The long-awaited recommendations from the Parliamentary Joint Committee Inquiry into Financial Products and Services were handed down earlier this evening by the Committee’s Chair, Bernie Ripoll MP.
… there is no one silver bullet …
The news for the financial services industry is that there is no one silver bullet that will solve the issues that prompted the Ripoll Inquiry in the first place.
Instead, Mr Ripoll says the eleven recommendations handed down by his Committee must be adopted as a package of initiatives in order to have the desired outcome.
Each of the eleven recommendations, either separately, or in concert with other recommendations, are intended to:
- Increase the professionalism of the financial services industry
- Instill greater confidence in consumers of the value and importance of financial advice
- Protect the consumer from inappropriate advice
Key issues include:
Adviser Remuneration
After exhaustive submissions from many interested parties representing advisers, regulators, consumers, adviser representative bodies and institutions, the Ripoll Inquiry recommends that:
“…the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.”
Speaking earlier tonight on the ABC’s Lateline Business program, Mr Ripoll made it clear that his Committee wanted to see an end to any adviser remuneration practices that may lead to a conflict of interest. While the intent is clear, the devil may be in the detail as to how this will best be executed.
Note that the language of this recommendation refers to ‘ceasing payments from product manufacturers’, rather than more specific or direct language such as ‘banning commissions.’
Tax Deductibility of the Cost of Financial Advice
By making the cost of financial advice tax deductible, the Committee is acknowledging the need to make financial advice as accessible to as many Australians as possible:
“The committee recommends that the government consider the implications of making the cost of financial advice tax deductible for consumers…”
The benefits of tax deductible financial advice are immediately apparent, with probably hundreds of thousands more Australians able to afford financial advice, and advisers potentially expanding their client base
Fiduciary Duty for Financial Advisers to Act in Clients’ Best Interests
In part connected to the issue of adviser remuneration, the Committee has recommended that:
“… the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers … requiring them to place their clients’ interests ahead of their own”
If the Corporations Act is amended as recommended by the Ripoll Inquiry Committee it will clearly enshrine the responsibility of the adviser to more than simply ‘know your client’.
Mr Ripoll indicated this recommendation should be taken into account when Government and industry consult to determine the future structure of adviser remuneration, and is a clear example of the proposition that the eleven recommendations need to be considered as a package rather than eleven separate initiatives.
Education, Competency Standards
The Committee recommends the formation of a new body that will oversee the competency and conduct of planners, in a move that would form part of an ongoing trend to raise qualification and competency standards for new and existing financial advisers:
The committee recommends … establishment of an independent, industry-based professional standards board to oversee nomenclature, and competency and conduct standards for financial advisers.
Initial industry reaction has been very supportive of the Ripoll Inquiry Committee Recommendations.
The Report provides a pathway for the profession to become a trusted profession in the eyes of consumers
AFA CEO, Richard Klipin, told riskinfo his Association welcomes the Report and believes it is well balanced: “The Report provides a pathway for the profession to become a trusted profession in the eyes of consumers.” It is now time to move forward as a profession and move on from the distraction of internal debate,” said Mr Klipin.
Meanwhile, institution representative association, IFSA, has also welcomed the Report.
“The Committee’s recommendation seeking a fiduciary duty for financial advisers is a win for consumers and a win for the professional standing of the advice industry,” said IFSA CEO, John Brogden, adding, “The debate over conflicts of interest should now be put aside, enabling the industry to move forward on a solid professional foundation”.
On the related issue of adviser remuneration and fiduciary duty, Mr Brogden observed, “If a fiduciary duty for financial advisers is adopted, we do not believe that ceasing remuneration paid to financial advisers from product manufacturers is required.”
Other important recommendations made by the Committee include providing ASIC more power to deny, suspend or cancel a licence, developing a statutory ‘last resort’ compensation fund for investors and other initiatives.
The eleven recommendations are:
Recommendation 1
The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.
Recommendation 2
The committee recommends that the government ensure ASIC is appropriately resourced to perform effective risk-based surveillance of the advice provided by licensees and their authorised representatives. ASIC should also conduct financial advice shadow shopping exercises annually.
Recommendation 3
The committee recommends that the Corporations Act be amended to require advisers to disclose more prominently in marketing material restrictions on the advice they are able to provide consumers and any potential conflicts of interest.
Recommendation 4
The committee recommends that the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.
Recommendation 5
The committee recommends that the government consider the implications of making the cost of financial advice tax deductible for consumers as part of its response to the Treasury review into the tax system.
Recommendation 6
The committee recommends that section 920A of the Corporations Act be amended to provide extended powers for ASIC to ban individuals from the financial services industry.
Recommendation 7
The committee recommends that, as part of their licence conditions, ASIC require agribusiness MIS licensees to demonstrate they have sufficient working capital to meet current obligations.
Recommendation 8
The committee recommends that sections 913B and 915C of the Corporations Act be amended to allow ASIC to deny an application, or suspend or cancel a licence, where there is a reasonable belief that the licensee ‘may not comply’ with their obligations under the licence.
Recommendation 9
The committee recommends that ASIC immediately begin consultation with the financial services industry on the establishment of an independent, industry-based professional standards board to oversee nomenclature, and
competency and conduct standards for financial advisers.
Recommendation 10
The committee recommends that the government investigate the costs and benefits of different models of a statutory last resort compensation fund for investors.
Recommendation 11
The committee recommends that ASIC develop and deliver more effective education activities targeted to groups in the community who are likely to be seeking financial advice for the first time.
Both Mr Ripoll and Shadow Minister for Financial Services, Superannuation and Corporate Law and fellow PJC Committee member, Chris Pearce, used the expression “…no silver bullet” this evening to emphasise the fact that there is no ‘quick fix’ to the issues confronting the financial services industry and that solutions will be found in a collaborative approach from stakeholders across a broad range of issues.
All those interested in accessing the full Report (152 pages plus appendices) of the PJC Inquiry into Financial Products and Services in Australia can click here.
The simple solution to remuneration to advisers is easly set. All ASIC have to do is set the maximum that can be charge in any product or purchase of a product via the PDS. eg. The timbercorps of this world that allowed 10% commissions would not see the light of day. Most product suppliers have it set at around 4% entry fees/commissions. ASIC must take some responibilty as every PDS cross’s over their desk for their approval… cheers David
I agree. If fees/commissions are capped at the PDS level, to say the 4%, this will stop the storm/timbercorp debacles.
I recently saw a client who was charged a $4,000 fee on a $50,000 investment. He would have got the same from me for $2,000 – 4% entry fee. How is the direct fee in the client’s ‘best’ interest?
What a waist of time!!
When will it be realized that the current system works…. complaints seem to be coming from those that opperate outside the regular system (and products).
Maybe a medicare type system if “they” really want change (& even more cost to pass back to the consumer)??
The issue isn’t so much the cost of the fees, but the advice that was given to generate the fees. I.e. the Storm issue was that additional gearing was recommended to increase the FUM size and hence the fees generated (regardless of whether this was suitable for the client). 4% on $50,000 + Geared $50,000 is still more than 4% on just a $50,000 total investment. (Capping of fees would have made no difference).
It’s idiotic to think a fee for service will remove that issue either, as the fees charged would just reflect what the adviser wanted to make in the above scenerio (He would probably still justify it on a FUM basis).
No matter what charging basis is used there will always be the potential for dodgy (or unaware) advice which is provided to generate a dollar for the adviser. If there isn’t a finacial gain or benefit for the client, then any fees charged regardless of how small are too expenses. That’s why I thought it appropriate and on the money for the report to recommend higher levels of fiduciary care, in that the advice must be in the best interest of the client (Which 90% of advisers I’ve ever talked with have always supported). We just need to make it too hard for the sharks or idiots that don’t know better to operate within our industry.
Good to see the Ripoll report kept things logical and didn’t become an overrection which would only benefit certain parties positioning for market share behind the BS of needed reform.
PS> On the Topic of products like Timbercorp, you need to keep in mind it was a 10 year product with no additonal fees/commissions paid through to the adviser after the initial payment, so thats only a 1% commission per year. Most products with a 4% upfront will also pay up to 1% per year ongoing. I for one have done a lot of work in recent years for clients with failed Agri Investments which was all covered from that initial upfront, so where is the real issue, cheaper than fixing up a damaged managed fund portfolio? The current Agri collapses were off the back of the ATO’s “failed” attempt at messing with non-forestry, not the fact they paid 10% commission, only it wasn’t so failed in the end in the ATO’s perspective, as it managed to decimate the sector. (Any business with 30-70% of revenue sources cut off due to BS court action would likely fail, not just Agri).
More accountability and transparency from advisers is always welcome but the dilemma is that if commissions are limited then low asset clients may become unservicable (ie, why would I assume all the risk of giving advice to a client with $50,000 if the most that I can earn is $500 before licensee costs ?).
One idea might be to cap the advisers total remuneration form ALL sources (client, product provider etc) at some arbitrary limit, say 4% for asset balances less than $500k, with no limit above that (wholesale client) and no limit below $20k (the curent nil SOA limit).
naturally, if this was the known limti for all advisers then competiton would aris eot go below this (eg “My fee is capped at just 3.5% of your balance etc”).
Would that work ?
I think some advisers do over charge, but most are fair and in any case changing to a fees based only model will a. Not stop dishonest advisers b. Penalise the small investor. Basically the system works and should be left alone.
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