In true Terminator style, Mathias Cormann’s contentious wind-back of Labor’s Future of Financial Advice (FoFA) laws refuses to die. About two minutes after the Senate voted to disallow Cormann’s radical FoFA changes, the Minister for Finance, aka the “Cormannator”, emailed this columnist with the belligerent news: “Given our changes had force of law for five months, ASIC will provide another transitional period to 1 July 2015.”
Rather than accepting defeat, Cormann’s Frankensteinian version of FoFA will now remain afoot until July next year. That means tremendous uncertainty as to what long-term industry architecture business will be working under.
It will be bad for consumers, who will be exposed to unacceptable new conflicts, and advisers and institutions, which will be subject to another seven months of debate about their capacity for ethical compromise.
And it is classic Cormann. His relentless porkies on the ramifications of his FoFA wind-back, which initially hoodwinked almost all advisers, journalists and politicians, nevertheless came back to bite him in the bum after The Australian Financial Review exposed them in several columns.
Australia’s entire financial services industry had for years turned itself inside out to ensure it was compliant with Labor’s FoFA reforms. Planners and their employers, which are nowadays mostly banks and other “vertically integrated” institutions like AMP, reinvented compensation models.
All conflicted remuneration, which means anything that creates economic disconnects between clients and an individual giving simple “general advice” or sensitive “personal advice” that involves specific product recommendations, were banned under Labor’s FoFA. This included all payments linked to the volume of products sold to clients outside of deposits, loans and insurance.
Advisers also had a clear-cut and principles-based obligation to always act in their clients’ “best interests”, with no carve-outs.
GOOD WORK JUNKED
The financial planning profession moved heaven and earth to migrate away from commissions and bonuses linked to sales and embraced compensation based on payments for services they rendered clients, in the same way lawyers and doctors do.
Manufacturers – including the banks, fund managers, super providers and the developers of complex, often tax-driven “structured products” – discarded the many incentives they paid distribution networks, including advisers, to push solutions down customers’ throats. While Labor’s FoFA was imperfect, it did introduce a crystal-clear focus on aligning advice and product capabilities with the client’s wealth goals. This helped ensure that the best-performing solutions, as opposed to those favoured by the distributor, won maximum market share.
Much of this good work was junked by Cormann’s vision for FoFA, presumably inspired by his time running a commission-based insurance business in Western Australia. Now anyone selling financial products using the “general advice” framework, wherein you explain a product’s features but cannot tell the customer whether it suits them, could earn unlimited sales bonuses – as long they were subject to one other test.
More remarkably, Cormann also introduced an explicit provision that allowed financial planners giving “personal advice”, which means tailored product recommendations that ostensibly address a client’s lifetime income needs, to receive direct kick-backs, or sales bonuses, from their employers based on how many products they pushed.
If you combine this with a best-interests duty demolished by Cormann to be functional in name only, and which permitted any advice to be conveniently telescoped to in-house products, the changes are a recipe for mis-selling on a massive scale.
Cormann has injected conflicts into the very heart of the financial planning vocation that only benefit the big institutions that have spent years buying or licensing planning groups on the basis they can use them as product-flogging shops. When an adviser is licensed by an institution, governance and risk management are used as Trojan horses to encourage the adviser to use the institution’s products, including their lucrative administration “platforms”.
Yet the big banks made an essential strategic mistake in this respect: having spent decades selling deposits and loans through branches, they assumed they could do the same with investments and super via planners. But they were wrong.
One of Cormann’s most senior superiors recently told me: “We need to separate financial advice from big institutions.” At the very least, we have to comprehensively eradicate conflicts between advisers and clients.
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