ASIC Report 499: Financial advice: fees for no service

ASIC today released its report on the extent of failure by financial institutions to deliver ongoing advice services to customers who were paying fees to receive this service. The institutions in the study were AFS licensees who are product issuers or provide personal services to retail clients and are part of AMP Limited, ANZ, CBA, MQG, NAB and WBC. The report indicates that, to date, ASIC has no evidence of fee-for-service failures of a similar scale occurring in licensees outside these institutions. (ASIC Report 499, at para 12.)  

Two types of situations were studied by ASIC

1. No financial adviser was allocated to the client but the client was being billed by the financial institution for this advice and this was done usually by way of a deduction from the investment products
2. An adviser had been allocated to the client, failed to deliver on the obligation to provide the ongoing advice service and the AFS licensee failed to ensure the service was provided.

How did this happen? According to ASIC the situation arose from a culture in the financial services industry of relying on automatic periodic payments such as sales commission and adviser service fees.

In terms of remuneration, reward was given for advice revenue and fee generation rather than also ensuring the required services were delivered. To me this sounds like a risk-reward horizon problem: the reward is given when the dollars come in, rather than when the service/product in exchange for those fees have been delivered (and the risk that could arise from that service or product has either ceased to exist, or is being effectively managed).

Risk-reward horizon problems are not confined to the financial services industry: you can see it in the STI schemes for a number of companies that reward winning the deal/ obtaining the client/ signing the major contract via the non-financial performance measures. It's usually tucked away under 'progress against strategic priorities'. 

ASIC is very focussed on culture and remuneration: yes the two are linked and to the extent that what gets measured gets managed, there is scope to include ‘soft’ or non-financial performance measures provided they truly measure what is happening. Net Promoter Score, the preferred metric of a number of financial institutions (and the odd Telco, Airline, energy company) will let you know what customers think - how likely are they to recommend your service to others - but if you don’t balance that out with some consideration of the level of complaints or, for example, the time to resolution of complaints, it is only picking up on one aspect of the customer story.

As ASIC notes, when faced with a complaint, the review and remediation processes were legalistic and did not prioritise the interests of customers. See also its Regulatory Guide 256 Client review and remediation conducted by advice licensees.

Note this observation from ASIC (ASIC Report 499,  at para 191.) on practices and remuneration: ‘advisers were allowed to have many more ongoing advice customers on their books than they would have been able to monitor or advise on an annual basis...some licensees charged fees for services that, arguably, had limited value for customers. For example..a fee for ‘retention of client records’ 

Retaining client records is a legal obligation. 

The other key failure areas relate to record keeping either by failing to keep adequate records or, where data is captured electronically, by failing to ensure sufficient data was captured to facilitate monitoring and analysis.

The media release indicates that, to date, some 27,000 customers have been identified to receive compensation (collectively) of $23.7 million. However ASIC also notes that it anticipates a further $154 million plus interest in compensation will be needed to pay compensation to 175,000 further customers.

The Future of Financial Advice reforms in effect from 1 July 2013 happened after many of the incidents to which this compensation relates, with ASIC calling out the two-yearly opt-in to the advice relationship and the annual fee disclosure statement as key reforms.

From the report  comes the following table of compensation outcomes – note Macquarie Group is not included in this table because it has not identified any systemic issues in the area of charging ongoing advice fees. Note also the low level of compensation for Westpac who identified a systemic issue but only in relation to one adviser.

Compensation outcomes as at 31 August 2016, and future projections

ASIC is planning further reviews in relation to CBA, NAB and Westpac.

AMP agreed in May 2016 to conduct a view of the period from 1 July 2008 to 30 June 2015 to include the 15 AMP-owned advice licensees that charged ongoing service fees in the period, with an initial focus on areas AMP considers to the higher-risk and, once that is complete, reviewing practices perceived to be lower risk. The scheduled completion date of this review is September 2017. (ASIC Report 499, at para 127.)

ANZ agreed in June 2016 to a wider review and proposed a methodology (which ASIC has accepted), which will include the three advice licensees covered in the initial review but will be broader than this, with an initial focus on advisers considered to have a higher risk of non-compliance and reviewing a sample of their customers based on size of the customer book. Lower-risk advisers would also be reviewed by selection a sample of customers from these advisers. This review has started but no completion date has been provided. (ASIC Report 499, at para 132.)

Macquarie Group focused on Macquarie Equities Limited which provides a different kind of financial advice to the others as its focus is more on equities (direct shares) advice and transactions. Advice data from 1 July 2013 to 31 July 2015 was reviewed and a compliance and client file review examined data since 2004. A review of 18 complaints and a review of customer files for the 32 advisers who were high fee earners was undertaken by Macquarie. That review found around half of the complaints resulted in compensation (the remaining complaints were not upheld). Its adviser file review did not uncover any instances of ongoing advice services not being provided. (ASIC Report 499, at para 158.)