Royal Commission Financial Advice Recommendations

Ten of the Banking Royal Commission’s 76 recommendations relate to the key area of Financial Advice.

While other sections of Commissioner Kenneth Hayne’s final report also impact advisers and their clients, it is these ten recommendations on structures and issues surrounding financial advice which, especially when combined as a package of reforms, will have a telling impact on the future of the advice sector in Australia.

The ten recommendations advocated by Commissioner Hayne all relate back to three different issues he says emerged at the Royal Commission hearings in relation to the provision of financial advice, namely:

Fees for no service

Until satisfactory steps have been taken to deal with those involved in the charging of ‘fees for no service’, and to ensure that it does not happen again, the financial advice industry will lack the public respect and trust that is a necessary aspect of any profession.

Poor client advice

Poor advice …too often, is the result of the conflicts of interest that continue to characterise the financial advice industry… Until something is done to address these conflicts, the financial advice industry will not be a profession.

A fragmented and ineffective disciplinary system for financial advisers

“…the existing disciplinary arrangements for financial advisers are fragmented, and hampered by inadequate sharing of information.”

Prefacing his recommendations, Commissioner Hayne offered his view on the history of the advice sector and its ongoing journey to professionalism:

…I do not believe that the practice of giving financial advice is yet a profession

Expressed in a single sentence, that history tells the story of an incomplete transformation – from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice. I say ‘incomplete’ because I do not believe that the practice of giving financial advice is yet a profession.

Reinforcing his view, Commissioner Hayne added that:

For some time now, a financial adviser has been something between a salesperson and a professional adviser.

He also states in his report that in the emerging advice sector of the 1980s, most financial advisers came from a background of life insurance, in which a sales-driven, commission-based culture prevailed and comprehensive advice was not commonly sought or given. “These were the roots of today’s financial advice industry, and the culture has endured,” noted Commissioner Hayne.

The Commissioner also made reference to the implementation of the Future of Financial Advice reforms in 2012 and the attempt within FoFA to address and resolve conflicts of interest as they existed between the adviser and the client, including the manner in which advisers were remunerated.

In a detailed and damning assessment of the nature of institutions, licensees and advisers charging fees for no service, the Commissioner set out Recommendation 2.1:

Ongoing fee arrangements

Recommendation 2.1 – Annual renewal and payment

The law should be amended to provide that ongoing fee arrangements (whenever made):

  • must be renewed annually by the client;
  • must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and
  • may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.

Conflicts of duty and interest, combined with what the Commissioner saw as issues related to lack of adviser independence were the basis for his next five recommendations:

Lack of independence

Recommendation 2.2 – Disclosure of lack of independence

The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.

Quality of advice

Recommendation 2.3 – Review of measures to improve the quality of advice

In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.

Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.

Conflicted remuneration

Recommendation 2.4 – Grandfathered commissions

Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable. (Note that the Treasurer, Josh Frydenberg, in his speech following the public release of the Royal Commission’s recommendations said all grandfathered commissions would cease by 1 January 2021.)

Recommendation 2.5 – Life risk insurance commissions

When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.

(This critical Recommendation 2.5 is addressed in more detail in a separate report – see: Royal Commission Flawed Rationale on Risk Commissions?)

Recommendation 2.6 – General insurance and consumer credit insurance commissions

The review referred to in Recommendation 2.3 should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including:

  • the exemptions for general insurance products and consumer credit insurance products; and
  • the exemptions for non-monetary benefits set out in section 963C of the Corporations Act.

The final group of four recommendations made by Commissioner Hayne focused on disciplinary systems for financial advisers:

Professional discipline of financial advisers

Recommendation 2.7 – Reference checking and information sharing

All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’.

Recommendation 2.8 – Reporting compliance concerns

All AFSL holders should be required, as a condition of their licence, to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis.

Recommendation 2.9 – Misconduct by financial advisers

All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise):

  • make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and
  • where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly.

Recommendation 2.10 – A new disciplinary system

The law should be amended to establish a new disciplinary system for financial advisers that:

  • requires all financial advisers who provide personal financial advice to retail clients to be registered;
  • provides for a single, central, disciplinary body;
  • requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and
  • allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.

Click here to access the Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry.