The ‘Hayne Royal Commission’ inquires into and reports misconduct in the Banking, Superannuation and Financial Services industries; with financial advice constituting a key element of the report. Within financial advice, the report specifically focuses on the issue of ‘fee for no service’ – directly related to ongoing review services.
Given that Planlogic is a solutions provider for ongoing review services, understanding the Hayne Royal Commission is paramount in helping us uphold our standards of service.
In this article, we dive into the implications of the Hayne Royal Commission for ongoing services, with a specific emphasis on the ‘fee for no service’ issue.
Access the full Hayne Royal Commission report here.
Fee for No Service
Fee for no service can be defined as the failure of financial advisers to deliver ongoing advice services to clients that were charged for these services; especially with regards to an annual (or other periodic) advice review that was promised to the client.
The failure to deliver ongoing advice services can be a result of:
- The adviser simply forgetting to provide the annual review that the client has paid for.
- The Australian Financial Service (AFS) licensee failing to appoint a new adviser to service the client following the retirement or resignation of the previous adviser.
The Hayne Royal Commission & Corporations Act 2001 – Section 1041G
Section 1041G prohibits engaging in dishonest conduct in relation to a financial product or service, with dishonesty defined as:
- Dishonest according to the standards of ordinary people; and
- Known by the person to be dishonest according to the standards of ordinary people.
This applies to fee for no service based on the fact that money was taken from clients, and that the taker had no intention of returning the money to the client. The Hayne Royal Commission invites ASIC to consider whether criminal or other legal proceedings should be instituted in instances of fee for no service.
Recommendations by the Hayne Royal Commission
In order to mitigate the risk of clients not receiving ongoing advice services, recommendation 2.1. ‘Annual renewal and payment’ of the Hayne Royal Commission states that the law should be amended to provide that ongoing fee arrangements (whenever made):
- Must be renewed annually by the client;
- Must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged;
- May neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.
Implementation of these recommendations would justify the ongoing service fees charged, promote transparency and protect clients from negligence and dishonest acts of advisers.
Improving Systems & Processes
The report also references findings from a 2016 ASIC report that details system changes made by some licensees – such as CFPL, AMP, ANZ, CBA, and NAB – to prevent a recurrence of fee for no service.
Licensees such as CFPL took steps that included:
- Introducing a system that provides a central electronic record of all customers paying ongoing service fees and when ongoing service is provided;
- Introducing a centralized document management system to record customer interactions and retain evidence of delivery of service;
- Establishing an Ongoing Services Admin and Support team to administer ongoing service processes and controls;
- Implementing additional processes and controls for customers paying ongoing fees when an adviser leaves CFPL, including checks designed to identify customers who are paying ongoing fees but are not assigned to an adviser.
Despite this, however, the report is clear that fee for no service misconduct is a result of more than just inadequate systems and processes; with higher profits, uncertainty around what was promised for the ongoing review and the ability to deduct fees invisibly identified as some important reasons behind fee for no service.
In conclusion, the Haynes Royal Commission states that if a financial adviser and client want to enter into an agreement where the client agrees to pay fees on an ongoing basis, the arrangement should follow the recommendations made by the Royal Commission (see above).
These recommendations should apply to all ongoing fee arrangements, whenever made, with adherence to these recommendations helping avoid the fee for no service situations in the future.