What will financial services look like after the Royal Commission?

Royal Commission Financial Services Banking Royal Commission Mike Taylor

10 August 2018
| By Mike |
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What will the Australian financial services industry look like in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry?

There are some things the industry already knows – that the Financial Adviser Standards and Ethics Authority (FASEA) regime will impose minimum degree-level education standards and a code of conduct on financial planners, and that the regulators will be more generously funded and further empowered.

Not certain, but highly likely, is that the recommendations flowing from the Royal Commission will spell the death knell for almost all forms of commissions, even those currently regarded as grandfathered.

These are the matters on the table for Money Management’s Future of Wealth Management Conference, an event which will compare what is currently happening in Australia with what has already happened in a similar regulatory environment – the United Kingdom.

To explain those parallels, former UK regulator, Rory Percival was asked to look at what is evolving in Australia and compare those developments to what has occurred in the UK where under that nation’s so-called Retail Distribution Review (RDR) all investment advice commissions were banned with no grandfathering allowed.

However, what Percival’s analysis also revealed was that while following a similar path to that navigated by the UK, Australia is going further in pursuing minimum degree-level qualifications.

By comparison, the UK adviser qualification entails:

  • Qualifications and Credit Framework (QCF) Level 3 to Level 4,
  • Level 3 = Certificate or A levels (highest school qualification),
  • Level 4 = Diploma, equivalent to first year of degree,
  • Level 6 = Full degree level (can apply to become Chartered Financial Planner).

The bottom line of his analysis was that the UK financial planning industry harboured similar concerns about the legislative and regulatory changes they were forced to accommodate to the concerns being expressed by their Australian counterparts, but the outcome proved to be much better than they envisaged.

What needs to be remembered, however, is that the UK financial advice industry entailed significant structural differences to that of the current Australian financial planning industry, not least an absence of any significant dealer group structures and therefore the underlying relationships between AFSLs and authorised representatives.

However, also worth taking into account is the recent admission by the Treasurer, Scott Morrison, that he has been an admirer of many of the UK’s legislative moves in the financial services arena and that measures such as his Bank Executive Accountability Regime (BEAR) were inspired by the UK’s Senior Managers and Certification Regime.

Indeed, Morrison has admitted to swapping notes and sharing ideas with his UK counterparts.

Counsel assisting the Royal Commission, Michael Hodge QC has already delivered an indication of the matters the Commissioner, Kenneth Hayne will need to consider in making his recommendations to the Government and which will likely flow through to regulatory changes.

Among the current structures in question are:

  • Vertical integration and its impact on advice and superannuation,
  • The nature of the relationship between Australian Financial Services licensees and authorised representatives,
  • The ‘tension’ which exists for the Australian Prudential Regulation Authority in balancing industry stability and enforcement,
  • The balance of responsibilities between the financial services regulators – APRA, the Australian Securities and Investments Commission and the Australian Taxation Office.

At the same time industry participants are conscious that three of the major banks – ANZ, the Commonwealth Bank and National Australia Bank have either exited or are in the process of exiting all or part of their wealth management and insurance businesses.

Commensurate with this, there is a question mark over the underlying model likely to be pursued by AMP Limited in the wake of the searing scrutiny and negative assessments it received out of the early rounds of the Royal Commission.

This fact has given rise to an expectation among industry participants that while wealth-focused groups such as IOOF, AMP and Perpetual will continue to pursue and grow their businesses, there will be an increased trend towards self-licensing on the part of advisers.

That expectation has been backed by Investment Trends, with its research confirming continuing momentum among advisers to pursue self-licensing over the past three years.

The Investment Trends data pointed to 20 per cent of planners operating under a boutique/their own AFSL as at May 2018, up from 17 per cent in 2017 and 15 per cent in 2016.

Perhaps more importantly, a further eight per cent were signalling their intention to become self-licensed in the next year, albeit they acknowledged they needed more support.

The bottom line, however, was that the Investment Trends data was pointing towards as many as a quarter of financial planners in Australia becoming self-licensed perhaps as early as 2020.

This was also acknowledged by platform providers such as HUB24 and netwealth, which acknowledged that their technology offering and product sets, particularly managed accounts, were developed with self-licensed advisers in mind.

Netwealth joint managing director, Matt Heine acknowledged that with an increased number of non-aligned advisers operating in the market the opportunity for specialist platforms continued to grow.

He described the opportunities as being exponential as advisers previously limited by dealer group choices took the opportunity to migrate to new platforms and technologies.

For financial planners and dealer group heads, one of the key areas of interest from the Royal Commission will be what it finds with respect to the continuing appropriateness or otherwise of the current AFSL regime, particularly in light of the manner in which the Dover’s licensee, Terry McMaster pre-empted ASIC by suspending both his license and the authorisations of his planners.

McMaster has subsequently exited the industry but his actions were unprecedented and pointed to the anomalous nature of the current licensing regime, which makes the planner/client relationship subordinate to the interests of the licensee.

Will the changes to the Australian financial advice industry mirror those which occurred in the United Kingdom? The answer is that there will likely be some similarities but also many differences. But post-Royal Commission change is inevitable.  

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