratings companies.
It’s not surprising that my client received no benefit from the existing reforms. The adviser that provided the initial advice is degree qualified, and is an authorised representative of a large dealer group that is, in effect, owned by one of Australia’s four major banks, which also owns the wrap investment platform, superannuation fund, and most of the managed funds that the adviser recommended.