Unintended Consequences

How the Financial Services Royal Commission recommendations could actually reward the banks

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry concluded in February, with Commissioner Hayne making 76 recommendations for wholesale sector reform in his final report. Having had time to digest this, and as we wait to see how the findings will be enacted into law, it’s a good time to reflect the report’s implications for financial advice services – particularly where there might be unintended consequences.

Much of the interest around the Commission has focused on the behaviour of larger institutions like the banks and the clear need to clean up parts of the sector. At Fowler’s Group, as a small, fiduciary financial advisor firm with a genuine track record of transparency and placing our clients’ interests first, we are long way from the kind of unethical behaviours reported in testimonies at the hearings. However, the final report has widespread implications for the whole of the financial advice sector. And with both the Federal Government and the Opposition making a commitment to implementing Hayne’s recommendations, it is worthwhile considering some of the effects that might flow. For example, it’s foreseeable that giving effect to the findings will increase financial advice costs for consumers and end up rewarding the banks.

The Commission hearings demonstrated the need for greater transparency, particularly around financial advice and life insurance products. At Fowler’s we have been reporting on such advice for the past fifteen years – well before this was mandatory. The Hayne Report recommends more rigorous compliance measures as the industry standard. Currently, advisors are required to report on compliance to their customers every two years with the client given an opportunity to continue or cease the advice service. The Royal Commission is recommending this should be reduced to one year, with 30 days for the client to respond by opting back in order for the advice to continue. Complying with such a measure will undoubtedly place a new burden on the financial advisor and likely push up the cost of the financial advice for the customer as a result.

These added cost pressures and the need to put further resources into such compliance will no doubt be a greater burden for smaller operators. The banks by comparison, whose behaviours were at the centre of the Royal Commission, are much better placed to deal with this. We might even end up with a situation where smaller firms are eventually forced out of the sector by the combined effect of losing customers to these cost increase factors and the resources needed for compliance. This would result in a perverse outcome where the banks benefit from the reduced competition and actually be rewarded for the unscrupulous practices that prompted the Royal Commission in the first place.

At Fowler’s, we completely back the aims of the Royal Commission, which reflect the way we have operated since our beginning, while also recognising the need for extensive reform of the financial sector. However, we are concerned that implementing the Hayne Report in full will have unintended consequences. We therefore urge legislators to give careful consideration to these as they consider their amendments – otherwise we will actually end up rewarding bad behaviour and consumers will be worse off for it.

Get in touch with us at Fowler’s Group today and find out how a small, fiduciary financial advisor can really make a difference with building and protecting your wealth.

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