The British financial advice sector arguably faced its most difficult period in the 1980s and 1990s. Advisers have been collectively working since then to regain the trust of the public and promote the need for expert advice, while working under tightening restrictions designed to improve ethical conduct and increase client protection.
During the same period of time in Australia, a barrage of financial inquiries that failed to fix the stifling concentration of power in the hands of banks has continued to see the nation hold back from separating general banking, investment banking, advice and insurance in the way industry reforms in the UK and Europe have done.
Public hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia began on 13 March. As at 25 May, a total of 6,014 submissions had been received.
While budget papers show major banks, insurers and others will have to stump up millions to underwrite their appearances before the Royal Commission, Australia’s corporate and prudential regulators – the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority – will receive additional government funding.
The first calls for the current Royal Commission came half a decade ago following a journalistic exposé and subsequent Senate Inquiry into the Commonwealth Bank of Australia’s sales-driven, profit-focused culture.
Spurred on by the account fraud scandals at US bank Wells Fargo, further digging found bribery, forged signatures, overcharging, identity theft, mischarging and misselling plaguing the financial planning arms of Australia’s four biggest banks.
Vertical integration – a controversial advice model prevalent for three decades in Australia – has been well and truly crumbling since.
Following the Commonwealth Bank, National Australia Bank was implicated by the discoveries of unethical foreign exchange trading and secret payouts of millions of dollars between 2009 and 2015 to compensate for inappropriate financial advice.
ANZ Bank was subsequently implicated in a bill swap scandal perpetrated by big four bank Westpac, later also linked to multiple data breaches and fraudulent lending.
Now, research house Adviser Ratings has found that as many as 14,000 of Australia’s financial advisers – close to half the industry – may choose to exit over the next five years as a fallout of what has been labelled a “cultural failure”.
The commission, along with the fallout from the establishment of the Financial Adviser Standards and Ethics Authority 12 months ago, could see AU$900bn (£511bn) in client wealth left unmanaged, according to estimates.
Adviser Ratings’ findings show advisers leaving their jobs at the major banks at 270 per cent of the historical rate so far for 2018. The establishment of self-licensed practices following the UK’s IFA model has had a 33 per cent increase since 2015.
Overcharging, as well as setting up ongoing charges for little or no service, is a key downfall in Australia that the UK must avoid.
FinaMetrica director Paul Resnik says: “What the Royal Commission shows is that there were very good mechanisms in place to recover fees from clients, but very few to show the value those fees were generating or that there was anything being done at all to show fees are relative to anything.”
In Asic’s response to the first round of Royal Commission hearings, the corporate regulator said that ongoing service fees have similarities to commissions because they remain essentially invisible to the client. In addition, they may bear no relation to actual work carried out.
In the UK, advisers are continuing to call for more guidance from the FCA on fee models, with many still feeling in the dark over how to decide which clients are worthy of their time.
Resnik says: “Advisers have always argued ongoing trail is just their entitlement for a lower initial fee because they were charging less than the time it cost them. Now, the battle for the client is under way because fund managers that were disintermediated by platforms and actuarial firms are now playing back into the game next to advisers.”
Unpicking the tangled industry will continue to be a difficult, expensive and time-consuming process in Australia, not just for the remainder of the year but for however long revelations about poor advice conduct continue to emerge.
Resnik says situations being considered in the cultural inquiries into banking culture in Australia include situations like the Commonwealth Bank having been found to have been charging clients who had died.
Despite rumours that Barclays, Lloyds and others may return to advice, the Australian example shows big lenders could be spread too thin to give good advice.
“What you hear now is the FCA saying that robos do not provide suitable advice, but the banks want to offer robos that go beyond guidance,” Resnik says. “But in the UK a lot of people know they made the right decision to not always just trust the banks.”
The reputation of the Australian advice industry had already been and will continue to be significantly tarnished in the eyes of the most important party: the consumer.
Resnik adds: “In essence, things feel like a melting pot but the lines between the two countries are becoming clearer.”
Further down the line, it can only be hoped the painful lessons other countries have struggled through and improved from rub off.