There are four key things that organisations should consider to help them avoid repeating the issues that caused the undermining of trust in financial services that led to the Hayne Royal Commission, according to the eponymous man behind the inquiry.
Speaking at the International Congress of Actuaries in Sydney on Tuesday, Kenneth Hayne identified the connections between the four key pillars of conduct and reward, asymmetries of power and information, conflicts between duty and interest, and how entities are held to regulatory account.
“[These are] useful to examine when considering how any commercial enterprise is organised and operated,” Hayne said, adding that they also help to identify various forms of risk that the enterprise is facing.
The concepts also tie in to the “six fundamental norms of conduct” Hayne identified in his final royal commission report: obey the law; do not mislead or deceive; act fairly; provide goods or services that are fit for purpose; deliver goods or services with reasonable care and skill; and when acting for another act in the best interests of that other.
“Now, each of [the fundamental norms] is widely accepted, well established, easily understood,” Hayne said.
“Of course, all of them will find some reflection in the law, but expressed in the form in which I have, they may provide a more useful framework for judgment than simply saying that an enterprise must obey the law.”
Hayne added that, too often, “the applicable law is found in many different places and there is a tendency to become lost in the woods”.
“You become immersed in the details of the law without first focusing on the basic norms of conduct that underpin a particular legal provision and also reflect what customers and society more generally expect of enterprises.”
Balance of power
The Quality of Advice Review sprang from one of the royal commission’s recommendations and the Minister for Financial Services Stephen Jones is expected to deliver a response to the review in the coming days.
Advice review lead Michelle Levy has copped criticism for her proposals, with those against the reforms arguing they risk the return of conflicted advice models.
The proposals have the potential for institutions, like super funds, to give more advice which could include on their own products.
At the congress, Hayne spoke of the imbalance between the power dynamics of a customer and the supplier of a product.
“If a customer seeks advice from a supplier about what would suit their needs best, have you ever encountered a case where the supplier has ever gone beyond saying ‘my product at my price is best for you’?” Hayne said.
“If a customer cannot make any independent assessment of fitness for purpose, and cannot make any useful price comparison, the customer makes the choice to accept or reject what is offered according only to whether the customer trusts the supplier.”
In this hypothetical scenario, Hayne rhetorically asked whether it would be compatible for an adviser to deliver advice in the best interest of the consumer.
“To adopt a metaphor I came across in a very different context: can the adviser stand in more than one canoe?” Hayne said.
“Some provisions of the Corporations Act which deal with financial advice speak of a need to manage conflicts of interest, but can conflicts of interest and duty be managed? Should we surprised that very often persons whose personal interests conflict with their duty to a client rationalise the conflict in a way that accords with their personal interest or is that being too cynical?”
Conversely, Hayne pondered whether an adviser can protect themselves against a client if a product has underperformed.
“The accusation will be the adviser looked after itself, not the client,” he said.
Reflecting on the work he conducted during the inquiry that re-shaped the financial services landscape, Hayne said he unequivocally feels no regrets about his contribution, noting it was down to the government to implement any recommendations.
“One of the oddities about doing a royal commission is that you investigate an area, you make your recommendations, but you are making your recommendations to government, and it is for the political branches to decide what to do with them,” he said.
“You take it on knowing that those are the ground rules and the decisions they make are decisions which, in effect, they must live with. There’s no point in my having regrets or applause for what they have done.”