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Let’s be Honest: We Needed a Royal Commission

The murky depths of greed and incompetence within the financial services sector embracing banks, insurance companies, intermediaries and so-called financial planners and retirement and investment counsellors are being stripped bare by the Royal Commission and it’s not a pretty sight. In many respects what has been going down is similar to a ponzi or pyramid scheme where everybody inside the tent is getting some of the action, from the chief executive down to those generating the sales and for the model to work (for them) there have to be plenty of ‘us’ feeding the beast.

Labor tried to overhaul this sector when in office but that was against the background of a powerful lobby opposed to change, regulation and oversight and as always, the Liberal Party was stridently opposed to anything that Labor proposed. Indeed, when Abbott achieved office he tried to repeal FoFA but the Senate blocked him. Despite a massive onslaught of misinformation and negativity led by Tony Abbott there were some improvements in disclosure and transparency written into FoFA but obviously not enough and certainly with insufficient oversight by APRA, ASIC and ACCC.

Acknowledging that many of these financial products are sold by frequently poorly trained individuals who are remunerated by sales and trailing commissions with their income periodically bolstered by volume bonuses, Labor initially tried to outlaw some of these practices in favour of a transparent, upfront fee for service model – most of the consumer related problems now being revealed are connected to hidden commissions, camouflaged and inflated fees and other such opaque practices. But they inevitably met with strong opposition from a sector not used to being open about what they charge you for the services that they frequently don’t even deliver on. This led to a flawed compromise bringing about the introduction of a new section 923A in the Corporations Act (2001).

This new section restricted the holder of a financial services licence – both companies and individuals need a financial services licence to operate in this sector – from using terms such as independent, impartial and unbiased in describing their services in circumstances where they receive any part of their remuneration in the form of commissions, volume or sales bonuses or other gifts that could reasonably be expected to influence the licence holder. In other words, if a bank or insurance company are paying a sales agent, mortgage or insurance broker a sales commission or a bonus based on the volume of sales or if they are flying these people off to Bali for a conference, they cannot put themselves out there as being independent, impartial or unbiased. It doesn’t however, place an obligation on the sales agent to inform the customer that he/she does have a bias or to tell the customer how much they are receiving by way of such commissions or bonuses or that they might win a prize for dodgy conferences in Bali depending on how much they sell : they just can’t describe themselves as independent, impartial or unbiased.

Clearly the compromise by Labor has not worked and neither could it have as it places the responsibility back on the punter, the person seeking the financial service, to ask the licensee or sales person “are you independent, impartial and free of bias?

The original intent of this area of the FoFA reforms was to place an obligation on sales people to make these disclosures upfront but the industry argued that, if they did introduce that level of transparency it would damage their business model. Well, would you buy a financial product or accept advice from a sales representative who upfront told you that he was ‘not independent, was biased in favour of a particular principal and was not impartial and received his remuneration in the form of a commissions taken out of your pocket but not disclosed to you and was in line for a bonus based on his sales volumes and if he sold you more than you need, he could qualify for a trip to Bali which, incidentally, you would also be paying for’? The chances are that you would be loathe to seek financial advice in those circumstances but, that is what has been happening!

The Royal Commission has a long way to go and the more we learn of what has been going on the more we are going to be alarmed about the lack of adequate regulation, transparency and oversight that we have been prepared to stomach for so long and, when the Commission reports, will this government have the will to legislate change or are they more interested in giving corporations a tax cut?

Here is just one example from the Royal Commission of the sort of rorting that has been taking place:

An AMP financial planner gave advice to a young couple – a tradesman and stay-at-home mum with a combined income of $73,000 – with a one-year-old daughter, who sought advice about insurance. The planner recommended the couple replace their existing insurance policy with one from AMP.

They were told the new insurance would be about $1000 cheaper per year. But the planner’s advice was wrong perhaps even deceptive. The new AMP premiums were about $1000 more per year. The premiums were being deducted from the couple’s super so they didn’t notice the increase and it wasn’t brought to their attention.

Why this, one of many, examples, is significant is that it clearly shows the conflicts of interest that exist: the financial planner to earn his/her commissions needed a new sale even though the existing insurance appeared to have been adequate for the client’s purposes and was cheaper – the model relied on to get away with this scam was that the customer would not see or be aware of the increased premium as these were merely being deducted periodically from the customer’s superannuation nest-egg. For this scam to work, there has to be a shroud of misinformation hidden behind a veil of deception and that’s how it works.

There is a long way to go with this Royal Commission!

 

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6 comments

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  1. CaptainWise

    Anyone paying any sort of attention to this industry sector is not surprised at all, it’s been patently obvious for many many years.
    The record increasing profits and ignoring of Reserve Bank interest rates at mortgagees expense have all flagged attention to the fact that the banks don’t show any concern for customers.
    They were ably assisted by many mostly Conservative Government’s.

  2. etnorb

    It is beyond time that ALL the banks & financial institutions were held accountable for the illegal “happenings” that they all were involved in were held accountable for their actions! It has taken many years for this to finally happen, & I wonder just how many of the long-suffering public were cheated & lied to in the process? Hopefully, this Royal Commission will expose ALL these wrongdoers, & cheats & that they ALL get appropriate sentences for their sins!

  3. Matters Not

    Re:

    There is a long way to go with this Royal Commission

    Yep. But what will Labor’s strategy be, given it’s likely to be in government when significant decisions will have to be made. Will Labor extend the timelines of this RC? Will it broaden the Terms of Reference to include the big 4 accountancy companies which aid and abet massive tax avoidance via transfer pricing and other ‘constructions’? Will it create and empower a new agency to look at insider trading? Etc, etc?

    Or will it look at Abbott’s failed RC gambits and decide that there’s no net, political gain? And decide that there’s been too many distractions?

    Yes the political future is undecided. There’s a long way to go.

  4. ajogrady

    Trust is earned and not given. The L/NP, The Business Council, The IPA, The Minerals Council, The Main Stream Media and all the usual conservative suspects have trashed trust, honour, respect, truth and fairness in their all out pursuit of relieving the Australian people of their democratic rights and their common wealth. Power and greed has blinded them to anything that is remotely considered to be for the good of the people and the nation.

  5. Glenn Barry

    Great article and the spectacle of the Royal Commission is going to become increasingly explicit, graphic and truly astonishing

    It looks as though our next debt in this country is the trust deficit – Morrison made the mistake of admitting that the government knew about many matters under investigation by ASIC revealed in RC testimony, that renders the LNP both egregiously corrupt and complicit.

    Their adherence to the protection mantra if assessed honestly and impartially should see them condemned at the ballot box – we shall see

  6. economicreform

    There is a big difference between incompetence and corruption.

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