Financial advice following the Royal Commission
Financial advice following the Royal Commission
The ongoing pressures on the financial advice industry mean there is a need to focus on providing quality advice for clients, while also ensuring advice businesses remain profitable.
With scrutiny faced by advisers and the industry as a whole, coupled with the reforms already in progress, none of the findings and recommendations in the Final Report (the Report) from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry are surprising.
While implementation of the recommendations will no doubt prove challenging for legislators, regulators and the industry, the industry will likely welcome the fact that the Report is not recommending a complete overhaul. Rather, the recommendations continue the existing trend of reforms and changes designed to increase consumer confidence in financial advice.
Financial advice licensees need to digest and consider how to implement the recommendations into their existing models. Focusing on the following three areas will be critical:
Quality advice and the best interests duty
The Commission, together with existing legislation and reforms, has made recommendations on three key pillars which go to the heart of safeguarding the quality of financial advice:
- Customer centricity and the best interest duty.
- Improving professional standards of financial advisers.
- Removing impact of conflicted remuneration.
The Report notes the safe harbour provisions may undermine the broader obligation for advisers to act in the best interests of their clients, but it stops short of recommending that the safe harbour steps be repealed. Instead, it has recommended a review of the effectiveness of FoFA and other measures designed to improve the quality of advice by 2022, including the safe harbour provisions.
The Report has included a number of additional recommendations focused on the quality of advice and the conflict between advisers’ duty to clients and their own interests (or the interests of the licensee and other related parties).
In KPMG’s view, there are three additional levers that directly impact the delivery of quality of financial advice in a compliant and efficient manner (whether the following are provided by a self-licensed adviser, or with the assistance of an advice licensee):
- Efficiency in the implementation of advice – delivery of customer advice through efficient, transparent and simple advice platforms, including the adoption of improved technology.
- Sustainable financial planning practices with sufficiently robust revenue streams to support the investment in tools and services that attract and retain financial planners and customers, and cover the costs of effective controls and higher compliance standards. The phasing out of grandfathered commissions places increased pressure for financial planning practices to remain profitable (as discussed below).
- The advice is right-sized for the client’s needs and profile, with lower cost options beyond traditional comprehensive advice including direct distribution to the customers.
The changing nature of revenue and further cost pressures
The recommended cessation of grandfathered commissions, and a continuing reduction of the life insurance cap to zero, will impact revenue models at both a practice firm level and licensee level, especially where back office services are centralised by the licensee. This has the potential to impact P&Ls and solvency. Given the significant cost pressures already faced by advice licensees, expense reduction will need to be considered, as well as cost-to-service models that are cheaper and more efficient.
While the Report has not recommended that vertical integration be banned, which will be welcome by those who believe in the greater efficiency such structures deliver customers, these benefits will likely only be fully realised where licensees:
- develop truly integrated retail capabilities
- are able to offer the customer a genuinely flexible omni-channel experience with different advice propositions
- are able to develop a far more sophisticated conflict management framework. And with the added pressure of recommendations prohibiting the hawking of superannuation products and insurance products, licensees will face greater pressure to identify and realise all efficiency gains.
New business models (not just new pricing models), and more efficient service delivery to reduce the cost of advice must be quickly identified and implemented to ensure the cost of advice doesn’t outweigh the revenue available to advisers and licensees.
Implementing technology to increase efficiency (while also promoting standardisation and process improvements, improved compliance and better customer experience) will be central to ensuring that the provision of advice remains profitable.
Improved governance and control frameworks
To support the Report’s recommendations, to ensure compliance with the legislative and regulatory changes, and to increase consumer confidence, advice licensees will need to further enhance their governance and control frameworks with clear accountabilities for risk monitoring and management, and an understanding of risk appetite.
In line with our thoughts above, it is KPMG’s view that enhanced technology solutions will play a critical role in driving the required improvements in risk management, supervision and monitoring to ensure all required improvements can be delivered effectively and efficiently.
To support the drive towards professionalism, adviser onboarding (in line with the Report’s recommendation 2.7 regarding reference checking) and termination processes will require more vigour and transparency by licensees. A new disciplinary system has been recommended to register misconduct, which will require improved policies and processes to ensure compliance and appropriate reporting.
It remains to be seen how such a disciplinary system will interact with the requirement that advisers are a member of a code monitoring body. Licensees, advisers, clients and other industry participants will have an increased expectation that licensees have available accurate, up to date, and complete records to support these new requirements. The need to ensure advice and monitoring records are complete will become ever more important.
While the challenges keep coming, the drive towards professionalism and the incorporation of better technology into advice businesses will hopefully result in better customer outcomes and improved profitability.
Financial Services Royal Commission Final Report: KPMG overview
KPMG’s overview of the Royal Commission Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry.
Culture and governance in financial services following the Royal Commission
With the release of the Royal Commission’s Final Report it is clear that every financial services entity must look closely at its culture.
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