On the same day the Coalition successfully rammed through a windback of financial advice reforms by doing a “dirty deal” with the Palmer United Party, the Murray inquiry found conflicted remuneration structures “undermine” the ability of customers to get quality advice.
If it seems like the two are at odds, they are. No matter which way the government tries to play it, the changes to the Future of Financial Advice (FoFA) reforms are substantial and it is only the banks and a few other vested interest groups that support them.
Indeed Senator Mathias Cormann’s argument that the amendments to FoFA are designed to make advice more affordable by cutting red tape fails to recognise that the current structure of vertical integration is inherently conflicted. It also fails to recognise that cheap advice is good for nobody if the advice is bad or conflicted.
The reality is the Australian banking system is highly concentrated and the expansion of banks into wealth management in the past decade or so makes the issue of vertical integration of paramount importance.
The interim report into the finance system headed by David Murray looks at the concentration of banks and acknowledges the trend of greater vertical integration in the wealth management and superannuation sectors.
However, it stops short of canvassing whether banks should own wealth management divisions or financial planners it seems to accept this structure and seems more intent on changing the disclosure of advisers so consumers can distinguish between those working in a vertically integrated empire and those who are independent.
In other words the interim report seems to be saying accept the problems and conflicts caused by vertical integration but make it easier for consumers to identify if the financial planner is employed or tied to a big institution such as a bank.
This is surprising given the Murray inquiry found that the superannuation system needed to be more efficient, has one of the highest operating costs in the OECD and “competition in the wealth management sector appears to be focused more on securing distribution channels and improving product features, rather than reducing fees”.
When all of this is married with the fact that the big banks dominate the wealth management sector and 80 per cent of the financial planning industry is owned by the major product providers and the massive conflicts of interest that creates, it paints an interesting picture about why the quality of financial advice is “variable”.
As former Commonwealth Bank financial planner and whistleblower Jeff Morris says: “For a big picture report of this nature to canvass secondary issues, such as merely distinguishing between ‘independent’ and ‘aligned’ advice, while ducking the fundamental underlying issue of vertical integration, is disappointing, to say the least”.
But all is not lost as the report concedes that more work is required between now and the final report to see whether vertical integration is reducing competitive pressures and contributing to higher superannuation fees. The report and the windback of FoFA lobbed on the same day Treasurer Joe Hockey told the party room the corporate regulator had “failed miserably” in its duty to protect CBA customers.
The reminder of what happened at CBA’s financial planning division and how the regulator failed to officially investigate the bank 16 months after Jeff Morris had warned it of misconduct and a widescale cover-up designed to dupe customers of compensation, made the Murray inquiry’s take on ASIC all the more interesting. It suggested the following options be considered: ASIC should have an autonomous budget and funding process, conduct periodic legislated independent reviews of its performance to make it more accountable, give it powers to ban products, lift the penalties for misconduct and refine the scope and breadth of ASIC’s mandate.
These are sound options but an effective regulator needs to be more than the regulation it is enforcing. It needs to have the right people working in its ranks. The inquiry makes the observation that regulators face strong competition for “top talent”. “Another hurdle is the perception that APRA and ASIC’s operational independence and effectiveness are unduly hampered by public sector operating constraints.” These are live issues that need to be addressed in the quest to build a regulator that is feared and respected.
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