Do we need a Royal Commission?
As everyone will be aware there is currently a major political issue about whether there should be a Royal Commission into Bank misconduct and into misconduct generally in the financial services industry. In my view we don’t need a Royal Commission – what we need is fundamental reform in a number of areas. The following issues arise:
- the problems in the financial services industry are very well understood – they are not hidden and a body with the powers of a Royal Commission is not needed to expose them – everyone knows what the problems are – what is lacking is the will to do anything about them;
- what we don’t need are any further laws – there are a myriad of laws that govern financial services some of which provide for severe penalties if they are breached – consumers of financial services also have extensive rights to claim compensation. Moreover, ASIC has extensive investigatory powers – we have all of the laws that we could possibly need;
- ASIC needs to be properly funded – the laws we have today are not being enforced by ASIC – we don’t need any more;
- there has to be a division between financial product manufacture and advice – you should be allowed to make financial products or provide advice about them but you can’t do both. At present there is no money to be made in providing financial advice – large financial institutions provide financial advice as a means to funnel clients to their products (the money made from these products is used to subsidize what would otherwise be an unprofitable business financial advisory business) – this distorts the entire financial advisory industry – clients don’t understand the true costs of advice (and will not pay for proper advice) and a vast part of the advice that is provided is provided by people who are actually salespeople for financial institutions;
- the Banks do not need to be broken up into components (this being the scare campaign being run by the Banks about why a Royal Commission should not be held) – Banks should be allowed to make managed funds, provide insurance and run superannuation funds – but they should not be allowed to provide advice about these things – as I said, the only reason Banks bother to provide financial advice is to get people to buy their products – otherwise the Banks would have to compete in an open marketplace and would have to try to get independent financial advisers to recommend their products to consumers (this being a very difficult task as one superannuation fund is much the same as the other) – the problems that have arisen in the Bank owned financial planning businesses derive from the fact that their advisers are not independent – their job is to sell as much of the Bank’s products as possible; and
- there needs to be fundamental reform of the legal system so that consumers can actually enforce the rights that are given to them – lawyers should be able to charge contingency fees – but most importantly the law relating to legal costs must be reformed – a person who loses at Court should not be liable to pay the other side’s costs – exposure to adverse costs orders is the main reason why people do not otherwise pursue worthwhile claims against large financial institutions – this reform will encourage litigation against financial services providers and would inevitably bring about a fundamental change in behaviour because they would be aware that if the behaved inappropriately there was a real risk that proceedings would be commenced against them.