After years of fighting back, the big banks have been forced by the public “shaming” of the royal commission to concede that charging commissions in financial advice must finally be abolished.
Despite having already released a new industry code earlier this year, the Australian Banking Association on Wednesday announced it was updating the code to refund fees charged to dead customers and fees charged for no reason.
Crucially, the banks also pledged their support for a change to the law that would remove most, if not all, remaining commissions from the financial advice they sell.
“This is another important piece in the puzzle of ensuring there are no conflicts for advisers,” Australian Banking Association chief Anna Bligh said.
In a live interview on Channel Nine, she said: “I can absolutely assure you that banks are sitting up and listening to everything in the royal commission and you can take the announcement of these reforms today as clear evidence they know ‘business as usual’ is not going to be enough to earn back the trust of the Australian people.”
Bank support for beefing up what are known as the ‘FOFA’ laws marks a dramatic turning point. As Ms Bligh admitted, it was a response to the interim findings of the banking royal commission – which she has already described as a “day of shame” for the sector.
The big four banks have already said they will end grandfathered commissions.
The Gillard government banned commissions in 2013 on the grounds they encouraged advisers to recommend products that were in the adviser’s interest rather than the customer’s. The reforms were known as the Future of Financial Advice (FOFA).
(A ‘commission’ is where a financial adviser is paid money for recommending a product. It differs from fees charged for the service of giving financial advice.)
But the big banks fought hard for an exemption that allowed them to ‘grandfather’ commissions that existed before July 1, 2013.
‘Grandfathering’ simply means allowing the old laws to continue on contracts that were entered into before the new laws came into effect. The grandfathering provisions end if you leave your adviser or switch your investments to a new product.
An example is AMP – a member of the banking association – which revealed to the royal commission that 20 per cent of the fees paid to its financial advisers, worth billions of dollars, were ‘grandfathered’ commissions.
Corporate regulator ASIC had repeatedly called for an end to grandfathered commissions (including during the royal commission’s public hearings in August) on the grounds that they encouraged advisers to keep clients in old financial products instead of moving them onto newer and better products.
“Grandfathering – the entire provision – is not in the interests of consumers,” then deputy ASIC chair Peter Kell told the commission.
“The Parliament has in effect put in place a provision that enables the continuing payment of commission that generate conflicts of interest and unnecessary costs widely across the financial system.”
If legislated, a ban on grandfathering might fully realise the original intention of FOFA – the full abolition of financial advice commissions.
Signing the new ABA code of practice is voluntary for the banks, but once agreed to, customers can take signatories to the new Financial Complaints Authority for breaches.
In his interim report, the banking royal commissioner Kenneth Haynes accused the banking sector of greed.
“Why did this happen? Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty,” he wrote.
“How else is charging continuing advice fees to the dead to be explained?”