The Hayne report was an anti-climax.
When our Treasurer announced the report with “From today, the banking sector must change, and change forever”, I reckon he was talking about the alligators rather than the swamp.
It was a missed opportunity.
Considering the brief he was asked to deliver, Justice Hayne and team did an outstanding job.
But he’s set us up for the inevitable re-match.
A re-match which will again be about similar conflicts of interest and misconduct that occurs when products are sold to Australians seeking value.
THE INQUIRY CYCLE
We’ve been here before.
The 2009 Ripoll Inquiry was in some ways a response to the Townsville-based Storm Financial collapse. Bernie Ripoll found that remuneration incentives from financial product providers can lead to advice that is not in best interests of customers, recommending that advisers must hold a fiduciary duty to their clients.
In 2010 Jeremy Cooper, former deputy chair of ASIC, headed the Cooper Review into our Superannuation. Among many initiatives, he heralded MySuper to ‘make it easier’ for those non-engaged, but couldn’t predict some of the consequences of his recommendations six years later in ASIC Report 499 – Fees for No Service.
In 2012 the FOFA Legislation was tabled for implementation July 2013. FOFA promised the worthy pursuits of serving the best interests of all Australians while helping us avoid conflicted advice and making fee disclosure clearer. Unintentionally, FOFA has successfully positioned compliance as its own industry within an industry.
In 2014 we had the Murray Inquiry. Another thorough analysis of our financial system which tabled 44 recommendations. Two of the seven key themes will be familiar as they aimed to enhance confidence and trust by ensuring financial firms treated customers fairly and strengthening the regulator to minimise the future need for regulations.
In 2015 we heard about the insurance focussed 2015 Trowbridge Report, recommending 11 initiatives, designed to remove misaligned incentives while aligning the interests of insurers, licensees and advisers.
In 2017, the Australian Bankers Association tabled Stephen’s Sedgewick’s Retail Banking Remuneration Review with 21 recommendations to bridge the trust gap between the banking industry and customers.
Justice Hayne has now asked former ACCC head Graeme Samuel, to head an APRA review. Mr. Samuel notes that Justice Hayne has ‘struck the right balance’ for a new industry balance between governance, culture and remuneration.
We’ve been here before and we seem destined to keep going back.
IT'S ABOUT VALUE
While the origins of financial services were in times with different priorities and respect regarding the role finance provided to us and the economy, there’s little doubt that financial services today is more a discussion about products rather than services.
We need a loan. We need to manage our superannuation. We need to get our taxes done. We want to live well in retirement as we age. We want to support our kids. We want our money to work as hard as we do.
However, most of us don’t wake up craving a loan, or a better superannuation return.
While important, we want what these products might best provide for us.
Financial products and services are only the means for a much more significant question – acquiring what we value.
Justice Hayne wasn’t tasked to determine how the swamp should deliver value.
Dr. Philip Lowe, our Reserve Bank governor, leans with many others highlighting the common culprit as ‘culture’. At a National Press Club speech recently he said “Why did this happen? I think there was a very clear focus on sales rather than service”.
When I read that ‘culture’ is being rounded up with the other usual suspects of arrogance, greed, profits and shareholder returns, I’m reminded of Professor Steven Luke’s three dimensions of power.
Culture is indeed important, but a potentially dangerous aspect of the ‘culture blame game’ is what Professor Luke’s refers to as his second dimension of power – which is the subtle intended (or unintended) focus that influences the much-needed change efforts.
By controlling the improvement agenda around the topic of culture, while not without merit, helps avoid more in-depth focus on harder questions.
Harder topics such as how does the swamp deliver value to more Australians.
Or even harder, how to best remunerate providers of value?
IT'S ABOUT REMUNERATION
Fundamentally, the swamp continues to remunerate most of its alligators in a manner that is not linked to the delivery of value.
No wonder the alligators are confused and hungry as their careers in the last thirty years have been built upon provision of products, profits, and shareholder value. It’s less about the culture of the swamp and more the remuneration of some of the dwellers.
Building new careers on the provision of what the client values, that’s a very different swamp.
It’s a topic Justice Hayne skirts.
However, like nature, entrepreneurs abhor vacuums and less crowded swamps, provided they can continue with existing models to legally ‘clip the tickets’ of all dwellers.
Remuneration of the financial sector is not a topic that Professor Elizabeth Sheedy from Macquarie University’s Applied Finance Centre shies away from. Professor Sheedy is reported as being ‘underwhelmed’ by the Royal Commission’s recommendations suggesting a broad review of all variable remuneration within the financial sector.
This isn’t easy stuff.
Back in 2012, after four years of consultation, the Accounting Professional and Ethical Standards Board (APESB) released a new accounting standard – APES230 – which effectively removed all remuneration from all products for all accountants delivering financial advice in Australia.
The new standard was barely breathing for less than four months before the incumbent product-dominated accounting groups manage to lobby and water down APES230 to enable their product-based status quo - i.e. remuneration for products, profits and shareholder returns.
Remuneration standards in the financial services industry must be regarded as equivalent to sanitation standards in our health system.
Without an agreement to new standards of remuneration the delivery of value, either product or advice, will remain infected by perceived or real incentives.
For as long as people continue to get remunerated in a manner that is not linked to the delivery of value, either as products or advice, they have little incentive to understand what their customers value.
There’ll be a re-match.
It might not be the banks.
It could be the new giants – the industry funds – who, according to recent Productivity Commission Superannuation Performance report identified an estimated $2.6b waste simply due inactive default super accounts – it appears the smoke signals for the next fees for no service are already on the horizon.
Or maybe it will be the next target will be the new fintech-savvy, robo-advisory, open banking opportunists, funded by (ad)venture money seeking high returns delivering smarter financial products without the costs of long-established bricks and mortar. I heard more than danger signs from one before Christmas sprouting how they could not believe the amount of venture money they are being offered.
Maybe our expectations of Justice Hayne’s finale were always going to be hard to live up to.
Who would have believed that the initial estimates by ASIC of $178m in remediation fees cited in the October 2016 media release of the original Fees For No Service Report were going to blow out to the billions now being provisioned?
Justice Hayne has given us all more knowledge, he has persuaded and influenced us, he has us making different decisions about our financial lives.
But he hasn’t delivered us more value.
We had hoped his recommendation might include how best to address the lost link between product and value, with more explicit reform surrounding remuneration and incentives. While the current banks exit wealth, their positions will be readily taken by other similarly remunerated groups.
It will be a pity if Justice Hayne’s report is best remembered for how it influenced the culture of today’s alligators. We had hoped it provide the forward regulatory path needed to accelerate the delivery of greater value for us all.
Maybe the next inquiry.
What do you reckon?
About Jim Stackpool
For nearly 30 years Jim has influenced, coached, and consulted to advisory firms across Australia. As founder of Certainty Advice Group, he leads a like-minded team of professional advisory firms seeking to create greater certainty for their clients. As an author, blogger, columnist, and keynote speaker, Jim is regularly called upon for his professional insights into the advice industry. His latest book Seeking Certainty is available now.