Opinion Piece By: Curtin University Business School Instructor, Elson Goh
The latest revelations from the Banking Royal Commission may be a surprise to some, but it is certainly not news to people in the financial services sector; or people who have been burnt by bad advice.
We have been down this road and seen the ugly side before, Wallis Report in the 90s, Financial Reform Act in 2001, the Ripoll inquiry, Henry Tax Review and Cooper Review a decade later and more recently the Murray and Trowbridge report.
In 2012, we saw the Future of Financial Advice (FoFA) becoming law after the findings of ASIC’s shadow shopping. The problems uncovered back then were similar to what we are hearing today.
So why have things not changed for an industry that had so many chances? Well, the solution is unfortunately not as simple as there are many stakeholders and ramifications for the economy and more importantly, the access to financial advice.
The provision of financial advice is linked and integrated to many different service providers like investment, accounting, legal and real estate businesses. Changes made to the sector may have dire consequences on many parts of the economy.
We know that the banks and their subsidiaries are the main providers of financial advice in the industry. They employ advisers directly and assist financial advice companies that are licensed through them. As they are also product providers, there would be an inherent conflict of interests through vertical integration.
A report published by the regulator, ASIC found that financial advisers from these vertically integrated institutions had failed to comply with the best interests of customers in 75% of advice files reviewed.
However, the banks are also the ones who have provided resources, administration and compliance assistance to financial advisers under their distribution network. This support helps lower the cost of financial advice, making it affordable; especially to those who need it.
Increased legislative and compliance requirements increases the reliance to institutions that have the capacity and resources. A dichotomous relationship that is difficult to unravel.
As consumers, we have to understand that we live in a free market; which is by design, capable of regulating itself. Unfortunately, our complacency and acquiescence to the influence have given too much power over to these large institutions.
We have to take time to select who we are to entrust the future of our finances, constantly find out what we are getting for the fees we are paying and hold those we trust accountable. We do this for childcare providers, dentists, mechanics, etc., why should it be any different for providers of financial advice.
If there is one new thing that this Royal Commission has raised, it is the question of whether the banks can earn back the trust that been lost.