Regulation alone won’t solve financial advice woes
More regulation will be the most likely result after the Hayne royal commission hands down its final report. But is this really the answer?
When then financial services royal commission hands down its final report by 1 February 2019, it’s odds-on it will call for more regulation. And the government of the day will duly oblige, rightly fearing the political fallout if it fails to implement the report’s recommendations in the wake of the malevolent behaviour being unveiled.
The legislation will pass the Parliament, giving the regulators more power to keep the top end of town in line. And the regulators, whose reputations have been mauled in Kenneth Hayne’s courtroom, can be expected to finally bite more than they bark.
But will more regulation prove the answer – or will it just be a political panacea for government. I suspect the latter.
Remember, after the Storm Financial implosion in January 2009 came the FoFA reforms (belatedly), taking effect on 1 July 2012.
That legislation addressed conflicted remuneration structures, required financial advisers to act in their clients’ best interests, had an opt-in obligation requiring advice providers to renew their clients' agreement to ongoing fees every two years, and gave ASIC more powers. Yet clearly it was no solution. It led to an acceleration in the vertical integration model, also encouraged by regulators to reduce the number of entities to regulate. The result was to produce the very issues being aired at the royal commission.
What inquiries, including royal commissions, don’t do – but governments that receive their recommendations should do – is question the industry’s structure, the over-arching policy goals and, in this instance, consumer behaviour, before responding. The government can then determine the KPIs for regulatory bodies, perhaps without adding more regulation. But don’t hold your breath.
I contend that the biggest issue that the royal commission has revealed is the implicit acknowledgment that the unethical behaviour of the “big four” and AMP has stemmed from their market dominance. Although the banks publicly extol the virtues of competition, their actions more resemble that of a cartel – happy to compete against each other but a unified front in the face of outside competition.
There’s no better evidence of this than the fact that all have been culpable of much the same crimes, whether it be overcharging, poor and often conflicted advice, misleading regulators, or contravening trust laws. It’s almost like they “conspired” to exploit those opportunities to gouge more fees or commissions.
Despite the politicians and regulators, more competition will enter financial services. Technology will ensure this. Portfolio construction for SMSFs and high-net-wealth individuals is an example. Blackrock has already started replacing active fund managers with artificial intelligence (AI), and it’s only a matter of time before similar services are available on line for retail investors. Also emerging are fund management products with flat fee structures, while the debt markets are seeing unsecured loans via peer-to-peer platforms, many offering products unavailable from the banks.
What government should do on receiving the royal commission’s recommendations is to take the time to get the industry structure right for a digital world. Certainly, look at regulation, but don’t think for a moment this is the complete answer.
But a recent consultation on the introduction of Open Banking, an initiative to increase competition, between Treasury and the ACCC does not inspire confidence. The proposed plan is to make it easy for the “big four” and other ADIs to become accredited to receive data, while the rest of the industry will need to jump through hoops, including demonstrating why they are they are “fit and proper” persons.
The banks, however, seem excluded from this test. How Treasury can reconcile the banks being “fit and proper” in the wake on the royal commission (including recommendations to lay criminal charges against CBA and NAB) suggests a bureaucratic mindset that would do Sir Humphrey Appleby proud.
The issue of consumer behaviour is even harder for governments to address. There is a naïve belief that regulation can save people from themselves. History says it can’t; remember the tulip scandal in 17th century Netherlands, the South Sea bubble in 18th century England and, more recently, the investment by banks in collateralised debt obligations – a primary factor in the GFC.
The fact is parliaments can pass all the laws they like; they will never be able to legislate against greed on both sides of the equation. Every investment carries risk and not just market risk, but risks associated with the promoter and issuer of the product.
The royal commission has clearly illustrated the issuer and promoter risk. The brands of the “big four”, AMP and insurers have been badly tarnished, providing an opportunity for new market entrants to play by different rules. To do so they just need an industry structure that ensures a level playing field for all. If this emerges from the royal commission, then it won’t simply punish past sins, but help create an environment in which a healthy, innovative financial services industry can flourish.
George Lucas is chief executive of Raiz
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