Australia’s largest financial institutions could face a collective bill of more than $180 million after charging over 175,000 customers for non-advice over multi-year periods.
In a damning report delivered by the Australian corporate cop last week, six of the country’s biggest financial services firms – covering the big four banks plus AMP and Macquarie – were slammed for charging clients for advice they never received.
Peter Kell, ASIC deputy chair, said the systemic failings were uncovered following the introduction of the Future of Financial Advice (FOFA) legislation in Australia in 2013.
“Changes introduced through the FOFA reforms have shone a light on the advice fees that customers are paying and the services they should be receiving in return,” Kell said in a statement.
According to the Australian Securities and Investments Commission (ASIC) report 499 ‘Financial advice: fees for no service’, to date the regulatory review – instigated in 2015 – has resulted in compensation payments of almost A$24 million shelled out to more than 27,000 customers across a range of the affected institutions.
“We expect the amount of compensation to substantially increase as the process to identify and remediate affected customers continues,” the ASIC report says.
ASIC estimates the final tally could hit at least A$178 million plus interest (suggested at 6 per cent above the Australian base rate) once the six firms complete further in-depth reviews by the middle of next year.
The investigation, part of ASIC’s Wealth Management Project, was sparked by concerns that larger institutions were charging clients for ongoing advice – via trail commissions or ‘adviser service fees’ – that was never delivered.
“Some large licensees, including several bank-owned licensees, reported that between 60% and 80% of their clients had received no advice or service in the past year,” the ASIC report says.
The regulator says while poor administration may have been a factor in the failure to “switch off” ongoing advice fees embedded in products, commercial factors were more likely to blame for the systemic abuse.
“ASIC considers that the fee-for-service failures show that AFS [Australian Financial Services] licensees and advisers prioritised revenue and fee generation over the delivery of advice and services paid for by their customers,” the report says.
Based on current estimates, the Commonwealth Bank of Australia (CBA) would face the largest fee claw-back of almost A$106 million plus interest, the ASIC report shows, followed by ANZ (about A$50 million) and National Australia Bank (close to A$17 million).
So far, AMP has uncovered just A$4.6 million of ‘no advice’ compensation claims with Westpac reporting only a A$1.2 million payout relating to a single adviser.
Macquarie – given its predominately wholesale and equities-focused advice process – did not report any potential compensation claims to ASIC during the first phase of the regulator’s review.
However, all six of the firms were carrying out in-depth investigations of advice clients to identify further breaches.
According to the ASIC report, the six institutions have also introduced a range of internal measures to ensure clients receive appropriate financial advice or turn off fees and commissions where no advice is required.
The 2013 FOFA legislation banned commissions in investment products with grandfathering provisions for existing arrangements. Under the FOFA rules, advisers are also required to get ‘opt-in’ approval for fees every two years.
“However, we are concerned that the industry (including licensees and advisers) may still have a culture of reliance on ongoing trail revenue (through commissions and fees) for a portion of their income, without necessarily providing advice to customers in return,” the ASIC report says.
“… We encourage the institutions reviewed in this report to consider how their culture may have supported these systemic failures, and why their stated commitment to providing excellent service to customers is not translating into good outcomes for customers in the many instances we identified in this report.”
The ASIC report says it found “no evidence” of similar scale ‘no advice’ fee gouging outside the institutions under investigation.
“However, we strongly encourage other advice licensees to review their operations to ensure they do not have similar issues,” the report says.
A number of Australian banks – including CBA and Macquarie – have been stung with hefty fines over the last few years in relation to other financial advice scandals.