Upping the ante on financial misconduct

Summary: The Government has announced new measures to rein in rogue financial advisers, including tougher fines and jail terms.

Key take-out: Major banks and financial institutions have been at the centre of the worst behaviour. Rebuilding their tainted reputations will be difficult.

Over the weeks since the start of the Royal Commission into the Banking, Superannuation and Financial Services Industry, we've heard many harrowing tales of financial misconduct.

They've included revelations of big banks and financial institutions such as AMP providing questionable if not fraudulent advice, charging for advice not given, and even charging fees to the accounts of deceased customers.

Should we be surprised? Well, not really.

The Future of Financial Advice (FOFA) package of legislation by the Federal Government back in 2012 was designed to clean up the abhorrent commissions structure in the financial advice industry.

Among other things, the reforms introduced a ban on conflicted remuneration structures, including commissions and volume-based payments, in relation to the distribution of and advice about a range of retail investment products. They also imposed a duty of care on financial advisers to act in the best interests of their clients.

But it has been clear for a long time that the FOFA legislation only scraped off the tip of the advice iceberg. It still left major flaws in the advice system, especially the quality of advice being delivered.

In January ASIC released a scathing report into the advice being provided by the major banks, which showed an alarming number of bank-employed advisers were providing biased advice to customers that was slanted towards recommending their in-house products.

This week it was revealed at the Royal Commission that a senior Westpac adviser had been recommending customers into products specifically to earn fees and commissions.

Then the biggest bombshell so far. Evidence was given to the Royal Commission on Tuesday that AMP CEO Craig Meller and chairman Catherine Brenner made substantial changes to an “independent” report on the group's financial advice practices before it was presented to the Australian Securities and Investments Commission (ASIC).

Yesterday Meller resigned, shortly before Federal Treasurer Scott Morrison and Minister for Revenue and Financial Services Kelly O'Dwyer announced tougher penalties to protect Australian consumers from corporate and financial misconduct.

The penalties come in tandem with the Government strengthening ASIC's powers to enforce and prosecute corporate offenders, which includes increasing the jail sentences applicable for serious crimes.

Here are the changes announced from the Ministers' joint statement:

The Government will increase and harmonise penalties for the most serious criminal offences under the Corporations Act to a maximum of:

• For individuals: (i) 10 years' imprisonment; and/or (ii) the larger of $945,000 OR three times the benefits;
• For corporations: (i) the larger of $9.45 million OR (ii) three times benefits OR 10 per cent of annual turnover.

“The punishment must always fit the crime and we must not forget that these are not victimless crimes,” Treasurer Morrison told a news conference. “The impact that can occur to individuals, and very large numbers of individuals, is serious.”

The Government is also expanding the range of contraventions subject to civil penalties, and increasing the maximum civil penalty amounts that can be imposed by courts, to the maximum of:

• the greater of $1.05 million (for individuals, from $200,000) and $10.5 million (for corporations, from $1 million); or
• three times the benefit gained or loss avoided; or
• 10 per cent of the annual turnover (for corporations).

As well as $127 million in additional funding to ASIC to bolster its investigative and surveillance capabilities and appointing a new chairman to the corporate watchdog, it has established a new standards setting body for financial advisers (the Financial Adviser Standards and Ethics Authority) and has just passed legislation to establish the Australian Financial Complaints Authority. 

AFCA will be a new free one-stop-shop for consumer complaints, which will be binding on financial institutions and which can order compensation where appropriate.

“There is no place for criminality in the financial services industry and wrongdoing should be met with the full force of the law,” says Financial Services Council CEO Sally Loane.

“It is entirely appropriate that penalties for civil and criminal misconduct are as strong as possible. Consumers must have confidence that the individuals and organisations they entrust with their savings will act in the right way. Both effective enforcement of the law as well as severe punishments for wrongdoing are central to promoting better trust and confidence.”

The Turnbull Government has at least shown it is very serious about cleaning up the advice industry.

Yet, given the ongoing evidence emerging in the Royal Commission pointing to rampant misconduct, a foul smell still lingers and may never totally blow away.