ifa reflects on a turbulent 12 months for an industry in constant transition
On 25th June – as 2014 reached its halfway point – newspapers and TV stations from Perth to Parramatta pounced on the nation’s largest bank and explosive accounts of corruption and cover-ups in its financial planning arm.
For readers of ifa, the stories were largely unsurprising. Many of the details may have been unknown, but the conflicts of vertical integration and culture of KPIs and sales incentives underlying the CBA scandal have long been debated on this website.
And yet, the bubbling over of what Fortnum boss Ray Miles calls “our industry’s biggest secret” into the psyche of mainstream Australia, is a development that has undoubtedly affected every adviser – aligned and non-aligned, risk and investment, salaried and self-employed.
For most advisers, this was a bad day – one on which the entire profession was tarnished by the actions of a rogue few (and most especially, by their owners and managers who created the twisted system that allowed them to thrive).
It has not been uncommon – throughout the year – for advisers to talk of feeling ashamed by the story, of uncomfortable conversations at barbecues and in living rooms.
Ultimately, however, history may show that this was a good day for financial advice – the day that institutional ownership began to be widely questioned and the notion of ‘advice as distribution channel’ began to unravel.
Over the course of the year – perhaps sparked by the CBA affair or perhaps in spite of it – the groundswell support for independence has also continued unabated. All of the lobby groups and associations representing the various strands within the non-aligned community have reported an increase in queries, both from advisers and clients who have voiced increasing disillusionment with the institutional/distribution model of financial planning.
In addition, consultants specialising in AFSL applications have drawn a direct connection between the government’s rebuke of the Commonwealth Bank and a rise in applications for a licence – the first indications of a true boutique resurgence.
Even within the aligned dealer groups, there are whispers of change as practice principals demand – finally – greater control of their business affairs, from product recommendation to software usage and social media freedom.
For too long, advisers have simply been seen as product middle-men, with the financial wellbeing of their clients a side benefit to the core goals of returning dividends to the institutions’ shareholders and bonuses to their bosses.
Efforts to drive professionalism have always been doomed when they focused on individual behaviour standards and not the structural deficiencies driving the industry.
While the headlines of 2014 have been painful, the legacy may prove sweet. At its core, 2014 was the year that clients fought back against the might of Australia’s most powerful bureaucracies – and advisers had to choose whose side they were really on.
Advisers could be forgiven for thinking that the FOFA debate would have died with 2013.
Those with a more peripheral understanding of or interest in our national politics not surprisingly assumed that the election of the Abbott government – which had long advocated a repeal of elements of Labor’s FOFA agenda – would spell the end of the seemingly endless back-and-forth and see advisers move on from being the political football flavour of the month.
Those more acquainted with Australian Westminster democracy were less surprised to see the parliamentary debates about commissions and kickbacks in the advice sector only escalate in the wake of the election, with the hung parliament not doing any favours for those lobbying on advisers’ behalf.
In December 2013, just weeks after ifa’s 2013 Year in Review feature went to press, then-assistant treasurer Arthur Sinodinos released the government’s draft legislation and draft regulations to amend FOFA – and in so doing cracked open a hornets’ nest that is still buzzing angrily almost 12 months later.
The draft legislation travelled throughout the halls of Parliament House – from one committee to another – and increasingly that debate fell over into the mainstream news cycle, gathering steam for those who opposed the changes.
With momentum gathering for the anti-amendment coalition – led by Labor and the Greens inside parliament and the industry super funds lobby and a few key Fairfax-stable commentators outside – there were several months during the year when it appeared unlikely that the amendments would ultimately pass.
This got the attention even of those advisers who usually took only a cursory interest in industry politics or regulatory affairs.
With an Abbott victory looking certain in late 2013 and the Coalition’s position on financial advice regulation clear, many advice firms – and indeed, some institutional wealth managers – had stopped implementing the costly red tape provisions contained in Labor’s FOFA, leaving them potentially exposed should the regulator come knocking.
However, in a last-minute negotiation during the winter parliamentary session, acting assistant treasurer Mathias Cormann struck a deal with the increasingly powerful Palmer United Party (PUP) to save the fledgling amendments. Going against a number of previous public statements, PUP leader Clive Palmer supported the government’s agenda, in exchange for a number of conditions – including an enhanced register of financial advisers, which has dominated internal industry debate for much of the latter half of 2014.
However, the relief was short-lived as ultimately that deal become null and void as tensions within the PUP frayed and Tasmanian Senator Jacqui Lambie ditched her party and crossed the floor to vote against the FOFA amendments.
This was a disappointing end to a year of highs and lows for politically-engaged advisers. However, a number of senior Coalition figures have assured the financial services community the government remains committed to its FOFA agenda, meaning that it is likely the debates will continue into 2015 - for better or worse.
Action and inaction
As well as the reputational fallout, the Commonwealth Bank also had to contend with a regulator making up for lost time.
ASIC – which would keep its eyes closely on the bank throughout the year – imposed licence conditions on CBA dealer groups Financial Wisdom and Commonwealth Financial Planning on 16 May.
The conditions require both businesses to undertake “significant further work” in relation to the compensation process for customers. The regulator has also forced CBA to employ an independent monitor.
That said, ASIC’s main gripe with the CBA was the bank’s communication with affected customers rather than the compensation process itself.
Macquarie Private Wealth – which was also implicated in the senate inquiry into CBA and the performance of ASIC – was compelled to write to its current and former clients about “possible remediation for flawed financial advice” on 15 August.
The remediation process is part of an enforceable undertaking with ASIC which was imposed in January 2013.
Another financial planning dealer group that fell foul of ASIC was Custom Wealth Solutions (CWS), which had its licence suspended for three months after entering into receivership on 11 June.
Queensland-based licensee SMSF Partners quickly snapped up the homeless advisers.
The good news to come out of the story was that the advisers’ commissions were secured despite the collapse of CWS.
Another AFSL holder, Sentry Financial Services, also drew the regulator’s fire for failing to deliver proper statements of advice to SMSF trustees on 21 May.
The move against Sentry appears to be part of a concerted effort by ASIC when it comes to targeting SMSF advice.
Professional Investment Services put a difficult chapter behind it on 28 July with the finalisation of ASIC’s adviser monitoring program, which was the result of an enforceable undertaking put in place by the regulator in December 2010.
Adelaide-based licensee PGW Financial Services entered into an enforceable undertaking with ASIC on 30 July.
The regulator discovered “deficiencies” in the advice PGW delivered to its clients, as well as failings in the licensee’s supervision of its authorised representatives.
But it wasn’t just financial advisers who caught the eye of ASIC in 2014. Industry Super Australia was rapped over the knuckles on 24 June regarding its misleading ‘Compare the pair’ advertisements.
The industry fund lobby group agreed to amend the ads to ensure future versions clarified the terms ‘average retail super fund’ and ‘average industry super fund’.
The increase in the number of ‘knuckle raps’ by ASIC suggests pressure has been mounting on the regulator in 2014.
The final report of the senate inquiry into the regulator’s performance delivered a scathing assessment of ASIC’s response to the CBA advice scandal.
On top of that, the federal Budget saw ASIC’s funding further cut by $120 million over the next five years.
As the government withdrew the funding, it instructed ASIC to “adjust its priorities” amid a national drive to cut ‘red tape’.
One of the regulator’s top priorities – along with the monitoring of SMSF advice – is its investigation of the risk advice and life insurance sectors, as evidenced by the release of a much-anticipated report on the subject in October.
ASIC did not mince its words, pointing to the “unacceptable level of failure” in the life risk sector.
Having reviewed more than 200 files from “large, medium and small” licensees, ASIC determined that 37 per cent of advice reviewed “failed to comply with the laws relating to appropriate advice and prioritising the needs of the client”.
The ASIC report found there is a high correlation between high upfront commissions and poor-quality advice. However, the regulator stopped short of recommending a ban on commissions on risk advice.
ASIC deputy chairman Peter Kell made it clear that the regulator was not recommending or suggesting that commissions be banned.
“Commissions for life insurance are allowed under FOFA – they are part and parcel of the life insurance industry,” Mr Kell said. “ASIC’s message to the industry is clear: the industry needs to ensure that remuneration and incentive structures do not undermine good-quality, compliant advice.”
The regulator made clear that it is up to both the insurance industry and advisers to fix the supposed problem – and ASIC made clear it will not tolerate finger-pointing.
Under the microscope
Revelations of scandalous advice practices at the CBA may have caused the greatest stir in 2014, but the ‘slow burner’ issue throughout the course of the year was David Murray’s Financial System Inquiry (FSI) – the first report into Australia’s financial system since the 1996 Wallis Inquiry was off and racing.
Treasurer Joe Hockey duly announced the terms of reference for the FSI on 20 December 2013.
Mr Murray’s appointment raised a few eyebrows. As a former chief executive of the CBA, it seems unlikely he would be one to ruffle any feathers within the banking establishment.
His chief assignment has been to ensure the continued funding of Australia’s economic growth and to examine the capital adequacy of the big banks.
But for the advice community, there are a few items in the terms of reference that catch the eye.
Competition within the financial services industry is a big-ticket item on Mr Murray’s agenda, as is the intermediation of savings through the banks. An invitation to comment saw the FSI sifting through 280 submissions representing the competing interests of the various players in the financial services sector.
Mr Murray handed down his interim report on 15 July to a muted response.
Aside from its initial assessment that the financial system has performed “reasonably well” in meeting the financial needs of Australians since the Wallis Inquiry, the interim report drew few concrete conclusions.
However, it did raise concerns about the amount of direct leverage within superannuation – as well as the lack of evidence of “strong fee-based competition” in the sector.
Mr Murray also found that the banking system was, “on balance”, competitive.
But advisers’ ears pricked up when Mr Murray commented that he would not be averse to the banks being forced to divest their wealth management arms.
The final report of the FSI was yet to be released when ifa went to print, but the advice community will be watching with interest to see which, if any, of Mr Murray’s recommendations are adopted by the Coalition government.
One issue discussed in the FSI interim report that has taken hold is the education levels required of financial advisers. This renewed attention to the inadequacies of RG146, along with the findings of the earlier inquiry into the CBA and ASIC, led to the creation of yet another government inquiry in late July.
The membership of the inquiry overlaps with the Senate Economics References Committee, which spent much of 2014 grilling ASIC and the advice industry.
The parliamentary joint committee (PJC) inquiry into proposals to lift the professional, ethical and education standards in the financial services industry received submissions up until 5 September.
Thus far, much of the debate within the inquiry has focused on whether financial adviser education should be governed by a self-regulatory organisation or a government body.
The latter proposal, championed by the Financial Services Council, has been widely denounced by the rest of the industry. But it remains to be seen what the committee’s final report will contain, and whether it will lead to higher education requirements for advisers.
Concurrently with the creation of the new PJC inquiry in July, the government established a working group to discuss the practicalities of the aforementioned register.
The deliberations of the working group – which were closely reported by ifa – resulted in an announcement by Minister for Finance Senator Mathias Cormann on 24 October.
The register will include the name, registration number, status and experience of every financial adviser in Australia – and, controversially, AFSL ownership details.
The register, which will be funded by a $5 increase to the ASIC lodgement fee, will be “up and running” by March 2015, according to Senator Cormann.
Consolidation gives way
With the banks increasingly under pressure and the original FOFA legislation looking more powerful than ever, the mid tier of financial advice – which many had predicted to be a dying breed – fought back with a vengeance.
This was specifically the case for Australian Unity’s proposed acquisition of Premium, which M&A consultant Steve Prendeville said is a perfect example of a financial services business which sits in the “grey space”.
Australian Unity’s proposed acquisition of Premium is just one of the many mergers and acquisitions by a large financial group that carries what Mr Prendeville calls an “independent mandate”.
IOOF is another example of a “grey space” dealer group that has been active within the market. Its proposed acquisition of Shadforth Financial Group parent company SFG Australia in May was a further indication of an emerging trend in 2014 between non-aligned dealer groups and boutique firms wanting to achieve growth but not wanting to do so with a bank.
This desire on the part of businesses for growth with a major institution, while remaining outside of the control of the product distribution of the banks, became a firmly-established cultural trend in 2014 and as the culture developed, the position of the banks within the market continued to diminish.
“Cultural alignment and independence of product choice is very important to the remaining independent and boutique dealer groups,” Mr Prendeville said. “It is unlikely we will see the banks come back into the buying space anytime soon.”
The acquisition of Paragem by technology provider Hub24 in September marked another interesting milestone within the financial services industry and within the market.
The merger between the boutique financial advice firm and the technology provider saw the birth of what Paragem managing director Ian Knox said is “Australia’s first vertically-integrated model between technology and advice”.
Mr Knox added that the merger between the technology provider and the boutique licensee is strategically important for the industry and will prove to be a “better model than conflict through ownership by an investment or insurance product manufacturer”.
Hub24 chief executive Andrew Allcock said the merger was an “innovative move which would result in significant benefits to Paragem’s client base and a win-win for consumers in the post-FOFA era”.
September also saw activity from ASX-listed company ClearView in its intention to acquire 100 per cent of dealer group Matrix Planning Solutions.
ClearView boss Simon Swanson said the deal between the life insurer and wealth management company – if approved by Matrix’s shareholders – would create a combined company that is unique, being the only “integrated life insurer and wealth manager that is not aligned to a major institution”.
“This transaction, combined with our recent results, will provide further momentum in ClearView’s goal of building Australia’s best financial advice and financial services business,” Mr Swanson said.
Clearview announced in October, following its proposed merger deal being unanimously agreed upon by Matrix’s shareholders, that the move would deliver a great “cultural fit between the two companies”.
“The merger of such a quality dealer group with ClearView Financial Advice Pty Ltd will be instrumental in achieving our goal of building a major financial advice and financial services business that is not aligned to any major institution,” ClearView said via a statement on the ASX website.
The line of mergers and acquisitions that has been occurring within the “grey space” of the financial services industry has opened the gates for members of the financial advice industry looking to achieve growth but not through the channels of the banks.
Late 2014 also saw the arrival of a significant new player, with Ray White-backed mortgage brokerage Loan Market entering the space with a new dealer group called Wealth Market.
With an official launch (and granting of an AFSL) yet to be held, it is too soon to contemplate whether other real estate giants might follow and what impact that might have.
But undoubtedly an entry of such scale – without the baggage of financial product manufacture and distribution – has the potential to be a game-changer among these shifting sands as we approach 2015.
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