Diagnosing bank cancer
The incentive structure is the problem, not ownership
Instead of pre-empting the financial services royal commission, it might be more prudent for politicians to wait for its recommendations. Yesterday, the government announced a $70 million funding boost for the Australian Securities and Investment Commission, proposing to embed integrity officers into the big banks and the beleaguered AMP. Today, the Greens have announced a policy to break up the big banks and transfer the consumer protection functions of ASIC over to the Australian Competition and Consumer Commission. These ideas are worth exploring, but if politicians jump the gun in responding to Kenneth Hayne’s inquiry, there is a risk that they may misdiagnose the problem.
Hiving off the wealth management arms of the banks, which is already happening, is not going to get rid of the conflicts that bedevil financial advice, for example, and which have led to scandals like fees-for-no-service.
In simple terms, a financial adviser has a conflict of interest when their statutory obligation to consider their client’s best interest in recommending a financial product is at odds with the adviser’s desire to maximise the fee income generated by that product. Imagine that a client is looking for advice on which managed fund to invest their money in. One fund has great performance but pays a lower fee to the adviser. Another fund has poor performance but pays a higher fee to the adviser. As a rule, most financial advisers in this situation will recommend the fund that pays the higher fee to themselves, regardless of how it performs for the client. Often that fund is owned by a bank, which also owns the financial advisory network that the adviser is aligned with or employed by … but not always.
A completely independent financial adviser can and very often will face exactly the same conflict between their own interest and that of their client. The conflict is bedded into the remuneration structure, which is why ethical advisers are moving to a fee-for-service model paid by the client and charged by the hour or as a flat percentage of the client’s assets, regardless of which underlying investment product is chosen.
The dynamic is exactly the same for insurance salespeople and mortgage brokers. Such conflicts persist because clients find financial products difficult to understand, and until these products go belly up, no one really knows whether they’re in a good one or a bad one. Calculating future interest repayments on competing mortgages, digesting the fine print on various insurance products, or analysing the past and likely future performance of various superannuation funds is completely beyond most of us. Truth be told, it is also beyond most financial intermediaries. The people who design and manage these products are highly qualified financial whizzes. The people who flog them to us – correction, tailor their financial recommendations to suit our circumstances – are not. Deep down, clients know it and advisers know it, which is why they haven’t been prepared to charge, and why clients haven’t been prepared to pay a fee for their advice out of their own pockets.
In fact, the less said about advisers’ remuneration the better … hence you’ll often hear advisers or brokers say things like “oh I’ll take it out of the product” or “it’s only one per cent”. Boil that right down and, when we go to any financial intermediary, we all want the same thing, regardless of our circumstances: to get as rich as possible as fast as possible with as little risk as possible while paying the lowest fee possible. That is, we want the impossible. Whatever advisers recommend, they can’t be held accountable for delivering it. Shifts in interest rates, share market corrections, acts of God: all provide an easy out clause for the financial intermediary. The result? Consumer – and, for that matter, regulator – expectations of financial professionals are very low, and we have an industry full of sharks.
Integrity officers located within banks and employed by the corporate watchdog might help. However, the Greens point out that idea is not new, and that there were 41 secondments from ASIC to the banks between 2009 and 2014, part of what the Greens describe as part of the “soft touch” approach that created the problem. The Greens’ plans to break up the banks and shift ASIC’s consumer powers over to the ACCC might help. Outside the royal commission hearing in Melbourne this afternoon, Greens leader Richard Di Natale called for [$] “lengthy criminal sentences” for banking executives who commit crimes, and said there was a “cancer at the heart” of the banking and financial services industry.
Let’s be clear where the cancer lies. Over and over, from one scandal-plagued decade to another, whether it’s in investment or insurance or mortgages, and regardless whether the parent entity is a bank or a boiler room, the root cause of the worst behaviour comes back to the sales commission paid by the product manufacturer to a financial intermediary who has a brazen conflict of interest. Which is why the Productivity Commission last week recommended a ban on trail commissions in mortgage broking, and why the Greens have proposed a ban on all commissions, although it was the recommendation that received the least coverage today. It’s the incentive structure that’s the problem, not the ownership structure.
since this morning
Reserve Bank governor Philip Lowe has reiterated [$] expectations that the next interest rate movement will be “up, not down”. The RBA yesterday left the cash rate at 1.5 per cent, marking a record two years on hold.
Royal commissioner Kenneth Hayne has raised the prospect that National Australia Bank may have committed a crime by taking money from superannuation customers to which it was not entitled, The Australian reports [$].
The Turnbull government’s $444 million grant to the Great Barrier Reef Foundation contravened its own guidelines for the allocation of such funds, environmental lawyers and governance experts have told the ABC.
IN CASE YOU MISSED IT
The SMHreports that Emma Husar has accused a state Labor parliamentary colleague – understood to be shadow minister Prue Car – of deliberately “isolating” her and excluding her from media events within her own electorate. Meanwhile, a former employee of Husar claims [$] she received “insensitive and brutal” treatment during six months of working as a staffer.
Malcolm Turnbull will commit [$] to underwriting new dispatchable power generation in a bid to get his National Energy Guarantee through the Coalition party room next week, while a series of demands by Victoria and other Labor states are reported to have left the NEG “hanging by a thread”.
According to the AFR, NBN will begin deploying [$] new technology to increase the capacity of its struggling hybrid fibre-coaxial network, which had its rollout halted last November. The planned upgrade to the HFC network, mainly old pay-TV cables, will reportedly bring some three million homes a step closer to gigabit speeds.
The Guardian reports that Labor has committed to removing the arbitrary National Disability Insurance Scheme staffing cap, a legacy of the Coalition’s 2014 federal budget, which disability advocates say forces the scheme to rely on contractors and outsourcing.
Australia’s road safety strategy is failing, according to the Australian Automobile Association, with an 80 per cent increase in cyclist fatalities in the past year.
Paddy Manning is contributing editor (politics) at The Monthly and has worked for the ABC, Fairfax, Crikey and The Australian. He is also the author of three books, including a recently updated unauthorised biography of Malcolm Turnbull, Born To Rule?
Instead of pre-empting the financial services royal commission, it might be more prudent for politicians to wait for its recommendations. Yesterday, the government announced a $70 million funding boost for the Australian Securities and Investment Commission, proposing to embed integrity officers into the big banks and the beleaguered AMP. Today, the Greens have announced a policy to break up the big banks and transfer the consumer protection functions of ASIC over to the Australian Competition and Consumer Commission. These ideas are worth exploring, but if politicians jump the gun in responding to...