IT is ironic that the first consequence to flow from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was a massive financial services profit estimated at $22 million amid speculations about insider trading.
The Banking Royal Commission’s final report was made public at 4.10 pm on Monday 4 February 2019. Trading on the ASX had just stopped. Commentators had expected that the final report would recommend banning banks from owning financial advice businesses. Five hours earlier, traders had bought half a billion dollars’ worth of bank shares. The next day bank shares went up dramatically. Those traders made an estimated $22 million profit in a single day.
It’s given rise to speculations about insider trading and fraud.
Commentators had expected that the final report would recommend banning banks from owning financial advice businesses. To everyone’s amazement, the Commission did not ban “vertical integration”, jargon for a financial company manufacturing financial products and giving people so-called financial advice to the effect that they should buy those products.
It was not just commentators who got it wrong. The Commonwealth Bank, the National Australia Bank and ANZ bank had divested themselves of financial advice businesses. Clearly, those banks, too, expected a ban on “vertical integration”.
The Commission’s recommendations do not refer to “vertical integration” at all. The closest any recommendation gets to addressing the obvious conflict of interest inherent in “vertical integration” is recommendation 2.2. The Corporations Act already makes it illegal for a financial adviser to say they are “independent”, “impartial” or “unbiased” if they are not. The Commission has recommended the law should be changed, making financial advisers who are not independent, impartial or unbiased give prospective clients a note explaining that they are not independent, impartial and unbiased and why.
It is unclear what benefits will flow from the note writing.
Further recommendations by the Commission are:
Financial advice fee arrangements should be renewed annually by the client. This will ensure that financial advisers can no longer charge dead people.
Default funds should not be able to charge advice fees.
A person should be able to have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account. This recommendation echoes a recommendation by the Productivity Commission.
It should be made illegal for super fund managers to offer incentives to employers so that employers might choose their fund as the company’s default fund.
Funeral insurance should be classed as a financial product, to put beyond doubt that the consumer protection provisions of the ASIC Act apply.
The Commission has also made a string of recommendations to make the financial services industry watchdogs and regulators more effective. This confirms the Commission’s view that it found that the law was broken in many instances without enforcement and punitive action following. Rather than making new law, the Commission recommends existing law should be enforced.
This is not unreasonable and explains the fairly unexciting nature of the Commission’s recommendations. However, the banning of vertical integration of financial advice services represents a missed opportunity and a blot on the Commission’s copy book.