The Future of Financial Advice legislation has now been in place for more than five years, yet the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has revealed the degree to which major players in the financial planning environment have sought to cling to pre-FoFA commissions.
More importantly, the Royal Commission has revealed the folly of such strategies.
It is now history that AMP Limited was cast in a poor light by the second-round Royal Commission hearings which revealed the degree to which the company had sought to “ring-fence” grandfathered commissions and National Australia Bank (NAB) has emerged in little better odour as a result of the revelations of the lengths to which it went to sustain grandfathering, including during the successor fund transfer processes relating to the establishment of MLC Super.
For the most part, it seems that NAB/MLC ended up doing the right thing with respect to refunding it’s so-called “Plan Service Fee” for superannuation fund members who were receiving no advice but one is left to wonder about an internal culture which gave rise to the notion of “fair exchange of value” to justify retaining fees where no advice was actually given.
Given what the Royal Commission had already heard about AMP Limited, it is hard to conclude other than that too much time was dedicated to trying to prolong the existence of pre-FoFA remuneration structures rather than accepting the inevitable and moving to comply with the new regime.
At the time of writing the Royal Commission still has many weeks to run but what is already evident is that a line is likely to be ruled under virtually all commission-based remuneration, including grandfathered commissions, and that vertical integration will not be allowed to continue as it currently exists.
The Australian Securities and Investments Commission (ASIC) used its Report 562 released in January, this year, to outline its position on vertically-integrated institutions and conflicts of interest and the testimony heard in the Royal Commission appears to have solidly validated the regulator’s view that “there is an inherent conflict of interest between an advice licensees’ interest in selling its in-house products and the customers interest in receiving advice that is in their best interests”.
Indeed, the same might be said of vertical integration and superannuation in circumstances where the Royal Commission’s examination of the events leading up to the creation of MLC Superannuation pointed to shortcomings with respect to protection of members’ best interests in the relationship between the fund trustee, NULIS, and the super administration and wealth management arms of the broader NAB/MLC business.
Of course, many of the issues that have been generated by vertical integration may be overcome as a result of the MLC business being divested by National Australia Bank by the end of next year and by the Commonwealth Bank demerging its wealth management business, however it likely that the Royal Commissioner, Kenneth Hayne will make some specific recommendations which will be acted on by Government.
As Money Management’s Future of Wealth Management Conference will discuss this month, the Royal Commission will result in significant change to the financial services industry and industry participants would be foolish to seek to cling to the past.