On 28 September 2018, Commissioner Hayne released his Interim Report into misconduct in the banking, superannuation and financial services industry. At three volumes and over 990 pages in length, Commissioner Hayne has certainly been keeping busy.
The purpose of the Interim Report is not to reach conclusions or make recommendations; its purpose is to identify not only what has happened, but why it happened. To this end, Commissioner Hayne retraces some of the history of the financial services industry. It makes for interesting reading. In particular, the Report reflects on the vertical integration which has taken place. Commissioner Hayne says vertical integration promised the virtue of efficiency which could then be passed on to consumers in the form of lower costs and greater access to advice. However, he concludes the internal efficiencies do not necessarily produce efficiency in outcomes for customers.
In this context, Commissioner Hayne identifies some specific questions which he will no doubt consider further as he prepares his final report due in February 2019. The answer to some of those questions could have a significant impact on the industry:
- Is it possible for a financial adviser to manage the conflict between its own financial interests and the duty it owes to each of its clients?
- Should entities that manufacture (or issue) products be permitted to provide financial advice at all?
- Should there be a distinction between someone who "sells" a financial product and someone who gives financial advice in relation to those products?
- Should a financial adviser be permitted to recommend a financial product manufactured or sold by a party to whom the adviser is associated?
- Should all financial advisers be licensed by ASIC? That is, should the concept of authorised representatives be abolished?
Commissioner Hayne has not attempted to answer any of these questions, but it will certainly make for interesting reading when he does. It is hard to imagine the final report will not make recommendations which will significantly overhaul the existing regulatory environment.
Recently, Funds Management partner Brendan Ivers presented on the Report at the annual Australian Property Funds Forum hosted by Core Property. In this edition of Fundamental, Brendan provides a summary of his assessment of the Report and the likely regulatory changes to follow.
Also in this edition of Fundamental, partner Brit Ibanez looks closely at the requirement to provide financial services "efficiently, honestly and fairly" and how this means more than mere compliance with the law.
Often when significant regulatory changes are proposed, lobby groups make submissions which see the proposed changes watered down, at least to some extent. In these exchanges, historically the loudest voices have belonged to the banks and wealth managers. However, all of them have lost a significant amount of their political capital in this argument. In those circumstances, it is hard to imagine we are not about to embark on some of the most significant regulatory changes we have seen in the last 20 years.