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Royal Commission's Table of (Dis)Contents

After weeks of reading the Financial Services Royal Commission Final Report on a screen, my hard copies arrived recently. Anyone can order them for free here.

There’s something different about sitting down with a book, like in the good old days, and it’s surprisingly easy to read. Kenneth Hayne does not write in a legalistic way, but he is chatty in places, as if writing as his thoughts form. Someone should have given it a good edit but my guess is nobody was willing to suggest this to Mr Hayne. He’s even elegant in places:

“It is time to ignore the ghostly apparition of constitutional challenge conjured forth.”

“Saying only that there may be a ‘disruption’ or ‘unintended consequences’ is nothing but a naked appeal to fear of the future.”

Revelations in the Table of Contents

But something jumped out even before I left the Table of Contents section. There’s not much in the 'Banking' section. It’s often called the Banking Royal Commission (and in fact, Cuffelinks bought the domain name although we never activated it). The Banking section starts on page 51 and finishes on page 118, only 67 pages. Even in there, 28 pages are devoted to mortgage brokers and intermediation. Surely a wider range of banking services should have been the Commission’s primary target, not a mere 40 pages.

Look at the topics in the Table of Contents:

  • Intermediated home lending
  • Intermediated vehicle and consumer good lending
  • Access to banking services
  • Farm debt mediation
  • Valuation of land
  • Charging default interest
  • Distressed agricultural loans
  • Enforceability of industry codes
  • Processing and administrative errors

Among the vast array of products and services banks offer, are these the most important? Farm debt mediation! Valuation of land! Distressed agricultural loans! It’s a rural banking review. Nothing much on how banks price products, credit card lending and rates, transaction services, foreign exchange, fees on loans and deposits, closure of bank branches … the list goes on. Why is a cheque dishonour fee $30 for an automated process? Why are some credit card rates over 20%? Why are term deposit rollover rates worse than new offers? The Commission only scratched the surface.

It matters because bankers are now focussing on the issues raised by Kenneth Hayne, leaving some major issues untouched.

Then ‘Financial advice’ starts on page 119 and goes for 100 pages, after which ‘Superannuation’, which also deals with financial advice, kicks in and covers another 47 pages.

There’s twice as much on financial advice as banking (even acknowledging there are general sections on culture and remuneration later). It’s more like the Financial Advice Royal Commission.

What about stockbrokers and FoFA?

The instructions given to the Royal Commission are in the Letters Patent. It refers to ‘financial services’, and it invites the Commissioner to inquire into almost anything that he considers relevant to “peace, order and good governance”. The massive industry of listed securities, stockbroking and the ways companies raise money on exchanges barely rates a mention. Meanwhile, financial planning was pilloried in the witness box month after month, as if the remuneration and market practices of one industry are any less questionable than the other. Who can forget the well-justified trials on the Future of Financial Advice (FoFA) misdeeds, grandfathered commissions and the evidence of financial adviser, Sam Henderson and others?

The Terms of Reference make no more direction towards financial advice than stockbroking, and the official name of the inquiry is the Royal Commission into Banking, Superannuation and Financial Services Industry.

Since FoFA and financial advice were front and centre for months, why wasn't an activity which has close operational parallels to financial advice (such as distribution of products for commissions, raising of capital for companies, provision of advice to consumers) examined? Stockbrokers and financial planners carry far more similarities than differences.

In a previous article, 8 problems the Royal Commission missed, I wrote about the ability of fund managers and other market participants to avoid the FoFA rules by using the Listed Investment Company (LIC) structure. It was good to see Christopher Joye write a quality analysis in The Australian Financial Review on 8 March 2019 entitled, ‘Boiler rooms are back as listed investment companies’. He notes:

“Fund managers have figured out how to circumvent the vital Future of Financial Advice (FOFA) consumer protection laws to pay gigantic sales commissions worth more than $150 million to brokers and advisers despite FOFA being implemented to prevent precisely this practice ...

When these laws were introduced in 2012, they applied to all investment entities, including listed and unlisted funds and investment companies. In 2014, however, sustained industry lobbying convinced politicians to exempt listed investment companies and trusts from FOFA's all-important reach ...

In dollar terms, fund managers have paid more than $150 million in conflicted commissions to get brokers/advisers to push their products to retail investors, often in incredibly short time frames ...

For the vast majority of fund managers rushing to exploit this huge loophole, there is zero chance they could secure this volume of capital as quickly as they can on the ASX through normal FOFA-compliant channels.”

The legislation Joye is referring to includes 7.7A.12.B of Consolidated Regulations. It says:

“A monetary benefit is not conflicted remuneration if it is a stamping fee given to facilitate an approved capital raising.”

So call commission a ‘stamping fee’ for ‘an approved capital raising’ and we’re off to the races. Call a commission a conflicted remuneration from a product provider to a financial adviser, and we’re off to the slammer.

Redefining financial advice

Given both political parties have indicated that Hayne’s report will be adopted in full with only one or two exceptions, what does it say about the future role of financial advice? Here is a sting in the tale that financial advisers should worry about.

For a start, there is plenty of evidence that Hayne is unconvinced about the merits of advice. For example:

“ … poor advice which, too often, is the result of the conflicts of interest that continue to characterise the financial advice industry. Other professions are not so pervaded by conflicts of interest and do not have such a high tolerance for the continued existence of conflicts of interest. Until something is done to address these conflicts, the financial advice industry will not be a profession.”

the existing disciplinary arrangements for financial advisers are fragmented, and hampered by inadequate sharing of information.”

“Not all advisers (financial or other) are equally skilled or diligent. In some cases, reasonable advisers may form radically different views about what should be done.”

“In 10% of all the files ASIC reviewed, ASIC ‘had significant concerns about the potential impact of the advice on the customer’s financial situation’.” 

Has Hayne misunderstood where financial advice was heading?

Powerful implications for financial advice start on page 238 of the Final Report. I will quote extensively because these findings are a redefinition of the future of financial advice, and the industry is not reacting enough. Advisers are shell shocked and keeping their heads down. Kenneth Hayne writes:

“It is not consistent with the sole purpose test for a trustee to apply funds held by the trustee in paying fees charged by an adviser to consider, or re-consider, how best the member may order his or her financial affairs generally or may best make provision for post-retirement income.

"It follows that the nature of the advice that may properly be paid for from a superannuation account is limited to advice about particular actual or intended superannuation investments. This may include such matters as consolidation of superannuation accounts, selection of superannuation funds or products, or asset allocations within a fund. It would not include broad advice on how the member might best provide for their retirement or maximise their wealth generally. Any practice by trustees of allowing fees for these latter kinds of financial advice to be deducted from superannuation accounts must end. (my bolding).

"I would modify the general rule in respect of MySuper accounts, and permit no deduction for advice fees of any kind ... It is difficult to imagine circumstances in which a member would require financial advice about their MySuper account. If a member wants financial advice, the cost of that advice should be charged to and paid by the member directly.

Perhaps a superannuation member invested through a platform would benefit – or believe they would benefit – from ongoing financial advice in respect of their superannuation investments. But such benefits would be relatively modest, and would accrue to relatively few members ... the advice in respect of which fees may be charged is limited to advice about particular superannuation investments."

This recommendation flies in the face of current practice and will result in fewer people obtaining financial advice. Many superannuation funds allow the cost of financial advice fees to be charged to the super account. For example, an adviser telling a MySuper client about co-contributions, or dividing up an estate between dependants, or transferring from accumulation to pension, or aged care. Advice fees on such issues will no longer be chargeable to the super account.

Financial advice should not be predominantly about investments, as Hayne will encourage, but it is a holistic solution to satisfy future goals, especially retirement. It is no more relevant to advise about investing for retirement than it is about estate planning, aged care, lifestyle coaching, budgeting, property and tax advice. Kenneth Hayne is pushing the industry back to an old model where advisers were stock pickers and fund managers, and this should not be the primary skill.

The advice industry is fruitlessly fighting against the banning of grandfathered commissions, but Hayne's proposed change in their fundamental model is far more important. In fact, one of the reasons managed accounts have become so successful is that advisers put their clients into model portfolios designed by investment experts, allowing advisers to concentrate more on the non-investment side of their client's future goals and retirement plans. Most members will not pay for advice from their own pockets, and denying payment by their super fund will result in less people obtaining the advice they need.


Graham Hand is Managing Editor of Cuffelinks.


Josef Pilger
March 21, 2019

Superficially it may look like the Financial Advice RC as the big findings from the banking part already came last May. At a closer look conflicts of interest, culture and effective oversight with teeth seemed pervasive. But are those the root causes of the negative outcome incidents we saw? Too simple, as far bigger “issues” stayed untouched and many issues were known anyway. What role does the - low - consumer protection maturity play? And what about lack of policy implementation scenarios that model likely stakeholder behaviour and risks, and commensurately mitigate ahead of pervasive poor outcomes? More questions to restore confidence and design a sustainable future in light of huge temptations.

March 17, 2019

Great article thanks Graham. We are now in the absurd position where football sponsorships, corporate entertaining, construction projects designed to create union jobs, and new member inducements with frequent flyer points, are somehow deemed perfectly acceptable uses of superannuation savings under the Sole Purpose test.

Paying for superannuation advice is also acceptable use of superannuation savings as long as that "advice" is given by a super fund call centre operator, and is paid for via an insidious new charge called "intra fund advice costs". This is a charge levied on all members of some funds whether they use call centre "advice" or not. (Fee for no Service reinvented?)

Yet if a licensed financial adviser is paid a specific client authorised amount from that client's super account for advice about their asset allocation or their contribution or withdrawal strategies, Hayne thinks that's a big problem that needs to be stamped out??

March 17, 2019

Dermatologists have entered a medical school, studied hard for 14 years minimum, gone through a very competitive selective training scheme to get that title, whereas financial advisers, well, their training can be anything, and you can get a good advice if you are lucky, but usually end up losing money with them as I did 2-3 times until I got my lessons. You never get a bad dermatologist advice/ treatment, because the bar of standard is very high for them in that highly regulated practice. thank you.


March 14, 2019

Hayne is right about conflict preventing the financial services industry from becoming a profession.
But I note the Independent Advisers Association of Australia is applying to the Professional Standards Councils (PSC) for an Occupational Scheme, under the Professional Standards Act 2004.
This means, when successful, all members of the IFAAA will be nationally and legally recognised as professionals.
If they don't want to (or can't) join the IFAAA because of the requirements not to be affiliated with product manufacturers or accept commissions or charge asset-based fees etc, then maybe they need to accept they aren't true professionals.
I am not saying they don't act professionally, or they don't care about their clients or anything else that snowflakes might want to read into my comment. But if you saw a GP who could only recommend medication by one drug company even though another medication was better for you, or a GP who received more money if you had certain tests done - well, "professional" is hardly the word you would use to describe them.

Hilda Benjamin
March 15, 2019

FYI it is financial advisers tied to the big four banks and AMP that push their organizations products because, as found in the Royal Commission, they receive incentives to do so (and censure for not doing so).
Many "independently owned advisers" can and do recommend from virtually from every single product provider and their fee charged (not a % or asset based, but for defined advice costed at an hourly rate - ring any bells?) is the same irrespective of the product. Your claim is misguided.
Furthermore, it has been well documented that doctors and specialists (real "professionals according to you) frequently take incentives to prescribe (ie push) certain products. However, unlike financial advisers, they are not obliged to disclose these relationships.
Yep, its a grubby world and legislation is needed but the mortgage brokers have shown how having buddies in big business, politics and regulatory bodies can protect entrenched interests and make a mockery of "reform".
I think most of the "non-aligned" financial planners are a threat to entrenched interests and vertically integrated business models because they can offer a "non-aligned" view and "non-aligned" advice.
Legislation should ban asset based commissions and all fees should be justified and documented but allowing fees to be deducted from super balances makes it easier for people to afford advice, often at an age where cash flow is problematic. Much research indicates people will forgo advice if it cannot be funded from super - this is fundamentally the same with "insurance inside super" logic.
Once again, legislation is set to punish the innocent (the consumer) and reward the guilty (the thugs exposed at the Royal Commission). C'est la vie!

Peter Stewart
March 14, 2019

Commissioner Hayne may not have contact with a financial planner, but I bet he has a private banker.

March 15, 2019

Hilda, I'm afraid I don't understand what you are referring to when you say "my claim is misguided".

My "claim" is that if GPs were to diagnose medications or tests based on the remuneration they would then receive, the public would not regard them as professionals.

I agree with you that legislation should ban asset-based fees and commissions and all fees should be justified and documented. (Please note that "independently owned advisers" is NOT the same as "independent advisers".)

I think the assertion that "doctors and specialists frequently take incentives to prescribe (ie push) certain products" is unfair and unjustified. Every barrel has rotten apples (even the Catholic Church!) but the vast majority of GPs and specialists has NOT been shown to recommend treatment because of incentives they receive.

March 14, 2019

I don't agree that denying payment by their super fund will result in less people obtaining the advice they need. I have yet to see any data that supports this contention and suspect it is just an industry scare tactic. Unless and until advisers properly define and charge for their services on the basis of the value they provide, like any other genuine profession, then advisers will be tagged as salesmen. The problem to date is advisers charging a FUM based fee which is completely divorced from the complexity and expertise required to solve the client's problem. If a client's needs are simple, then the fee should be modest. If their needs are more complex, then I suspect most people would be willing to pay for the expertise and professional skills required. I certainly wouldn't pay $4000 for a simple annual portfolio rebalance any more than I would pay a doctor $4000 for a simple flu prescription.

Graham Hand
March 14, 2019

Hi Patrick, most advisers (and especially those who handle personal advice for clients with smaller balances such as Hostplus and REST) say that asking someone to pay for advice results in many people not bothering, whereas they are happy for it to be paid for from their account.

Harry Chemay
March 14, 2019

Sorry Graham, but that it *precisely* the point that I believe Patrick was making.

The question to ask is why won't people pay 'out of their own pockets' while being prepared to pay 'from their account'?

Leaving tax treatments to one side, the reasons appear to be primarily behavioural.

The superannuation and advice industries long ago figured out that mental accounting results in people viewing payments from differing sources differently.

It's a form of loss aversion, where people feel more pain making a payment from their bank account versus having the exact same amount debited from their super or investment account. And a whole business model, based on trail commissions thus deducted, has arisen on the basis of this cognitive bias.

I commend Commissioner Hayne and his team for being alive to the behavioural finance aspects of the finance industry. Many of his 76 recommendations are designed specifically to counter the 'Sludge' that pervades the industry.

[Sludge being a term coined by Nobel Prize winner Richard Thaler to describe a behavioural 'Nudge' designed to induce behaviour that is detrimental to the customer's interest and advantageous to that of the supplier.]

The Hayne report sees through the Sludge and is setting about reducing its presence in the Australian financial system. Australian consumers will be the beneficiaries of his recommendations (if duly implemented) in the long run.

March 15, 2019

I was going to make a similar observation yesterday. I can go to a professional person with a specific problem, get a period of their time to discuss just this problem whilst touching on a broader general context, and come out with the solution for about $85 - and then get about $30 back from Medicare. I may have to go more than once, and some times it can get way more complex, but mostly that's all that's required.

I have any number of similar level financial queries that I'd be happy to pay a professional financial consultant to solve, but there's no way to do that without a huge process to work out my "goals and aspirations" and attempt to garnishee a percentage of my entire asset base. I can choose a product myself. A product is often not what I need, it's strategic or tactical advice.

I appreciate that this structure is in some ways forced on the industry, but I won't go anywhere near a financial planner while it appears to be done this way. I just wish my GP would branch out into retirement finance - would solve all my issues.

Hilda Benjamin
March 15, 2019

"Every barrel has rotten apples (even the Catholic Church!) but the vast majority of GPs and specialists has NOT been shown to recommend treatment because of incentives they receive."
D'accord. This applies to financial planners, too.
Some medical practitioners have been found out to be prescribing medications based on the amount of promotion and "support" they receive from big pharma - i.e. pushing products because they are incentivized to do so. There is extensive documentation showing how big pharma perverted drug trials to get shonky products approved.
There are crooks in every type of work - when it comes to ethics there are no automatic "saints" in any industry: doctors, priests, drain cleaners or whatever.

Hilda Benjamin
March 14, 2019

If Mr Hayne had presided over the Nuremberg Trials he would have sentenced ordinary soldiers serving in regular (non SS) units to death while watching the leaders stroll over the Swiss border with his looted treasures intact. Very disappointed in his pronouncements on topics where he has little understanding. Culture is another issue that defeated him. This Royal Commission, probably largely thanks to being designed to LNP and bank specifications (scope, duration), is starting to look like a dud...

Richard Brannelly
March 14, 2019

Mr Hayne's dealings have been with the unsavory element within the industry. The rest of us could only dream of being blessed with his financial security!

March 15, 2019

You’ve hit the nail on the head with this comment

SMSF Trustee
March 15, 2019

The Royal Commission had terms of reference that didn't allow it to comment on good things in the industry, but directed it to uncover and make recommendations on bad things. That he found bad things is the issue, not his personal background!

Play the ball, not the man is another way of putting this.

March 17, 2019

The endorsement of most recommendations by both The government and the alternative vindicate the findings by QC Hayne. Not sure why the vested groups are indignant.

Richard Brannelly
March 28, 2019

With respect SMSF Trustee Mr Hayne's recommendations will have a major cost impact on all financial planners and their clients - not just the bad apples. In reality the bad apples leave and the honest operators carry the can. As someone who has read the report and findings in full I think it is fair to say Mr Hayne sees very little value in financial advice and it is quite likely this is due to his lofty and secure financial position. Every human on the planet is to a large extent the sum of their life experiences. It is unfortunate that someone blessed with financial security who doesn't share the same issues and worries as 99% of Australians - didn't think more broadly about the real issues as we might have got better solutions?

Tony Reardon
March 14, 2019

I'm not sure that anyone would disagree with you about the need for broad financial advice for many people, but I don't think that is what the report is arguing. It simply says that superannuation has a sole purpose test which is “... of providing retirement benefits ...” and that broader advice, while worthy, doesn't fall under that rubric and thus money within superannuation cannot be used to pay for it.

Some types of advice could be argued as to whether they are or are not within the sole purpose and the report simply says that this must be considered before agreeing to pay for it from superannuation. I would guess that lifestyle coaching, budgeting, property and tax advice would definitely be outside.

If the consequence of this is that people won't pay for this advice, then was it a good thing before since they weren't getting it for free, they just didn't realise how they were paying?

Shelley Fisher
March 14, 2019

I would like to offer Mr Hayne free financial advice so he can see the hours and hours of analysis and strategy work that goes into assisting a client with their goals and objectives.
How dare he question my integrity and that of 80% of my fellow advisers.
What is most disappointing is our "associations" (read, FPA, AFA and the like) are doing nothing to support and counteract the bitter analysis from Mr Hayne and his team.
I am becoming more cynical by the day and worry for the future of my industry.

Fortunate Advisor
March 14, 2019

I agree that the actual way advice is delivered by those of us that focus on the Client seemed to be lost in the Royal commission examination. The voice of the industry is lost due in the main because of the dominant Licensees being the conflicted organizations.

Without changes to Approved product lists conflict will not disappear a point completely ignored or overlooked. As there is no mention of a need to change this aspect of the vertical aligned.

Our costs of delivery have and will increase and the advice will be less accessible. So clients will ring call centres for advice and not know what are the experience or qualifications of those they are speaking. I suggest Mr Hayne ring them for advice on maximising his Transition Cap see how it goes.

I feel confident about the future although my business model and client engagement approach needed is an evolution from today. It is just disappointing the brand is damaged at the moment.

Allan Wilson
March 14, 2019

I am sure MR Haynes has never had to do anything so grubby as ask a client for a fee, had he done so he would find that people hate paying fees of any kind. In 30 years of Financial Planning and offering clients a choice of paying me a fee directly, or deducting it from an investment/super, they have overwhelmingly chosen deduction from product even though the amount was the same!
For Risk advice of course all are happy to pay for a recommendation that doesn't go through for health considerations? NO they don't, even though the adviser has had to do an SOA, application and follow up.

Then there is of course the grubby process of selling insurance as people don't buy it however I wouldn't want to raise such an odious topic before such an august personage in his rarefied atmosphere.

March 14, 2019

Another interesting newsletter, BTW. Thank You.

In your editorial, you say: “…When he heard about this newsletter, we spent 20 minutes on his portfolio and investing. Then 15 minutes on my sun spots. I thought we were about even but I paid him $250 for the honour of his time….”

I’m a mortgage broker. Welcome to my world.

March 17, 2019

Martin, the mortgage brokers fraternity must be popping the corks. It was close to the end of the party. Well played, I tip my hat.

March 14, 2019

Excellent points Graham. It's a step backwards for advice.
Hayne's interpretation seems to be more aligned with an adviser charging a percentage of funds under management - which is something I believe ASIC was trying to move away from.


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