On Monday 4th February 2019 the Banking Royal Commission findings were handed down by Commissioner Kenneth Hayne. Having heard testimony from a cross section of Australia’s most prominent financial institutions, a series of issues were exposed that made it clear further change is needed to protect Australian consumers. Read our summary from during the trial, of some of the main issues identified.
A total of 76 recommendations have been made and on most issues, I think Hayne has taken a fairly common-sense approach. The guiding principles he followed when making his determinations included:
Obey the law;
Do not mislead or deceive;
Provide services that are fit for purpose;
Deliver services with reasonable care and skill; and
When acting for another, act in the best interests of that other.
These are simple things that you'd think all Australian businesses would already aspire to, however we now know that wasn't the case and many large institutions are still struggling with getting it right.
Some of the findings that relate specifically to financial advice are about ensuring that advisers act in the best interests of their clients and provide a service commensurate with the fee that is being charged. Both of these principles are already legislated and enforced, however some of the recommendations will take this a step further.
Some of the bigger measures recommended that will affect financial planners include:
We be obliged to provide a service when we are being paid a fee. Yes, this is actually a thing!!;
Removal of ‘grandfathered’ investment commissions;
Introduce annual ‘opt-in’ requirements, where clients must ‘opt-in’ to continuing a service, rather than ‘opt-out’ as would typically be the case for a service;
ASIC and APRA should be empowered to regulate the industry as intended, as findings found they have previously been hampered;
Review and potentially change the way advisers are remunerated;
Review of Insurance commissions again in 2021, with a view to potentially reducing these to zero.
These will be the main pain points for advice businesses moving forward in my opinion and depending on the business, will have varying impact.
To summarise my thoughts on each of these and where applicable, their impact to Yield
When we are being paid a fee, we should be obliged to provide a service
Incredible to think that this does not go without saying, but with many instances of ‘fee for no service’ uncovered it’s been deemed necessary.
Advisers are already obliged to provide review service agreements to demonstrate the service that is being promised.
Furthermore we are currently required to provide a ‘Fee Disclosure Statement’ (FDS), which details the service promised, what has been delivered and the fee paid.
Moving forward it has been proposed that a more detailed account of the service that is to be delivered will be required as a minimum standard.
We believe at this point that it will not impact what Yield does for our clients, as we already outline the service we promise to deliver in some detail and provide an account of what we promised and delivered annually.
Removal of ‘grandfathered’ investment commissions
This means the commissions built in to old investment products will cease. Both Liberal and Labour parties have indicated their support of this measure.
This has been widely anticipated and for Yield is of very little consequence. The reason for this is that we have never accepted investment commission on products we have recommended from the day we opened our doors in 2006, because we could see they were inherently conflicted. A small win for Yield!
With that said, this measure will have some far reaching impact on several older practices and some consumers. For consumers, there are going to be unintended consequences, because the focus is only on the revenue. This recommendation combined with others affecting superannuation, will mean that some people that are currently getting legacy benefits on, for example, how they are treated for Age Pension, could be impacted.
For the older Financial Planning businesses affected or newer advisers that have bought businesses relying on this income, my heart goes out to them. Some businesses I understand have as much as 50% of their ongoing revenue linked to investment commission. Practices across Australia will have income reduced and potentially slashed, affecting their ability to carry on employing staff; repay loans; and potentially impacting their ability to retire.
Introduce annual ‘opt-in’ requirements, where clients must ‘opt-in’ to continuing a service, rather than ‘opt-out’ as would typically be the case for a service
A recommendation that has been agreed to by both parties is that all fee paying clients will be required to ‘opt-in’ to the service they have.
Since 2014 all new clients have had to opt-in every two years, so this is not new for Advisers offices, however it does add additional compliance and administration and will mean that our clients that commenced working with us before 2014, will need to formally opt-in every year to our service when it is legislated. We’ll keep you updated on this.
ASIC and APRA should be empowered to regulate the industry as intended, as findings found previously they have been hampered
This relates to using the full power of the law to enforce wrong doing. In the past ASIC have been more inclined to issue infringement notices and enforceable undertakings as a deterrent and they have been criticised as being ineffective when the law has been broken.
For Yield and many other boutique advice practices out there, we have always had a very healthy respect for ASIC’s regulatory power and done everything we can to do the right thing to avoid ever having to find out the severity of their wrath and reach.
With this in mind I can only hope that any change that results from this recommendation does not result in ASIC throwing more weight behind making an example of relative minnows in the industry, while missing what seems to me to be the real intent behind the change, being the manner they execute against big institutions when it’s appropriate, that have the budget to defend their position.
Review and potentially change the way employed advisers are remunerated
What I understand this to mean is that an adviser’s remuneration structure should not be directly linked to their engagement of new clients or at the very least it should be well balanced to the entire client experience.
I believe that this is likely to have extremely far reaching implications for financial advice in Australia as it has often acted as the carrot-on-a-stick for sales performance and has been proven to be one of the significant reasons for advisers doing things that are not in their clients best interest.
Indeed it already is, when you consider that at least two of the major banks that I’m aware of, have ceased or are in the process of ceasing the built up commission payments they were formerly paying their advisers.
This is an example of where I think that Hayne has got the balance right in his recommendations, as it will make a model built on vertical integration very difficult to remain sustainable. Especially if ASIC is empowered to police it properly. This is compared to the extreme alternative that was considered possible, being the outright banning of vertical integration, a stance which some still believe Hayne should have adopted.
With this said, it will have very real impacts on advisers and their families and for those affected, again my heart goes out. Advisers with debts and family commitments that they’ve taken on, believing that their income was sustainable have had their lives abruptly turned upside down as a result of this change.
Review of Insurance commissions again in 2021, with a view to potentially reducing these to zero
In 2015, John Towbridge handed down a package of reforms to the Life insurance industry that included reducing insurance commissions to a flat 20%. This was varied ultimately to be a flat 60% upfront and 20% ongoing and Hayne has recommended that ASIC review this again in 2021, with a view to reducing the commission to 0% as a preference. I can see a lot of unintended negative consequences of this decision.
At Yield we opted to rebate all investment commission from our inception and at the time we considered the same for insurance, but identified that it is a very different service, without the same inherent conflict and the structure as it stands has made it even less so, now there is a flat commission across the industry.
One of the misunderstandings it seems to me is that advisers do nothing for the ongoing commission they receive. Speaking for Yield, we dedicate an entire resource to our ongoing review service. Our clients will be well aware of the ongoing service we provide which includes; preparing an anniversary report for our clients; reviewing the market to identify cheaper cover if applicable; proactive assistance to review and remove exclusions or loadings; proactive review of circumstances as change occurs; and claims handling support when needed.
Not only this, but the nature of the commission model means that clients with relatively small policy’s get the benefit of the same level of service as bigger clients get. In this way bigger clients essentially make it economic to support smaller clients. Considering the massive underinsurance issues we have in this country, to adjust the system to a user pay model will mean:
People who can most afford to pay will get cheaper access to advice overall; and
People who can least afford to pay will not get the benefit of advice and will either opt for inferior products or elect no cover at all.
On the second point, it is a mistake to assume all insurance policies are created equal and it is an adviser’s job to help people choose an appropriate policy for their need. Default policies offered through super funds are fraught with sub-standard clauses and when people who think they are insured find out that they are not, it will start to expose the issue.
I could go on.
I founded Yield Financial Planning with the ambition to build a boutique advice business focused on helping my clients to build financial freedom.
We are a business that isn't owned by a major institution and we are happy to keep it that way;
We are one of the very early adopters to charge fees for the strategic and investment advice (since our inception in 2006) and our aim is to always improve and always deliver value to you that exceeds the fee you pay us.
Thank you for taking the time to read our Banking Royal Commission summary and how it impacts financial planning.
If it raises any questions for you or you would like to reach out to discuss how you can achieve the life you desire for yourself, please call us on 03 9819 0699.
Written by James McFall
Founder | Yield Financial Planning