The Banking Royal Commission’s final recommendations have missed a golden opportunity to address the issues associated with vertical integration, says PPS Mutual CEO, Michael Pillemer.
Referring to the Royal Commission’s ‘root and branch’ investigation into the structural flaws within the sector, Pillemer has acknowledged the Royal Commission’s final report has much merit, with big banks and insurers coming under increased scrutiny.
…I fear the Commission’s recommendations are confined to pruning the branches only
Following the release of Commissioner Hayne’s recommendations, however, Pillemer says in a statement that “I fear the Commission’s recommendations are confined to pruning the branches only, leaving the root of many problems essentially untouched.”
Pillemer says he is perplexed as to why Commissioner Hayne did not address what Pillemer refers to as structural conflicts inherent within vertically integrated businesses. According to Pillemer, many of the issues impacting Australia’s life industry can be traced back to the demutualisation of the major life companies during the 1990s. “Mutual life insurers were owned by their policyholders – they did not have any shareholders,” he says, adding, “Once demutualised, and ASX-listed, shareholder interests took precedence.”
He argues, “It is the fundamental misalignment of shareholder interests with customer interests overlaid with the vertically integrated business model that has been the root cause of most of the scandals and problems identified in the Royal Commission,” and asserts that by not addressing these structural conflicts, “…a golden opportunity has been missed.”
Risk Commissions
…a commission deducted from premium is just another remuneration method that gives greater assurance that the client will take out the insurance
Pillemer has also taken aim at the Royal Commission’s stance on the future of life insurance commissions (see: Government to Consider Mandating Level Commissions…). He says risk commissions have been a soft target: “I understand that advocating for commissions in the current environment is not a popular view. But in my considered view, a commission deducted from premium is just another remuneration method that gives greater assurance that the client will take out the insurance.”
He continued, “Under the recently introduced life insurance reforms, …the caps are the same for all insurers, so there is no conflict or incentive to place business with one insurer over another. In addition, advisers are bound by a best interest duty to their clients and disclosure provisions to ensure transparency.”
Pillemer also asserts that reducing the commission caps will do nothing more to protect advised clients. “All it will do is damage small business advisory practices and result in fewer Australians receiving high-quality insurance advice,” he said.
Click here to access the full statement released by PPS Mutual CEO, Michael Pillemer.
All this talk about vertical integration is misleading. You can say it is the root of all evil and that it is the cause of misery for Clients of advice, but in essence it is standard practice with 90% of financial businesses that provide financial advice.
Even truly independent Financial Advice practices with their own AFSL require and use the support of major platform providers for research, placement and even compliance reviews as it is not financially feasible to do it all.
Also, most people point to the Industry Super Space as an example that is not Vertically Integrated, but in essence they are. The manufacture a super fund, source insurance for their members, and then they run closed shop advice businesses either directly (First State Super) or via joint ventures (Industry Fund Services Ltd – a specialist Adviser Group owned by several industry funds) which limits the choice of the client.
Pointing to Vertical Integration as the source of all evil is simply taking the easy path.
What we need to do is ensure that the Advisers who are employed are actually ethically fit, technically competent and actually follow our Best Interest Duties requirement
Well said Ronald. I do think, however, that vertical integration aside – it is now time to try and understand what actually drove Hayne and where he may be lacking. Has there really been enough thought leadership. He has obviously looked at things from a narrow legal point of view – the corporations act and the conflict of interest seems a focus. The recent article on Terry McMaster in the February IFA issue raises serious questions on the efficiency of the use of $100 million of taxpayer funds. What ever your view on Terry I find the treatment and lack of follow up on his report worrying at least.
well said Michael Pillmer, I said the same in my last message
Don’t kid yourself it is an issue always has been and it narrows the so called clientbest interest”
When you are loved into your companies policies how can you be playing fair
Michael Pillemer,
You are spot on. It’s refreshing to here a man speak the truth, compared to these low-life lying politicians. I’m totally fed up with these lying ignorant bast..….s. The labour party are so stupid that they openly state that they are reigning in the banks while simultaneously launching a frontal assault on the only competition to the big 4 banks(i.e. small adviser firms, and individual broker firms).
The day the royal commission made it’s announcements banks surge almost 10%, broker firms fell 30%. They could not be that dumb to have not have foreseen this outcome.
They have shown that they not only don’t give a toss about these small business’ and the tens of thousands of employees, but they have no knowledge of how the financial sector works. They want to spend lots and lots of taxpayers money, but are just slowly killing off all the taxpayers. They are one disaster after another. God help us all.
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