The Royal Commission's long awaited final report into misconduct in the Banking, Superannuation and Financial Services Industry was delivered by commissioner Hayne on Monday afternoon. The report is far reaching and covers many aspects of financial services, delivering it’s recommendations in different sectors, with the section on financial advice running for around 100 pages. In the coming days, we will unpick the report, specifically the areas concerning financial advice, to try to understand the 10 individual recommendations included that relate directly to financial advice. We will add to this analysis from our data archives, to help determine the potential material effect that actioning the recommendations will have on advisers and the implications for their businesses, their clients and the financial advice industry as a whole.
In his introduction to the section on financial advice, Hayne noted:
“Three different issues have emerged in connection with the provision of financial advice. The first is ‘fees for no service’: ongoing advice fees charged when no advice was given to the client. The second is that clients have often been given poor advice that has left them worse off than they would have been if proper advice had been given. The third is the fragmented and ineffective disciplinary system for financial advisers.”
Noting that each of these issues has its roots in the history of the financial advice industry, he continues:
“Expressed in a single sentence, that history tells the story of an incomplete transformation – from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice. I say ‘incomplete’ because I do not believe that the practice of giving financial advice is yet a profession”.
His 10 recommendations regarding Financial Advice are an attempt to tackle the problems he sees negatively effecting the industry regarding;
- Ongoing fee arrangements,
- Lack of independence,
- Quality of advice,
- Conflicted remuneration and
- Professional discipline of financial advisers.
Remuneration
Potentially the most immediate material concern for advisers are the recommendations around changing the ways they are remunerated. Going to the heart of the “poor advice” issue, Hayne has pointed to adviser so-called conflicted remuneration – inparticular grandfathered commissions and insurance commissions, recommending they both (eventually) be reduced to zero. This would, in the comissioners eyes, help ensure advice clients get the best advice for their individual situation and help thwart the temptation for advisers to use products that give them the most commission.
Needless to say, if these two proposals were enacted, they would significantly effect a large proportion of adviser revenue streams and force a re-think in the fee structure of many firms businesses.
Discipline
The report also recommends new standards of professional discipline for advisers and licensees, including reference checking and information sharing by concerned parties, and increased compliance around reporting and misconduct by financial advisers. Also recommended is a new disciplinary system that:
- requires all financial advisers who provide personal financial advice to retail clients to be registered;
- provides for a single, central, disciplinary body;
- requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and
- allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body
Hayne stated that the aim of the disciplinary system is to ensure that advisers who engage in misconduct face appropriate consequences, and that where appropriate, the consequences imposed on advisers extend beyond their association with a particular licensee. He noted that the current disciplinary arrangements were undertaken by different sections of the industry: licensees, ASIC, membership associations and the newly formed FASEA and that to be effective, “a coherent system of professional discipline must be established for financial advisers”.
Mortgage Broking
The commission also mooted changes to commissions relating to mortgage broking, while not specifically concerned with advice, these changes would implicate around 25% of financial advisers who do deal in this area. Specifically, the recommendation states that:
“The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.”
Significantly, this is one area where the government has been cool regarding the commission’s recommendation, but if enacted, it would change the nature of borrowing for millions of Australians and have far reaching effects on advisers currently engaged in provision of these services.
What Is Your (re-)Action?
In total, the commission’s recommendations will have serious implications for the revenue models of financial advisers, forcing many to restructure not only their fee arrangements, but also their entire business models. Revenue and cost pressures will demand advisers ask themselves “what is my ideal client?”, “what are my strengths?”, “who do I partner with to reduce costs or achieve scale?”, “how can I exit clients I can no longer afford to service?” and “what is my strategy?”.
We will talk more in depth in the coming days about these issues, so stay tuned!
If there is anything else advisers would like us to explore or comment on, we welcome suggestions and feedback in the comments section of this article.
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Comments23
"The number of misconceptions is astounding , Namely - Insurance commissions ,they are paid at the same rate and despite the amount of work done in sourcing your clients insurance and sometimes as many applications as 6 or 7 to find that elusive client coverage to protect them and the cost to our FP practices to create 1 financial plan with 6 RoA's, you are still at risk in two years if a client cancels due to reasons beyond your control for example - divorce or Poor bank media coverage. The result is we are paying this all back. I would like to challenge which other industry goes to work to have their pay clawed back in a year or two years time. Why do we not implement the 7 Safe Harbour steps for the Government legislation and why do we not get them to refund their salaries when they do not achieve the objectives mandated and they should have to list these all documented with a dossier on how they are going to do meet these steps and how to compensate us the common people with the salaries paid in the event of non eventuality promised to the people. Why do we not put targets on the pension payouts and clawbacks on what they are paid based on performance issues including debt creation. Would they go to work with this hanging over their heads? I am a practical person and I have to say Australian has gone mad and is known as the Nanny state of the world. Policing is all about Revenue Generation. Next point- Mortgage Brokering commissions - these trail commissions are paid for rendered services and the fact that the report given by CBA bank who reported inaccuracies in Broker submissions is totally questionable given that they have been caught with heir pants down first but this was a consideration in findings documented by Commissioner Haynes ,conveniently in the report. This is absolutely laughable where is the common sense approach. We are like lams to the slaughter while banks like CBA gain momentum in closing brokers down leading to catastrophic events like hard working families losing homes , employment downturn and we are giving long term banks the opportunity to increase interest rates and erase competition.Another point to make as a Mortgage broker for 18 years is that Trail commission is not given freely , Banks have profited billions of dollars by laying of staff so that Mortgage brokers can provide extra services for this trail. Mortgage brokers have been acting on behalf of clients -closing accounts, discharges, opening of accounts , switching loans, securities and applying for visa cards and many other day to day banking tasks .This is the service we have been providing for as little as $200 a year to clients. Banks have used us as their internal staff and been able to shut down numerous branches and use scale ability to profit. As a financial planner I have paid a lot of money for a client book which I have serviced with no complaints ever and now I have to leave the industry because I am tired of working with the threat of loss of income over my head and dooming study costs ,not because of wrong doing but because of Banks wrong doing , including the loss of grandfathered commissions ( which I paid huge sums for)and the loss of brokerage commissions. The fall out effect with be huge as lending tightens , monopolies increase , employment decreases , property prices fall and then this will have a fall out effect on the building industries as more and more loans are declined , leading to loss of work in industries such as Building companies, trade laborers,Real estate agents, Settlement agents,Mortgage brokering companies ceasing, Financial planners leaving the industry , foreclosures on homes and business buildings remaining empty, Reduction in property prices.Potentially 300 Billion interest only loans that could fall out. Bringing about the largest recession ever. Wake up Australia! See the larger picture. The other thing no one has considered it has been well known fact for the last 3-5 years - Universities have been struggling with enrollment numbers and conveniently we now are all required to become degree orientated at a cost of 60 000 per person. Mathematically this certainly does help all Universities and Online Universities just like Asic charging new fees for Financial planners and Mortgage brokers. This is all about Revenue creation for the government industries , money into the Union pockets of Labour parties and shame on Australia that they are so short-sighted to see the entirety of the play! This country needs a complete governmental overhaul with someone who has Common Sense certainly not Commissioner Haynes, someone act now before its too late!"
Deanne Mullen 14:38 on 07 Feb 19
"I'm 58 years old. I dearly loved our 'once great' industry and never wanted to stop what I do - helping and protecting my clients. I've been advising and helping clients for 34 years. Come end of 2020 the 'powers that be' would have you believe I am no longer capable of helping families with income protection, life, TPD or trauma cover - as I have done for 34 years quite successfully without a hard word or complaint from a client yet - especially the hundreds with whom I've helped claim. The 'powers that be' are insisting I must get a degree and be able to help clients now, with knowledge about international currency markets, Contracts For Difference (CD's), derivatives, trade balances and any one of another dozen complex financial subjects that fully qualified investment planners need to know. The 'powers that be' in their infinite wisdom think this knowledge will help me help my clients learn about insurances better. I don't react or do well under the pressures of exams and I find I don't learn as well as I once did. This doesn't mean I've forgotten anything important that I need to help protect my clients. I see things pretty simply, as I know many other 'risk-only' advisers do. People like me and my colleagues around my age love out clients and we feel the sentiment is mutual. We planned to be helping our precious client until health failed us - probably out past 70 for me. However, 'the powers that be' have made it so that we must leave the industry in late 2020 (age 59 for me) because we don't know all the complex calculus and investment knowledge of the investment planners. makes as much sense as having doctors forced to do lawyer exams. If you can see the sense in any of this please comment here. Maybe I'm missing something . . ."
Squeaky_1 22:27 on 06 Feb 19
"I sincerely hope this site and the other two ineffective so called Adviser representatives stand up and expose this for the scam that it is. Disgraceful! The ripple effect will be catastrophic and in the end consumers will be worse off as will the country when it all comes home to roost and Centrelink collapses!!"
Brad Cochrane 16:42 on 06 Feb 19
"Perhaps a RC into whether anyone in the know shorted Mortgage Aggregators and went long the banks! Also, I watched the RC and I don't recall seeing a Life Insurance Broker nor a Mortgage Broker on the stand getting reamed. I did see banks up there for predatory lending, and Insurers for poor claims, both entities which are now in the clear......and yet Brokers have know been bent over and destroyed. DISGRACEFUL. Look for a rise in Go Fund Me pages as more Australians that require advice are shunned as they cant afford "fee for service""
Paul Langdale 11:04 on 06 Feb 19
"Daryl L"Brooy is correct. The advisers who bought a business or a book of clients to build a future for their family and their own retirement with a loan are now to be trashed. Single mothers and young mothers need a business that allows flexible hours, work from home in the early days while going out to visit clients is an ideal career. Now, with the black letter law perspective of a former High Court judge the banks are back in the black. I am appalled that someone who has never worked in this industry can level the accusations that we are all lacking in ethics and don't put the client first because the business that advisers have purchased to set up their own future based on the current government's own legislation will be punished at the end of next year to repay the loan, completely restructure their business, so the new FASEA study, 60 hours of CPD and cope with the rising costs of compliance. The imminent date of 1 January 2021 to end grandfathered income is highly discriminatory for single/ single parent women who are slowly building for their own financial independence while coping with kids and all their business responsibilities. if this is to be ceased then allow a common sense approach of 4-5 years to allow time to repay the loan first. There is HOPE. The AIOFP, who are far more effective than other industry bodies, have had myself and others advisers meet directly with politicians of both sides in Canberra last year to push back on FASEA and did have some effect. We are working with the FSU, which is our own union and Nathan Rees who is the Secretary of the FSU to directly deal with the Labor politicians. Visit the AIOFP Facebook page to see progress. Advisers are joining the FSU under the AIOFP to form a collective voice and get direct face to face meetings with the politicians who are directly responsible for implementing the changes. The more advisers join us the louder the voice. This is simply union membership, not voting preferences. 65% of FSU members vote LIberal! WE ARE NOT POLITICAL. The AIOFP are doing their best to help us so don't sit there and let it happen to you. Take control of your own future and join us in our own AIOFP adviser group in the FSU. Use the opportunity of the Federal election to get heard and action. We don't want to lose you - many good advisers who provide a great service to your clients out of this industry and leave it to the Banks. If above all else, where will your clients end up? Will they get the same quality of advice and service if you leave and the financial advice industry because it's decimated because so many advisers have bought a business that will lose value if the current two year timeline for ending grandfathered income is done in two years? How about some negotiation here?"
Philippa Hunt 08:32 on 06 Feb 19
"From what I can discern the 'trailing commissions' of insurance products have not been covered in his ruling comments, only "grandfathered commissions" which are entirely related to investment/super products. Insurance commissions are protected as they are currently under the LIF tenure and have already been dealt with. I can clearly see the value of good risk books increasing as investment planners, along with committed risk writers, look for new ways to ensure their future viability. A good renewal stream from protected insurance trails will be considered gold. There are a number of facts that will ensure insurance commissions stay where LIF has placed them. Firstly, the vast majority of clients will NOT pay a separate fee for risk advice (NOT attached to investment advice). Secondly, all of the life companies pay the same commissions so there is zero conflicted remuneration here. It appears Mr.Hayne is unaware of this (as with many other issues). The 3 year responsibility period now for risk commissions is also causing a focus on any and all replaced business so in a twisted way this is strengthening the fight against churning. Hayne really has no case in recommending any changes whatsoever to life commissions based on his misguided understanding of the term 'conflicted remuneration. None of that now at all in the risk commissions area. Risk commissions are the tidiest area of all now, regarding fairness and client best interest - they serve the client now better than ever."
Brian Howard 21:03 on 05 Feb 19
"I suspect the general public will believe that; i) Hayne's Final Report if an absolute fizzer and ii) that the Banks have had a giant win despite their illegal behavior. That perception will be very bad for the Liberal Party at the next election. There remains just one hope; for the Liberal Party to now go further than Hayne's limp public recommendations and ban Vertical Integration. It punishes the Banks and also stops the Union Funds from flogging there own rubbish. It distinguishes them from Labor's support for the Union Funds, and it will be an important step for the financial planning profession to regain public trust. "
Grant 18:37 on 05 Feb 19
"So zero commission will fix the problem. Commission is the main source of income for the traditional risk adviser the majority of whom provide very good insurance advice, ongoing advice and excellent claims service. This has been the case for my business for over forty-five years. If I follow Hayne's logic which is as bad as that of Trowbridge, because of a few bad eggs, we will no longer be paid for our advice unless we charge our clients a decent fee which the majority of people cannot afford. To take this thought process further, all professions including politicians, lawyers, accountants and all executives etc. should also cease to be paid because there certainly are criminals in there midst and that is a fact! Why are aging, out of touch academics appointed to solve quite simple, practical problems? It is beyond me!! BTW I am a professional, as are many of my colleagues, using honesty, fairness and common sense. These gentlemen will be responsible for the decimation of our numbers and a massive increase in under insurance throughout the country. Mark my words. "
Russell McConachy 18:16 on 05 Feb 19
"I feel for businesses that have as recently as last year bought client bases with grandfathered commissions, which were entirely legal, with borrowed money only to now face the prospect of these commissions being terminated at the end of next year and the debt having to be repaid with no revenue coming in. The value of the client base they bought has also been trashed! No wonder some are facing bankruptcy, marriages are falling and some are contemplating the unthinkable! We all need to fight back rather than just accepting our fate. Join the Finance Sector Union so we have a seat at the table when the Labor Party implements the RC recommendations after the next election."
Daryl La' Brooy 18:09 on 05 Feb 19
"Just so I understand this correctly, I’m a financial planner whose not affiliated with the bank or part of a vertically integrated licensee who has an open APL of 25 superfunds and 15 Insurance products. I’m being stripped of my livelihood because the bank financial planner who has 3 products they can recommend, which the other 2 products on there APL is a weaker product compared to the product they want to channel all the clients into am being thrown into the same kettle of fish. How about you just strip the banks of everything and let them stick to home loans instead now my business is in jeopardy because of their royal stuff up. If I were the CEO’s of these banks and insurance companies there would be a massive party at my place to celebrate the greatest expense cut/win in the financial sectors history. Sure will shell out some money in fines, but in the long run those fines will look like a speed bump in the profits margin will soon see."
Joey 18:07 on 05 Feb 19
"There is nothing wrong with asset based fees where the planner shares in the portfolios performance. Also it is painless for the client when the fee is paid for from his Super or pension. These fees should be tax deductible This is a win win for the client and the planner"
Chris Farley 17:54 on 05 Feb 19
"I believe advisers whom are truly passionate about what they do will endure the changes. How many doctors would leave the medical or people in many other professions if treated similarly? Non the the less there are many positives in the changes that are right and should be extended to all professions equally... What doesn’t kill you only makes you a better adviser. .. Garth SFR Advisory Group "
Garth Lovelace 17:46 on 05 Feb 19
"For the last year I have explained to my husband, (who is not in the industry), how the banks will be laughing in about four and a half years time, with so many advisors driven out of the marketplace due to FASEA, lack of motivation due to being legally exposed paper pushers and sick of being expected to work for less and less whilst being seen as the devil incarnate. The banks would mop up all the small businesses and truly have a monopoly. But I stand corrected. With the accountants being absolutely given the rough end of the stick with FASEA and now the mortgage brokers shafted, four and a half years is too long. About two years until the banks own the marketplace. "
Anna-Louise Brown 17:34 on 05 Feb 19
"It is ironic that the Royal Commission that was supposed to put the Big Bad Banks in their place and teach them a lesson, has helped their Share prices to go up. The pattern of incompetence continues, where out of touch Lawyers and regulators put forward regulations that do the exact opposite of the supposed objectives, which is to protect Australians from the sort of tactics that have been highlighted over the last few years. The grand plan by Hayne is a hodge podge of theory based on nil reality. Australia is being held to ransom by the Legal elites who have a strangle hold on virtually every facet of Business now. Regulation and Laws that are clear, concise and fair, that actually penalise wrongdoers and allow small Business to grow, free of red tape and a constant noose around it's neck, is a crucial element of a workable society. The mistake we continue to make, is asking Lawyers to be involved in that process, which they are incapable of doing. Hayne is a part of the problem, by not clearly articulating the problem, with a workable solution."
Jeremy Wright 17:27 on 05 Feb 19
"It's a new era and financial planners ( of which I am currently one) will need to adjust and I'm sure many will. I have been fee for service for 8 of my 16 years advising. In my current employment we have negligible trail and revenue each year is a combination of upfront and renewal insurance commission, fixed upfront and ongoing advice fees. I feel that I have always tried to act in clients best interest act with an honesty and ethical approach. The ridiculous compliance (industry's own fault) compared to say the accounting industry - safe harbour, SOA's, best interest duty, documenting product comparison etc etc makes the job enjoyable as so much focus, time and expense is spent on be on compliance. I am exiting the industry in the next 3-4 months, not as a result of the recommendations of the RC but, sadly, because for me it has just become unenjoyable. Constantly feeling the need or actually needing to justify that you are 'one of the good ones, becomes tiresome. The lack of faith of the general population in financial planning and the value of advice is on the evidence understandable but frustrating and deflating. The challenges will be overcome but in my case I will be leaving that to others."
Scott 17:20 on 05 Feb 19
"I though the Rc people were intelligent, how do they not know risk Commisssions are all the same and their is no reason ther than suitability of peoduct claims experience and customer need to choose which products y to use in this day and age? How could they not know this , this will push FP back to A cottage industry where small businesses are the go and union run funds Hoover up clients and provide them with poor or no advi e and poor and substandard insurance, tell me Hayne how have you improved outcomes for consumers ? You say there is no reason why commission should go to zero we’ll wait until 15 years have passed and people have had poor industry fund claims experiences and under insurance because they didn’t want to pay a fee for strategic advice but by them my Hayne will be. Adodderina doddering old 85 year old who will just say oops sorry I got it wrong ..... fat lot of good that will do the millions who won’t get the advice they need "
Les hayward 17:10 on 05 Feb 19
"The only winners here are the banks - by removing upfront commissions for mortgage brokers it will shut down 90% of broker businesses and decreae competition which will force everyone back to the banks and they will only be too happy to accept the new customers and increase interest rates independantly of the RBA then blame it on "wholesale funding" The end result will be LESS competition for the banks and the customer ends up footing the bill for it"
Edward 16:59 on 05 Feb 19
"Commissioner Hayne in his ivory tower lives in a complete utopia where you can consume your ideals and be well remunerated for doing so by the tax payer. Fee for service in mortgages and insurance is simply not workable and mostly because the consumers don't want it. only royal commissioners and regulators do. Commission is the only efficient way to have a non conflicted and viable industry. All the rates are the same anyhow. All this will do is destroy the industry overnight and require it to be all repealed with egg on their face. Who is going to tell Nippon life they just paid a heap of coin for MLC and now the business model is finished. Honestly Hayne can say what he wants . reality is its not going to happen because less than 2% of new business clients will pay fee for service. "
David 16:58 on 05 Feb 19
"I can't believe that the final RC report made no mention of vertical integration and the role this plays within the industry. If we are to move to becoming a true profession with little or no conflicted remuneration then surely legislation needs to be enacted that prohibits vertically integrated models and makes it conducive for financial advice professionals to always act in the best interest of the client no matter who they happen to work for. This applies to all players - retail funds, industry funds - everyone. This was a huge opportunity missed by the RC to make fundamental change to the advice industry - to move us away from being product pushers to being professional providers of financial advice that is always in the best interest of the client. Its almost impossible for financial advisers who are employees of industry funds, the banks, AMP and other vertically integrated businesses to provide advice that is in the client's best interest when they work under such a business model. "
Brett 16:49 on 05 Feb 19
"I think you only need to look at how much the share price of the banks went up to understand who this Royal Commission was really for. Very concerning for the advice and brokering community and gravely concerning for the general public."
Jane Walker 16:47 on 05 Feb 19
"My first impression was that this will decimate the industry of financial planning. A great opportunity for some but something entirely different for many others. With unknown remediation costs attached to any purchase of an investment book plus the new measures - what will the impact on the value of advice practices be?"
Christoph Schnelle 16:37 on 05 Feb 19
"Load of crap all insurance companies pay same commission and trail doesn’t effect cost of insurance what absolute crap"
Darren Mclaine 16:34 on 05 Feb 19
"If this gets passed, it will tip me and many other out of the industry. Shame it has come to this. Greed on all levels...it's a funny thing."
Graeme 16:31 on 05 Feb 19