Considerations for the royal commission
With the second round of hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry commencing in Melbourne next week, there are a number of issues that should be raised.
1. Reference checking
The big four banks do not supply adequate references for their departing financial advisers. In our experience, they withhold information and in at least one case we know of, a bank did not disclose that an adviser had been reported for a breach. In an industry that is trying to increase professionalism, we see this kind of behaviour by banks as being a serious issue.
2. Best interests
It is not possible to act in the best interests of a client if advisers are forced to work from a restricted approved products list (APL) and/or if they are paid a bonus to sell a particular product. There are still many advisers working with restricted APLs and banks are still paying bonuses for certain product sales. This needs to be addressed.
The matter of best interests and the role of life insurance product providers also needs to be addressed. When the Life Insurance Framework (LIF) was introduced, providers argued that one of the reasons LIF was in the interests of consumers was because the cost of premiums would go down. In fact, premiums have gone up. The royal commission should therefore look not only at the behaviour of banking product providers in relation to best interests, but also at the behaviour of the providers of all kinds of financial products.
3. The role of product providers
On that note, there is not an insurance company that does not take business from advisers they know churn from one company to another. They take it because one company’s churn is another company’s new business. The way to fix this problem is first for the life insurance companies to keep a register of these advisers and not take their business, or put them on level commission only, which means that there is less incentive for them to churn business.
4. Adviser education
There is still no clear understanding around how FASEA will operate. It’s one thing to say everyone must have a graduate degree and provide transition arrangements for those with degrees in related fields such as perhaps accounting, commerce, economics, law – but what transition arrangements will be offered to older advisers with 25 years or more experience who do not have degrees? If no transition arrangements are offered, many of these people will disappear from the industry, which will drive up the cost of advice significantly because there will be a smaller number of advisers to service the same market.
The other education issue is that the government is delivering only sticks, no carrots. There is no incentive scheme to become a financial adviser, as there is, for example, via the apprentice scheme for people wanting to work in any of the trades.
If we are serious about building a robust advice profession that helps people build and protect wealth, we ought to be looking at how to attract and keep people working in the industry. This means someone, presumably the government, should be going into schools and encouraging people into the profession, perhaps by subsidising programs that demonstrate how to make a career in financial advice.
5. Professional indemnity
A number of factors are profoundly impacting on both the viability of professional indemnity (PI) providers and the cost of PI premiums and these in turn will ultimately impact on the viability of advice businesses and the accessibility of advice for consumers.
In relation to the viability of providers, there are companies that are in the PI market one year and out of it the next because they’re not making any money. For example, Allianz was in the market last year, this year it is not; AXA is in the market this year but it was not a couple of years ago. We have been lucky to have been able to stay with one company for the last 10 years and we have a track record, but we know it’s been difficult for others.
In relation to cost, premiums can be hefty and when groups want to lower the cost of the premium, they opt for a hefty excess. This obviously impacts the viability of that business because how many claims could it withstand?
Another problem complicating the PI issue is that it is very hard to get any clarity around the new complaints process. There is no information or transparency around exactly how it will operate but as limits have been increased, PI costs will likely increase as well. There also doesn’t seem to be a real understanding of how PI is affected by things like the ability ASIC now has to fine for breaches. We think there should be a mechanism to fine for breaches, but there is a need to examine what the correct mechanism might be.
The government may ultimately decide to create a community PI pool – but that penalises everybody all over again.
ASIC can now also spend funds on industry reform and tax us with higher levies the following year. We think this may give ASIC an incentive to grow its own business. This is an issue which does not yet appear to have been raised, which the royal commission also needs to consider.
7. Direct offers and franchised advice
The royal commission should also look at whether life insurance that is bought direct over the internet or via phone and advice offered by companies operating a franchise model are currently serving consumers well.
The main issue with direct insurance is that while there is ‘automatic acceptance’ on policies, the policies are not underwritten at commencement but at the time of claim, which means consumers might think they are protected, when in some cases, they are not. These types of insurance policies typically have small print that consumers may not read. The other main issue with direct insurance is that it may actually be more expensive to buy than life insurance cover offered via life insurance advisers who consider their clients’ individual circumstances and needs.
In relation to franchise model financial advice, we know of at least one group that runs a bit like McDonald’s. They offer advice solutions that are made the way a hamburger is made – via a step-by-step process. Operators of this model apparently think they don’t need to bother with audits. But in our experience, issues don’t usually arise because there is anything wrong with a process or with documentation, but because of some other incident – perhaps something an adviser said in passing. It’s fringe things that trip people up, so audits are absolutely necessary.
The royal commission is charged with the responsibility of looking at the big picture and in the interests of consumer protection and in the interests of advice businesses, we believe these issues need to be addressed.
Michael Harrison is chair of Synchron
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