Hayne royal commission and FoFA

Whether or not they’ve delivered has been exposed to some extent by the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Below is an excerpt from the IPA’s submission to the interim report.

POLICY OBJECTIVE:

Corporations Amendment (Future of Financial Advice) Bill 2011 (the Bill):

The Bill and subsequent legislation implemented the first components of the FoFA reforms. The reforms focus on the framework for the provision of financial advice. The underlying objective of the reforms is to improve the quality of financial advice while building trust and confidence in the financial planning industry through enhanced standards which align the interests of the adviser with the client and reduce conflicts of interest. The reforms also focus on facilitating access to financial advice, through the provision of simple or limited advice.

To this end, the Bill sets up a framework with the following features:

•  a requirement for providers of financial advice to obtain client agreement to ongoing advice fees and enhanced disclosure of fees and services associated with ongoing fees (charging ongoing fees to clients); and
•  enhancement of the ability of ASIC to supervise the financial services industry through changes to its licensing and banning powers.

The reforms also include the introduction of a requirement for advisers to act in the best interests of clients and a ban on conflicted remuneration, including commissions, volume payments and soft-dollar benefits.

Is there evidence of market failure?

As stated above, the policy objective of FoFA was to provide a ordable and competent advice to Australian consumers. According to ASIC Report 224 (December 2010), a survey at the time suggested that 60 per cent to 80 per cent of adult Australians have never used a financial adviser. In the eight years since this report and the introduction of FoFA, which was meant to increase the number of Australians accessing financial advice, we find that the numbers have not changed.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Background Paper 6 (Part A), Some Features of the Australian Financial Planning Industry, 2018, stated: “Public information indicates that between 20 per cent and 40 per cent of the Australian adult population use, or have used, a financial planner or adviser.

The Productivity Commission (PC) observed that 48 per cent of Australian adults indicated having unmet financial advice needs” (Draft Report: Competition in the Australian Financial System, January 2018). Even though the number of financial advisers has grown by 41 per cent from 2009 to 2018.

The PC report found that the five main types of advice sought by consumers were:

1. Superannuation and retirement advice;
2. Loan and investment advice;
3. SMSF advice;
4. Other services – such as estate planning; and
5. Tax advice. 

ASIC Report 562: Financial Advice: Vertically Integrated Institutions and Conflicts of Interest, January 2018, reviewed financial institutions’ approved product lists and found that they comprised 21 per cent in-house products and 79 per cent external products. However, as a result of receiving personal advice from the licensee’s advisers, 68 per cent of the total funds invested by customers were placed into in-house products, with 32 per cent of such funds invested in external products. The ASIC report went on to state that the review found that overall, customers were not better off from the advice and that their best interests were not served.

Of advisers, 44 per cent (both aligned and non-aligned) operated under a licence controlled by the 10 largest financial institutions.

Investment Trends’ 2017 Financial Advice Report found that demand for advice from financial planners is at a record high, with numbers of people intending to access advice increasing since 2013.

However, financial planners are not able to turn this demand into actual clients with planners typically losing three clients for every two they gain. According to the report, one of the main problems is the substantial difference between the amount that Australians are willing to pay for advice ($750 on average) and planners’ estimated cost of delivering advice ($2,500 on average).

Over nine in 10 potential planner clients are open to conducting review meetings with someone other than their planner if it meant a reduction in fees.

Under the Corporations Act, generally before the financial service is provided, a retail client must be provided with a Financial Services Guide (FSG) that contains information about remuneration, including commissions or other benefits to be received by an adviser.

If personal advice is provided, the retail client also generally receives a Statement of Advice (SOA) from an adviser, which includes information about the advice and remuneration and commissions that might reasonably influence the adviser in providing advice.

Before a product is provided, a retail client must further receive a Product Disclosure Statement, which must also include information about the cost of the product and information about commissions or other payments that may impact on returns. By this stage the cost of advice has become more than some consumers are willing to pay. 

Based on the Hayne royal commission, PC, ASIC and Investment Trends reports, the IPA contends that there is sufficient evidence of continued market failure despite the FoFA reforms coming into operation, and that government intervention is warranted through the form of a qualified accountants financial services licensing regime.