Not another patch job

The Federal Government recently announced a royal commission into the financial services industry.

This Commission has been a long time coming. While the current Government originally vowed against it, it was influenced by sustained pressure from the public, and followed an admission from the big four that the industry needed an inquiry to restore faith in the system.

Make no mistake it won’t be pretty. Some practices within the financial services industry, by not only the banks but large institutions and dealer groups, have not been in consumers’ best interest.

They have been conflicted, biased and designed primarily to add to bottom line profit.

It will uncover numerous examples where Australian Financial Services Licences (perhaps not just the banks) have not shown a duty of care to their customers.

For example, where ludicrous financial incentives were provided to those offering financial advice based on volume, and where institutions recommended company-owned products to clients rather than options that were in the best interest of the client.

So what will happen next?

Nothing! Well, nothing meaningful, that’s for sure.

There will be reputational damage to certain brands and perhaps some fines dished out. However it’s doubtful that anything material will come from this, other than a promise or two from the institutions exposed that certain practices won’t continue, which we all know is not true.

What should happen next?

Up until this point in time, any changes to the financial services industry have been akin to patching a crack in the wall, but a crack can be a symptom of a shaky foundation and the financial services industry’s foundation is precarious.

Patch jobs are not going to cut it.

Let’s be honest, the industry was born out of selling products to unsuspecting consumers and “financial advisers” being paid by commissions and volume based payments to the product manufacturer.

Clients’ best interests were often not considered in the first place.

Although commissions were banned as part of the Future of Financial Advice (FOFA) legislation introduced in 2014, the grandfathering rules mean they still exist and financial products for many customers will be left untouched.

Some advisers will continue riding the gravy train, and mark my words, commissions are still paid one way or another.

To enact real and meaningful change to the financial services industry, we need a courageous government that rebuilds the industry’s foundations based on one simple premise – “what’s in the consumers’ best interest?”

The areas of focus should be:

• Improving financial adviser education standards
• A complete removal of commissions (old and new)
• Separation of license powers (advice verses product)

Patch jobs will not repair the loss of trust and faith of consumers.

Those who pushed for the Royal Commission think they are representing consumers who are feeling ripped off by the big end of town, but they know better than anyone it’s all hot air.

Consumers should not be fooled into thinking the royal commission will have meaningful impact on them.

Andrew Hewison is the managing director of boutique firm Hewison Private Wealth.