Navigating moral quandaries in advice: Hayne offers insights on balancing conflicts of interest and duty

At a time when advisers and the broader public are debating the ethics of welcoming superannuation funds, banks, and insurers to expand their footprint in the industry, the financial services royal commission leader Kenneth Hayne has presented a distinctive viewpoint on the moral quandary concerning the duty towards customers and the interests of services or product providers.

Financial Services Minister, Stephen Jones, has strongly implied that superannuation funds could soon be allowed to provide financial advice to their members as was recommended by the Quality of Advice Review (QAR).

However, what remains unclear is how the quality of their advice will be measured, and whether it will be done so against a new “good advice” duty proposed by the QAR, rather than the existing best interests duty.

Inevitably, concerns have been raised about the quality of the advice provided and how members would pay for it.

Speaking at the International Congress of Actuaries in Sydney on Tuesday, Mr Hayne reflected on how certain propositions made in the final report of the royal commission resonate with the present-day landscape, echoing the ongoing debate that has captivated the industry.

Mr Hayne began by asking: “If a customer seeks advice from a supplier about what would suit their needs best, have you ever encountered a case where the supplier has ever gone beyond saying ‘my product, at my price, is best for you’?

“And if the customer cannot make any independent assessment of fitness for purpose and cannot make any useful price comparison, the customer makes the choice to accept or reject what is offered according only to whether the customer trusts the supplier.

“And often the customer does that by reference only to the supplier reputation. So, what happens to that reputation if the supplier sells products to customers that are not appropriate?”

The problems, he said, are further exaggerated if the supplier carries on a business of providing advice.

“Will it be even greater again if the supplier of the advice is remunerated by the maker of the product that the adviser recommends?” Mr Hayne questioned.

“What is the duty that the adviser owes to the client? The adviser holds itself out as providing advice and providing advice is a task different from selling a product. Is the customer entitled to treat the adviser as acting in the customer’s interests? Is duty to client, to act in the client’s interests compatible with the adviser having a pecuniary interest in what product the client buys or how much of a product a client takes?”

Ultimately, Mr Hayne asked: “Can the adviser stand in more than one canoe?”

“Some provisions of the Corporations Act which deal with financial advice speak of a need to manage conflicts of interest. But can conflicts of interest and duty be managed? How?

“Should we be surprised that often, very often, persons whose personal interests conflict with their duty to their client rationalise the conflict in a way that accords with their personal interest? Or is that just being too cynical?

Next, he questioned, “What about regulation?”

“If an industry is regulated, what’s the regulator’s role? Will those who break the law be held to account? … Or will regulatory intervention be a little more than a nuisance or cost of doing business?” Mr Hayne said.

“Will regulatory intervention occur sufficiently quickly to change behaviour in the market? Now those are issues that participants in the market may say are for regulators to confront but if there is not appropriate regulatory response to misconduct, the entire regulated industry will come to suffer,” he continued.

“The so-called bad apples will multiply, public dissatisfaction with the industry generally will increase, and none of that is good for individual participants.”

Mr Hayne also offered the six “fundamental norms of conduct” that he identified during the royal commission, which include: obey the law; do not mislead or deceive; act fairly; provide goods and services fit for purpose; deliver goods and services with reasonable care and skill; and when acting for another, act in the best interests of that other.

“Each of those is widely accepted, well established, easily understood. But of course, all of them will find some reflection in the law. But expressed in the form in which I have, they may provide a more useful framework for judgment than simply saying that an enterprise must obey the law,” Mr Hayne said.

“It may be useful to consider whether the six ideas I have mentioned, sufficiently capture what the public expects and should be entitled to expect when dealing with a commercial entity.”

Finally, Mr Hayne highlighted that “the question for you becomes whether those norms of behaviour or something like them can be applied more widely”.