A Federal Parliamentary inquiry into the financial planning sector has recommended that financial planners be subject to a new fiduciary duty to place their clients’ needs ahead of their own, but has stopped short of advocating a ban on commissions paid to financial planners.
The Parliamentary Joint Committee on Corporations and Financial Services launched an inquiry into the financial services and products sector following the collapse of Queensland-based financial services company Storm Financial, and heard countless stories from the victims of that crash.
In response, the Committee has made 11 specific recommendations aimed at reducing perceived conflicts of interest in the industry and improving surveillance of the sector.
The key recommendation is to amend the Corporation Act to give financial planners operating under the financial licensing regime a fiduciary duty “requiring them to place their clients’ interests ahead of their own. ”
The committee sees this as a key strategy to reduce potential conflicts of interest that can occur when a financial planner is being paid commissions to recommend certain products or investment strategies.
The chief executive of the Investment and Financial Services Association, John Brogden, supports the recommendation.
“The Committee’s recommendation seeking a fiduciary duty for financial advisers is a win for consumers and a win for the professional standing of the advice industry,” Brogden said in a statement.
“If a fiduciary duty for financial advisers is adopted, we do not believe that ceasing remuneration paid to financial advisers from product manufacturers is required. “
But while Borgden is clearly pleased that the committee refused to ban commissions outright, it has recommended that “the Government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers”.
It would appear that there is strong support in Labour Government ranks for the complete removal of commissions.
This morning, Federal Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, signalled he will be looking closely at doing away with commissions.
“We’ll be working through the recommendations of the Ripoll report… to help ensure that financial advice is in the best interests of the client, while keeping this advice within the reach of those who may need it most,” Bowen said in a statement.
“The move away from commissions will improve transparency for consumers and will help to ensure that your clients receive advice which is free from any conflict of interest, whether real or perceived.”
The other key recommendations involve the beefing up of supervisory powers of the Australian Securities and Investment Commission, including providing resources for the watchdog to conduct “risk-based” surveillance of planners and planning groups, including annual “shadow shopping exercises”.
The new powers for ASIC came after the committee found that “more effective risk-based auditing processes might have assisted ASIC in recognising Storm’s practices as being problematic at an earlier point in time”.
The committee has also recommended that the Government investigate the possibility of establishing a last-resort compensation fund for victims of dodgy financial advice.
However, the chief executive of the Financial Planning Association of Australia, Jo-Anne Bloch, has warned that the introduction of such a scheme – and particularly the methods used to fund it – could lead to increased costs.
This issue has long been a source of anxiety for the FPA. If we are now to grapple with a compensation scheme, we want to work with the committee and other stakeholders to ensure a reasonable outcome that does not simply raise the costs for financial planners who are doing the right thing.”
However, both the FPA and IFSA were pleased with the committee’s recommendation to make financial advice tax deductible.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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