Kenneth Hayne on the conflict of interest problem in advice
In a rare speech, former High Court justice, the Honourable Kenneth Hayne, has questioned whether advisers can ‘stand in more than one canoe’, when it comes to conflict of interest between client and product provider.
Hayne handed down his Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2018 and reflected on how the industry had changed since then.
Speaking at the International Congress of Actuaries 2023 in Sydney, he raised the issue of conflict of interest and whether they could be managed.
“If a customer seeks advice from a supplier about what would suit their needs best, have you ever encountered a case where the supplier has ever gone beyond saying ‘my product at my price is best for you’?” Hayne said.
“If the customer cannot make any independent assessment of fitness for purpose and cannot make any useful price comparison the customer makes the choice to accept or reject what is offered according to only whether they trust the supplier and often they do so only by reference to the suppliers’ reputations.
“What happens to that reputation if that supplier sells products to customers that are not appropriate?”
This problem was further exaggerated, he said, if the supplier also went into providing advice or if the provider of advice was remunerated by the maker of the product the adviser recommended.
Last week, Franklin Templeton chief executive, Jenny Johnson, said there was a portion of the population who would benefit from receiving advice via commission rather than fee-based. There had also been speculation the implementation of the Quality of Advice Review would see banks and other financial providers return to providing advice.
Hayne said: “The adviser holds itself out as providing advice, and providing advice is a task different from selling a product. Is the customer entitled to treat their advisers as acting in the customers’ interests? Is duty to client, to act in their interests compatible with the adviser having a pecuniary interests in what product the client buys or how much of the product it takes? Can the adviser stand in more than one canoe?”
Moving onto the regulation, he questioned whether law-breakers would be held to account by regulators, which was a key theme of his review.
“Will regulatory intervention occur sufficiently quickly to change behaviour in the market? Those are issues that participants in the market may say are for regulators to confront but if there is not appropriate regulatory response to misconduct, the entire regulated industry will come to suffer” Hayne said.
“The so-called ‘bad apples’ will multiply, public dissatisfaction with the industry generally will increase, none of that is good for individual participants.”
He also outlined six standards that captured what the public expected and what they should be entitled to receive when dealing with a commercial entity that were each “widely accepted, well established and easily understood”.
These were:
- Obey the law.
- Do not mislead or deceive.
- Act fairly.
- Provide goods and services fit for purpose.
- Deliver goods and services with reasonable care and skill.
- When acting for another, act in the best interests of that other.
AUTHOR
Laura Dew
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“If a customer seeks advice from a supplier about what would suit their needs best, have you ever encountered a case where the supplier has ever gone beyond saying ‘my product at my price is best for you’?” Interesting that this test is being applied to financial planners, what about lawyers, accountants, real estate professionals, car salesman, beds sales, lender from a bank etc etc etc... the list goes on and on. The reforms they undertaken have not worked, regulatory intervention has gone too far.
I question whether someone should be able to receive 2 defined benefit schemes at the same time.
“If a customer seeks advice from a supplier about what would suit their needs best, have you ever encountered a case where the supplier has ever gone beyond saying ‘my product at my price is best for you’?” This statement can be applied to lawyers, accountants, lenders from a bank, real estate sales people, car sales people, bed sales people. Effectively insert any professional service, sales person or tradesmen here!! Regulatory intervention has gone way too far and we have lost sight of the most important person, the clients. Agree change was needed but we have lost our way!
What an insult to the greater majority of Financial Planners. Shows that he doesn't really understand the work done, the over compliance regimes and the processes followed. He still regards us as crooks that can't be trusted and I find this offensive. Perhaps he would be better served advising the more respected professionals at PWC.
A bit too late for poor old Mr K Hayne, he had his chance to dismantle vertical integration and he absolutely squandered it so he should go back into hiding because so no one cares what he thinks anymore!
Totally agree. You wouldn't go into a Freedom showroom and expect to walk out with Brescia lounge, would you?. Why is financial services different. Call sales people, sales people and professional (independent) financial planners, Financial Planners. There's a distinction the Australian public will relate to. But wait.....that wouldn't serve the product manufactures who have been happy to "manage" the conflicts of interest in the interest of making annual bonuses and ever increasing share prices. I'm even cynical enough to pose the question, who has had more than their fair share of Levy's ear since the Royal Commission? I very much doubt whether she even bothered to talk to the group we are supposed to be serving....the Australian public. Surely product manufactures know what is best for everyone, just ask them.
Is the Honourable Kenneth Hayne telling us that financial advisers are incapable of putting the client's interest before their remuneration. Oh dear, what a sad man. Lawyers do it all the time.
Prioritizing short term gain over the value of a long term relationship is bad for business. Ask any of the big four banks about using KPI instead of genuine leadership to run financial planning businesses.
Laura, another important article. The duty of care is changing with AI as it will look across silos in human thinking (e.g. lending risk management being in a separate silo) and can have a serious impact on clients' financial well-being and therefore on the potential liability of the quality of advice provided. This is especially true when different divisions within organizations are providing advice and do not consider the overall financial well-being of clients. AI is likely to change the process mapping of advice and risk management. This topic would be worthy of an article because of its potential impact on clients and providers of advice.
Keep up the good work.
Regards
John Cosstick
He doesn't appear to have any issue with industry funds having vertically integrated models which must be a conflict.
Furthermore he doesn't have an issue with industry funds charging all members advice fees whether or not the service is used by a member.
Perhaps the only thing he has issues with are independent advisors threatening industry funds.
Maybe old mate still doesn't know or understand how a financial adviser has to address this every time we provide advice!
This is exactly the reason why product providers cannot provide "advice" as per Michelle Levy's recommendation. It is okay for them to provide financial information and product guidance while letting the consumer know that they cannot provide advice that is in the consumer's best interest. It is then clear to the consumer where they stand and the consumer can then decide if they want to proceed knowing that this is not "advice" or whether they are prepared to pay more for true "financial advice".
The word "advice" should not be used when the product provider is having discussions with the client so there is a differentiation.
Kenneth Hayne had the opportunity to do some good in the world by controlling the Big Bank, but unfortunately he didn't. He ignored the lag from banks when passing on interest rate rises to savers v's speed of rises to borrowers, he ignored excessive transactional fees, exchange rates etc . Instead he focussedo n financial advisers, when in reality lawyers are considerably worse3, and considerably more conflicted - they deliberately string out the court process.
Hayne's concerns on financial advice conflicts of interest are important but shouldn't lead to blanket judgements. Many advisers, despite receiving product maker compensation, balance client obligations effectively. Moreover, with accessible financial information today, clients can make more informed decisions than acknowledged by Hayne.
While regulation is key for industry trust, over-regulation risks dampening innovation, restricting competition and potentially raising consumer costs.
Hayne's commercial standards, though noble, may be unrealistic. 'Best interests' can be subjective and context-specific.
In essence, we must recognise the sector's complexity. We need nuanced understanding and balanced strategies for progress, not a 'one-size-fits-all' approach.
Kenneth Hayne is absolutely right. At this very moment the Labor Party are pushing for Industry funds to provide advice. Essentially those in-house advisers will be selling product. The Industry Fund products. There will be no regulatory oversight and they will not be held accountable. The Labor Party, Industry Funds and Union Movement are unwinding everything the Royal Commission rulled should be stopped. What a joke!
Geez Ken, now you address vertical integration???? Why did you not ask this question when you were sitting in the RC chair?
Instead you listened to only a portion of the community - the highly conflicted bank, insurance and union funds crowd. You then laid the blame on "advisors" with some of your ridiculous recommendations that have added cost, complexity and no benefit to clients. The gov't then holds an enquiry as to why advice is so expensive - is that so hard to connect the dots for you?
Union funds especially were barely acknowledged despite their egregious history of behaviour, why did you not address this farce?
I'm sorry, despite your titles and work experience I struggle to respect you after your botched effort at the RC, why was vertical integration not recommended to be banned???
You then come up with some ridiculous statement about canoes after the fact.
Thanks not at all for all your help. You have not added any value. Go off to your retirement, your post RC missives are not appreciated.
So in my first canoe I am advising a consumer to embark on a certain strategy. Do I send them off to a new canoe provider to obtain the products to enact that strategy? How is that going to work? How will any strategies ever get implemented. I cannot count how many times i have advised someone to do a will but i dont provide that product so they dont get it done.
This Hayne 'person' is seriously out of touch in his elitist bubble. In know this on a 'ground-floor' basis as I had a bit do do with him in a past life a long while ago. He has zero experience at the coal face with clients, has not bothered to consult directly with those who have that experience. Further, he has little understanding about the pros and cons of commission as remuneration. Having him in a position to make recommendations on these subjects is foolhardy at best and deplorably insulting to the interests of consumers at worst. he has no place whatsoever pontificating on things of which he has little understanding and zero experience. he's wholly unqualified in this instance.