Royal Commission: A new quality paradigm towards a sustainable financial advice market

The ongoing pressures on the financial advice industry don’t seem like letting up anytime soon, with a need to continue to focus on providing quality advice for clients while also finding ways to ensure advice businesses remain profitable under increasing cost pressures.

Given the ongoing scrutiny of advisers and the industry as a whole, coupled with reforms already in progress, none of the Commissioner’s ten recommendations for the financial advice industry is overly surprising.

While implementation of the recommendations will no doubt prove challenging for legislators, regulators and the industry at large, the industry will likely welcome the fact that the Final Report (the Report) is not recommending a complete overhaul. Rather the recommendations continue the existing trend of reforms and changes designed to increase consumer confidence in financial advice. Given the recommendations, financial advice licensees need to digest and consider how to implement these changes to their existing models.

Focusing on the following three areas will be critical to successfully address the Final Report’s recommendations.

Quality advice and the best interests duty

The Commission, together with existing legislation and reforms, has made recommendations on three key pillars which go to the heart of safeguarding the quality of financial advice:

  1. Customer centricity and the best interest duty;
  2. Improving professional standards of financial advisers; and
  3. Removing impact of conflicted remuneration.

The Report notes the safe harbour provisions may undermine the broader obligation for advisers to act in the best interests of their clients, but it stops short of recommending that the safe harbour steps be repealed. Instead the Commission has recommended a review of the effectiveness of FoFA and other measures designed to improve the quality of advice by 2022, including reviewing the effectiveness of the safe harbour provisions.

In addition to concerns raised about the effectiveness of the safe harbour provisions, the Report has unsurprisingly included a number of additional recommendations focused on the quality of advice and the conflict between advisers’ duty to clients and their own interests (or the interests of the licensee and other related parties).

Licensees will need to continue to focus on these critical areas including addressing existing reforms and the Commissioner’s related recommendations. In KPMG’s view, there are three additional levers that directly impact the delivery of quality of financial advice in a compliant and efficient manner (whether the following is provided by a self-licensed adviser or with the assistance of an advice Licensee):

  1. Efficiency in the implementation of advice – delivery of customer advice through efficient, transparent and simple advice platforms, including the adoption of improved technology;
  2. Sustainable financial planning practices with sufficiently robust revenue streams to support the investment of tools and services that attract and retain financial planners and customers, and cover the costs of effective controls and higher compliance standards. The phasing out of grandfathered commissions places increased pressure for financial planning practices to remain profitable (as discussed below); and
  3. The advice is right-sized for the client’s needs and profile, with lower cost options beyond traditional comprehensive advice including direct distribution to the customers.

The changing nature of revenue and further cost pressures

The recommended cessation of grandfathered commissions and a continuing reduction of the life insurance cap to zero, will impact revenue models at both a practice firm level and licensee level, especially where back office services are centralised by the licensee. This has the potential to impact P&Ls and solvency. Given the significant cost pressures already faced by advice licensees, expense reduction will need to be considered as well as cost to service models that are cheaper and more efficient.

While the Report has not recommended that vertical integration be banned, which will be welcome by those who believe in the greater efficiency such structures deliver customers, these benefits will likely only be fully realised where licensees:

  • develop truly integrated retail capabilities,
  • are able to offer the customer a genuinely flexible omni-channel experience with different advice propositions, and
  • are able to develop a far more sophisticated conflict management framework. And with the added pressure of recommendations prohibiting the hawking of superannuation products and insurance products, licensees will face greater pressure to identify and realise all efficiency gains.

New business models (not just new pricing models) and more efficient service delivery to reduce the cost of advice must be quickly identified and implemented to ensure the cost of advice doesn’t outweigh the revenue available to advisers and licensees. Implementing technology to increase efficiency (while also promoting standardisation & process improvements, improved compliance and better customer experience) will be central to ensuring the provision of advice remains profitable.

Improved governance and control frameworks

To support the Report’s recommendations and to ensure compliance with the legislative and regulatory changes, and increase consumer confidence, advice licensees will need to further enhance their governance and control frameworks with clear accountabilities for risk monitoring and management and an understanding of risk appetite.

In line with our thoughts above, it is KPMG’s view that enhanced technology solutions will play a critical role in driving the required improvements in risk management, supervision and monitoring to ensure all required improvements can be delivered effectively and efficiently.

To support the drive towards professionalism, adviser onboarding (in line with the Commission’s recommendation 2.7 regarding reference checking) and termination processes will require more vigour and transparency by licensees. A new disciplinary system has been recommended to register misconduct which will require improved policies and processes to ensure compliance and appropriate reporting.

It remains to be seen how such a disciplinary system will interact with the requirement advisers are a member of a code monitoring body. In any event, licensees, advisers, clients and other industry participants will have an increased expectation that licensees have available accurate, up to date and complete records to support these new requirements. The need to ensure advice and monitoring records are complete will become ever more important.

While the challenges keep coming, the drive towards professionalism and the incorporation of better technology into advice businesses will hopefully

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