Citizens Electoral Council of Australia

Media Release Thursday, 15 November 2018

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://www.cecaust.com.au

Banks and their pollies up to usual tricks with financial advice ‘reforms’

British banker Lord Forsyth of Drumlean delivered the most memorable line in the UK Parliament’s 2013 debate on separating commercial banking from investment banking. “Investment bankers are extremely adept at getting between the wallpaper and the wall”, he warned. In other words, you can’t trust them—so separate them!

Clearly Australia’s banks can’t be trusted either, nor can the regulators and politicians who do their bidding. Despite all the revelations of the banking royal commission, and their public mea culpas and pledges to reform their “culture”, by their actions they are preparing for business as usual.

For instance, and most telling, following the royal commission’s hearings into financial advice, which exposed how “vertical integration” of banks with financial advice firms had enabled them to advise their customers to buy and invest in products sold by financial businesses owned by the same banks, enabling the banks to fleece them through higher fees and costs, the big four banks made a big show of announcing they would demerge from their financial advice businesses. Yet in their submissions to Commissioner Kenneth Hayne’s Interim Report, they all rejected any need for structural change that would end vertical integration, confirming the suspicion that the banks intend to lay low while the heat is on before returning to their old ways.

Scapegoating financial advisers

Another example of this cynical intention are the financial advice “reforms” that the Turnbull-Morrison government implemented in 2017, as part of their pre-emptive supposed cleanup of the banks that they cited to argue against the need for a royal commission. What was packaged as reform is nothing but a scam by the banks to drive out of the financial advice sector the only people who have consistently called out the banks’ conflicts of interests—independent financial advisers.

For years the Association of Independently Owned Financial Professionals (AIOFP) has tried to blow the whistle on vertical integration in the finance sector. The AIOFP is made up of independent financial advisers, most of whom are small businesses. Unlike the large banks’ financial advisers, AIOFP members don’t benefit from the financial products in which they advise their clients to invest—they have no conflict of interests. They offer independent advice based on an assessment of their client’s needs. They are therefore understandably angry about the financial advice scandals that have rocked Australia over the last decade or more, because in almost all cases the bad financial advice came from advisers who worked for the big institutions which do have a conflict of interests, but the scandals have given all financial advisers a bad name.

At the time of the now discredited 2014 Financial System Inquiry (FSI), the AIOFP distributed a list of 171 financial products representing $38 billion of investor funds which had failed, been frozen, or were fraudulent. The list was dominated by the big financial institutions. AIOFP executive director Peter Johnston said the problem was the financial products, not the financial planners; blaming financial planners was like blaming a pharmacy sales assistant for a bad drug, when the blame lies with the manufacturer and authorities which approved it. Vertical integration allows the manufacturers of the financial products, which are the big institutions, to also rate them and employ financial advisers to recommend them; the only “independent” step in the process is ASIC approving the product, but the royal commission has shown that the big institutions have captured ASIC.

“In our industry everyone runs for legal cover, blames the advisers for not being educated and the product manufacturer avoids accountability”, Johnston told the 10 November 2014 Sydney Morning Herald, adding that “if product manufacturers continue to make flawed products, consumers losses will continue.”

The government’s response to the growing financial advice scandal was not to end vertical integration, but to impose new educational requirements on financial advisers, enforced by a new body called the Financial Adviser Standards and Ethics Authority (FASEA). Assistant Treasurer Kelly O’Dwyer, a former NAB executive, established FASEA in 2017, and appointed ex-NAB director Catherine Walter as chair. Walter had been forced to resign from NAB’s board in 2004 over its $360 million loss on derivatives, which she failed to act on as chair of the Audit Committee.

Onerous burden

FASEA requires all financial advisers to complete a new university degree by 2024. While it sounds reasonable on paper, it is in fact a heavy burden on independent advisers. AIOFP protests that as most independent advisers are running a small business, are in their 50s on average, and won’t have their existing qualifications recognised, the “real agenda behind FASEA is to intimidate up to 10,000 advisers to depart from the industry”.

In a paper prepared by the AIOFP titled “The FASEA Fiasco”, Johnston states: “We agree that the industry needs to lift its education standards but adviser education has little to do with products failing. The regulators, research houses, custodians, trustees and institutions have successfully avoided accountability over the years by successfully ‘spinning’ the blame onto the advisers. This is now being used to justify the harsh treatment of advisers.” He charges that the institutions want to clear out independent financial advisers because they want to market inferior products—such as insurance policies on which they can avoid paying claims—directly to consumers through telemarketers and online advertising.

It is therefore a glaring conflict of interest that FASEA is funded by the “industry”, namely the Big Four banks and AMP, the vertically-integrated institutions which are determined to keep the structure that enables them to fleece their customers on an industrial scale. “The ills of our industry emanate from the poor and even criminal behaviour of certain institutions and their management over the years”, Johnston declares, “it is not the advisers.”

This FASEA scandal is yet another example of the banks’ predatory modus operandi, which bad press alone is not sufficient to change. They must be restructured through a Glass-Steagall separation of commercial banks with deposits, from investment banks and all other financial activities. The solution is already in Parliament—the CEC’s Banking System Reform (Separation of Banks) Bill 2018 introduced by Bob Katter MP. Combined with stricter law enforcement and jail terms for financial crimes, structural separation is the only sure way to force the financial sector to serve, rather than exploit, the community. Anything less is protecting the criminal banks.

Click here to order a free copy of the CEC’s new banking handbook, The Next Financial Crash is Certain! End the BoE-BIS-APRA Bankers’ Dictatorship: Time for Glass-Steagall Banking Separation and a National Bank.

Click here to join the CEC as a member.

Click here to refer others to receive regular email updates from the Citizens Electoral Council of Australia.