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The Financial Services Royal Commission in Australia

April 2018 saw a number of shocking revelations of the behaviour of the four main Australian Banks and AMP.  All of these companies operate in New Zealand (ANZ, Commonwealth Bank of Australia (ASB), National Australia Bank (BNZ), Westpac and AMP).  These have kept coming throughout May, with more information on various questionable practices from the big four.

The commission was established in 2017 after years of pressure from whistleblowers, consumer groups, the Greens, Labour and some National MPs.  The questions to be addressed were:

  1. Have any of Australia’s financial services entities engaged in misconduct,
  2. Should criminal or other legal proceedings be referred to the commonwealth.
  3. Are there sufficient mechanisms in place to compensate victims?

There were 5019 submissions received, which covered issues relating to Financial Advice, Superannuation and Banking.

Links for you to find out more about what happened:

Easy to read coverage by The Guardian (International)

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry website https://financialservices.royalcommission.gov.au/Pages/default.aspx

Why did this happen?

Businesses have a responsibility to their shareholders to make a profit.  Over the last twenty to thirty years, financial institutions around the world have found many ways to make profit for their shareholders, and also for their executives and management.

Although the regulations in Australia require financial advice to be provided ‘in the best interests of customers’, the ability for financial advice providers to clip the ticket at multiple stages of the process was too tempting.

This is referred to as being ‘vertically integrated’.  You would get advice from your ‘adviser’ at the coalface.  You would pay them a fee, they would get remunerated and rewarded on the volume of their sales.

They would then put you into a product provided by their employer/owner, which meant more fees, adding into the profit stream.  These products would then invest money with the inhouse fund manager, more fees, more profits.

The incentive packages were designed around sales and profit and often with little consideration of the client.

The whole system created significant conflicts of interest.

From personal experience, we note that the disclosure system required many pages of information to be provided to clients, much of which was not in plain English, and confused the clients, who didn’t know what was happening, but who implemented the ‘advice’, trusting the large institutions.

What was revealed?

  • AMP repeatedly lied to ASIC (the regulator)
  • 90% of financial advisers who provided advice to self managed super funds failed to comply with the best interests of their clients (out of a sample of 137)
  • Across the board –
    • Wide spread mis-selling of financial products
    • Advisers falsified documents, impersonated clients
    • Charging of fees for services that were never provided (including to client who were long dead)
  • At ANZ, risk analysis documents that weighed up the costs of changing the culture versus the risk that it would cost the company $20 million in compensating clients for bad advice.
  • NAB Staff were involved in a bribery ring covering multiple branches, forged documents, fake payslips and medicare cards, so that staff could receive their incentives to sign up new customers.

There were many other examples, but the concern is that much of these were ‘deliberate decisions’, in pursuit of profit.

An example was quoted of the consequences of getting caught doing things wrong – a senior executive had his bonus docked by 5% - that meant that his bonus was reduced from $1,020,000 to $960,000.

What has happened since?

The CEO and Chairman and three additional AMP Directors and several other senior people from AMP are no longer in their roles. https://www.smh.com.au/business/banking-and-finance/amp-directors-step-down-ahead-of-meeting-20180508-p4zdyv.html  At AMP's aGM, there was a record protest vote against Directors remuneration: http://www.abc.net.au/news/2018-05-10/amp-agm-investors-vent-their-wrath/9746798.  Two seperate class actions have been launched since the royal commission against AMP in relation to AMP shares.

ANZ have announced that they have scrapped sales bonuses for their financial planners:  https://www.channelnewsasia.com/news/business/anz-scraps-sales-bonuses-for-financial-planners-as-inquiry-shakes-up-sector-10208562

The potential sale of AMP New Zealand has been put on hold so that AMP can focus on getting things working within the Board, Management and the business.

We have outlined what is happening in New Zealand and how it affects Moneyworks in the blog articles noted below.

What does the Australian Financial Services Royal Commission mean for New Zealand?

Quota’s, incentives, and Moneyworks withdrawal from offering mortgage advice

If you have any thoughts or opinions that you would like to share, visit us at our Twitter, Facebook or Linked In pages, and comment.

By Carey Church



 

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