Analysis: AMP’s $14m fine a reminder of fee-for-service woes

ASIC confirmed AMP Superannuation, AMP Life, AMP Financial Planning, AMP Services, Charter Financial Planning and HillRoss Financial Services as the companies penalised.

The court found between July 2015 and September 2018 that AMP deducted $356,188 in fees even though it was aware that the members had ceased their employment and could no longer access the advice services.

While the issue at hand relates to advice fees charged to superannuation members, what this latest case was really about was a lack of oversight by AMP.

The court found that AMP failed to investigate whether or not there was a systemic issue, despite many complaints over a lengthy period of time.

These are the sorts of issues that can arise at large organisations that charge a fee for service. Or, in this case, no service at all.

Broking dodged a bullet

Some people will argue that a fee-for-service model is fine, provided service is being provided for the fee charged. They will argue that these issues are really only a problem within certain institutions, like AMP.

Why then has there been such a fallout from the royal commission about fees for no service? It’s a scandal that stretches well beyond AMP. In fact, it was sector-wide in wealth management. This suggests more of an issue with the actual fee model, and more importantly, how it is supervised.

With the spotlight still firmly placed on the superannuation and financial advice sector, the broking industry can thank its lucky stars that commissions weren’t scrapped in 2018 and replaced with a fee-for-service model. Trying to police the thing would have been horrendous, and expensive, as groups like AMP are realising.

But it very nearly happened

“To best serve consumer interests, upfront commissions should be removed and replaced with fixed fees for advice, either lump-sum payments or rates based on hours of work required to arrange a loan”, read a 2017 submission from so-called consumer groups Choice, Financial Rights Legal Centre, Consumer Action Law Centre and Financial Counselling Australia.

There was clearly a lack of thinking here on what “fixed fees for advice” involve, and how they could ultimately lead to lawsuits. These “consumer groups” were also clearly unaware of what consumers actually wanted.

In 2019, the inaugural Momentum Intelligence Consumer Access to Mortgages Report found that 96.5 per cent of borrowers who use a broker would not be prepared to pay a fee.

Results from the survey of more than 6,500 consumers revealed that the majority (58 per cent) who have used or intend to use a mortgage broker in the future are not willing to pay a fee.

Just 3.5 per cent were willing to pay the $2,000 comparable to the upfront commission paid on the average-sized loan.
Fortunately, consumers got what they wanted, and the broking industry avoided the mountains of compliance and oversight required to profitably operate a fee-for-service business.

[Related: ASIC to prioritise DDO and sustainable finance]