“The ﬁrst-mover problem has been eliminated. The onus now shifts to the entities wishing to continue to pay and accept grandfathered commissions to demonstrate why the calculations made by [those who have banned grandfathered commissions] do not work for them.”
This is the line from Kenneth Hayne’s interim report that propelled institutions to take action and change the conflicted remuneration structures they’d been protecting for so long.
Westpac read the writing on the wall the best and moved to end grandfathered commissions within its salaried advice networks. The latest move came from CBA, which announced the removal of fees on its legacy products – which is says will save its customers $25 million annually – and put in place measures to try to ensure that people paying ongoing service fees are indeed being provided a service.
CBA’s announcement was made a day before its chief executive, Matt Comyn, fronted up to questioning at the Parliamentary Standing Committee hearings into the big four banks. Macquarie Group, National Australia Bank and ANZ have all announced they will cease paying grandfathered commissions to their salaried advisers since the April royal commission hearings.
AMP has since become an outlier by shying away from making a public statement but a look at where its revenues have been ﬂowing makes it clear the company is winding down conﬂicted commission payments, too. The wealth giant will need to continue to manage its approach to ending these legacy remuneration structures because they are inextricably linked to the valuations of the individual advice businesses within its network.
After CBA’s announcement to ban grandfathered commissions within its salaried network, the Australian Banking Association followed suit, saying the Banking Code of Practice would ﬁnally look to eradicate fees-for-no-service and, further, that the association would seek new legislation to end grandfathered payments and trail commissions for ﬁnancial advisers.
Hayne’s observation that the ﬁrst-mover problem in ending grandfathered commissions had been eliminated might have been impotent at another time and in another context but the time is right and the inference was enough to take full effect.
FOLLOW THE BREADCRUMBS
The upcoming November edition of Professional Planner highlights clues Hayne leaves throughout his interim report for the country’s most powerful ﬁnancial institutions to pick up on in advance of ﬁrm recommendations expected in February.
In the report, Hayne posed 693 questions about the suitability of current laws, regulations and practices; the word “greed” appeared a total of 50 times, so it’s no surprise this is what the newspapers went with in the headlines. However, the report contained no recommendations – those will come at the end of February, when Hayne’s ﬁnal report is due. The interim report is a trail of breadcrumbs leading to what those ultimate conclusions will be.
Reading along and between the lines reveals it’s clear Hayne thinks the application or interpretation of the laws needs to be simpliﬁed; he’s warning politicians the answer to the problem at hand is not more laws and regulations but a better application of the ones that already exist. Further, the report makes it quite clear Hayne also thinks the regulator needs to stop negotiating and start enforcing – this view will almost certainly manifest in his ﬁnal recommendations.
“Too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequences of breach remedied,” Hayne emphases in the report, which was published on September 28. It’s not clear from Hayne’s stated view on ASIC and the regulators more broadly whether he thinks ASIC can be ﬁxed.
Speciﬁcally, Hayne asks whether ASIC’s remit is too large, whether its enforcement practices are satisfactory and, if not, whether they should be changed. In addition to queries about the need for laws to be simpliﬁed and the failings of the regulator, Hayne posed many questions around whether practices can be owned by product providers and still give advice that’s in the best interests of clients or adequately disclose where their conﬂicts lie.
BEHIND THE HEADLINES
Beneath the banks’ bold announcements and behind the headlines lies the fact that there are conﬂicted practices that continue. Institutions have mentioned little publicly about volume payments from platform operators to ﬁnancial advice dealer groups, volume-based shelf-space fees fund managers pay to platform operators, and asset based fees, particularly relating to borrowed amounts.
These are practices that have been in place just as long as the ongoing commission payments and serve the same purpose of shoring up distribution of ﬁnancial products through ﬁnancial advisers. Hayne goes to great lengths in his report to point out this second level of conﬂicts.
Hayne points to ASIC’s January 2018 report, Financial Advice: Vertically integrated institutions and conﬂicts of interest as a reference for his point that advisers’ wills had been bent towards their ﬁnancial interests and not those of their clients.
ASIC’s report shows that the approved product lists maintained by licensees that are controlled by the ﬁve largest ﬁnancial institutions do include products manufactured by third parties. However, while third-party products make up nearly 80 per cent of the lists, more than two-thirds (by value) of the investments clients go into inhouse offerings. The announced bans on grandfathered commissions don’t extend to the inﬂuence exerted over the so-called independent ﬁnancial adviser market. Product distribution via platforms is surging towards $1 trillion; Westpac’s wealth management subsidiary, BT, is the market leader, with an estimated $150 billion of client funds under administration.
Hayne outlines that, at the level of individual licensees, the proportion of inhouse products on approved product lists controlled by the ﬁve largest banking and ﬁnancial institutions varies from 31 per cent to 88 per cent (by value). By product type, the proportions invested with inhouse products varied: 91 per cent for platforms; 69 per cent for superannuation and pensions; 65 per cent for insurance; and 53 per cent for investments.
Taken as a whole, the report shows that advisers favour products associated with institutions. “The result is not surprising,” Hayne points out. “Advisers may be expected to know more about the products manufactured by the licensee with which the advisers are associated than they know about a rival licensee’s products. “Advisers will often be readily persuaded that the products ‘their’ licensee offers are as good as, if not better than, those of a rival. And when those views align with the adviser’s personal ﬁnancial interests advising the client to use an in house product will, much more often than not, follow as the night follows day.” For too long, advisers have been ignoring the voice of the client and listening to the “siren song of ﬁnance” in recommending the products of institutions for which they work, Hayne states.
THIS TIME IS DIFFERENT
Well told is the story of how the original intentions of Future of Financial Advice (FoFA) reforms were ultimately watered down in response to the lobbying efforts of the big end of town. In 2012, the government established its Peak Consultation Group at the behest of these powers, drawn from bodies as diverse as the Association of Financial Advisers, the Australian Banking Association, CHOICE, Industry Super Australia and the Property Council of Australia. The term “grandfathered commissions” came about after the commencement of the FoFA reforms, when payment and receipt of some forms of conﬂicted remuneration were permitted to continue, thanks to a carve-out from the legislation. FoFA had three principal elements: the imposition of a best-interests obligation on ﬁnancial advisers giving personal advice to clients; a ban on conﬂicted remuneration; and measures intended to promote greater transparency by requiring consumer agreement to ongoing advice fees, along with enhanced disclosure of fees and the services associated with ongoing fees.
“We fought very hard to keep the FoFA legislation intact; we left plenty of room for the industry to self-regulate and they didn’t step up,” Bernie Ripoll told Professional Planner recently. Ripoll was a Labor MP with oversight of ASIC, along with other agencies within the Treasury portfolio. He now heads consulting business SAS Group and holds various board positions, including a seat on the Allianz Retire+ board and on the board of fintechs including robo-advice startup Map My Plan.
Ripoll said he believed the industry’s inaction after FoFA has made regulators and policymakers more intent on making a crackdown stick this time around.
“Institutions put a lot of effort into saying this FoFA was a step along way and that the government would be making a mistake if it was to go too hard… There was a lot of good will from the government at that time; the industry was given the opportunity to self-regulate and it’s evident now the industry won’t move on its own – it has to be forced,” Ripoll said.
“For about 12 months before the legislation was enacted, this group met each month to discuss the proposals,” Hayne noted. “It is, therefore, not surprising that the resulting provisions show signs of compromise and accommodation of widely divergent interests.”
Despite lobbying to keep commissions – particularly as they relate to general advice – the ABA appears to have attempted to draw a line under at least this aspect of conﬂicted remuneration.
“It has always been unacceptable for any organisations to charge fees without providing a service…This announcement will put beyond the shadow of a doubt that this practice has no place in Australia’s banking industry,” ABA chief executive Anna Bligh said.
Institutions have been lining up to put a price on the cost of bad advice in the hope they can move on, but as UBS’s Jonathan Mott highlights in a recent report, these costs are likely to be elevated for several years as the banks invest in cultural change, compliance, systems, processes and possible litigation provisions.
A slew of analyst reports in the wake of the interim ﬁndings left the door open for more in the years ahead. National Australia Bank was the latest bank to announce its royal commission hit. In midOctober, the bank announced it would set aside $314 million after tax for its customer remediation program, the company stated that the hit would reduce is second-half 2018 cash earnings by an estimated $261 million and earnings from discontinued operations by about $53 million.
So far, Commonwealth Bank, the largest of the big four, has committed to the highest remediation payout of all the large institutions: $580 million for the improvements it will need to make to get its advice systems and processes functioning appropriately and for customer remediation and the administrative costs associated with those reparations.
The amount CBA has set aside surpassed the previously unparalleled $290 million one-off plus $50 million a year for the next three years contingency that AMP set aside for its reparations just two months earlier, leading up to its half-year results.
ANZ announced its customer compensation, provisions and write-downs would cost the bank in the realm of 10 per cent of its 2017-18 net proﬁt after tax. After soaring for years, bank shares on the Australian Stock Exchange have had the wind knocked out of them – the ﬁnancials index ex-REITs has dropped 20.5 per cent since its high in mid-August to where it was trading on Friday October 26.
The stage is set for the next ideation of ﬁnancial advice ownership.