Not the same, old song

On the 29th of November last year, ASIC Deputy Chair, Karen Chester delivered a speech at the Australian Institute of Company Directors (AICD) Leaders’ Lunch. Her speech outlined a change in approach to consumer protection and offered many considerations for consumers, businesses and the broader community in financial services.

The speech was reliant on the Royal Commission, previous studies conducted by ASIC and collaborations with other financial bodies. The message was quite clear in that ASIC will not be lessening their involvement any time soon but will be increasing their presence through the industry with a slightly different approach. Interestingly, the theme included various references to disclosure but from the perspective of the over reliance and confirmation that it does not excuse bad advice.

There are 75 case studies referenced from the Royal Commission which total approximately $790 million in remediation costs for more than 1.2 million consumers, driven by poor outcomes including credit insurance, add on insurance, fees for no service and deficiencies in financial advice. Four lines of defence were referenced in the Deputy Chair’s speech – public policy, the consumer, firms and directors and the regulator, with all of these playing in part in the delivery of fair outcomes to consumers.

What we’d like to do is examine the pertinent points of the speech in relation to providing advice and offer some guidance on what can be done to ensure obligations are being met. It may also be prudent to ponder systems and processes ahead of the new year and new environment.

Public Policy

The first point addressed was the exceptionalism identified in the financial services industry by Commissioner Hayne in the Royal Commission and it was argued that it had drowned out the consumer voice. It is ironic that the very people it is meant to serve are the ones who suffer most, and the different treatment of institutions and some representatives of the financial services industry became somewhat normalised in Commissioner Hayne’s view. The process of re-building will take some time but as we move towards a new normal, hopefully the industry and its professionals grasp the chance with both hands and become heavily involved in the change for the better.

The second point mentioned regarding public policy was disclosure. We have written many articles on disclosure and its limitations, along with the dangers of over-reliance. The joint report from ASIC and the Dutch Authority for the Financial Markets (AFM) released last year in October “Disclosure: Why it shouldn’t be the default” highlighted the findings from over 10 years of case studies and demonstrates the repeated failings of disclosure itself. ASIC argue that this has played a part in the poor quality of advice being provided and the misguided belief in the industry that ‘anything goes as long as you disclose’. ASIC’s view is that disclosure is not equipped to handle the role that some professionals are expecting from it. Perhaps the more concerning factor addressed by the Deputy Chair is the architecture within the system that requires the disclosure and the businesses who rely heavily upon it for their activities. Advertising, sales, manipulation of trust and emotion, coupled with distribution and ‘sludgy’ products all compete for the consumer’s attention and the disclosure documents are rarely read and understood. ASIC have released a report on disclosure (RG 168) as it is a necessary part of the system and overall client experience, but it does not protect against, or compensate, for poor advice.

A research paper by ASIC in 2011 was also referenced and uncovered a large gap in the quality of the advice and the client perception of the advice. From 33 files, it was found that 86% of clients viewed their advice as ‘Good’ and 81% trusted their advice ‘a lot’. Later, a 12 person reference group and assessors found 3% of the advice to be ‘good’, 58% to be ‘adequate’ and 39% ‘poor’. Another indicator that disclosure cannot solve the current issues facing financial products and services.

Disclosure can also backfire, and this was evident in the findings. When ‘bad’ advice was provided by a conflicted adviser, 81% agreed to the advice when the conflict was disclosed. When this conflict was not disclosed, only 53% agreed to the advice. Disclosure is designed to arm the client with relevant information to assess and make an informed decision, but the study suggests that even though there was a conflict and bad advice was provided, it led to increase in trust.

Tips and considerations

• Reviewing the current relationships, affiliations and associations within the business and whether these are client centric;
• Examine the level of reliance on disclosure and clarity of information provided;
• Review the processes and advice documents; and
• Consider the products utilised in the advice and how these are linked to the client goals and objectives.

The Consumer

Again, disclosure and employed practices in the provision of information is referenced here. In the past, the assumption has been that giving the consumer the right information will make it easy for them to make an informed decision. In ASIC’s view, two main factors are contributing to the shortcomings, which are the time and ability of the client to read and understand the information, but also the product provider being ‘opaque’ in the provision of information for their unnecessarily complex products. The reliance on the public to understand the very product they are being advised upon has been too large in the past. The Deputy Chair eluded to the distribution of responsibility in this area and the shift to the firm designing and offering the product to be much higher. We recalled an instance where NAB were ordered to pay $10,200 in penalties for potentially misleading statements in one of their Product Disclosure Statements.

Financial literacy is an important piece of the puzzle, but this also has its own limitations. Within the report by ASIC, there is reference to the research suggesting that humans have limited capacity in the consideration of a high level of factors in decision making. In fact, once the number reaches two or three important factors, the differentiation of a good and bad deal becomes more difficult. This further speaks to the firms and professionals in the advice landscape to ensure that the client is at the centre of the process and the protection of these individuals is occurring. Within the report, it is evident that 59% of people who were provided with either a product disclosure statement or a ‘simplified’ key fact sheet could not identify the objectively best of three home insurance policies.

Richard Thaler stated that “consumers are not dumb, the world is hard” and there is a suggestion that a range of factors including the level of, and delivery of the content within the disclosure documents needs to be addressed, with only 5 of the 55 recommendations directed at the demand side of the equation (the client). Whilst financial literacy plays an important role, it is not the ‘silver bullet’ anymore. The recommendations from the Royal Commission highlight the need for the responsibility to be shared between the client, firm and provider. This will place more importance on the delivery and explanation of the advice being provided and translating the information for the client.

Tips and considerations

• Review the advice documents with a view to shortening, removing irrelevant information and personalising that which remains;

• Employing an Executive Summary; and
• Consider engaging an external party to review advice documents.

“Pursuit of profit has trumped consideration of how the profit is made.”

— Royal Commissioner Kenneth Hayne

Firms and their Directors

Three separate areas where there are blind spots were mentioned and the fact that each of these are interrelated. These are the gaps associated with empathy, evidence and incentives. The role in which firms, directors and employees play in the quality of advice (whether good or bad) is clear and this is where the responsibility for change lies, not with the regulator.

Empathy:

A report titled Conflicts of Interest and Disclosure – conducted by Professor Sunita Sah, specifically addresses the occurrence of a shift in empathy and ethics and highlights chain of events whereby a gradual creeping of thresholds occurs and the firm, directors and staff fail to see the situation from the client perspective. This causes the shift in behaviour as the small incremental changes become commonplace and what was considered un-ethical previously now seems more palatable (for the business). 

Evidence:

The argument exists that data and systems have not kept pace with the complexity of the products which directly affect the outcome for the client, and the ability of the provider to identify the value of the product for their customer. Relying on the voice of their clients and determining what is important to them creates an opportunity for the development and utilisation of new products and services to meet these needs. Instead of the self-servicing bias which has been evident in some behaviours, the question is now whether the overly complex and conflicted practices were worth it to begin with.

“If it’s so hard to clearly explain what we’re paid, what we’re charging and for what, shouldn’t we simplify our businesses rather than complaining about the difficulties?”

— Sean Graham, Assured Support

Incentives:

Realigning the incentives and interests is a necessary step in the recovery of the financial services sector and the need for designing and offering products which deliver value and meet the client needs, must be addressed. The Deputy Chair called upon firms to ‘do the right thing’ and address the areas of their practices which are overly complex and ultimately harmful to consumers.

Providing good advice is not hard but it has become a more complex process due to several factors, including uncertainty. In reality, the removal of conflicting incentives and aligning the strategy and products to the client needs and objectives and placing them in a better position is what advice is for.

Tips and considerations

• Review internal processes and systems;
• Consider the client position in the advice process and the effectiveness of the approach; and
• Review the current relationships, affiliations and associations within the business and whether these are client centric.

Regulators

“We see our role as being a change agent provocateur to get incentives aligned.”

— Karen Chester, ASIC Deputy Chair

Broadly speaking, ASIC have decided to employ a two-pronged approach to reducing regulatory burdens through enforcement and transparency. The transparency aspect will be seen through strengthened supervisory programs – Close and Continuous Monitoring (complaints and breach handling) and the Corporate Governance Taskforce. Transparency will be evidenced through feedback to corporates on findings and reporting these publicly. ASIC’s view is that the firms and directors should view this as a valuable insight to how they are faring individually, and against their competitors. This will drive competition and better practices.

Naming names has also been included within the list of activities employed by ASIC along with Design and Distribution Obligations (DDO). We anticipate that these obligations should assist firms in solidifying their commercial value, with the outcome benefiting the client.

In closing, it was reiterated that there is an underlying need for the businesses to close the gap and do the right thing to ensure that client outcomes are better. This will reduce the regulatory burden and restore balance.

Tips and considerations

• Consider external assistance and a Licensee review to provide a gauge for reference;
• Review the internal business process and examine the protocols in place to address requirements; and
• Consider whether you are ready for DDO.

We find that the majority of Licensees, businesses and advisers we assist are doing the right thing from a broader perspective. It’s rare that we encounter a situation where it is evident that a conscious decision has been made to circumvent statutory obligations, or the Licensee, business or adviser has clearly placed their interests above the client’s consistently. The trouble is though, some of the occurrences are brought on by a blind spot or a change in structure or legislation that has not been fully examined or integrated into the framework of the Licensee of business.

We can help.