Puzzle Financial Advice Pty Ltd

Parliamentary Joint Committee on Corporations and Financial Services - Inquiry into Financial Products and Services in Australia

SUMMARY of SUBMISIONs. Summary of many of key issues raised in Puzzle Financial Advice submissions to Parliamentary Joint Committee Inquiry into Financial Services.

6/4/2009 Puzzle Financial Advice initial submission to Parliamentary Joint Committee Inquiry into Financial Services 6/4/2009 - reviewing UK FSA proposal, calling for separation of sales from advice.

10/5/2009 Puzzle Financial Advice first Supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services 10/05/2009 - seeking to define the dividing line between Financial Product Sales people and Advisors.

Peter Bobbin (lawyer) argumes that the law already disallows sales people from calling themselves advisors. 27/4/2009

19/5/2009 Puzzle Financial Advice second supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services 19/05/2009 - Refocusing Financial Services Reform away from FORM and towards SUBSTANCE. This supplementary submission also responds to Peter Bobbin's argument that the law already disallows sales people from calling themselves advisors.

26/6/2009 Puzzle Financial Advice third supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services 26/06/2009 - Volume over-rides. Volume Bonus. Profit Share. Platform rebates. If commissions are to be banned – then volume over-rides need to be banned. Volume over-rides are commonly not disclosed – offenders need to be prosecuted.

22/6/2009 Puzzle Financial Advice fourth supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services 22/06/2009 - Reducing costs of advice and funds management for consumers. The primary problem is that there is very little price competition. Solution force price competition to occur by:

Break down the existing distribution channels for unlisted managed funds
Ensuring that financial planning AFSLs get paid the same regardless of whether they recommend an unlisted managed fund or a listed security (eg shares, LICs and Exchange Traded Funds)
Create a transaction system for unlisted managed funds and superannuation with the same simplicity and same low cost as buying a share through E-trade or CommSec.

Note: The conflicts of interest of the financial planning AFSL are far more powerful source of tainted advice, than the conflicts of interests of individual financial planners.

12/7/2009 Puzzle Financial Advice fifth supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. Commissions reward the wrong behaviour for consumers seeking advice & punish good behaviour. Therefore commissions should be banned.

17/7/2009 Puzzle Financial Advice sixth supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. Corporations Law creates big incentives for planners to build distribution businesses.

Problem: The structure of Corporations Law pushes financial planning businesses down the path of building product distribution businesses – as explained in this submission. Only small financial businesses who are totally committed to being advice businesses resist these forces. Is this good for consumers who are seeking high quality good financial planning advice? I believe the simple answer is NO – because it inevitably leads to very large conflicts of interest that taints advice. These forces that push financial planning businesses to become product distribution businesses create a situation where there are comparatively few pure-advice businesses – and this makes it very difficult for consumers to find truly independent advice. If the government is seeking to make quality unconflicted advice readily available to consumers, then the disincentive of being in the advice business needs to be removed.
The solution:
- License individual advisors rather than businesses.
- Ban all factors which can bias financial planners to recommend expensive investments over inexpensive investments.
- Adopt the UK FSA's proposal from the June 2009 consultation paper section 4.15 that “where firms access lower prices they will have to pass these on completely to their consumers, without retaining a margin.” This would ensure more complete and clearer disclosure of fees.

Attachment:

Asset magazine article “Waging the war of independence” July edition. In this article the journalist exposes how a range of different planning practices maximise their profits by “transfer of margins from fund managers to distribution”.

30/7/2009 Puzzle Financial Advice seventh supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. ASIC says it believes that “markets operate most efficiently when there is a minimum of regulatory intervention. So, in short-hand form, this might be termed the efficient market theory.” Why is this a potential problem for Australia's future?
Recommendations:

We need to introduce more regulation of financial markets. Key regulatory reforms to include:
- Applying Paul Volcker's key recommendations to Australian regulation would change the shape of financial institutions in Australia for the better. These changes would help create a “financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort.” (Volcker):
  - The commercial banks. The government to provide an explicit guarantee to Australian commercial banks – the core of the system. These commercial banks would simply focus on deposit taking and providing credit. These commercial banks must be more highly regulated. These commercial banks would need to divest all highly risky entrepreneurial activities including proprietary trading and wealth management. In this vital sector, it is not acceptable that shareholders and executives gamble to win gains from risky activity, where taxpayers may wear the big losses.
  - The capital market system. Capital market players are dealing with each other. They’re trading. They’re about hedge funds and equity funds. They don’t need to be so highly regulated. They’re not at the core of the system, unless they get really big. (eg Too big to fail.) If they get really big then you have to regulate tightly them, too.
  - Since some Australian insurance companies are “too big to fail”, they would have to be regulated more tightly too. If financial institutions become “too big to fail”, shareholders and executives benefit from the gains from risk-tasking, but taxpayers potentially wear the losses as we have seen with AIG’s failure.
- Banning securitisation of debt.
To help protect consumers from Storm Financial or West-point style losses, we need to create a Financial Planner Registration Board (FPRB) – requiring higher education standards and a requirement that advisor acts in the best interests of the client. The goal would be to register only quality financial planners delivering “acceptable” advice. A discussion paper on how a FPRB might work is below.

Attachments:

25/8/2009 Puzzle Financial Advice eight supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. The inquiry has focused on financial planners. However most financial planners are owned and controlled by corporations. Corporations can and do manipulate planners to their own ends to the detriment to consumers. This needs to be fixed.

Problem: Research by Chan-Serafin (AFR 4/Aug/09 article “Liars need others to lie too” below), demonstrates how readily corporate culture and corporate behaviour can readily over-ride ethical, moral and legal obligations of representatives such as financial planners. Thereore there is no point simplify focusing the regulatory effort on financial planners. A much greater problem are the Corporations that control financial planners. Suzanne Chan-Serafin found “28 percent say they would act immorally – including lying or backstabbing – to keep their jobs. A further 13 per cent say they would lie or exaggerate to keep their jobs, even though their company forbids it.” Chan-Serafin’s work is very applicable to the financial services industry as this was a particular case study she examined.
Possible solutions:
- Either put a much higher legal responsibility on the financial planning AFSL to take full and meaningful responsibility for the behaviour of its financial planning reps. This is in contrast where, over recent years, ASIC has often taken action against a rep (eg banning) while no action has been taken against the AFSL.
- Alternately, license financial planners rather than licensing corporations.

Attachments:

Suzanne Chan-Serafin’s research discussed in 4/8/09 Australian Financial Review article “Liars need others to lie too”.
AFR 4th August 2009 “Storm lender on $10m buying spree.” Form your own view about whether San-Serafin’s research is relevant to Bank of Queensland’s behaviour in this article about Storm Financial.
CBA admits Storm failings. Form your own view about whether San-Serafin’s research is relevant to Commonwealth Bank’s behaviour in this article about Storm Financial.
9/July/2009 Mmgt Suncorp planners torn between advice and sales ‘The pressure to hit sales targets is compromising the level of advice some bank planners say they are able to provide their clients. Those who are experienced in the Suncorp Life (Suncorp) work environment say the emphasis placed on selling products that were substantially Suncorp manufactured saw it become increasingly difficult to provide a financial planning service. Planners who chose to do the right thing by customers and spend time giving advice would likely see a drop in their sales “and you might have been retrenched”, the former senior employee said.’
4/Sept/2009 MMgt Financial Services Union - sales and bonus culture directly linked to collapse of Storm Financial. ‘The sales targets for North Queensland were imposed by the state manager in full knowledge of the business Storm was providing, FSU national secretary Leon Carter advised. “The [Commonwealth Bank] and Storm seem to have been so busy creating and rewarding a culture of chasing sales volume they forgot their responsibilities to the people relying on them for professional advice – their customers.“ Carter called for an end to the practice of approving high risk-loans or “loading Australians with more debt” in order to reach sales targets. “If banks won’t end it voluntarily, governments must do it for them,” Carter said.’
7/Sept/2009 MMgt Financial Services Union - Sales targets see customers in more debt than they can handle. ‘Members of the Finance Sector Union (FSU) say the pressure to meet sales targets has them obliged to sell finance products to customers beyond the level of debt they can handle. Fifty seven per cent of respondents admitted to feeling bullied by management about meeting targets while 63 per cent said they were fearful of losing their job if they did not meet their targets. FSU national director, policy and communications, Rod Masson said the union has had many disputes with banks about unfair dismissals predicated on the basis of failure to meet targets, which must be met in order to receive pay increases let alone qualify for bonuses. “The systematic bullying from managers undoubtedly makes our members feel conflicted in their roles,” Masson said. Despite 60 per cent of members agreeing that sales targets were unreasonable and could not be met during ordinary work hours, the majority of members said they were given no opportunity to agree to the targets. Almost two-thirds of workers say local factors like a community’s financial health are not considered when sales targets are set according to the survey.’