The focus of Justice Kenneth Hayne’s royal commission on incentive structures is likely to shift next to the banks’ wealth advice divisions.
While the spotlight is currently on mortgage brokers, bank wealth advice departments will come under scrutiny from 16 April.
All eyes will be on how Justice Hayne will approach the issue of vertical integration in wealth advice, and whether that has been in the best interest of bank clients.
One conclusion could be that incentive structures are at the heart of the problem and have resulted in an overwhelming preference for in-house product.
The best indication of how Justice Hayne is likely to approach this issue is how ASIC approached this earlier this year.
In January 2018, ASIC investigated the wealth practices of the banks in ASIC Report 562: Financial Advice: Vertically integrated institutions and conflicts of interest.
In this investigation ASIC interrogated individual client files to see how actual client recommendations from five of the ‘big six’ in wealth advice were being implemented in practice. The five investigated were:
- AMP;
- ANZ;
- CBA;
- NAB; and
- Westpac
Alarmingly, ASIC found that the bank advisers had only fulfilled the best interests duties (Corporations Act s961B) in just 25 per cent of the customer files reviewed.
Further, in 10 per cent of files reviewed, customers were likely to be in a “significantly worse off” position following the advice they were given.
The royal commission has virtually unconstrained power to investigate how actual product recommendations can be so heavily skewed to in-house, bank-owned product.
It is not going to be a pleasant Easter for the banks as they prepare to defend their past practices in wealth advice.
William Davidson is the chief executive of Powerwrap.
