Bernie Ripoll has produced a bipartisan report from the Financial Services inquiry into the Storm and Opes collapses, and it shows. The report goes halfway but no further in addressing the fundamental problems in financial planning in Australia.
Whether Ripoll and his Labor colleagues on the Joint Committee on Corporations and Financial Services should have cut the coalition — which lacks a financial services policy and has a retiring shadow minister in Chris Pearce — loose and gone further will remain a hypothetical. Ripoll’s approach has the virtue that the legislative changes recommended by the committee stand a much greater chance of ending up happening.
The report is strongest on the need for a legislated fiduciary duty, to require financial advisers to place their clients’ interests ahead of their own, which would address the fundamental issue of the conflict of interest of financial advisers.
A fiduciary duty appears inevitable, with the Investment and Financial Services Association backing it as a “win for consumers”. The committee also urged that ASIC be resourced to take a more pro-active and aggressive regulatory role to enforce it.
The committee also devoted considerable space to the vexed issue of disclosure. For some financial advisers, disclosure has the status of a magic spell: provide a 50-page statement about duties, obligations and relationships to clients, and that mysteriously obliterates the problem of conflict of interest.
For all the good disclosure statements do, they may as well be in pig Latin as well. Disclosure is a myth peddled by an industry hell-bent on protecting the rivers of gold of commissions. The committee proposed ways of improving disclosure, but that’s the financial services equivalent of alchemy. Disclosure does nothing to address conflict of interest, whether it’s 50 pages and utterly baffling even to lawyers, or a simple, straightforward two-pager of the type proposed by some planners.
Conflict of interest can only be properly addressed by banning commissions. The industry itself, or at least the more forward-thinking/politically astute sections of it, such as IFSA, have said they want to move away from commissions. But they want to do it at their own — very slow — pace and in a way that leaves intact the vast bulk of earnings currently generated for financial planners. It’s here that the committee ran for cover, presumably because the coalition, to the extent that it has a policy, is opposed to banning commissions.
Instead, the committee recommended that the government “consult with and support” the industry “in developing the most appropriate mechanism by which to cease payments from financial product manufacturers to financial advisers”. In effect, despite the manifest failure of self-regulation in the Storm and Opes collapses, the committee wants more self-regulation.
This suits the industry just fine. “The debate over conflicts of interest should now be put aside, enabling the industry to move forward on a solid professional foundation,” IFSA head John Brogden said. “If a fiduciary duty is adopted, we do not believe that ceasing remuneration paid to financial advisers from product manufacturers is required.”
Sorry Mr Brogden, but it can’t be “put aside”, not when Storm demonstrated just how much damage financial planners could inflict on ordinary punters. The problem is that payment of commissions is inimical to the notion of a fiduciary duty. You can’t put a client’s interests ahead of your own when you are receiving a stream of revenue from the owner of a financial services product.
The committee was also tempted by industry arguments that a move away from commissions will somehow discourage lower-income clients from seeking financial advice. The Institute of Actuaries thought that was rubbish, telling the committee:
the whole issue around those who are less affluent is a bit of a furphy. Who are we talking about for starters? We are talking about 90 per cent of people whose best investment advice is to pay off the mortgage or put money into super — none of which would give any sort of commission or trail to an adviser. So we are talking about that 10 per cent who are left — in which case they are more sophisticated and in which case people should know how much they are paying for advice. Advice is expensive. For a financial planner the hourly rates might look high, because there are overheads, research and that sort of thing. But I think people have to see what that advice is. The profession has to stand on its own two feet. People need to understand that this is the cost of that advice.
Nevertheless, the committee half-bit at this image of the poor despairing because they couldn’t get some wealth management advice, suggesting that the tax deductibility of financial advice be considered by the government. It did this despite specifically acknowledging “that tax deductions could represent a subsidy for financial advisers, with the market willing to bear higher costs knowing that a proportion will be returned at the end of the financial year”. Dead right. Tax deductibility will direct a healthy subsidy straight from taxpayers into the pockets of financial planners.
IFSA, not surprisingly, thought tax deductibility would be great.
The committee report is a start, but it’s betwixt and between, not willing to embrace regulation, but conscious that self-regulation has worked poorly. There’s no consistent approach to regulatory practice behind it. If the committee was unwilling to embrace direct regulation, it should at least have considered something like the co-regulatory model used in broadcasting, where industry develops codes of practice to supplement legislative requirements, but those codes of practice are overseen by and signed off by the regulator. A model in which the financial planning industry revamped its codes of practice to address conflicts of interest, move away from commissions and improve professional standards — another area where the committee proposes some good reforms that will be backed by smarter sectors of the industry — should have ASIC front and centre in supervising that process — with the resources to effectively do so.
The bottom-line question is how much the committee’s recommendation will prevent an Opes or a Storm from happening again. Regulation can never guarantee that, of course, but the recommendations do go some of the way to address the systemic problems that caused them. It’s just that they could have gone a lot further.