There has been both media and public outrage at the revelations coming from the Banking Royal Commission (BRC). From our perspective, the issues raised fall into two broad categories; examples of outright fraud/bad behaviour and the results of conflicts of interest. The two are linked because a poor culture that allows misconduct is unlikely to be concerned with conflicts of interest and a culture that fails to manage conflicts of interest is probably on the slippery slope towards more serious misconduct.
It has proved incredibly difficult, if not impossible, for AMP and the major banks to manage their conflicts of interest between their financial advisory and their investment product promotion and manufacturing divisions. As we wrote a few months ago, the Cole Report for NSW Local Government in 2008 was in many ways ahead of its time as it recommended a complete separation of those that provide independent investment advice and those that provide investment products as being the only way investment advisors are free from conflicts of interest when recommending investments.
Amicus believes this will likely be the ultimate outcome from the Royal Commission in that there will need to be a complete separation of investment advisors/financial planners from those that provide investments as the two businesses cannot co-exist within the same parent company without problems.
Some banks have already voluntarily taken steps in this direction with CBA deciding to separate from its funds management business, Colonial First State, via an IPO and NAB announcing it will divest its funds management arm, MLC. ANZ sold its wealth management and advisory business to IOOF in October 2017 and its life insurance business to Zurich in December 2017.
In the wholesale fixed income advisory business, in which Amicus operates, we see the same issues as those firms with other business beyond advisory face conflicts of interest in recommending investment products if they have a broking business or trading/markets platform providing investments. Conflicts arise both in terms of a direct or indirect fee taken for transactional services on the products recommended or through confining the client to the limited scope of products accessed through the broking business or trading platform. This effectively restricts the client’s access to those products on the platform or available via the broking business and prevents them from having uninhibited accessing to the total suite of investments available from the broader market.