Less than four years ago, on July 15, 2014, the model of “vertically integrated wealth management” created by our major financial institutions was triumphant.
Finance Minister Mathias Cormann had engineered a Senate triumph, talking around Clive Palmer to support his repeal of the Labor-era Future of Financial Advice (FOFA) reforms.
The big banks and AMP hated FOFA, because it directly undermined their vertically integrated model in which financial planners were paid commissions for steering customers into their wealth management products. The Liberals had delivered: commissions would be restored for financial planners and the vertically integrated wealth industry, which the big banks had begun getting into in the 1990s, starting with David Murray at the Commonwealth Bank, would be safe.
Now it’s a smoking ruin.
First, Labor’s Sam Dastyari exploited the fact that the Abbott government had tried to be clever and repeal much of FOFA via regulation. Dastyari kept trying to build the Senate numbers to disallow the regulations, and in November 2014, in what will be Dastyari’s lasting legacy in his short public life, he exploited the falling out between Clive Palmer and Jacqui Lambie and brought Ricky Muir on board to kill the repeal.
That was the de jure death of conflicted remuneration. David Murray in his financial services review skirted the whole issue of the conflict of interest at the heart of vertical integration. But the de facto death of the model was already playing out as a result of Adele Ferguson’s reporting of the debacle of the Commonwealth’s wealth management arm, Commonwealth Financial Planning (CFP), and a Senate inquiry into the Australian Securities and Investments Commission (ASIC). Labor’s Mark Bishop and Nats Senator John Williams, leading the inquiry, focused on ASIC’s shocking mishandling of the CFP case. The reputational damage inflicted on the Commonwealth Bank and ASIC was profound.
Independent financial planners knew it — the Financial Planning Association (FPA), which backed repeal, had urged the government to keep the FOFA ban on commissions, saying “it is undeniable that conflicted remuneration has eroded public confidence in our financial system”.
That erosion of confidence, coupled with a myriad of other banking scandals, and increasing calls for a banking royal commission, made the vertically integrated model less and less appealing for banks at a time when the prudential regulator was demanding they boost their capital buffers.
In 2015, Westpac sold a chunk of its wealth management arm. At the end of 2016, ANZ announced it was getting out altogether. The banks also started selling their life insurance arms — another area rife with scandals and conflicted remuneration.
And whatever was left standing of the vertical integration model went up in flames at the banking royal commission yesterday. Counsel assisting provided evidence from the Commonwealth, NAB, Westpac and AMP that remuneration outlawed under FOFA had continued to be paid.
ASIC’s Peter Kell explained how vertical integration was inherently conflicted, that the majority of advice from bank-owned financial planners was not in clients’ best interests and ended up steering them into bank products.
Worst of all, an AMP executive was grilled about how AMP continued to charge clients for advice not merely when they weren’t receiving it, but when there was literally no one to give them advice, despite advice from AMP’s lawyers that this was against the law. AMP subsequently lied to ASIC about the circumstances in which it did this. AMP also admitted it had found over 80 advisers who had either engaged in serious misconduct or been found to be incompetent. Another 400-plus had question marks over them.
The executive apologised, though he struggled to identify which exact thing he was apologising for.
None of this is any surprise. Everything that FOFA repeal critics warned about has proven correct. Everything the FPA said was true. The conflicts of interest hurt consumers. The big banks and AMP encouraged planners to direct them into products that weren’t in their interests. They were sold products they couldn’t even use and billed for things they never received. The banks and AMP couldn’t help themselves.
Perhaps they thought, given the ineptitude and lack of interest of ASIC, they could get away with it forever. But Nemesis is here. It was AMP’s turn yesterday. Later today it will be the CBA’s turn. The others will get theirs. How far we’ve come since that winter day in 2014.
Yeah well, we’ve been moaning about banks for decades and nothing has come of it. Now we’re having yet another inquiry, a royal commission no less, I’m soooo impressed.
We’ve had inquiries into all sorts of important matters over the years, petrol prices, treatment of aboriginal children, hospitals, housing. You name it, we’ve had inquiries. And yet hardly anything changes.
We already know how this will turn out, the Libs will make a lot of noise over some effete new regulations, Labor will shout ‘its not enough!’, the banks will squeal like mad pretending to be pissed off, but its all a game and they will go on as usual making obscene profits ripped out of the pockets of their ‘customers’.
Good summary, Bernard. The other point worth noting that it was the banks’ dominance of all aspects of wealth management that made them so politically powerful in the first place so that they were within a whisker of completely dismantling FOFA. The end of vertical integration returns them to their core businesses, removes fingers from pies and reduces the virtual veto that had over the implementation of publicly minded policy. That it was ever otherwise is (another) stain on Australia’s recent record of governance.
Good luck with that Mr Denmore, banking corporations will just own other businesses that will continue their ‘wealth management’ endeavours. It was never their business practices that were in doubt – corporations by their very nature are amoral and don’t give a bugger about the societies they reside in.
Its the Labor and Lib govts who slavishly follow the American practise of allowing corporations to operate with minimal regulation thats the problem. Maybe they should look to northern Europe to see how it could be done. If they really had balls they could set up a new bank ‘of the people, for the people’ to give banks real competition.
“Counsel assisting provided evidence from the Commonwealth, NAB, Westpac and AMP that remuneration outlawed under FOFA had continued to be paid.”
I was watching snippets of this on TV and thought how good was Rowena Orr, Senior Counsel Assisting. This RC is turning out to be right on to the problems, rather in contrast to what I was expecting. If they did have much say in setting the parameters of this inquiry the banks did a lousy job of it. Too stupid to help themselves?
There’s a few different factors here.
I’m sure the banks and Turnbull tried to limit the damage, but Turnbull couldn’t nobble the either the terms of reference or the commissioner too hard for a number of reasons including placating the nats and appointing anyone who looked like they could be Dyson heydon mark 2.
The reality is that the banks have such a history of serious, major, ethical and legal scandals to which they respond by saying they’ve now fixed the culture, which has been a lie every time. It’s not hard to drag out all these stories out, there’s plenty more where those came from.
I’m pretty hopeful that this will lead to big changes.
Surely ASIC must be smashed as well? They knew, but did not act. Then, let’s consider some jail time. All ASIC odes is issue fines to the institutions. The executives swap shops and we all go again.
Yes, ASIC issues fines, but not very large ones.
I also think that criminal charges should be investigated. Especially for things such as the CBA’s money laundering reporting issues.
Criminal penalties are the only thing white collar criminals respect and fear. Fines are just a cost of doing business. See the continuing disgrace that is wide spread underpayment of wages and superannuation in Australia.
Until governments start making these crimes punishable by real prison time it will never be stopped.
Stick a couple of bank executives in a proper prison with violent felons for a few years and watch the industry clean itself up overnight
You’re assuming our govt has an appetite for jailing corporate CEOs – not happening. Bond was an exception not the rule.
It would be in their long term self interests, a bit of porridge now or lamp posts later.
Despite his flaws, Sam Dastyari is responsible for saving FOFA & is one of the few politicians who can claim to have actually achieved something significant during their political career. Ditto Ricky Muir who proved to be nobody’s fool.
Agree with you. I’d swap most of the seat-warming galahs in the Senate for Ricky Muir and others like him, any day.
+1 Zut Alors & DF, precisely correct. I was really disappointed when Ricky Muir & Glenn Lazarus were not re-elected in Turnbull’s self-immolation election of 2016. They actually worked hard to find out the facts of any matter before they voted on it, and were a shining example (like ex-Senator Lambie) of what a parliamentary representative of the people should be, and act.