FOFA: perhaps it's not the answer

The politics must be favourable. When the Senate inquiry into the financial planning scandal inside the Commonwealth Bank was announced recently, all parties couldn’t agree quickly enough. Greens, Labor, and Liberal; they could all sense the political opportunity.

The big banks are never popular, and when coupled with a regulator, in this instance ASIC, that, on all the available evidence, hardly broke any records in initiating an inquiry after being tipped off by whistleblowers inside the bank, it was always going to be a lay-down misère that the politicians initiate an inquiry.

ASIC could have some serious questions to answer, particularly as to why it didn’t act more quickly after the whistle was blown in October 2008 about allegedly corrupt behaviour. Since then ASIC has banned seven CBA planners who are understood to have represented hundreds of clients and managed hundreds of millions of dollars, but the expression "shutting the barn gate after the horse has bolted” does come to mind.

All the events, of course, occurred before FoFA, which took effect on 1 July. And FoFA may assist in ensuring this type of rogue behavior does not happen again. After all, FoFA, we are told ad nauseam, has been introduced for this very reason.

The FoFA legislation was driven, in large part, by the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the collapse of the independent Queensland-based Storm Financial. Remember, ASIC has decided to pursue civil penalties against Storm’s executive directors for their alleged rogue behaviour; compare this with an Enforceable Undertaking against CBA.

It was never stated explicitly, but underpinning this inquiry, and the Government’s response to it, was, in my opinion, a belief system that small, independent planning practices were the core of the problem. It was believed that many of these advisors lacked the industry knowledge, the education, and the market savvy, to properly represent their clients. Big was better and easier to regulate, which suits ASIC.

So when FoFA was announced the banks couldn’t believe their luck. The focus on making advisors generate their revenue from fees – not commissions – played straight into their hands. They were being given, in effect, a competitive advantage as they could cross subsidise their financial advice businesses and investment products.
They owned the products and have accumulated a vast army of advisors to sell them. In this environment, the conflict of interest is evident, although not discussed in polite company.

What we know now, of course, is that bigger is not necessarily better, that KPIs, sales targets, bonuses, call it what you will, can be just a harmful to a client’s best interests as the old-fashioned trail commissions.

The difficulty that the banks are having in implementing new remuneration models to satisfy their advisors is illustrated by the recent announcement giving them another year, until July 2014, to comply with the ban on bonuses and other remuneration based on sales volume.

I suspect even after 2014 sales targets and bonuses will remain inside the big institutions – and as long as AISC takes what appears to be a different approach to large institutions than to smaller dealer groups - their clients’ “best interests” may always be problematic.

About George Lucas

George Lucas is managing director of Instreet Investment Limited. He has over 24 years' experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products.

He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.