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2019: The transformation of advice

The team at ifa looked back at some of the key moments in the world of financial advice in Australia in 2019, all stemming from one day in February.

The Hayne final report and its aftermath

By Adrian Flores

It seems like practically everything that has happened in the world of financial advice in 2019 has been influenced by the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry handed down by commissioner Kenneth Hayne on 4 February.

“All too often advisers have preferred their own interests against the interests over clients, despite having an obligation to pursue the best interests of their clients,” Mr Hayne said.

“Providing a service to customers was relegated to second place. Sales became all important.”

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The report gave 76 recommendations, focusing on misconduct around areas including advice, broking, insurance and remuneration, along with calling for changes to the industry watchdogs and accountability measures.

The government has since indicated it would follow through on all 76 recommendations.

Perhaps the most contentious of them within the advice world has been Recommendation 2.4 relating to grandfathered commissions.

“Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable,” commissioner Hayne recommended.

The ban would eventually pass through the Parliament in October, but not without some resistance from the Association of Financial Advisers. Upon the passing of the bill, AFA chief executive Philip Kewin called the outcome “devastating” for all affected advisers.

“We recognise grandfathering does not impact all advisers and indeed many see it as a blight on our industry that needs to be removed. We also recognise that banning grandfathered conflicted remuneration will remove another of the layers of opaqueness that fuels negative perceptions of financial advice,” Mr Kewin said.

“However, the outcome will be devastating for some advisers, particularly those, who in good faith borrowed money to kick start or grow their client base, and now will not have time to review their clients whilst trying to maintain an income to repay a loan on an asset that now has no value.”

On the other hand, the Financial Planning Association of Australia supported the phasing out of grandfathered commissions on investment products. However, the FPA criticised the legislation for having no additional details or steps in place to ensure customers will benefit from the change.

“Removing commissions must result in a genuine reduction in product fees or the rebating of the commissions to consumers, and we haven’t seen details of how the government expects this will work,” said FPA chief executive Dante De Gori.

Another recommendation raising the ire of a particular sect of the advice community has been Recommendation 2.5, stating that life insurance commissions should “ultimately be reduced to zero” unless there is a clear justification for retaining them.

However, it looks like there will be little movement on life insurance commissions other than what has been put in place by the existing Life Insurance Framework, with ASIC’s review into life insurance commissions scheduled to take place sometime in 2021.

“ASIC will consider this recommendation and factors identified by the royal commission in undertaking its post implementation review of the impact of the ASIC Corporations Life Insurance Commissions Instrument 2017/510, which set commission caps and clawback amounts, and which commenced on 1 January 2018,” the regulator said.

One person who’s come forward to set a clear justification is the chief executive of dealer group Lifespan Financial Planning, Eugene Ardino, saying such a ban would be against the public interest as clients will move on to inferior products.

“Many financial advisers will say that if clients don’t want to pay a fee for advice, then that’s their problem and it’s too bad if they get inferior insurance or none at all, and it’s more important for the industry to make the transition to a profession,” Mr Ardino said.

“However, I think this is a callous attitude which puts the needs of the advice community ahead of the public interest.”

Further, despite attempts from the FPA to create a joint initiative with five other professional associations to self-regulate the industry the moniker Code Monitoring Australia, the government followed through on Hayne’s Recommendation 2.10 and establish a new disciplinary system for advisers.

With the government working towards establishing the new body in early 2021, subject to the passage of legislation that will be introduced into the Parliament next year, the FPA and the AFA both saw the writing on the wall and abandoned Code Monitoring Australia.

“We do not think that it is prudent to establish CMA as a new monitoring scheme that will be superseded within a short period, resulting in a duplication of costs and compliance obligations for our members and the financial planning profession broadly,” said FPA chief executive Dante De Gori.

AFA chief executive Philip Kewin agreed on the same basis.

“We need to avoid adding complexity, further duplication and cost to the regulation of financial advice,” he said.

Based on the events, it looks like the fallout from the Hayne royal commission looks set to continue well into 2020.

AMP sends its planners packing

By James Mitchell

The royal commission was the catalyst for significant change at the group, including the appointment of a new leadership team following the departure of former CEO Craig Meller and chairman Catherine Brenner in 2018.

Following the release of the royal commission final report in February, AMP chairman David Murray said the recommendations establish a solid industry framework and provide a strong basis for setting AMP’s future direction. 

“The royal commission’s final report will be a turning point for the industry, which has rightly been heavily criticised for its mistakes,” Mr Murray said.

“AMP notes that the benefits of vertical integration remain available for customers while acknowledging that conflicts of interest need to be more effectively managed. The proposed regulatory changes will require serious and determined effort to implement but, with the support of industry, should deliver better outcomes for customers.”

The company held its annual general meeting (AGM) in May, where new CEO Francesco De Ferrari gave one of his first public appearances since taking up the top job in December 2018.

The chief executive said any large transformation of a company that has “been through such a crisis” needs to be anchored in its true sense of purpose.

“AMP’s sense of purpose goes back 170 years. Many of the older buildings in which we operate still feature the Amicus statue, with the Goddess of Plenty standing above a family. It also bears a Latin inscription, which translated in English means ‘a certain friend in uncertain times’.”

But AMP advisers were thrown into significant uncertainty and a crisis of their own after the group announced on 8 August that buyer of last resort (BOLR) arrangements would be reduced from 4x revenue to 2.5x.

Within a week of the announcement, hundreds of advisers received a termination letter from the company.

Over subsequent weeks, ifa communicated with a handful of AMP advisers who wished to remain anonymous, fearful that going on the record and speaking to the press would do them no favours with AMP.

We learned that many AMP advisers were facing a negative equity dilemma; under the new BOLR valuations, their businesses would be worth less than what they had borrowed to pay for them.

In an exclusive interview with ifa, AMP group executive of advice Alex Wade answered the tough questions many advisers would like to know the answers to. For starters, what was it about those that have received termination letters that made AMP decide they should no longer be part of the group?

“It’s really about having sustainable businesses for the future,” Mr Wade told ifa. “There may be some that are not quite profitable today but with a few tweaks would be very profitable. There are some who may be a one-man band that may be very strong in its existing capability with an existing adviser, but then how sustainable is that for the long term? I’m not sure.

“For us it is about looking at each adviser, each practice, how they sit and where they could benefit – for them and their clients. It is about identifying the best need for the adviser and their client. That may see a lot of mergers. It is about looking at each individual practice and seeing if they are sustainable, whether we can help them be sustainable.

“Obviously, there are a lot of disruptive changes to the industry. Grandfathered commissions and those sorts of things that are impacting the economics. But realistically we are trying to retain the best advisers in the best way for their clients that creates a sustainable business for the future.”

Those outside the network knew AMP advisers had a good thing going; the four times revenue promise was unheard of anywhere else in the industry. Did Mr Wade and the new leadership team think these high valuations should never have been made in the first place?

“I have personal views on some of the decisions that we inherited,” Mr Wade said. “But honestly, we are just focusing on going forward. That’s why you saw that huge write-off number. We came in, there were some things that we needed to deal with around legacy and we wrote it off. I think the feedback and support from investors was strong. The revalue of BOLR was part of that, to realign those businesses to market value.”

Ampfpa CEO Neil Macdonald said his members intend to hold AMP accountable for the severe financial, reputational and psychological harm it is inflicting on its own advisers. In October, the association announced that it had selected Corrs Chambers Westgarth to investigate legal action, including a possible class action against AMP Financial Planning.

The IOOF court case

By Lachlan Maddock

What was supposed to be a show of force for APRA in the aftermath of the royal commission backfired spectacularly when the Federal Court dismissed its case against the Independent Order of Odd Fellows.

The saga began on 6 December 2018, when the prudential regulator filed court proceedings to disqualify five individuals, including IOOF Holdings chair George Venardos and managing director Chris Kelaher, from acting as a ‘responsible person of a superannuation trustee’.

It also sought to issue directions to IOOF Investment Management Limited (IIML) and impose additional conditions on IIML, Australian Executor Trustees Limited (AET) and IOOF Limited (IL).

APRA alleged that on three separate occasions, IIML and Questor Financial Services Limited (a subsidiary that Kelaher was also responsible for) contravened the Superannuation Industry (Supervisions) Act by compensating beneficiaries from their superfund’s reserves rather than the trustees’ own funds or third-party compensation.

IOOF’s share price plunged 36 per cent following the news, and Mr Kelaher and Mr Venardos stepped aside.

The charges came after a horror showing at the royal commission, where Mr Kelaher’s flippant response to commissioner Hayne’s questioning drew the ire of stakeholders and observers. When asked whether APRA had previously tried to resolve the issue with IOOF, Kelaher infamously replied that they had a ‘robust, active’ dialogue with the watchdog.

Mr Kelaher also wrote in a letter to APRA that IOOF’s decision to reimburse members from the fund reserves passed ‘the pub test’ in terms of members’ best interests.

But what should have been a coup for APRA quickly turned into a full-scale rout after Federal Court Justice Jayne Jagot dismissed the case and ordered the watchdog to pay IOOF’s costs.

“None of APRA’s claims of contraventions of the SIS Act against the respondents are sustainable with the consequence that there is no foundation for the making of any disqualification orders and the further amended originating application should be dismissed,” Justice Jagot said.

The primary drivers of Justice Jagot’s decision was a ‘fundamentally inadequate’ approach on APRA’s part, including an overreliance on IOOF documents and insufficient information on IOOF’s systems and procedures for dealing with wrongdoing.

“There is an evidentiary vacuum when it comes to the existing systems and procedures making it impossible to perform the kind of analysis that would be required for APRA to make good its claims,” Justice Jagot said.

Justice Jagot said that minutes upon which APRA had relied were “not required to record everything that was said” and that APRA dubiously justified the so-called “profit motive” of IOOF’s decision to reimburse beneficiaries from their own reserves.

The case also settled the question of whether a trustee is required to exhaust all other means of risk management before resorting to the use of reserves.

“SPS114 contemplates that the ORFR [Operational Risk Financial Requirement] is available for all operational risk events and not just those where there was no insurance or third-party liability,” Justice Jagot said.

“This concept of the ORFR being a last resort only is a construct of APRA’s.”

While Justice Jagot’s decision was based more on APRA’s failures than the idea that IOOF had not committed any wrongdoing, the watchdog APRA opted not to appeal the decision.

“Litigation outcomes are inherently unpredictable; however, APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner,” wrote APRA deputy chair Helen Rowell in response to the decision.

“APRA still believes this was an important case to pursue given the nature, seriousness and number of potential contraventions APRA had identified with IOOF.”

APRA had not taken action to disqualify superannuation executives this decade, and following the judgement, it’s uncertain whether they’ll try something this high profile again anytime soon. While additional licence conditions APRA imposed on IOOF in December remain in force, the case is a blow to the watchdog’s power.

And although IOOF cancelled executive bonuses for 2019, citing poor share prices, Mr Kelaher still received a $2.6 million golden handshake.

Retirement income gets a look under the microscope

By Sarah Simpkins

After 27 years of compulsory super being in place, the federal government revealed at the end of September it would be commissioning an independent review into the retirement income system.

The inquiry will look at the three pillars of the existing retirement income system: the age pension, compulsory superannuation and voluntary savings.

Its aim is to cover the current state of the system and how it will perform in the future as Australians live longer and the population ages.

The Productivity Commission had urged for the review in its report on the efficiency and competitiveness of superannuation.

But former ACTU secretary and one of the founders of the superannuation system, Bill Kelty, has slammed the Morrison government for initiating the retirement income review.

“For God’s sake, leave super alone!” Mr Kelty, former RBA board member and Labor party member, urged at the launch of Crescent’s think tank in October.

“Stop all the changes in super. Stop all this nonsense. Stop threatening it all the time. Leave it as it is. For God’s sake, leave it alone so that the next generation can get confidence again in the system.

“Leave the superannuation retirement system alone. People are sick and tired of government coming in and reviewing it and making decisions about it.”

The review is being taken on by an independent three person panel, consisting of Michael Callaghan, AM, a former executive director of the international monetary fund and former senior Treasury official, along with Carolyn Kay, a finance sector veteran, and Deborah Ralston, a professional fellow in banking and finance at Monash University, a member of the RBA’s Payments System Board and chair of the Alliance for a Fairer Retirement.

An industry alliance including the Association of Financial Advisers as one of its members welcomed the review, but it had five questions it felt the government should address.

One of them asked where are there gaps or issues that indicate a lack of fairness in the existing three-pillar system, while another asked what are the defined objectives of super and the age pension and how should they work together?

Super has notably gained more public scrutiny through 2019.

The industry’s assets are predicted to almost double in the next decade, with KPMG forecasting Australian super will reach $5.4 trillion in 2029.

It was touched upon in the royal commission, with industry funds coming out on top – but some experts, including finance journalist Adele Ferguson, criticised the inquiry for being too soft and having too short a time frame.

“Superannuation – a $2.8 trillion industry – it got two weeks,” she said at a Morningstar investor conference.

Since the commission, APRA and ASIC have somewhat kicked up their policing in the sector.

Earlier this year the Treasury Laws Amendment Bill 2019 was passed, providing APRA with the power to take civil action against trustees and their directors for breaching their obligations to members, including the duty to act in member’s best interests and important controls over the transfers of ownership of trustee licences.

The prudential regulator, with its newly gained authority in the space, noted it will be having “difficult discussions” with super trustees that fail to produce positive outcomes for their members.

“Are you going to get better or get out,” APRA chairman Wayne Byres warned.

And while industry reacted to new regulatory pressures in certain ways, such as looking to follow a trend of consolidation to use the compliance capacity of a larger entity, Liberal backbenchers questioned if the superannuation guarantee should rise to 12 per cent.

Currently the super guarantee sits at 9.5 per cent. It will increase by 50 basis points annually from 2021 until it reaches 12 per cent in 2027.

But as the raise has been disputed, others believe 12 per cent is not enough.

Mr Kelty, along with former Liberal Party leader John Hewson, argued for employer contributions of 15 per cent.

In particular, Mr Kelty noted “not one person” in the Morrison government had mentioned touching the guarantee before the federal election earlier this year, declaring “do what you told people you would do, implement the 12 per cent”.

“People are living much longer, and the nature of the wage-superannuation mix has changed,” Mr Hewson said.

“Governments have played a lot of policy games with super and it has become very complicated. In those terms I think that it is reasonable to question whether 12 per cent will meet the objectives. Fifteen per cent is probably a reasonable number, maybe more.”

The Retirement Income Review panel will provide its final report to the government in June next year.

2019: The transformation of advice
The transformation of advice
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