What Royal Banking Commission means for a Financial Planning Customer?

The Royal Banking Commission has been a hot topic over the past few months, with banks and financial institutions dragged over the coals regarding unscrupulous lending practices and bad financial advice. Recent findings have the potential to change the way the banking and financial services industries operate in Australia, and the implications of these findings will affect financial planning customers.

What is a Royal Commission?

A royal commission is a public inquiry governed by an act of parliament. They can call witnesses, take evidence and make recommendations, including to change laws and regulations. The Royal Banking Commission was called after ongoing accounts of serious misconduct in the banking and financial services industry. The purpose of the commission is to identify shortcomings in the way the industry operates, to protect consumers and to strengthen the industry in the long run.

 

A report released in January by the Australian Securities and Investments Commission (ASIC) found that financial planners across the Big 4 banks plus AMP disregarded the best interests of customers as much as 75% of the time. Furthermore, in 10% of cases customers were left significantly worse off*. As a consumer of financial planning services, the royal commission will result in you receiving better advice from more qualified planners in future.

What does this mean for me?

The royal commission is expected to run until February 2019, so it is still far too early for any action to be taken by the regulator and financial industry. In the meantime, financial planners will be under tough scrutiny and many have already started to revise their processes to ensure compliance with existing regulations and prepare for the future. Two of the major discussions have revolved around a change in fee structure for financial planners, and the complete separation between banks and financial planning institutions, as explained below.

1. Change in fee structure

One of the most likely results of the royal commission will be a change in fee structure for financial planners. In 2013, the Future of Financial Advice (FoFA) laws came into practice in Australia. These laws were designed to force financial planners to keep the best interests of clients in mind and restricted the way in which financial planners could earn profit. Primarily, the FoFA legislation enacted a ban on any payment to financial planners that could influence their product recommendations or advice.

Unfortunately, the laws were a costly exercise that did not lead to a reduction in profit-driven advice, as financial services companies simply changed their rewards structure and focused on exempt products. The royal commission has floated the idea of a complete ban on percentage based fees in order to increase the motivation for financial planners to give sound, customer-centric advice.

2. Abolish conflicted remuneration

Another proposed change may be the complete severance of the financial planning arms of the major banks. Currently, the major banks all own or have partnerships with a wealth management business. The royal commission has found that this structure allows financial services institutions to undercut the FoFA legislation and promote the services of their partner organization, potentially ignoring the best interests of the customer. Whilst awaiting this change, consumers do have the option to visit independent financial planners, who can provide a balanced service without the risk of conflicted remuneration.

And what about the future?

Of course, not all financial planners engage in misleading practices and profit-driven advice. In fact, the majority have the best interests of their customers in mind and solid training and experience to back it up. When the Royal Banking Commission comes to an end, we can expect a few teething problems as financial institutions adapt to the new recommendations, however, in the end, it should lead to fairer banking and financial planning for all.