Financial Planning, Regulation

Interim report questions key advice concerns

tax impact; franking credits

The impact of franking credit refunds on the wider tax base has yet to be addressed, despite being a major election issue.

The royal commission into banking, superannuation and financial services has identified greed and the “pursuit of short term profit at the expense of basic standards of honesty” as the reasons for the misconduct, and highlighted several issues for the financial advice sector.

In the interim report released today, commissioner Kenneth Hayne launched a scathing attack not only on banks but all financial services entities, stating they all recognised they sold services and products, and selling became their focus of attention.

“Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’,” Hayne said in the executive summary of the report.

He underscored the law already stipulates entities to “do all things necessary to ensure” that services they are licensed to provide are provided “efficiently, honestly and fairly”.

“Passing some new law to say, again, ‘do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?” he said.

Hayne questioned if, instead, existing law must be administered or enforced differently.

“Is different enforcement what is needed to have entities apply basic standards of fairness and honesty. The basic ideas are very simple. Should the law be simplified to reflect those ideas better?” he noted.

The interim report listed issues that have emerged from the royal commission, including culture and incentives, conflicts of interest and duty, and confusion of roles, and regulator effectiveness.

In the section covering financial advice of the 375 page report, Hayne posed numerous questions based on the concerns identified from the hearings.

He questioned how far can and how far should there be a separation between providing financial advice and manufacture or sale of financial products.

He further questioned whether financial product manufacturers should be permitted to provide financial advice at all, and to retail clients, as well as if financial product sellers should be permitted to provide financial advice at all, and to retail clients.

The interim report highlighted whether there should be greater focus on general deterrence in regulatory strategy.

“Should a component of enforceable undertakings be the acknowledgment of specific wrongs? Should self-reported breaches of the Corporations Act generally attract legal sanctions unless some special circumstances exist?” it said.

“Should banning orders continue to be preferred to civil penalty proceedings in case of licensee/adviser misconduct?”

Lastly, Hayne asked how a financial adviser’s employer encourages provision of sound advice, including, where appropriate telling the client to do nothing.

He was also critical of the effectiveness of the two regulators and their responses to misconduct in financial services entities and banks, stating the Australian Securities and Investments Commission (ASIC) rarely went to court to pursue public denunciation of and punishment for misconduct, while the Australian Prudential Regulation Authority (APRA) never went to court.

“Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct,” he warned.

“Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.”

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