Industry reputation putting people off getting advice

“The sad thing is that when you get damage done to the reputation of an industry like that, a lot of people that could really benefit from advice don’t get it. That’s a problem, because the data shows that people who get good advice early and act on that advice, do a whole lot better over their financial life.”

Mr Flavell added that he believed the Future of Financial Advice (FOFA) reforms, which became mandatory in July 2013, have helped put protections in place for customers. 

He said: “The changes that were made — in relation to commissions being removed, and fees for advice being charge to investment, among other things — were really, in simple terms, about customers’ best interests and delivering better outcomes for consumers.

“Some of the things that we are seeing now [in relation to investigations and penalties for misconduct] were from before the FOFA environment began. If it were a FOFA environment that [they] were working in when that advice was being given, those negative outcomes for consumers would not have transpired.”

Mr Flavell added: “It hurts and it pains me to see things like that happen and damage reputations, but I think the industry and the regulatory are working far more effectively now and I think consumers can have a high degree of trust in relation to the advice they are receiving and the outcomes that they get on the back of that advice.”

Speaking about the offering from Mortgage Choice, Mr Flavell said that consumers could be reassured that its mortgage and wealth advisers “are not remunerated favourably one way or the other depending on the lender or where the product might fall [because there is] a 'pay the same' proposition regardless of whether a customer’s/lender’s needs are met and exactly the same proposition for [the] wealth advice.”

Trail commission approach “is sound”

In relation to the current ASIC review into remuneration and ownership structures in the Australian mortgage industry, Mr Flavell said he believed that “the approach we have got to [trail] commissions is sound”. 

He highlighted that ASIC’s review into the insurance industry — which found that “the practice of only remuneration on a product sale works against the provision of balanced, strategic risk advice to clients” and that risks could be managed by “structuring remuneration arrangements so [advisers] receive some remuneration from clients for advice where there is no product sale” — could provide a basis for the current review into the mortgage industry. 

Mr Flavell said: “One of the recommendations in relation to life insurance was that where life insurance agents were receiving 120 or 130 per cent of the first year’s premium as a commission, and no trailing commission to service that customer, that led to a disproportionately large amount of churn which destroys the economics of that business. 

“What had been mooted and was to be legislated (prior to the election stopping the legislative changes) was that over the next three years the proportion of the first year’s premium that would be made available in terms of commissions payments on life would come down to 65 per cent … and the ongoing renewal commission would be 22 per cent. 

“So, the shape and quantum with that is not inconsistent with the shape and quantum that we’ve got in the systems of mortgage broking. And if that’s any sort of guide in relation to where logic sits and maybe the way the regulator’s thinking then that would suggest that maybe the approach we have got to commissions is sound.”

[Related: How the ASIC review benefits consumers]