There were 76 recommendations made by the Hayne Royal commission to address misconduct within the banking sector. Collectively, the recommendations are all aimed at addressing either directly or indirectly what Commissioner Hayne identified as the root cause of all the problems being “conflicted remuneration”.
Commissioner Hayne concluded that over an extended period of time a situation developed in financial services where customers came to banks essentially seeking advice as to the best products and services available to meet their needs. However, customers were unwilling in most cases to pay for this advice. To address this issue banks provided “free” advice to customers, but made money on the products and services they advised customers would meet their needs and which customers could purchase from the bank. A high pressure sales culture developed where banks were expected to increase profits each year and individual bank employees were paid bonus payments dependent on the revenue they generated for the bank. Over a number of years this sales culture resulted in customers being advised to take up products and services that increased revenue for the banks rather than those products that were in the customers’ best (or better) interests.
This situation where customers are reluctant to pay for advice which they believe should be given to them for “free’ is common in all walks of life and problems primarily arise through one of perception. For example, the average person typically treats advice from a used car salesman as to which vehicle they should buy with greater skepticism than advice from their doctor as to which drugs they should take for an ailment. Part of this is reason is because the person recognises that in these two situations the remuneration situations are entirely different. The used car sales person is heavily (if not solely) paid on commission whereas the doctor is paid an hourly rate for consultations (and hopefully not incentives from the drug companies). In a nutshell, the public has been outraged to discover banks were behaving like used car sales people rather than doctors.
Commissioner Hayne’s recommendations all try to tackle this issue of “conflicted remuneration” so that systems do not remain in place where the bank and individuals within the banks have monetary and other incentives to make decisions that are not in customers’ best interests (such as continuing to charge dead people for financial advice).
An interesting point of debate since the publication of the report has been Commissioner Hayne’s recommendations concerning the treatment of mortgage brokers who are paid both upfront and trailing commissions by the banks to sell mortgages to customers. This is obviously a classic example of how the obvious incentive to the mortgage broker is to sell the client the mortgage product that provides the highest hidden commission to the broker rather than the one in the customer’s best interest. Mortgage brokers are complaining that less than 1% of all the complaints made to the royal commission concerned their actions and that customers may not want to pay them directly for advice (or pay them as much for advice as the banks are willing to pay them in commission to sell their products). However, targeting this area is entirely consistent with Commissioner Hayne’s findings where he is looking to stop a disaster before it happens rather than simply cleaning up the mess afterwards.
For customers of any financial service provider a key point is to fully grasp this concept of “conflicted remuneration” in that if you are not paying directly for advice or any other service, then you must be paying indirectly for it and if you are paying indirectly for it (because the service provider is being paid commissions by a product manufacturer or distributor) is the service provider’s incentive to make recommendations that are in your best interests or ones where they will make a commission? The answer to this latter question is obviously to take actions such that they receive a commission (i.e. they are motivated to make “a sale”) but the degree to which this is balanced by the desire to act in your best interests will be determined by “the culture” of the organisation and the systems it has in place. Is the person selling to you a salesman on commission? Have they been there several years and have a market reputation to protect? Is the business a start-up or one that has been stable for several years?
As Commission Hayne said “The interests of a client, intermediary and provider of a product or service are not only different, they are opposed”
As we have commented in previous Amicus articles “Banking Royal Commission Highlights Conflicts of Interest” (published in May 2018) and “Regulatory Change Outlaws Bundling of Services with Advice” (published in December 2018), the New South Wales Office of Local Government was ten years ahead of its time putting in strong legislation to separate product manufacture and distribution from independent advice to remove the issue of “conflicted remuneration” in its investments guidelines of May 2010. However, it still requires vigilance on behalf of the customer (councils) to look beyond the statements of the company representative that they are independent and are acting in the customer’s best interests to understand how the tendering business actually makes its money. After all no sales person ever makes the pitch “You should buy this service or product from me because I get a large commission from the sale”.