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The debacle at the Royal Commission

Bloody hell.

I assume, like me, you’ve seen at least a few of the headlines coming out of the Financial Services Royal Commission.

Each new day brings another set of astounding allegations, most of them confirmed by those in the witness box.

Question. Answer. Boom!

Question. Answer. Boom!

Bombshell after bombshell after bombshell.

And while the inquiry is colloquially known as a ‘banking’ Royal Commission, the revelations have come from sources far and wide: banks, wealth management companies (I’m looking at you, AMP), and even independent financial advisors.

I say ‘even’, because most people assumed the issues were at the big end of town, where poor cultures, misaligned incentives and poor management oversight formented some of the worst excesses.

And then…

I have to say, I’m really impressed by Commissioner Hayne and Counsel Assisting, Rowena ‘Shock and’ Orr, QC. The latter, has been just brilliant in her skillful handling of witnesses, and I dare say has prompted fuller and straighter evidence from those appearing more recently, having watched her skewering of earlier witnesses.

Make no mistake. Without prejudging what it still an ongoing inquiry, the Royal Commission has displayed the rotten, stinking underbelly of the financial services sector in Australia.

Yes, the independent thinkers among us saw it coming. But the magnitude? The breadth? The sheer, awful bloody corruption of the thing? I don’t think anyone, perhaps other than those involved, knew just how bad it truly was.

Dead people charged fees. Fees charged for advice not given. Qualifications incorrectly claimed. Customers being impersonated. A culture of form falsification.

Indeed, the Australian Financial Review reported that:

“ANZ’s decision to get out of the wealth business was driven by widespread compliance failures by its financial planners that the bank had identified as high risk as far back as 2013, the Hayne royal commission has heard.”

Which surprised me, as CEO Shayne Elliott replied to a tweet of mine in October last year with:

“No. ANZ selling where it can’t win. Funds grow but margins fall. We keep biz focus on customers and shareholders via partnership model.”

Now, I’m not suggesting Mr Elliott was being untruthful, or indeed did anything at all untoward. But he didn’t exactly mention that the planning problems ‘drove’ the sale.

And while there’s not exactly a limit to article length online, if I listed the names and quotes from every banker, politician and apologist who said there was no need for a Royal Commission… well, let’s just say you’d get bored reading and go and do something else before I was finished.

Here at The Motley Fool, though, we’ve been very consistent.

One: banking (and financial services at large) cultures are broken.

Two: the structures of financial services companies are broken.

Three: the incentives are, you guessed it, broken.

I desperately hope the Hayne Royal Commission throws the book at the wrongdoers. But I even more desperately hope there are some very real changes recommended for the future. And I hope that the federal government and opposition give the changes their full, unqualified support.

I won’t prejudge the evidence, or presuppose what the commission might decide.

But let me repeat what we’ve been saying for ages:

1. A financial services company must be banned from recommending any product it ‘manufactures’. A bank planner can’t recommend a bank-owned fund. Nor can an ‘independent’ financial advisor

2. Financial services companies, and the planners who work for them, should be paid only by the client, and on a fee-for-service basis. No percentage cut of a client’s wealth. No payments — of any sort — from fund managers. No hospitality, no kickbacks, nothing.

And here’s two new ones:

3. Any fee found to be knowingly charged incorrectly to a client must be refunded 10-fold to them, and a penalty of the same size paid as a fine.

And:

4. Financial services company management bonuses will be paid over the following five years, only if the banks financial results and regulatory compliance hit agreed standards. Not only does that mean management are focussed on doing the right thing, but they’d better be sure their successors are similarly mindful, lest their payouts be jeopardised.

What do you reckon will happen once management and staff are no longer incentivised to do the wrong thing? And are instead incentivised — on pain of losing their bonuses — to do the right thing instead?

Yep, me too.

Forager’s Steve Johnson reminded me of a great line this week: “Whose bread I eat, his song I sing”

Wouldn’t it be nice for financial planners to be singing the song of their customers for a change?

While we’re here, it’s also time for both major parties to commit to massively increasing ASIC’s investigative and enforcement staff numbers. Both parties cut staff in recent budgets. Turns out, you can’t effectively police the sector without enough staff.

Who knew?

The banks fought the Royal Commission. The federal government fought the Royal Commission. The apologists fought the Royal Commission.

Some doubted that Commissioner Hayne and his staff would fight the good fight.

We now know that Rowena Orr and her colleagues will pull no punches. Good. I hope there are many, many more awful revelations, to steel the nerves of politicians who might be tempted to take the easy route.

And here’s the litmus test: new rules that don’t totally revamp incentives and culture will be a complete cop-out.

Incentives drive behaviour. It has ever been thus.

We’ll know how serious the pollies are by whether they add layers of rules (a cop-out) or drive a seismic change in incentives.

Prime Minister Turnbull and Treasurer Morrison, the time has come. Opposition Leader Shorten and Shadow Treasurer Bowen, so has yours.

You must take a stand.

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