At long last, the final Royal Commission report has been released.
In the preamble, Commissioner Kenneth Hayne mused on how instances of misconduct revealed during the hearings were driven “not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business.”
This, he said, led a situation where “providing a service to customers was relegated to second place. Sales became all important.”
“Those who dealt with customers became sellers,” he added. “And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers.”
The findings and recommendations made in the report are extensive, so for this initial piece let’s focus on the implications for financial advice, bearing in mind one of Hayne’s stated beliefs: that it is “time to ignore the ghostly apparition of constitutional challenge conjured forth by those who, for their own financial advantage, oppose change that will free advice about, or recommendation of, financial products from the influence of the adviser’s personal financial advantage.”
Ongoing fees
Hayne said that any ongoing advice fees charged to clients should be renewed annually. He also said advisers must record (in writing) each year what services a client will be “entitled to receive” under this arrangement and the total fees to be charged.
Finally, advisers must neither “permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.”
Disclosure of independence and addressing conflicted remuneration
Hayne also said the law should be amended such that advisers will need to give their clients a written statement explaining if (and why) they are not independent, impartial or unbiased.
The report also recommends removing any grandfathering provisions for conflicted remuneration “as soon as reasonably practicable,” and suggests ASIC should consider further reducing the cap on life insurance commissions – in fact, “unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.”
Improving the quality of advice
Hayne also recommended that the Government, in three years’ time, conduct a review of any implemented measures to raise the quality of financial advice.
The review should consider whether the “safe harbour provision” should be removed, given that in practice it “requires the adviser to make little or no independent inquiry into, or assessment of, products. Instead, in most cases, advisers and licensees act on the basis that the obligation to conduct a reasonable investigation is met by choosing a product from the licensee’s APL.”
Reference checking, misconduct and compliance concerns
In order to mitigate the risk of further misconduct in the advice industry, Hayne suggested all advice licensees should be required – as a condition of their licence – to implement reference-checking protocols for financial advisers in accordance with the Australian Bankers’ Association’s “Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol.” On a quarterly basis, licensees will also be required to report serious compliance concerns about individuals to ASIC.
In instances of individual misconduct – “whether by giving inappropriate advice or otherwise” – licensees will also make reasonable inquiries as to the nature of the misconduct and, if it is determined misconduct has occurred, inform affected clients and remediate them.
A new way of managing misconduct
Hayne recommended the establishment of a new disciplinary system for financial advisers. All advisers would be required to be registered, and AFSL holders would need to report compliance concerns to the new disciplinary body.
He said this made sense given that “a requirement of individual registration as a condition of practice is common to most professions. For example, health practitioners (including doctors and nurses) must be registered with the Australian Health Practitioner Regulation Agency (AHPRA). Lawyers must be admitted to practise, and hold practising certificates. Architects and teachers must be registered with a relevant state or territory registration body.”
Individual registration, he added, would “also assist in impressing upon financial advisers that they occupy a position of trust, and that their entitlement to continue to occupy that position of trust depends on their obeying the law and other standards applicable to them.”
What about ASIC?
ASIC’s shortcomings were also highlighted in the report. While Hayne said that significantly altering ASIC’s remit would “mark a sharp departure from the twin peaks model,” which he was “not persuaded … should now be abandoned,” he also said that financial services entities should not be perceived as “clients” to or by the regulator.
“ASIC does not perform its functions as a service to those entities,” he said, “and it is well‑established that ‘an unconditional preference for negotiated compliance renders an agency susceptible to capture’ by those whom it is bound to regulate.”
To address these issues, Hayne said ASIC should consider, at a starting point, whether a “court should determine the consequences of a contravention” and “recognise that infringement notices should principally be used in respect of administrative failings by entities.”
He added that infringement notices should rarely be considered appropriate for situations that “require an evaluative judgement and, beyond purely administrative failings, will rarely be an appropriate enforcement tool where the infringing party is a large corporation.”
Wrapping it up
Hayne concluded by suggesting the advice industry is currently in a state of flux, transitioning from an “industry dedicated to the sale of financial products” to a “profession concerned with the provision of financial advice.”
Upon implementing the above recommendations, the report suggests, “it will be time to ask whether the quality of financial advice has improved, and whether financial advisers are behaving like professionals.”
There’s a lot more to get through in the report and its implications for the wider financial services industry. We’ll keep you posted in the coming days and weeks.
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