The separation of banking from advice services is a necessary outcome from the Royal Commission together with changes to financial planner licensing and the ownership of clients, according to Connect Financial Service Brokers principal, Paul Tynan.
“The essential difference is that banking has a short-term time horizon and advice has a long-term time horizon. This most basic of contrasts has been the foundation for disastrous decision making resulting in high profile failings that in turn led to calls and the need for a Royal Commission,” he said.
The challenge for regulators and businesses alike is how they deal with this whilst shedding an obsolete structure designed to support product, distribution and third-party participants – while simultaneously developing new frameworks demanded by customers to deliver digital era services with transparency and rigour.
One of the first post Royal Commission casualties will be business advice models based on the ownership of clients. The transfer of licensing away from the dealership level to the adviser level will also be another inevitable outcome.
Tynan in February used a submission to the Royal Commission to suggest the following:
- Be wary of advice from the sector’s failed captains of industry as they created the vertical integration and bad advice mess in the first place!
- The four major banks should be allowed to merge or be sold and foreign institutions encouraged to enter the Australian market; and
- AMP’s business model has not delivered shareholder value in 20 years and needs to be broken up or sold to an Australian or foreign entity.
Licensing & Advice
- The advice sector’s transition to a ‘true profession’ is now unstoppable and individual adviser licensing inevitable. This simple move would eliminate industry issues like vertical integration, proprietary approved products lists and client ownership issues and lead to greater advice transparency for consumers;
- The advice industry licensing regime must be transparent and clearly distinguishes for consumers the difference between proprietary advice (e.g. bank /industry fund employees giving advice on proprietary product) and nonproprietary advice
- There needs to be separation of banking, distribution, product and advice;
- Australia has too many industry associations and they should be encouraged to merge;
- The Government has many different advisory boards and it is important that they appoint ‘independent thinkers’ (non-industry insiders) onto these boards in order to get more of a balanced and practical view; and
- Buyer of Last Resort (BOLR) arrangements must be reviewed in light of client best interests being enshrined in law.
Education & Ongoing Professional Development
- Academic and ongoing professional development pathways to attract new industry entrants that support consumer confidence must be robust and world’s best practice – professional member associations and government must work together to make this happen;
- There must be processes in place to ensure that the new legally mandated education standards are not exploited by education providers and other third party groups and conflict of interest needs to be closely monitored; and
- Education must utilise and adopt latest digital age and world’s best practice learning processes – however there must be an emphasis on soft skill capabilities.
Lessons Failures & Inquiries
- The industry has an embarrassing litany of failures that have reflected badly on the sector as a whole resulting in immense reputational damage and loss of consumer confidence
- Far too many of these disasters involved a major bank and confidence will only return with processes that provide greater accountability and penalties;
- Bank lending practices must be reviewed as a priority. The Storm Financial saga was compounded by the Commonwealth Bank’s (CBA’s) lending practices. If business key performance indicators (KPIs) are based on sale targets, bad advice and bad management practices will continue to happen;
- Small and medium-sized enterprises (SMEs) have been vocal critics citing access to capital and lending as ongoing issues. The small business sector is the economy’s biggest employer and significant contributor to the nation’s GDP – bank lending practices must be reviewed and competition between lenders must be encouraged;
- The self-managed superannuation fund (SMSF) recommendations of the Financial System Inquiry panel chaired by David Murray AO should be adopted;
- Far too many lobbyists, self-interest groups and associations have been allowed to hijack past reform agendas – this must not occur in the Royal Commission; and
- Australian Transaction Reports & Analysis Centre (AUSTRAC) must be strengthened and supported as it’s the first line of defence against criminal activities, money laundering, tax evasion, welfare fraud and terrorism.
Other Issues & Priorities
- Other financial service industries with product/commission features need to move to fee for service – lending products, mortgage, real estate and general insurance;
- Superannuation must be used for retirement purposes only and be the cornerstone of Australia’s saving policy; and
- A review of GST concessions, negative gearing, estate/death planning tax and the treatment of the family home is long overdue.
The Regulatory Outlook
- Industry regulations must be flexible to reflect the pace of change, challenges and opportunities of the new digital world with capacity to adapt new developments and technologies i.e. blockchain, cryptocurrencies and new asset sectors; and
- The Australian Securities and Investments Commission (ASIC) needs to have a policy of employing and utilizing individuals who have industry wide experience and knowledge e.g. financial planners, business development managers, accountants and research analysts.