Banks only scratch surface on conflicted remuneration
| 11 October 2018
It took a pair of velvet gloves – not a sledgehammer – to force the country’s largest financial institutions to move to change their outdated and conflicted remuneration practices.
After many years of the banks fighting tooth and nail to protect income streams generated by ongoing service charges most consumers weren’t even aware they were paying, their inertia was brought to an end by a few carefully chosen words.
By appealing to the banks’ competitive nature, Commissioner Kenneth Hayne has managed to propel the mass market of financial advice at least into the ball park of where the burgeoning profession needs to begin its journey to earn the trust and respect of a public fatigued by corporate leadership and structure designed to hoodwink them out of their hard-earned savings.
“Evidently, some entities have overcome the arguments against removing grandfathered commissions, and now consider it advantageous to do so,” Hayne states in his interim report. “The first-mover problem has been eliminated. The onus now shifts to the entities wishing to continue to pay and accept grandfathered commissions to demonstrate why the calculations made by [those who have banned grandfathered commissions] do not work for them.”
And so, the announcements have begun to flow and more will come; financial institutions suddenly taking the moral high ground, setting up record-sized funds for reparations, paying back lazily acquired fees, banning commission payments across their vast salaried networks.
Hayne’s words in another context might have been impotent, but the time was right and the inference was enough for them to take full effect.
The interim report, published on September 28, was indeed 1000 pages worth of clues left for the country’s most powerful financial institutions to pick up on in advance of firm recommendations they can be assured legislators will push hard to implement.
Credit to Westpac for reading the writing on the wall and moving first to end grandfathered commissions within its salaried advice networks. It’s admittedly cynical to think of this as the 11th-hour action of a team to ensure survival by confronting inevitability; perhaps this is how change happens and has happened throughout history but it’s fascinating to watch close up and in real time.
The largest of the banks, Commonwealth Bank of Australia, is the latest announce it’s remove fees on its legacy products – which is says will save its customers $25 million annually – and putting in place measures to try to ensure that people paying ongoing service fees are indeed being provided a service. CBA’s announcement today comes the day before it chief executive, Matt Comyn, fronts up to the royal commission to kick of the highly anticipated round of bank chief inquisitions. Again, timing and context are everything.
Macquarie Group, National Australia Bank and ANZ have all announced they will cease paying grandfathered commissions to their salaried advisers since the April royal commission hearings. AMP has become an outlier by shying away from a public statement but a look at where its revenues have been flowing makes it clear the company is winding down conflicted commission payments, too. The wealth giant will need to continue to manage its approach to ending these legacy remuneration structures because they are inextricably linked to the valuations of the individual advice businesses within its network.
But the banks’ bold announcements about ending grandfathered commissions mask the continuation of similar remuneration structures that have been in place just as long and serve the same purpose of shoring up distribution of financial products through financial advisers.
Institutions have mentioned very little about volume payments from platform operators to financial advice dealer groups, volume-based shelf-space fees funds managers pay to platform operators, and asset-based fees, particularly relating to borrowed amounts. Perhaps ending these more-nuanced areas of conflicted remuneration wouldn’t make the same splash as the end to grandfathered commissions, which have made their way into the public lexicon thanks to the Hayne hearings.
The truth is that the progress of the financial advice industry towards becoming a profession will be made when conflicts are addressed within the broader so-called “independent financial adviser” landscape where, as we speak, advice practices are signing agreements with platforms and technology providers that are tied up with product manufacturers.
Hayne is onto this second layer of conflicts, too, and it is hoped he will have the time to bring out some of them in his conversations with bank chief executives starting on Thursday.
There should be no mistaking how important it is to financial institutions to have some kind of control or tangible leverage over the advice businesses that recommend their products to clients. Fight for this control is reflected in the lobbying efforts on legislation and amendments over the years; from CLERP 6 and 9, to the Parliamentary Joint Committee on Corporations and Financial Services, which led to the Corporations Amendment Bill which formed the basis of the Future of Financial Advice (FoFA) legislation and so on and so on.
The Australian Banking Association, which is believed to be close to releasing a public announcement relating to the banning of grandfathered commissions on behalf of its members, is front and centre in the legacy of lobbying efforts to keep these commissions alive, as are other associations and organisations set up to protect the interests of financial product manufactures over the years.
Well told is the story of how the original intentions of FoFa were ultimately watered down in response to the lobbying efforts of the big end of town. This came to a crescendo in 2012, when the government established its Peak Consultation Group at the behest of these powers, drawn from bodies as diverse as the Association of Financial Advisers, the Australian Banking Association, CHOICE, Industry Super Australia and the Property Council of Australia.
Hayne is aware of this history and it seems unlikely he will let those same institutions pull the wool over his eyes with piecemeal concessions to conflicted remuneration.