Revelations, regulation and sullied reputations

By

24/04/2018

Australia’s army of competent financial advisers have possibly been more horrified than the general public by the revelations at Justice Kenneth Hayne’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – and that is saying a great deal.

Considering that long-time commission opponent Treasurer Scott Morrison sprang into action late last week promising tougher penalties for corporate criminals, you can see there is a white-hot anger among the public, most of whom haven’t been affected.

And after Kelly O’Dwyer’s lamentable performance on the ABC’s Insiders on Sunday, refusing to admit the government was wrong to delay the royal commission, it was almost a relief to note Prime Minister Malcolm Turnbull’s subsequent comment from Berlin that it was a “political mistake” to have done so.

I am one of the many people who naively imagined that most of the bad news was already in the market, thus making the commission unnecessary. I was wrong to take that view, partly because I could not imagine any respected institution (such as AMP) being so stupid as to mislead regulator ASIC – no less than 20 times – on the breathtakingly simple question of whether clients were being charged for non-existent advice.

Commonwealth Bank also staggered most people when news emerged it had been charging deceased clients’ estates, on top of all its other sins already revealed, and we are only halfway through this batch of hearings.

Meantime, advisers have been feeling a bit like Catholic clergy at the height of the furore over institutional child abuse; the many have been tainted ineradicably by the actions of the few.

Reputations built up over a working lifetime’s care and attention to clients’ needs may not have been entirely swept away but they’ve come close. Anyone in a public bar at the moment who reveals they are a licensed financial adviser will probably find conversations drying up in mid-sentence.

So, what does the future hold for them?

The news is not great.

Firstly, it now looks as though the commissioner is going to be granted more time and, with that, more money to pursue his inquiry further. The public shaming will continue.

It was always a stretch to imagine Hayne could provide any form of detail in his initial report, which is due to be filed in preliminary form by September 30.

That date smacked a lot of political compromise but now there appears to be a serious political push to get to the bottom of any rottenness in the industry, and that means an extension.

There will be a number of recommendations in Hayne’s report aimed at demolishing the remaining areas of conflict in the advisory industry. It’s the big institutions, rather than the advisers, who will be getting most of that in the neck.

So we are approaching a situation where the big banks, in particular, are looking to get out of the financial advisory business, at the same time as the legislators are probably going to be thinking along exactly the same lines, if for different reasons.

For at least a decade, the big players made hay from their vertically integrated model, until in 2013 the Future of Financial Advice (FoFA) legislation came along and spoiled the game somewhat.

Banks love businesses that earn them a return on equity (ROE) of 15 per cent or more a year. Given that they can readily earn about 19 per cent or better from lending on housing, and wealth management has turned into a reputational black hole that now earns them less than that 15 per cent hurdle, there’s a scramble round the door marked ‘Exit’.

It’s going to be interesting to see how CBA’s planned float of Colonial First State Global Asset Management goes. There will be many moving parts, most particularly the degree to which the big bank sells down. But what is becoming clear is that the two will be worth more separate than together. CFSGAM is reportedly worth somewhere between $3.7 billion and $4.8 billion, to Goldman Sachs states.

Where will that leave the advisers? Work on the assumption that they will scramble to be a part of any structure that allows them to operate as independently as they can.

But there is one near-certainty coming that will affect everyone in the industry, and you can thank the big institutions’ behaviour for this.

The pile of paperwork and the compliance burden will get bigger, rather than smaller – on that you can rely.

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