Now is the time to professionalise

The launch of the damning report by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia should serve as a kick-start for the industry to address its professional status. The Report has exposed significant problems in the financial industry in Australia, including advisers failing to act in the best interest of their clients, conflicted remuneration structures that lead to poor or inappropriate outcomes for clients, and an industry dominated by vertically integrated firms that puts the interests of the firms before the interests of their clients.

As we get closer to six months since the February release of the Report, we must move quickly to restore confidence in the industry and regain the trust of the public.

Reforming to regain trust

At the CFA Institute and CFA Societies Australia, we believe that reforms are needed in several areas, and that these areas must be addressed together to ensure better outcomes. The Hayne Royal Commission has shown that, despite the strong recommendations of the staggering number of inquiries that have preceded it, problems remain. It’s clear to us that the piecemeal approach to making improvements has not worked, and it is now time for a concerted effort across all areas.

In responding to the Hayne Royal Commission, we  have made recommendations, developed in close consultation with the CFA Societies Australia Advocacy Council and other investment management industry leaders in collaboration with the global CFA Institute advocacy team. Specifically, we have made ten recommendations which fall into four areas: strengthening best interest duty and ensuring appropriate consequences; addressing fees and conflicted remuneration; ensuring independence of advice; and the professionalisation of the financial advice industry.

Best interest duty

Recommendation 1: Strengthen the enforcement of best interest duty.

As currently defined, advisers’ duty to act in clients’ best interest often does not necessarily translate into best outcomes for the clients. Instead, the ‘safe harbour’ provision gets reduced to a “box-ticking” exercise, leaving room for circumventing the spirit of the regulation. We recommend a principles-based approach, and consideration of adopting a fiduciary duty standard.

Recommendation 2: Deter bad behaviour by establishing appropriate consequences for those who act against the interest of clients.

Deterrents should include the ability to suspend or ban people from the industry. Penalties should be in proportion to the damage done to clients and be significant enough that firms do not just view them as a cost of doing business.

Addressing fees and conflicted remuneration

Recommendation 3: Remove the grandfathering of commissions.

We strongly believe that the grandfathering of commissions allowed under the Future of Financial Advice (FOFA) legislation should be outlawed either immediately or with a short sunset period to allow firms to adjust.

Recommendation 4: Compel advisers to disclose and explain the fees that clients are paying.

Clients often pay for products and services without being aware of all the charges.  Advisers must disclose and explain in plain language to clients all fees and costs in relation to a financial product.

Recommendation 5: Ban conflicted remuneration arising from platform fees.

We want to eliminate the practice that rewards advisers for pushing particular products, rather than looking after the client’s best interests.

Recommendation 6: Reward the right behaviour by aligning the remuneration of both advisers and senior executives to the long-term interest of customers.

Remuneration and incentives at all levels should be focused on broader outcomes, which include non-financial  performance, client outcomes and compliance, while fostering ethical decision-making and removing bias toward sales.

Ensuring independent advice

Recommendation 7: Require all financial advisory firms to disclose institutional ownership or exclusive product relationships.

This recommendation is one of the most obvious steps. To ensure conflicts are known upfront, firms must disclose institutional ownership or exclusive product relationships with other organisations.

Recommendation 8: A ban on vertical integration should remain under active consideration.

We acknowledge the Royal Commission’s conclusion that an outright ban on vertical integration might not be warranted at present.  However, we believe that the banning of vertical integration for firms offering financial advice should remain under active consideration.

Professionalising the industry

Recommendation 9: Establish an independent professional body to register financial advisers.

The financial advice industry needs to become a true profession through the establishment of an independent professional body overseeing its members.

Recommendation 10: Require individual licensing of financial advisers.

Currently, individual advisers act as representatives of their firms, who often struggle to monitor the behaviour of their advisers. Individual licencing would impose an additional, individual level of accountability for professional conduct.

Changing a culture

We recognise, as does Commissioner Hayne, that the culture of the industry is a major factor behind much of the misconduct. In addition to the strengthening of regulations, significant cultural changes are required, driven not by government or regulators, but by the industry itself.

As the professional body for the investment management industry, CFA Institute and CFA Societies Australia have the tools and the ability to support the industry and its regulators in successfully achieving the reforms the Royal Commission has proposed. The CFA Institute Code of Ethics and Standards of Professional Conduct are an established ethical benchmark for the industry and, as such, can serve as a guideline in this effort.

We believe the time is NOW for the industry to act to ensure that the structures and behaviours underlying these issues are corrected. We look forward to playing a practical role in shaping the industry culture and improving outcomes on an individual and corporate level by lending our experience, expertise and resources.

Lisa Carroll is chief executive of CFA Societies Australia


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