While the banks, financial services companies, financial planners and ASIC come out badly from the financial services royal commission’s interim report, there are others who fare poorly as well, but who have received little or no attention. Nonetheless, they are every bit as responsible for the way the Australian financial services industry has worked. They’re not mentioned by name in the report, but they are John Howard, Peter Costello and the federal Treasury.
The report chapter on financial planning is good reading: a brisk history of the sector, how it operates, and the misconduct carried out by financial planners, licensees and our biggest financial institutions. And it makes some pointed observations about how the current regulatory framework developed.
We’ve already noted how the Wallis Inquiry got consumer financial services regulation wrong when it moved that role to the new ASIC from the ACCC. But Kenneth Hayne’s interim report discusses other reforms that flowed in the wake of Wallis, via what was known as CLERP 6, which was legislated at the end of the Howard government’s second term as the Financial Services Reform Act. Hayne notes:
In December 1999, Treasury released its Corporate Law Economic Reform Program Paper No. 6 (CLERP 6)… a number of its underlying principles have endured. One of those principles was to fold sales and advice relating to insurance and superannuation into the regulation of securities. That regulatory framework was premised on independent intermediation and the use of mandatory disclosure as a means of investor protection. It did not take into account that insurance and superannuation decisions were usually made with consumption (a payment in case of injury; an income stream at retirement), rather than investment, in mind, or that those products were usually sold by sales agents and not independent brokers …
That is, CLERP 6 treated consumer financial services like investment services, even though financial services products not merely differed in function from investments, but were sold by agents — not by independent brokers. It goes on:
Another key principle in CLERP 6 was to regulate intermediaries (including advisers) at firm level rather than at the individual level, in part to allow ASIC to target its resources efficiently.
That’s why companies, not individual planners, are licensed to provide financial advice — a key flaw that Hayne suggests could be ended.
CLERP 6 did not provide that financial advisers were to be independent from product issuers… The financial advice industry is still caught in this structural link between product issuers and the adviser’s legal obligation to act in the best interests of the client. Finally, CLERP 6 established that household access to wholesale markets and complex products would not be restricted. Rather, it relied on mandatory pre-disclosure as the means to inform consumers about risks on the basis that consumers would then make informed and rational choices …
So the CLERP reforms not merely didn’t require planners to be independent, broker-style advisers, but assumed ordinary consumers should have access to complex products and wholesale financial services — something traditionally reserved for the wealthy, until compulsory super and financial deregulation. That created a system that relied on consumers to make rational, informed choices based only on what planners were required to tell them about investment risks and conflicts of interest. The conflict of interest at the heart of the entire system between the interests of advisers and those of consumers — or what Hayne says should more accurately be seen as conflict between the duties of advisers and their interests — would be “managed” through disclosure.
The result? Several hundred crooked financial planners, hundreds of thousands of victims, hundreds of millions of dollars in compensation and counting. Thank you John Howard, thank you Peter Costello, thank you Wallis and team, thank you Ted Evans — Treasury secretary back then, and later (surprise!) Westpac chair.
Surveying the smoking ruins of financial planning now it’s clear what CLERP 6 was: a neoliberal fantasy, a blueprint for a free market Utopia based on an ideology of competitive forces, rational consumers and information symmetry and the Howard government’s dream of a shareholder democracy. In that dream, ordinary Australian workers would be transformed into McMansion-owning, private school- and healthcare-using, investor-contractors enjoying the fruits of unfettered (but taxpayer-subsidised) markets and endless asset price growth. The reality was shattered lives, ruined retirements, lost life savings, a system that gouged you for fees for nothing in return and made you keep paying them after you died, and regulators who looked the other way.
The royal commission is a missile aimed directly at the vast gulf between the fantasy we were sold by the Howard government and the shitty truth on display this year. And all of the perpetrators deserve to be shamed.