With the Royal Commission interim report now available to the public, it’s worth looking past the headlines and considering what’s actually being recommended for the advice industry.
After all, some of the misconduct discussed throughout the Commission hearings – and referenced in the report – pertained to behaviour that occurred prior to some of the more recent reforms affecting financial advice. So, looking forward, where is Hayne’s report seeing further opportunities for change?
In this article, we’ll cover how potentially conflicted remuneration might be managed, and how licensees should deal with it.
Issues identified in advice
The report identified multiple extant concerns in financial advice. First, it questioned how an adviser’s employer and licensee encourages the provision of “sound advice” – including, where appropriate, recommending a client “do nothing.”
It also asked whether conflicts of interest and duty can be managed, and identified a potential need for greater separation between the manufacture of financial products and the provision of advice.
Products and authorised representatives
Bearing in mind this is the interim report – and recommendations haven’t been finalised – it’s illuminating to see where the discussion is going. Hayne asks whether financial product sellers and manufacturers should ever be permitted to provide advice to retail clients, and expands on this by asking whether authorised representatives should be allowed to recommend products manufactured or sold by their licensees.
If so, he continues, should it only be following a written demonstration that the product is “better for the client than comparable third-party products?”
Finally, the report questions whether current product and interests disclosure requirements are “sufficient to allow customers to make fully informed choices.”
Remuneration in the spotlight
The report also asks whether grandfathered exceptions and life risk exceptions to conflicted remuneration provisions be changed. If so, it continues, how far should they be changed, and when should the changes take effect?
Furthermore, the report questions whether any remuneration to a financial adviser be dependent on “value or volume of sales.”
How licensees may operate in the future
One of the more curious suggestions made in the report is that ASIC may soon be responsible for licensing every single adviser, even those now acting as authorised representatives of a licensee. While there isn’t much more detail provided on this point, the report also goes into how licensees should police the conduct of their ARs.
First, in instances where an adviser is terminated for fraud or misconduct, the report asks whether a licensee should inform their clients of the reason for termination. Beyond that, it asks whether licensees then have an obligation to review all files (or clients) pertaining to that adviser to determine any further instances of misconduct.
With regard to licensees’ fee arrangements, the report asks whether the period “after which a client must positively review an ongoing fee arrangement be reduced from two years to one,” and whether platform operators should be able to deduct fees on licensees’ behalf without clients’ express permission.
As you can see, there are a wide range of issues being examined in the report – in our follow-up on Thursday, we’ll look at how the Commission is looking to improve regulation of the industry.
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