Australia’s financial advisers probably won’t need reminding that the week starting April 16 is going to be difficult for them, courtesy of Justice Ken Hayne’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Starting on that day at the Melbourne-based inquiry is going to be financial advice, and advisers of every hue are going to get a bumpy ride, so it’s worth sketching out what will probably happen.
Readers of this publication are fully aware that dodgy financial advice has long hung over the industry like an albatross, via a succession of inquiries, enforceable undertakings and other mostly deserved forms of public humiliation, but that won’t stop the commission going back over this ground.
That’s because for all the furious assumptions made by retail savers who over the years have been given conflicted and downright dud advice, it’s not about putting heads on poles.
The function of a properly conducted royal commission – and this one has all the hallmarks of being well run – is to find out what went wrong and make recommendations to prevent its recurrence.
Yes, a royal commission can recommend further investigation of specific events and malpractice that it uncovers, but it’s not a court of law in the conventional sense.
In general terms, nothing that is said in the commission is going to be used as evidence in a criminal prosecution unless it is re-examined in a separate legal process.
The point being, the commission wants to get to the bottom of a problem, most likely a systemic cultural issue in this case, and personalities take second place.
I am enough of a tragic to have attended almost all of the hearings of the HIH Royal Commission in 2002, and I found it an astoundingly thorough exercise that went way beyond personalities.
It essentially concluded that one of the biggest general insurers in Australia had so underpriced its risk over a nine years, after listing in1992, that collapse was inevitable. Not only that, it also made clear that even the worst-run general insurers are virtually guaranteed a seven-year existence, due to the inevitable time lag built into any insurance company’s operations.
It blew such a big hole in the Australian Prudential Regulation Authority that the organisation was compelled to rebuild itself virtually from scratch.
Do you see any individuals named in the above three paragraphs? No, and that’s the point.
Even though we all have a pretty keen idea of what went wrong – in some cases there were underqualified people pushing unsuitable products to unsuspecting clients on behalf of mainly bank-owned wealth management businesses in order to earn commissions – Hayne needs to find out how that came to pass.
His final report will take note of the changes legislators and the financial advice industry have already put in place, such as the Future of Financial Advice legislation and tighter qualifications. But it will also be testing their effectiveness, wherever possible.
Savers are more than slightly jacked off with the “bad apples” excuse for poor behaviour the industry has trotted out, so there will be a scary focus on recent possible changes in culture and whether things have improved.
The fact that a recent Australian Securities and Investments Commission report found that from July 2014 to March 2017 the massive bias towards recommending in-house products remained unchanged, means that in that circumstance they certainly haven’t.
Hayne, despite his focus on remedies, knows as well as anyone that the commission was called to defuse public anger, and that personal tales of loss and malfeasance have to form a part of the process. That’s why he’s running two streams in the inquiry. The main stream is for institutional, as described above, but there will also be a run of carefully selected (and hopefully representative) individual witnesses who will provide their own personal tales of woe.
That should go some way to satisfying the many people who would like to tell their stories but who will not get that opportunity, because there are many of them and the commission’s time is tight. An interim report is due by September 30 this year and the final version due in by February 1 next year.
Hayne gave the banks and institutions a deadline of February 13 to confess whatever sins they might have committed over the last five years. He has basically compelled the institutions to do their own self-flagellating, merely offering them the option of letting him do it if they forget anything.
The deadline was pretty harsh, with banks devoting dozens and even hundreds of staff to assembling their submissions and then still missing it. That hurt their already battered image a lot, particularly as time ran out the day after Hayne opened the proceedings.
That’s the main game as regards financial advice. Given that the royal commission is still doing its own investigating, Hayne will in many cases have the choice between tormenting representatives of those institutions over their admitted, but so far unreported, sins or, worse, confronting them with partially investigated atrocities that they hadn’t yet got round to confessing.
It’s not much of a choice for the institutions, and they know it.
