There can be no more grievous indictment of a service provider than that they continually charged for a service that was never provided, Mike Taylor writes.
At a time when the financial planning industry has been under immense, critical scrutiny, the release by the Australian Securities and Investments Commission (ASIC) of its Report 499, ‘Financial advice: Fees for no service', has to be viewed as a major ‘ball drop' on the part of the major banks and AMP.
The degree to which the findings revealed in ASIC's Report 499 have let down the industry can be measured by the following statement from the Minister for Revenue and Financial Services, Kelly O'Dwyer: "… What's been revealed today by ASIC's report, and ASIC is the regulator for banks, is a very serious failure in financial advice with the major banks and also with AMP. They have been charging clients over a number of years for fees when no service was actually being provided".
It does not matter that in a number of instances the banks self-reported their failings with respect to the issues raised in the report, the simple facts of the matter are that Report 499 will now be regularly cited by the critics as a reason why financial planners cannot and should not be trusted.
Perhaps more importantly, Report 499 does not involve the actions of a few "bad apples" or the provision of bad advice, it points to a situation of client fees being improperly harvested via poor institutionalised oversight or even maladministration.
It also does not matter that virtually all of the instances covered by Report 499 related to the industry as it existed before the Future of Financial Advice (FOFA) legislation was implemented in 2013. The collapse of Storm Financial Limited also occurred pre-FOFA and is also frequently quoted.
What matters is that ANZ, NAB, CBA, Westpac, and AMP licensees have been obliged to pay approximately $23.7 million in fee refunds and compensation to over 27,000 customers for charging advice fees without actually providing financial advice and that figure is likely to grow as work continues on the issue.
As bad as the reputational damage to the industry might be from this report, the instances it cites will come as little surprise to the many planners who have worked inside the wealth management operations of the major institutions over the past 20 or 30 years because it represents a manifestation of commission-based remuneration, particularly trailing commissions
This is how Minister O'Dwyer explained it on national radio: "… it can be that someone has gone along and they've seen a financial adviser and in that very first meeting the financial adviser has had the client sign a fee agreement, which involves a one-off payment for the initial advice and then an ongoing fee for the adviser to monitor that customer's circumstances going forward.
"And it could well be that that was never actually delivered, there wasn't a review each year and in fact that financial adviser might've left the bank and passed the file on to someone else who again has never actually actioned it."
In many ways, the findings of Report 499 could be interpreted as a validation of many of the things which financial planners found objectionable about the FOFA legislation as it was first drafted by the former Labor Government, particularly the elimination of commissions and the imposition of the opt-in arrangements.
With the benefit of 20/20 hindsight, it can be argued that opt-in would have eliminated the risk to both planners and their employers of being accused of charging for advice that was never delivered. In the meantime, the critics, including the industry funds, are shouting "I told you so".