What does the Financial Services Royal Commission mean for consumers?

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has uncovered a range of poor behaviours and unethical practices within many of Australia’s major financial institutions.

This has appalled consumers and raised serious questions about the management and culture within some of our biggest companies, and the scope of the commission may yet be expanded to investigate other issues within the industry.

Until the Royal Commission is completed and the findings are presented, we do not know exactly what the final outcomes will be.

However, we do know some of the changes that are coming and the potential impact for consumers.

Industry breakup

Firstly, most banks will exit the wealth management industry.

ANZ (Australia and New Zealand Banking Group) has already agreed to the sale of its Onepath business to IOOF.

Both Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) have announced the intention to divest their respective wealth arms, Colonial First State and MLC. Only Westpac is holding onto Pendal (formerly BT) for now, but there is talk of a demerger.

The biggest exception is Macquarie Bank, for whom wealth management is a core business.

Advisers are also following suit. Many are leaving the larger institutions and institutionally aligned dealer groups and pursuing relationships within independently licensed firms.

While there have been examples of poor advice provided by other practitioners in the industry, the main focus of the Royal Commission has been the larger financial institutions and aligned dealer groups. This is due to their vertically integrated model.

Selling their own products to consumers within a transactional culture and with associated financial incentives led to more systematic, larger scale failures in providing appropriate advice to consumers.

Compliance upgrade

Compliance obligations will increase with participants in the industry needing to adhere to stricter conditions, including reporting to more vigilant and better-resourced regulators.

If implemented properly, this will provide greater consumer protection and make it more difficult for poor behaviour or non-compliance to slip through unnoticed.

The downside is that the cost associated with an increased compliance burden will inevitably be passed on to consumers. This could make financial advice less accessible to those who need it the most.

Higher educational standards

Education standards for financial advisers will be increased.

While this is a good thing in the longer term and will ensure all advisers have minimum and consistent standards of education and experience, there are some other consequences.

The changes proposed by FASEA (Financial Advisers Standard and Ethics Authority) will not only require new advisers to adhere to new educational requirements, they will also apply to existing advisers.

While this may seem necessary to ensure consistency, it will mean that many highly skilled and experienced advisers will need to undertake potentially lengthy study in pursuit of expensive qualifications that simply formalise what they already know and practice.

For advisers who are nearing the end of the careers, this may be difficult to justify.

The result is that more than 25% of advisers are expected to leave the industry when the new requirements are implemented in a few years’ time.

This means a loss of experience and intellectual capacity within an industry that desperately needs skilled practitioners to continue to service clients and mentor new advisors coming into the industry.

Outcome

Overall, the outcome of the Royal Commission will be a more professional and ethical financial services industry that will better meet the needs of consumers.

Higher compliance and educational requirements should weed out the small number of unethical or substandard advisers, improve consumer confidence in the industry, and raise the profile of its practitioners to the same level as other professionals.

In the meantime, however, there are likely to be further dramatic headlines as the commission continues to uncover further skeletons in the financial services closet.

Find out more about the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry here.