Commissioner Hayne has taken a hit at the financial advice industry for its “dishonesty and greed” in the Royal Commission’s interim report.
Hayne said financial advisers who charge for doing what they do not do is dishonest and giving advice that does not service the client’s interests, but profits the adviser is equally dishonest.
“No matter whether the motive is called ‘greed’, ‘avarice’ or ‘pursuit of profit’, the conduct ignores basic standards of dishonest,” he said. “Its prevalence and persistence requires consideration of the issues of culture, regulation and structure.”
Hayne highlighted that the general response to scandals like Storm financial has been to blame the misconduct on “a few bad apples”, but given that generally similar conduct occurred in all of the major entities, the Commissioner said the excuse no longer stands.
“It ignores the root causes of conduct, which often lie with the systems, processes and culture cultivated by an entity,” he said.
Hayne delved into the Future of Financial Advice (FoFA) reforms, and determined that the conflict of interest described in the Corporations Act was in fact a conflict between the financial interests of the adviser and the duty it owes to the client. He said generally, the choice between interest and duty has been resolved, more often than not, in favour of self-interest.
“And they are results that, on their face, deny a fundamental premise for the legislative scheme of the FoFA reforms: that conflicts of interest can be ‘managed’ by saying to advisers, ‘prefer the client’s interests to your own’,” he said.
Hayne said conflicted remuneration for financial advice was permitted to continue by grandfathering provisions, but questioned whether they could really be justified today if the premise for the conflicted remuneration provisions is accepted.
“At the time the changes were first made, participants in the industry could say that sudden change in remuneration arrangements may bring untoward consequences for countervailing benefits that would not outweigh the harms of disruption,” he said. “Has that argument now outlived its validity?”
Hayne then recited ASIC’s submissions, which said that any exception to the ban on conflicted remuneration has the ability to create misaligned incentives, which could lead to inappropriate advice.
He rhetorically questioned what answer there could be to those (ASIC’s) observations about advice, given that in three out of every four cases examined, the advisers appeared to have preferred their own interests to those of the clients.