Jayson Forrest is the managing editor of Money & Life Magazine.
A review of the key recommendations in the Royal Commission’s final report into Misconduct in the Banking, Superannuation and Financial Services Industry that specifically looks at the section on Financial Advice that may affect financial planners.
Commissioner Kenneth Hayne has handed down a series of key recommendations that may affect the provision of financial advice. These recommendations have been broken into six sections:
– Financial advice;
– External dispute resolution and consumer compensation;
– Codes of practice, regulators and culture; and
– Additional Government measures.
Part one of the FPA Royal Commission wrap-up concentrates on Section 1 – Financial Advice.The FPA’s full response to all six sections of the royal commission’s final report can be accessed at fpa.com.au.
PART 1: FINANCIAL ADVICE
Recommendation 2.1 – Annual renewal and payment
Ongoing fee arrangements (whenever made):
– must be renewed annually by the client;
– must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and
– may 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.
FPA comment: The FPA supports ongoing fee arrangements that are simple, transparent, fair and deliver on the services agreed to. Advisers should be required to periodically review and renew ongoing fee arrangements, document them and seek the consent of their clients for any fees to be charged.
This recommendation will require amendments to the Corporations Act. The FPA will work with the Government to ensure this is implemented over an appropriate transition period (yet to be determined) and limit application of fee authorisation to non-basic bank products (i.e. super and investment products, rather than direct payments via bank account and simple credit products).
Recommendation 2.3 – Quality of advice review
In three years’ time, there should be a review by Government, in consultation with ASIC, of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice.
The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.
The review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.
FPA comment: The FPA supports the Government conducting a review of the effectiveness of the multitude of reform measures that have been implemented in recent years to improve the standard of financial advice.
However, the FPA notes that the current education and professional standards reforms being implemented by the Financial Adviser Standards and Ethics Authority (FASEA) will not have been fully implemented by 2022, and any review conducted before this date will not be able to judge their final effectiveness.
Commissioner Hayne also makes a number of comments about the current ‘safe harbour’ provision and whether it remains appropriate.
While he does not recommend changing it at this stage, he is concerned that it promotes a ‘tick a box’ approach to compliance, which is at odds with the broad best interests duty that advisers owe their clients.
What is clear is that Hayne considers that regulation of financial services should be principled and based on fundamental norms of behaviour. Exceptions and qualifications, such as the ‘safe harbour’, provision should be eliminated as far as possible.
For this reason, the FPA will look to recommend the Government consider a broader review of financial advice regulation to consider how to reduce red tape, reduce costs, consider what regulation is no longer required, and remove duplication. A system of financial advice regulation that is simple and robust will benefit both consumers and planners.
Recommendation 2.4 – Grandfathered commissions
Grandfathering provisions for conflicted remuneration should be repealed as soon as it’s reasonably practicable.
FPA comment: The FPA supports phasing-out grandfathering provisions over a period of three years, with all commissions on investment and superannuation products to be subject to the Future of Financial Advice reforms. Noting the potential adverse consumer outcomes, which could occur through a phase-out of grandfathering provisions, the FPA will work to ensure Government meets the following principles:
The change is in the client’s best interest – no client will be worse off;
Commission payments are actually refunded to clients and not retained by the product provider where the client has not authorised their payment to their adviser;
Tax relief is provided for any adverse tax consequences (including CGT);
Centrelink benefits are protected from any adverse Centrelink consequences; and
Exit fees be banned in line with the Government’s 2018/19 Budget proposal on both super and investment products.
Arrangements to phase out grandfathering of commissions under the Future of Financial Advice reforms can be established by regulation in a reasonably short timeframe.
Recommendation 2.5 – Life risk insurance commissions
When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.
FPA comment: As with Recommendation 2.4, Hayne broadly considers that exemptions to laws should be eliminated in general, but specifically in relation to conflicted remuneration. However, he recognises that the current Life Insurance Framework has only been in place since 1 January 2018 and that ASIC is due to review it after three years.
The FPA agrees that ASIC should be allowed to complete its review in 2021, and that no further changes to life insurance be made until this occurs.
Recommendation 2.7 – Reference checking and information sharing
All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information‑sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’.
In addition, the FPA recommends that AFSL holders ensure the adviser being recruited has not been subject to prior disciplinary action by the relevant Code Monitoring Body, and any other disciplinary bodies the adviser may be a member of (as per Recommendation 2.10), or are the subject of an ongoing investigation.
All AFSL holders should be required, as a condition of their licence, to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis.
FPA comment: This recommendation seeks to formalise and improve existing breach reporting by AFSL holders to ASIC where there are serious compliance concerns about an adviser.
Hayne has suggested the following definition: “Serious compliance concerns are where the licensee believes, and has some credible information in support of the concerns identified, that a financial adviser may have engaged in dishonest, illegal, deceptive and/or fraudulent misconduct or any misconduct that, if proven, would be likely to result in an instant dismissal or immediate termination; or deliberate non-compliance with financial services laws or gross incompetence or gross negligence.”
Hayne also notes that there is value in this reporting beyond addressing issues with specific advisers, as it may allow ASIC to identify industry trends that warrant a response.
Recommendation 2.9 – Misconduct by financial advisers
All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise):
– make whatever enquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and
– where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly.
FPA comment: This recommendation seeks to formalise the requirement for AFSL holders to investigate misconduct and where necessary, notify and remediate clients. Commissioner Hayne notes that while this does occur in many cases, it is not universal and mandating prompt investigation can ensure that misconduct is not allowed to continue.
All licensees should review ASIC RG 256 and ensure that review and remediation is taken as efficiently as possible where misconduct is identified.
Recommendation 2.10 – A new disciplinary system
The law should be amended to establish a new disciplinary system for financial advisers that:
– requires all financial advisers who provide personal financial advice to retail clients to be registered;
– provides for a single, central, disciplinary body;
– requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and
– allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.
FPA comment: The FPA does not have a position on individual licensing as a model, but supports a complaints and disciplinary system that is simpler and easier for clients to navigate.
It’s important to note that there are significant details on this recommendation for a disciplinary body that would need to be developed before a proper assessment of the pros and cons could occur.
The FPA supports a disciplinary system that has a variety of possible sanctions to supplement ASIC’s banning power and which match the severity of potential misconduct.
FASEA has recently released a Code of Ethics, which all financial advisers will need to comply with from 1 January 2020, and ASIC is in the process of approving code monitoring bodies which all financial planners will need to sign up to in late 2019.
Any new disciplinary body would need to operate consistently with the arrangements for applying and monitoring the Code of Ethics.
For this reason, and noting FASEA Code Standard 1 requires, “You must act in accordance with all applicable laws…”, it would be logical and reduce potential duplication and cost, for ASIC approved code monitoring bodies to fill this function.
FPA CEO Dante De Gori CFP® said the FPA will continue to work closely with Government and the regulators on the implementation of Commissioner Hayne’s recommendations.
“We will keep members informed on any developments regarding the implementation of Commissioner Hayne’s recommendations, as well as continue to monitor the Opposition for its formal response,” De Gori said.
Please note: Due to space restrictions, this article only outlines the key recommendations from the final report that may impact licensees and planners in relation to Financial Advice. The April issue of Money & Life will look at the recommendations to Superannuation.
To read the FPA’s full response to the royal commission’s final report, go to fpa.com.au.