Tracey Scotchbrook, SMSF Specialist Advisor and Director of Superology, discusses what impact the Final Report from the Financial Services Royal Commission might have on SMSFs, even though they were excluded from the Royal Commission’s terms of reference. Until we start to see draft legislation, we will not have a true idea of what final form the implementation of the recommendations will actually look like, she writes.
Commissioner Kenneth Hayne QC’s highly anticipated final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released to the public on Monday. Not surprisingly much of the media’s reporting has focused on the large institutions, the possibility of criminal charges and jail terms for company executives. For me I was keen to see what the findings and recommendations would be for self-managed superannuation funds (“SMSFs”) and more broadly the SMSF sector.
SMSFs were excluded from the Royal Commission’s terms of reference. From a superannuation point of view, the focus was instead on the practices of the large institutional superannuation funds, superannuation advice and product promotion activities. However, through the course of the Commission we saw evidence given by various parties on financial advice issues which inherently saw SMSF advice brought into the Commission’s spotlight. The main issues included the quality of financial advice including the suitability of a SMSF, conflicted advice as well as limited recourse borrowings within a SMSF.
Despite this, SMSFs or SMSF advice has not been expressly addressed or commented on by the Commissioner. The issues that arose with SMSFs typified a range of issues presented and examined on the provision of financial advice. They were not SMSF specific issues although some of the cases happened to involved SMSFs.
As a result, the Commissioner in his response has treated these issues accordingly, under the broader financial advice recommendations. The focus of the Report has been on range of issues on the quality of advice and the need for a credible and coherent disciplinary system, described in the report as being “a hallmark of a profession.” The resulting recommendations include:
- The removal of commissions (including Grandfathered arrangements);
- Greater levels of conflicts disclosure;
- Review of best interests duties legislation and consider the removal of the catch all safe harbour provision;
- AFSL holders required to undertake reference checking and the introduction of information sharing protocols on advisors;
- AFSL obligations to investigate and disclose advisor misconduct; and
- The introduction of a new disciplinary system for financial advisors through a single, central disciplinary body.
Education standards were raised at various points in the Report as being integral to improving industry standards and professionalism. The changes that have already commenced under the FASEA reforms were acknowledged. These reforms will see an increase in the education standards and ongoing professional development requirements. The intention of the reforms are to shift the financial services industry and evolve it into a ‘true profession’. This process includes the introduction of a code of ethics prescribed by FASEA which will be monitored by approved code monitoring bodies.
Given that the FASEA reforms are in progress and at various stages of implementation, it is too early to assess what impact these will have on the financial advice industry and in satisfying the desired outcomes of the Royal Commission. As such, the Commissioner has recommended that a further review of the financial advisory industry be undertaken again in three years’ time. The purpose of the review is to ascertain whether the reforms under FASEA have had sufficient effect or whether further reforms or legislative changes are necessary.
I read with interest Recommendation 3.4 – No Hawking. The object of this recommendation were the banks and larger institutions, and the sales techniques they used to sell superannuation products under the guise of general advice. It will however be interesting to see whether any legislation introduced to address this issue is structured sufficiently to address the widely reported issue of SMSF spruiking and the use of one stop shops. Whist not a matter before the Commissioner, this has been an ongoing concern for the SMSF industry and was flagged in ASIC’s report 575: SMSF – Improving the quality of advice and experiences.
The Final Report is significant in size, breadth of matters, and number of recommendations made. As such it will take the advice industry and professional associations time to analyse its contents in detail. For Government the mechanism to effect change is through new or amended legislation. Until we start to see draft bills we won’t have a true idea of what final form the implementation of the recommendations will actually look like.
The Royal Commission is by its nature a bad news story. It delved into the uncomfortable and unpalatable issues within the Banking, Superannuation and Financial Advisory Industries. Only by doing so can positive change be effected. On reflection, the recommendations around financial advice will not be too dramatic for those advisors, practices and licensees who already operate ethically, with integrity and utilise industry best practices.
To access the full Report and the Government’s response go to: https://treasury.gov.au/publication/p2019-fsrc-final-report/
Tracey Scotchbrook is a SMSF Specialist Advisor and Director of Superology Pty Ltd with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member. Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at [email protected]