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Updating customers about fees was 'administrative burden', says Westpac boss – live
Westpac boss confirms bank opposes many potential reforms – live
(35 minutes later)
Michael Hodge lays out Westpac’s submission and asks Brian Hartzer, one by one, about the recommendations for change.
Hodge: It opposes preventing authorised representatives from recommending a product manufactured or sold by the licensee?
Hartzer: Yes.
Hodge: It opposes prohibiting remuneration of financial advisers based on value or volume of sales?
Hartzer: Entirely, yes.
Hodge: It opposes requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements?
Hartzer: Yes.
Hodge: It opposes structural separation between product manufacturers and advisers?
Hartzer: Yes.
Hodge: In respect of consumer lending it opposes any duty being imposed on intermediaries beyond that imposed by the industry forum?
Hartzer: Yes.
Hodge: It opposes a ban on trail commissions for intermediaries?
Hartzer: Yes.
Hodge: It opposes a ban on introducer programs?
Hartzer: Yes.
Hodge: It opposes industry codes being given legal or further legal effect?
Hatzer: Yes.
Hodge: And do you think that one of the reasons that Westpac opposes each of those changes is because there will be an effect on the profitability of Westpac’s business?
Hartzer: That’s - that’s a component of it but that’s not the main driver. You would have to go through each one and I’m happy to explain our view on them. The way you described that sounds like we’re completely opposed to change, which we’re not, but each of those points has subtleties around them.
We move onto the ethical culture within the bank, and Michael Hodge lays out every suggestion Westpac has opposed in its submission to the commission.
In plain terms, Westpac responded to the draft recommendations in the interim report. And they don’t really want any of the changes.
Hodge: If you reward somebody based on a particular outcome, then you expect an increase in whatever the metric is for that outcome?
Hartzer: Broadly speaking, yes.
Hodge: And for a bank, the way to increase financial performance is to get – one of the ways is to get a customer into a product?
Hartzer: That’s one of the ways, yes.
Hodge: And one of the things that Westpac wants is more customers acquiring products that they want, within the risk appetite of Westpac?
Hartzer: Yes.
Hodge: And therefore, variable reward is a way of incentivising your staff to contribute to that outcome?
Hartzer: Yes.
Hodge: And the challenge then that you’ve recognised already is that variable reward can encourage more conduct in order to achieve the outcomes?
Hartzer: If it’s structured badly, yes.
Hodge: And the problem is it’s easy to measure pure financial performance?
Hartzer: Yes.
So now we are getting into how employees are incentivised.
It’s an arduous process. Brian Hartzer very clearly does not want to say that getting more money/business from customers is the behaviour staff would be incentivised for.
So everything Gareth has just laid out is why this line of questioning is so important, as the commission attempts to deep-dive into the banks’ policies.
And then:
Improper conduct by advisers:
Westpac acknowledged that a BT Financial Group adviser had established 72 life insurance policies in the names of clients with no existing accounts, with a view to dishonestly obtaining a benefit through the sale of these policies.
Criminal charges were laid by Victoria police and the adviser was permanently banned by Asic.
Westpac also identified that a financial adviser employed by an authorised representative of Magnitude had performed unauthorised transactions in accounts of five of her clients.
Three of these clients suffered losses as a result of these transactions. The adviser was criminally prosecuted and sentenced for charges including theft.
Westpac acknowledged that $2.75 million has been paid to 1,996 impacted customers as a result of advice fees paid between 1998 and 2012 for BT ‘Investment Wrap’ or ‘SuperWrap’ products that may have been higher than the maximum fee ranges noted in some disclosure documents.
Further to that:
Inappropriate advice:
An Asic review, established in 2015, called the Advice Compliance Program, identified 22 Westpac financial advisers who had provided inappropriate advice and who were reported to Asic.
BT Financial Group participated in Asic’s Advice Compliance Project, as a result of which a further 11 financial advisers were identified as potentially providing ‘problematic advice’.
Since 2015, BT Financial Group has identified a further 15 advisers who may have given inappropriate advice.
As at 29 January 2017, Westpac had paid a total of $12.568 million in compensation to 205 clients, with a further $1.024 million in compensation offered but not yet accepted.
When Westpac made its initial submission to the commission on 29 January 2018, Westpac had not completed its review of the advice received by 468 customers who had been given advice by the initial 22 advisers.
Westpac also provided to the commission some specific examples of the inappropriate advice of four advisers, being:
• an adviser who provided inappropriate personal advice primarily relating to gearing recommendations, with 116 clients requiring remediation;
• an adviser who had provided inappropriate advice relating to establishment of SMSFs and using limited recourse borrowing arrangements to fund the purchase of real property;
• two advisers whose conduct gave rise to concerns of inadequate disclosure, charging of ongoing fees without providing the relevant services, inadequate documentation of client goals and objectives, inadequate risk profiling and no documented reasonable basis for advice provided or superannuation switching; and
• an adviser who had provided standardised advice across his client base and recorded identical goals and objectives for many of his clients.
These four advisers were reported to Asic, and three have been the subject of banning orders.
Want some context for the discussion about Westpac’s behaviour?
Here’s what Westpac told the royal commission at the beginning of the year.
Fees for no service:
Westpac’s financial planning arm – BT Financial Group – began an Ongoing Advice Services review program in 2016. The program identified retail clients who, in the period from 1 July 2008 to 31 December 2015, had been charged fees for ongoing advice, where they had not received the service paid for, or evidence of such service being provided could not located.
As at 31 December 2017, BT Financial Group had paid compensation in excess of $3.2 million to 435 clients as a result of issues identified by the Ongoing Advice Services review program.
Westpac also noted that its 2016-2017 annual results provisioned approximately $24 million (including interest) for refunds of fee payments identified in the Ongoing Advice Services review program.
And we’re back.
We are on a five-minute break. Go get a cup of tea, or something stronger. We’ve got a lot of hours to go.
But Brian Hartzer is not entirely married to the idea of getting rid of the service:
But Brian Hartzer is not entirely married to the idea of getting rid of the service:
We have a alarge number of customers who do - it’s not all customers by any means but we do have a significant number of customers who do look to us as a trusted source of - of advice, and we would like to be able to help them with that.
We have a large number of customers who do – it’s not all customers, by any means, but we do have a significant number of customers who do look to us as a trusted source of advice, and we would like to be able to help them with that.
So to just walk away from it entirely to a certain extent is to abandon our customers in - in an important respect.”
So to just walk away from it entirely to a certain extent is to abandon our customers in an important respect.
And from these questions we get our first big admission of the day – that in moving away from traditional banking services, and into financial planning, banks didn’t really think through what that model would look like.
And from these questions we get our first big admission of the day – that in moving away from traditional banking services, and into financial planning, banks didn’t really think through what that model would look like.
Because the end game here, is, profit.
Because the end game here is profit.
Hodge: Because - and I think one of the points you’re getting at is you - when we talk about this idea of aspiring for a share of a customer’s wallet, what you don’t want is somebody after five years switching from Westpac and going over to one of your competitors?
Hodge: Because – and I think one of the points you’re getting at is you – when we talk about this idea of aspiring for a share of a customer’s wallet, what you don’t want is somebody after five years switching from Westpac and going over to one of your competitors?
Hartzer: Correct.
Hartzer: Correct.
Hodge: You don’t want to lose the, effectively, the profit from that customer?
Hodge: You don’t want to lose the, effectively, the profit from that customer?
Hartzer: Correct.
Hartzer: Correct.
Hodge:... because you are a profit-making business?
Hodge: ... because you are a profit-making business?
Hartzer: Yes.
Hartzer: Yes.
Hodge: And do you think that from the consumer’s perspective, the way in which Australian banks have gone into wealth management has been a success?
Hodge: And do you think that from the consumer’s perspective, the way in which Australian banks have gone into wealth management has been a success?
Hartzer: I think at a high level, clearly not.
Hartzer: I think at a high level, clearly not.
Hodge: And what does that suggest to you about the bank assurance model?
Hodge: And what does that suggest to you about the bank assurance model?
Hartzer: I don’t think banks fully thought through how the model needed to evolve to be consistent with being part of a service business that focuses on long-term relationships.
Hartzer: I don’t think banks fully thought through how the model needed to evolve to be consistent with being part of a service business that focuses on long-term relationships.
Hodge: Is it the case, do you think, that the movement into wealth management assumed a capacity on the part of banks to provide compliant financial products and financial advice - I’m sorry, not financial products, I will say wealth management products and financial advice when, in reality, the expertise of most banks is only in providing compliant deposit accounts and loans?
Hodge: Is it the case, do you think, that the movement into wealth management assumed a capacity on the part of banks to provide compliant financial products and financial advice – I’m sorry, not financial products, I will say wealth management products and financial advice when, in reality, the expertise of most banks is only in providing compliant deposit accounts and loans?
Hartzer: That’s one way to look at it. I
Hartzer: That’s one way to look at it. I think banks just underestimated how different the models were and how the model needed to evolve to be consistent with the way banks should run themselves.
I think banks just under - underestimated how - how different the models were and how the model needed to evolve to be consistent with the way banks should run themselves.”
Hodge is asking Hartzer lots of questions about the role of financial advice in Westpac’s business.
Hodge is asking Hartzer lots of questions about the role of financial advice in Westpac’s business.
You can see these questions aren’t really directed towards Hartzer. They’re for the commissioner, Kenneth Hayne.
You can see these questions aren’t really directed towards Hartzer. They’re for the commissioner, Kenneth Hayne.
Remember: this round of hearings, where we’re finally hearing from the bank bosses, is dedicated to understanding policy issues.
Remember: this round of hearings, where we’re finally hearing from the bank bosses, is dedicated to understanding policy issues.
The royal commission is trying to figure out what banking practices ought to go in the dustbin of history.
The royal commission is trying to figure out what banking practices ought to go in the dustbin of history.
Financial advice, financial planning, the manufacture of worthless wealth products – these things are all in the line of fire for an overhaul or a shredder.
Financial advice, financial planning, the manufacture of worthless wealth products – these things are all in the line of fire for an overhaul or a shredder.
So it doesn’t sound like Brian Hartzer, the boss of the bank, is aware of whether anyone in the bank has looked into whether their customers need to have an ongoing advice service agreement (an Oasa).
That’s important, because Michael Hodge is attempting to get at whether the bank has checked whether it is charging customers for services they don’t actually need. And locking customers into two-year agreements is potentially an issue there.
Hodge: Are you aware of how Westpac evaluates whether or not clients who have gone into an Oasa should have gone into an Oasa?
Hartzer: Well, my understanding is that would be part of the pre-vet process that we go through and the quality assurance process we go through when we look at the files, the statements of advice.
Hodge: Do you know whether Westpac has performed any analysis to try to determine what the characteristics are of customers in a general way for whom an ongoing advice service agreement is appropriate?
Hartzer: No, I don’t.
Hodge: Does that seem surprising to you?
Hartzer: I’m not saying it hasn’t happened. I’m just saying I’m not aware of it.
Hodge: You just don’t know?
Hartzer: No, I just don’t know.
Hodge then asks whether Westpac is considering if it even needs to have its financial planning business: I just wonder when you’re forming a judgment about whether it makes sense for Westpac to continue with a financial planning business, whether, necessarily, part of that is trying to figure out how many of our customers actually genuinely need a – to have an ongoing advice agreement?
Hartzer: Yes. That – that forms a part of it, certainly.
Hodge: And when you say “that forms a part of it, certainly”, is it something then that you’ve taken into account thus far in your thinking?
Hartzer: Well, I – I’ve said publicly recently that we’re thinking through how we make advice available to different segments of customers, and implicit in that statement is that we have to look at the different segments and understand where that sort of an advice relationship makes sense for them, as well as for us.
So back to the two-year contracts, Michael Hodge puts forward that a lot of Australians don’t actually need an ongoing advice relationship with their financial adviser.
The subpoint there being that most people are not hugely wealthy – they are trying to pay off their mortgage or work out their retirement plans.
Brian Hartzer:
Possibly. I’m not sure most Australians have one. But there’s a reasonable portion of Australians that would see value in that.
So why are Fofa and financial advisers becoming a profession important?
This interaction gives some insight:
Hartzer: I would observe that financial advice evolved over the last 20 years, starting very much in the way you characterise it as a distribution channel, and gradually transitioning into more of a profession.
Hodge: And that change is relatively fundamental because for a long time financial advisers were receiving ongoing commissions in relation to the financial products that they were acting as the distribution mechanism for?
Hartzer: Yes.
Hodge: And what then happened was that, particularly with the advent of Fofa, they were, by legislation, no longer permitted to be a distribution mechanism?
Hartzer: That’s a good way to characterise it, yes.
Hodge: They were being forcibly transformed into a profession?
Hartzer: Yes.
Hodge: To provide advice to customers?
Hartzer: I think it was all – the subtlety, I would say, I think it was already moving in that direction but Fofa formalised that.
Hodge: The writing had been on the wall for a few years?
Hartzer: Yes, indeed.
Hodge: And the discussion about whether or not – I’m sorry, I withdraw that. The concerns about the commissions being paid to financial advisers had been known for some time?
Hodge: Yes.
Hartzer: And the possibility of legislative reform had been foreshadowed since probably about 2010?
Hodge: I wasn’t in the country then, so I don’t remember.
Hodge: All right. And at least one institution had moved, in about 2010, to try to switch new arrangements from being commission arrangements over to advice arrangements, but you’re not aware of that?
Hartzer: I’m not – I don’t know.
Hodge: All right. In any event, can I suggest what all of this – what the fees-for-no-service problem suggests is that the switch from commissions to ongoing advice, which was intended to be a profound shift in the nature of the relationship between the adviser and the client, didn’t actually result in that profound shift?
Hodge: I think that’s too broad a statement.
Hartzer: That is, you think in some cases it did result in the shift?
Hodge: Yes … I think in the vast majority of cases, my sense is that the financial advisers are trying to do the right thing. But, clearly, there are cases where that hasn’t happened or people haven’t gotten the memo about the shift that – that you describe.
So much of what we’re seeing in the royal commission goes back to Fofa, the “future of financial advice” laws.
The Fofa laws were introduced by the former Labor government in 2012, and the financial industry hated them.
Why? Because they introduced a duty for financial planners and advisers to put their customers interests first, and ban the payment of sales and trail commissions, among other things.
The Abbott government worked incredibly hard to water them down. Incredibly hard.
After inheriting the Future of Financial Advice Act, which was legislated in 2012 and which came into effect in July 2013 but which didn’t take proper effect until mid-2014 – because that’s when Asic decided to start enforcing it – the Abbott government tried to add significant amendments to the bill.
It didn’t want an overarching requirement for advisers to act the best interests of their customers, and it didn’t want customers to have to “opt in” to having fees deducted from their accounts regularly.
It argued that he laws placed too many restrictions on financial advisers.
Long story short, the government ultimately failed. It only managed to buy the industry two more years before the laws were introduced.
So when you hear about “pre-Fofa” and “post-Fofa,” we’re talking about two very different financial regimes.
So we circle back round to Brian Hartzer saying he is not fundamentally opposed to customers opting in to that agreement with Westpac’s financial advisers every year, so they know what they are paying for, but he still thinks it would be a burden to the financial advisers.
His argument is basically that the more time they spend doing that, the less time they have to advise.
Michael Hodge doesn’t seem to be having much of that argument, given that, well, most professions have regular oversight requirements.
Hodge: Do you regard financial advisers as a profession?
Hartzer: I think it should be. I think it’s moving in that direction. And I think more reform would be helpful to make that happen.
Hodge: All right. Can you think of other professional services where it is regarded as too burdensome to ask clients each year if they still agree to pay for and receive an ongoing service?
Hartzer: I don’t know.
Hodge: I’m sorry?
Hartzer: I don’t know.
Hodge: Does that mean you can’t think of one?
Hartzer: I haven’t thought about it. I haven’t thought about it.
Hodge: Does it seem to you that fundamental to the nature of a profession is if you’re providing a service to a client you will agree on exactly what that service is and agree on how much you’re going to charge for that service?
Hartzer : Yes.
Hodge: And that in any other profession, it would be very surprising to hear a member of the profession say, “It’s too burdensome to have to have that confirmed even on a yearly basis”?
Hartzer: I don’t know.
Hodge: You don’t have a view about that?
Hartzer: I haven’t thought about it.
Michael Hodge then asks whether or not Brian Hartzer is talking about wealthy clients.
Hodge: I’m going to ask you this and not facetiously, these are very wealthy people you are speaking about?
Hartzer: Relatively speaking, that would be true, yes.
Hodge: And can I suggest to you that’s quite an important point, because the subset of clients that need to have an ongoing advice relationship and are in a position where they’re happy to just leave somebody to monitor their no doubt very substantial investments, are going to be very wealthy clients?
Hartzer: It depends on your definition but broadly, I would say yes.
Michael Hodge, who is still questioning Brian Hartzer, seems a little confused by that explanation:
Hodge: Now, I’m struggling with the idea that it would somehow be a distraction for the planner from working for the client to have to call up the client and actually talk through with the client what the client’s needs were and whether they still needed an ongoing fee agreement?
Hartzer: Well, some of these clients are being spoken to on a regular basis by their advisers anyway. So they would view it as an unnecessary administrative burden. The advisers have a – in some cases, reasonably sizeable portfolio and of customers they would have to ring. So I’m just saying it – you know, if you spend time doing that you’re not spending time doing something else.
Hodge: Presumably, though, you need to be contacting your clients anyway and talking with them about what their needs are?
Hartzer: In some cases. It – largely, yes, but it depends on the nature of the relationship with that adviser and their client.
Hodge: But it must be every case. That’s the entire point of having an ongoing fee agreement is that you are receiving ongoing advice and there’s an ongoing monitoring of your needs?
Hartzer: Well, different clients view it differently. Some clients do want an active set of meetings frequently. Some clients view it, as I mentioned earlier, as a bit of a retainer relationship where they can ring up and bounce things off their adviser when they want to, and sometimes they’re quite happy not to do that for quite a long time. But still like to know that the adviser is there. I know people like that.
So why can’t customers opt in to that agreement every year, instead of every two years?
Brian Hartzer essentially says it’s a paperwork issue.
Just administrative burden, in short. Not sure that it would add a lot of extra value. I don’t profoundly object to it, just think that it would be an extra administrative exercise that clients wouldn’t necessarily welcome. They would add cost, that would ultimately be borne by customers and would distract time that clients could be spending with their clients giving them advice.
Michael Hodge is straight into it.
He asks Brian Hartzer about an internal review undertaken by Westpac in January.
Westpac called it an “ongoing advice service and consequence management thematic review”.
In plain English, that means Westpac conducted a review of financial advisers employed by Westpac, to see what “ongoing advice” they were providing customers.
Ongoing advice is a big problem in the industry, because the banks have been claiming they’re providing “ongoing advice” and charging fees for that advice when they haven’t been providing any advice.
Hodge asks: “The review found 50% of the samples tested had no appropriate supporting documentation on file to match the review status recorded in the fee disclosure statement and ongoing advice delivery report?”
Hartzer replies: “That’s possible. You might need to show me which report you’re referring to.”
Hodge shows him the report. It’s from BT Risk (BT Financial is Westpac’s wealth arm).
Hodge: “What I want to ask you to consider and help us with first is, why do you think it had reached the point that these problems, very significant problems, persisted all the way until the beginning of this year before active steps were being taken to address them?”
Hartzer:
Well, I think one of the bits of background to this is there had been an over-reliance on the fact that customers had – were opting into – an advice relationship every two years.
So every two years customers were signing a contract saying, ‘I want an ongoing advice relationship and I’m agreeing to this set of fees.’ And then every year we were providing a fee disclosure statement that reminded customers what they were paying and what they were entitled to.
So I think the business, and perhaps the planners themselves, were overly reliant on that as being sufficient to demonstrate that they were providing the service that customers were paying for.
And – and that clearly was insufficient.
It’s the fourth day of the final block of hearings and Brian Hartzer is back in the chair after a shocking day for the Commonwealth Bank.
You can read some of the revelations from yesterday’s hearings, from Gareth Hutchens, here.
But now it’s Westpac’s turn in the chair and Hartzer, who began his testimony yesterday, is back, being pressed on the bank’s advice services.
Gareth Hutchens and I will be watching and blogging the day’s events, live, so make sure you check back.
The senior counsel assisting, Michael Hodge QC, is back on the case, so let’s get into it.
