Key themes to emerge on 16 April (Day 11 of the Royal Commission) covered fees-for-no-service conduct, conflicted remuneration and inappropriate advice to establish self-managed superannuation funds (SMSFs). Transcripts of the hearings are available on the FSRC website. To help inform the hearings, the Commission also released background papers on the legal framework for providing financial advice, and a further paper, prepared by Treasury, on the key reforms in the regulation of financial advice.
The Commission heard evidence from ASIC that fees-for-no-service conduct has occurred because the major financial advice firms had "prioritised fee revenue from their advice businesses over the provision of services to the clients".
In the case of the major financial advice businesses, ASIC Deputy Chair, Peter Kell, said the "systems that underpinned the ability to collect revenue were better developed than the systems that ensured that the client received the advice". Mr Kell also noted that the record keeping and systems for tracking whether the advice had been provided were "poor", which meant that for many of these entities it was difficult to identify how widespread the problem was, and how long had it been running for.
Commissioner Kenneth Hayne summarised the issue by identifying the 3 radically different kinds of case in terms of "selling what you can’t deliver, selling what you won’t deliver and selling what you don’t deliver." Under pressure from the Commissioner to be specific, Mr Kell said he would characterise the majority as cases of "don’t deliver", rather than "won’t deliver". Commissioner Hayne added that "selling what you can’t deliver might raise issues about application of the law that are…rather different from either of the other two categories". Those are matters that perhaps the Commission will look at, he said.
In relation to inappropriate advice, ASIC said it has found that both large and small AFS licensees are "struggling to get to grips with how best to implement the key best interests duty requirements", including how they are documented in advice files. In a recent review of large vertically integrated firms, Mr Kell said around 75% of the files examined did not demonstrate compliance with the best interest duty and related obligations.
More recently, in a yet to be published ASIC survey of advice on establishing SMSFs, Mr Kell said 90% of the advice files failed to comply with the best interest duty. ASIC said it was particularly concerned about SMSF establishment cases where a client has a lower balance, or may not understand the obligations that go with being a SMSF trustee. Although ASIC was quick to note that the majority of those instances did not necessarily involve consumer detriment. In the SMSF context, ASIC also pointed to examples where people are being encouraged to undertake borrowing to invest in real property.
Other prevalent types of inappropriate advice involved superannuation switching without any reasonable basis, and life insurance advice that can substantially erode superannuation balances, or trigger problems with pre-existing medical conditions, ASIC said.
The Commission is expected to provide an interim report to the Governor-General by 30 September 2018, with a final report due by 1 February 2019.
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