Second Anniversary of the Release of the Royal Commission Final Report

AFA News 3 February 2021. This week marks the second anniversary of the release of the final report of the Hayne Royal Commission.  Much has changed in those two years, including a slowly increasing realisation that some of these recommendations may not be in the interests of all consumers of financial services.  Change on this front has been slow as the Royal Commission recommendations remain largely sacred cows.  We should not forget that the ALP supported the recommendations before they were announced, and the Coalition agreed to 75 of the 76 recommendations within 3 days of receiving the final report.

What has definitely changed is the COVID 19 crisis.  Also, in the advice space, it is increasingly apparent to all that financial advice is rapidly becoming inaccessible and unaffordable for everyday Australians.  Nothing that Hayne recommended is going to improve that.  In fact, it is going to materially increase the cost of running an advice practice and providing financial advice.  Many clients have already lost access to advice as many grandfathered commission clients have unfortunately been forced out and the minimum annual ongoing fee has risen substantially.

A Lack of Deep Understanding

It was a big ask to have a Royal Commission review so much of the banking, lending, insurance, investment, superannuation and financial advice sectors in a short period of time.  There was a lot of media focus on what they were doing and arguably in the political dynamic at the time, in the lead up to the 2019 election, this became a big factor.  It is in the circumstances of this broad scope and limited timeframe that it was unsurprising that a number of mistakes were made.  This would be understandable and acceptable, except that the consequences were so great, and the political dynamic has meant that there has been inadequate debate and review of what was recommended.

A couple of obvious mistakes were to describe intra-fund advice as the “provision of advice that is not personal advice” and to refer to the Life Insurance Framework as “a monetary benefit relating to a life risk product will not be conflicted remuneration if it is a level commission within the applicable cap and provides a ‘clawback’ arrangement if the policy is cancelled, not continued, or the policy cost is reduced in the first two years of the policy”.

Clearly intra-fund advice is personal advice and the LIF only impacts upfront commissions and has no impact on level commission business.  There are no caps on level commission business.  This lack of understanding impacts recommendation 2.5, on Life Insurance Commissions in suggesting:

ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.

ASIC has no power to cap commissions on level commission business, which would mean that it is only the Government that could do what he has proposed.

What the Hayne Royal Commission Failed to Do

At the time of releasing the interim report in September 2019, one of Hayne’s key points was that the Corporations Act was too complex and that it needed to be simplified.  This is certainly the case for financial advice, however in the final report, there were no recommendations to deliver genuine simplification.  They might claim that the recommendations to remove some of the exemptions was simplification, however no regulatory regime exists without a range of exemption measures.  The removal of exemptions, like Grandfathered Commissions, is not the basis to claim simplification of the regulatory regime, which is what is really required to address access and affordability.

The primary focus of the Royal Commission was misconduct or conduct that was below community standards and expectations.  The Royal Commission was also tasked, through paragraph (f) of their Terms of Reference with assessing the adequacy of the existing laws and policies of the Commonwealth, taking into account existing law reform already announced by the Government.  However, in recommending any changes, the Royal Commission was also directed in paragraph (k) to have regard to the implications of any changes for access to and the cost of financial services.  The Royal Commission was also directed in paragraph (l) to have regard to comparable international experiences, practices and reforms.

It could be argued that by the requirement in paragraph (f) to consider any reforms already announced and through paragraph (k) to have considered the implications for access to and the cost of financial services and to have regard to international experience, that there were sufficient protections in place, to ensure that any recommendations were well founded.

We can see no evidence of compliance by the Royal Commission with paragraph (k) on the implications of the recommendations, and little evidence of adherence to paragraph (l) with respect to international experience.  This is clearly the case with the recommendation on life insurance commissions, where the western world has a very different view on commissions.  These issues have been compounded by the repeated statements In Explanatory Memorandums for Royal Commission legislation, that the Royal Commission was equivalent to a Regulation Impact Statement, despite the evident lack of consideration of the implications of these recommendations.

Status of the Royal Commission Recommendations

The Bill to Ban Grandfathered Commissions was dealt with early on in the process and was passed back in October 2019.  The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was introduced in November 2020 and passed in the last sitting week of 2020 with little fanfare or debate.  This is the Bill that will require claims handling licensing and make the significant breaches regime substantially more complex and resource intensive for the advice sector.  The latest batch, which includes the Annual Renewal recommendation was introduced to the House of Representatives on 8 December 2020 and is yet to be debated.  We still have the Single Disciplinary Body and the Compensation Scheme of Last Resort legislation to come at some stage this year.  There are other Hayne recommendations that are still to play out, including the one related to the 2021 LIF review and a 2022 Review of measures to improve the quality of advice (Recommendation 2.3).

Two years after the release of the Hayne Royal Commission final report, the impact is still flowing through.  In the context of the change in the financial advice sector dynamic and the increased focus upon access to and affordability of financial advice, we can only hope that the Government and the Parliament will give greater consideration to the impact of these reforms on the cost of providing financial services.  We want to see more great advice provided to more Australians, not less.

Issued 03.02.2021. AFA Policy & Education Update