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Interim findings of the Royal Commission should come as no surprise

John Hewison
Founder and Director
13 Nov 2018

The Hayne Royal Commission (RC) into the Banking, Superannuation and financial services industry released its interim report a month or so ago. The revelations of the RC have been widely reported to the dismay and shock of most. The questionable practices of many major corporate institutions have been disgraceful and the lack of action by the regulators unfathomable.

The fact is the financial services industry has grown up in an environment of hidden commissions, conflicts of interest and inflated costs to consumers to feed the hunger of greedy corporations.

What Hayne exposed was a climate of corporate greed and a failure of Boards of Directors to fulfil their obligations under the corporations’ law, and a failure of management to enforce appropriate policies and adequately supervise the activities of their employees and/or agents.

The Australian regulation is considered to be world’s best practice, so it is not as if there is any deficiency in the law. Where the deficiencies clearly lie is in the failure of certain sectors to apply this law. Also at question is the failure of the regulation of the standards – these are issues that must be addressed.

None of the issues exposed should have come as any surprise. Both the government and the Australian Securities and Investment Commission (ASIC) were continually briefed by the Financial Planning Association (FPA) and members of the profession over decades, concerning conflicted remuneration, inadequate supervision and education standards. These concerns fell on deaf ears, until recently when government legislated the banning of commissions and education standards were lifted to degree-based level.

But no one wants to take responsibility. The regulator blames the industry and the government for not legislating. The government blames the regulator for not enforcing. And then there are the political forces that come to bear in Canberra and the lobbying power of the big end of town that captures the politician’s attention.

It’s important to understand how the Australian financial services licensing regime works.

Providers of financial services, be it a large corporation like a bank or an independent sole practitioner, must hold an Australian Financial Services License (AFSL), which is regulated under Section 912 of the Corporations Act. The licensee may employ advisers or appoint agents, which could be other corporations, to act under the authority of their license to provide financial planning and product advice.

What this means is that the licensee, which could be a large corporation with thousands of representatives, is totally responsible for the compliance with the law in respect to advice and financial-product recommendations. It is totally responsible for the standards, education, management of conflicts, disclosure of costs and fulfilling fiduciary duty. Advisers operating under an authority to a licensee are responsible to the licensee and the licensee is responsible under the Act to supervise the activities of their authorised representatives.

Historically speaking, financial advisers were remunerated by commissions paid by the institutions whose financial products they recommended to their clients. This was clearly a conflicted model and after decades of lobbying by the financial planning profession and consumer groups the government finally banned commissions. But the government also saw fit to exclude existing arrangements and thus perpetuated billions of dollars in commission laden investments. This means that consumers holding these investments would continue paying annual commissions and were unlikely to ever be advised to change them, regardless of the appropriateness of the investment, as the adviser would lose the commission income.

What were they thinking?

It is interesting to note that in the light of Hayne, ASIC has come out and recommended that these grandfathered arrangements should be terminated.

As a Life Member and former Chair of the Financial Planning Association of Australia (FPA), I was troubled by the failure of the FPA’s Disciplinary process to bring timely sanctions against its member Sam Henderson in the light of the RCs questioning of his activities. The evidence presented against Henderson was damming and I don’t seek to defend him. Whilst I am surprised at the FPA’s failure to act more quickly I wasn’t party to the investigations or the hearing, so it is unfair for me to pass judgement.

But what I can say is that I have been a past member of the FPAs Judiciary Panel, which consists of senior experienced Certified Financial Planner professionals and members of the Judiciary. From my experience, panel hearings are taken very seriously and are run in an atmosphere of vigour and gravity. It is not a place you want to find yourself as a defendant. Why the panel had not finalised the Henderson case after 12 months is puzzling, but it can’t be denied that the FPA has a disciplinary process in place, although it may need to be given more powers under a co-regulatory model.

The FPA has done a wonderful job in driving education programs, Practicing Standards, Codes of Ethics and disciplinary arrangements. It is a little-known fact that the FPA established the Financial Services Compensation Scheme (now part of the Financial Ombudsman Service) back in 2000 with a $3 million investment of its member funds. The FPA introduced the globally recognised Certified Financial Planner (CFP) professional designation to Australia in 1993. The FPA is a highly respected member of the Financial Planning Standards Board (FPSB) which governs the CFP mark thought the world. Within that community, Australia is considered to represent world’s best practice in financial planning globally.

Now, after years of lobbying and negotiating, the government has legislated to lift the base education standard for financial planners to a tertiary degree level with appropriate post graduate specialist qualifications. Interesting to note that our firm Hewison Private Wealth introduced this minimum standard in 1996!

There will be considerable fall-out with the introduction of new standards that come into force in 2020. Already we are seeing a huge increase in the merger and acquisition market for financial planning practices led by principals who do not meet the degree-based standards choosing to sell-out. Likewise, if grandfathered commissions are terminated, many financial planning practices will become virtually worthless overnight and there will be a further exodus from the industry.

There are clear conflicts that exist in the current licensing system and that relates to the separation between financial advice and product manufacture. Simply put, where the licensee provides advice and manufactures financial products, a conflict of interest exists that is unacceptable. This needs to be changed as a matter of priority.

There is a distinct difference between a professional advice model and a corporate model. Professional advisers focus on the advice piece and the wellbeing of their client. The corporate model is conflicted and profit driven. There have been many attempts at corporatising professional advice including accountants, doctors and lawyers. All have failed for this very reason.

It has been shown that ASIC has been unable to effectively regulate the requirements of the legislation. The FPA has been found to have a lack of power in its disciplinary arrangements. But together, under a co-regulatory model, there is a good chance of successfully regulating the standards and enforcing accountability.

Financial planning is a distinct and separate profession requiring high education and practicing standards. It is important to the security of Australian’s financial futures. We have good legislation and a community of well-educated and well-intentioned financial planners, but we need to create an environment where practice standards are properly supervised and audited.

As commented by Commissioner Hayne, like all other professions, Financial Planners should be required to belong to a Professional Association that has a set of practicing Standards and Code of Ethics, Education standards and a robust Disciplinary Regime. The FPA already has these mechanisms in place.

My summary for change follows

  • Leave the prescriptive part of the legislation alone
  • Separate financial advice from product manufacture
  • Consider individual practitioner licensing
  • ASIC to maintain a register of practitioners with a record of experience and any offences
  • Require compulsory membership of a professional association e.g. FPA
  • Develop a co-regulatory model that can deliver effective compliance and accountability
  • Introduce compulsory user-pays audit of all individual practices and/or practitioners.
  • Introduce criminal sanctions for those who break the law
  • Develop a mutual discretionary fund to provide effective consumer compensation arrangements


My final message to those responsible and the community in general is that Australian standards are excellent and require little if change in respect to the delivery of financial advice. But there must be adequate accountability and supervision.

There are many high quality professional financial planning practices and individual practitioners operating in Australia and probably many more who are employed in the conflicted corporate sector. Despite the revelations of Hayne, we are not far away from getting it right. We just need all the parties to come together in a spirit of goodwill and take the decisions that are in the public interest and in the interest of the Financial Planning Profession of which I am a proud member.


Auhtored by Founder & Chairman, John Hewison CFP, M FinPlan, FFPA, FPA Life Member, SSA FAICD.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.