RC report released, raises serious questions about advice laws and regulations

In the interim report for the royal commission handed down today, commissioner Kenneth Hayne said the conclusions recorded in an ASIC report examining the files of clients that had received super advice were very telling.

“In 75 per cent of the files that ASIC reviewed for the purposes of its report, the adviser did not demonstrate compliance with the requirements of Section 961G to give ‘appropriate advice’. In 75 per cent of the files reviewed, ASIC found that the adviser appeared to have prioritised the adviser’s own interests in breach of Section 961J,” the interim report said.

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“In 10 per cent of the files reviewed, ASIC had significant concerns about the impact of the non-compliant advice on the customer’s financial situation.”

Mr Hayne said the results demonstrate the validity of a basic observation of the world: that the choice between interest and duty is resolved, more often than not, in favour of self-interest.

“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.

“Experience, too often hard and bitter experience, shows that conflicts cannot be ‘managed’ by saying, ‘Be good. Do the right thing’. People rapidly persuade themselves that what suits them is what is right. And people can and will do that even when doing so harms the person for whom they are acting.”

While the report acknowledged that the FOFA reforms prohibited the payment or acceptance of ‘conflicted remuneration’, the conflicted remuneration provisions, it said, also reflected compromise by allowing for some forms of conflicted remuneration to continue to be received.

Concerns around commissions and advisers not acting in the best interests of clients were also flagged by counsel assisting Michael Hodge in the closing address for the superannuation round of hearings.

Mr Hodge said one of concerning matters raised in the past couple of weeks is the ability to charge or allow others to charge member fees, which are then paid to financial advisers in circumstances where the member doesn’t receive or could not have been receiving the services.

The decision by superannuation providers to charge or maintain grandfathered trailing commissions and other forms of conflicted remuneration is also concerning, he said.

“Another decision of concern is the decision to delay, or at the very least not expedite the transition of accrued default amounts to a MySuper product with, it would seem, one apparent effect being to entrench members for a longer period of time in legacy products with trailing commissions,” he said.

ASIC gets a slamming

Treasurer Josh Frydenberg made a point of noting the failings of the corporate regulator, ASIC, in capturing and punishing misconduct.

“This interim report also makes clear that while behaviour was poor, misconduct when it was revealed when unpunished, or the consequences did not meet the seriousness of what has been done,” he said.

Often, in cases of misconduct, little beyond an apology from an offending entity or an immaterial infringement notice was forced by ASIC, the royal commission found. 

“Too often, entities were treated in ways that would allow them to think that they, not ASIC, not the parliament, and not the courts, will decide when and how the laws will be obeyed,” Mr Frydenberg said. 

“This is clearly unacceptable, and cannot continue,” he said. 

For example, earlier this month, the royal commission heard that ASIC allowed a 96 per cent penalty to CBA after it misled consumers in its marketing. Further, ASIC allowed CBA to draft a media release on the issue.

SMSF Adviser has long reported its fears that the smaller end of town is a disproportionate focus of ASIC’s compliance action. It’s significantly easier for the corporate regulator to capture non-compliance in a suburban firm than it is at one of the major banks. 

Law firms specialising in financial services have similar concerns. You can read more about what to prepare for in a post royal commission environment here.