Why most financial advice scandals give a sense of Déjà vu

Most financial advice scandals are depressingly familiar. It’s like watching Married At First Sight, where the participants are functionally indistinguishable from one another and always do the same things and make the same mistakes with the same, predictable results.

In financial advice the names change, the funds and licensees change, and the product changes. But the fundamental story doesn’t. Often the perpetrators paint themselves as victims, just as much as the people whose money they have lost, powerless to have acted any other way in the face of forces beyond their control.

Storm Financial collapsed in 2009, taking the savings of retirees with it. Its advisers sold clients margin loans secured against their homes, then invested them in index funds, earning commissions at every step. The root causes included a remuneration structure that paid advisers to sell, not to advise; a licensee that built its business model on volume (commissions were calculated on the value of clients’ geared investments); and clients who trusted advisers with money they could not afford to lose, yet suffered catastrophic losses.

Advisers employed by Commonwealth Financial Planning – then owned by Commonwealth Bank – forged client signatures, churned accounts to generate fees, and moved clients into higher-risk products without their knowledge or consent. The root causes included inadequate supervision, a culture that tolerated misconduct until it became too large to ignore, and a compliance function that existed mostly in theory.

Dixon Advisory systematically recommended clients invest in a fund related to the advice firm, regardless of its suitability for them. The conflicts of interest were structural, undisclosed, and obvious to anyone who thought to look. Clients still lost money.

The involvement of InterPrac Financial Planning-authorised advisers in the collapse of the Shield and First Guardian managed investment schemes fits this genre like a glove.

No matter how tightly the rules are drawn, there is always someone looking for a shortcut to riches. This is not solely a regulatory failure; someone truly committed to getting their hands on other people’s money cannot be stopped by the law, or by the disapproval of peers, or by the threat of professional consequences.

It is just as much a base feature of human nature. Access to other people’s money is an irresistible lure for bad actors, as surely as sharks are attracted to blood in the water. Something is missing in those people – call it the “empathy gene”, or maybe just common decency. They understand at least intellectually that their actions harm others, but they just don’t care.

And inevitably, they’re supremely confident in their own ability to outsmart the regulators and get away with it. That confidence is always misplaced; none of them are ever as smart as they think they are. In the end they’re ultimately revealed as just the latest in a long (and getting longer) line of opportunists and shysters.

ASIC has, in effect, outsourced the day-to-day regulation of financial advisers to licensees, through the breach reporting regime. ASIC issues the licence and grants authorisation to the adviser.

In a perfect world licensees will monitor their advisers effectively enough to spot problems and stop them, and also resist the urge to cut corners or turn a blind eye to malpractice. In practice, though, wherever we find egregious adviser misconduct we almost always find a litany of lax oversight, apathy, incompetence, and occasionally outright greed at the licensee level as well.

Self-regulation in financial advice is a long-running joke. It is part of the reason why, despite progress over the past two decades, advice is still not a real profession yet. Self-regulation is also often misunderstood. It does not mean an individual adviser holding themself to account, it means their professional colleagues and peers doing the regulating, to “see it, say it”. The question is, say it to whom, exactly?

The process depends on the regulator taking a report seriously and acting on it. By most accounts that happens rarely, if ever. ASIC leans heavily on a licensee’s obligation to self-report breaches by their advisers. Most breach reports come from a very small number of (usually large) licensees, and the vast majority of licensees report no breaches at all.

In a true profession, expulsion from the professional body means the end of a career. There is no professional body in financial advice. The Financial Advice Association Australia is not a professional association. It can expel a member but it cannot stop that person working as a financial adviser, albeit one inconvenienced minorly by not being able to call themselves an FAAA member.

Being removed from the ASIC Financial Adviser Register prevents an individual from calling themselves a “financial adviser” or “financial planner”, but they can only be removed from the register by ASIC or when a licensee terminates their authorisation and there’s no other licensee prepared to take them on.

And anyway, an individual need not necessarily even be a financial adviser to get their hands on client money (see: Caddick, Melissa).

The remedy isn’t more or stricter laws and regulations, because that approach has failed before and continues to fail today. The rules in force at the time didn’t stop Storm or Commonwealth Financial Planning; rewritten rules didn’t stop Dixon or InterPrac.

The fact the Compensation Scheme of Last Resort even exists is due to the persistent inability of policymakers, regulators, the profession collectively and individual advisers to deal with the bad actors in the market. It’s there so that when everyone else in the chain has ducked responsibility, clients aren’t left unrecompensed.

But advisers foot the bill for funding the CSLR and have a clear interest in doing their own regulating, and it’s a mystery why they’re not doing more to clean up their own profession.

The remedy includes genuine professional, individual adviser licensing, with a statutory register controlled by an independent body that has real disciplinary power, and where expulsion from that body or association means the end of the line. It means holding licensees to account, and stamping out the reprehensible practice of phoenixing, among other things.

But until the profession is willing to embrace these changes we’re doomed to watch this program on endless repeat.