This round of hearings will consider the conduct of financial services entities that offer financial advice to consumers. The Commission will examine the treatment of consumers by financial services entities, whether they meet community standards and expectations, their compliance with the law, and the adequacy of current regulatory and legal schemes for the financial services sector. The Commission will investigate these matters through specific case studies in evidence.
The hearings commenced on 16 April 2018 with Ms Rowena Orr QC highlighting the rapidly growing financial services sector in Australia, as well as ongoing misconduct within financial advice firms.
Figures quoted by Ms Orr show there were more than 25,000 financial advisors registered in Australia at 1 April 2018, which represents an increase of approximately 41% from 2009. The financial advice industry was estimated to be worth $4.6bn in revenue in 2015/16, with late 2017 figures showing that approximately 48% market share is held by the four major banks and AMP Limited.
A large portion of public submissions to the Commission relate to inappropriate financial advice. Issues raised have included customers being advised to borrow funds against private property, when they requested conservative or low risk investments.
The Commission has been informed by ASIC that it is aware of $383.117 million paid in compensation since 2008 to clients who have suffered financial loss because of the provision of inadequate financial advice or failure to provide services under an ongoing service arrangement. $218.939 million of this compensation is being paid to more than 305,000 customers by five major entities:
CBA ($117.8 million)
ANZ ($49.314 million)
NAB (41.313 million)
AMP ($4.715 million)
Westpac ($3.276 million)
Throughout this second round of hearings, the Commission will consider specific case studies, examining the forms of misconduct occurring within the financial advice sector that include the following:
Fees for no service
In his evidence to the Commission, the Deputy Chairman of ASIC, Mr Peter Kell stated that, in ASIC’s view, ‘fees for no service’ have been charged due to businesses prioritising revenue over service provision. According to Mr Kell, these businesses’ revenue collection systems were better developed than systems ensuring that clients received the ongoing services that they were paying for.
The Commissioner characterised ‘fee for no service’ in three main categories ‘selling what you can’t deliver, selling what you won’t deliver and selling what you don’t deliver’.
Matters for the Commission to consider include:
AMP and its related financial service entities admitting to having internal business rules under which they continued to charge clients fees 90 days after services had ceased. AMP also admitted to obtaining fees for no service.
CBA, Commonwealth Financial Planning Ltd and Count Financial Planning acknowledging misconduct in relation to charging clients fees for no services.
Other types of fees for no service scrutinised in the hearings include ‘orphan clients’, who were charged fees but did not have a financial adviser allocated to them. This could occur where a client’s financial adviser had left the industry and had not been replaced.
Inappropriate financial advice
Inappropriate financial advice can be broadly defined as advice which does not comply with the best interests obligation and related obligations in the Corporations Act 2001 (Cth), or which fails to take into account a client’s circumstances.
Mr Kell’s evidence also covered ASIC’s figures that 75% of advice provided by the four major banks and AMP failed to demonstrate compliance with the best interests duty and other obligations. Mr Kell also discussed figures, which are yet to be published by ASIC, that show 90% of advice related to the establishment of self-managed superannuation funds does not comply with the best interests duty, though he noted that this does not immediately show that consumers have suffered a detriment.
The Credit and Investments Ombudsman told the Commission that the largest category of complaints it received about financial advisers was about inappropriate advice (39% of complaints). This was followed by excessive or incorrectly charged fees (28% of complaints), conflicts of interest (15% of complaints), and failure to follow a customer’s instructions (around 11% of complaints).
ANZ and its related entities RI Advice Group and millennium3 acknowledged at least 56 instances of potential misconduct relating to improper financial advice.
Westpac and BT Financial Group acknowledged that their financial advisers engaged in conduct falling below community standards and expectations.
AMP, AMP Financial Planning Pty Ltd, Charter Financial Planning Ltd and Genesys Wealth Advisers Ltd demonstrated specific forms of inappropriate advice, as well as systematic issues concerning recruitment of advisers, vetting of advice and client remediation.
Improper conduct by financial advisers
Improper conduct, such as falsifying documents in support of higher lending levels and higher investment (particularly in-house products), will also be scrutinised. Examples include:
NAB employees who incorrectly witnessed binding beneficiary nomination forms, affecting the validity of binding beneficiary nominations for more than 2,500 customers.
Authorised representatives of ANZ aligned companies falsifying documents, misappropriating customer funds and engaging in misleading and deceptive conduct.
Ms Orr explained that the Commission will look at issues such as whether misconduct was due to particular culture, what role remuneration and incentives have had in this sector, and why misconduct has continued undetected for many years.
Read our previous articles on the Banking Royal Commission: