Consumer still drowning after Royal Commission
By George Lucas, Managing Director & CEO of Raiz Invest
The revelations unfolding at the Royal Commission into banking and financial services would make a mafia don blush. The pillars of banking and wealth management have been exposed for overcharging or charging for no service, poor and often conflicted advice, misleading regulators, and contravening trust laws, and that’s just to name but a few miscreant deeds. Reputations of regulators, corporates and individuals, are being trashed.
It’s good that we are having a root-and-branch inquiry into our financial services system. Those who said an inquiry wasn’t necessary, from politicians to analysts to senior journalists, haven’t got egg on their faces. They have omelettes.
But once it’s over and the media circus has moved on, where’s it going to leave most consumers. In my opinion, certainly not better off, and possibly worse off. Let me explain.
It seems to me that there are three certainties coming out of this inquiry; tighter regulations, higher professional standards demanded of those offering advice, and stricter enforcement by the regulatory bodies. All good outcomes in themselves, but they do have one obvious consequence – higher fees – especially as they will have higher levels of education. In addition, there are suggestions that many advisers will chose to exit the industry (some suggest up to 50%).
It means that advice could very much become the preserve of the well-heeled; the very people it could be argued least need advice. But for many Australians, getting good advice will be beyond their financial means, and this in a country where financial literacy is nothing short of a national disgrace. As the Royal Commission was told, a 2006 survey showed 46 per cent of people aged between 15 and 74 struggle to understand simple financial services documents, and it’s my guess this situation hasn’t improved.
So, the very consumers who have been shown to be the most vulnerable could now find themselves unable to afford any advice, although, it should be added, no advice is better than the bad advice many have been getting.
So, what to do? It seems to me there are three viable options. First, there needs to be a focus on financial literacy – and it needs to start at an early age. Via social media it is possible to reach young people on matters financial, but they still need to have the basic financial literacy skills to distil this information. Governments, state and federal, need to make this priority, and not keep paying lip service to it. This is one of the benefits of the Raiz App which increases financial literacy from the hands-on experience of participating in financial markets.
Second, governments (Liberal and Labor) and regulators who have spent the past 30 years creating and cultivating an oligopoly in Australia in financial services need to seriously reconsider. Barriers need to be imposed on large financial institutions to reduce their ability to user their existing market power to compete. This may include allowing international institutions into the market and creating an “un-level” playing field so new FinTech players such as Raiz, which can fill some of the gaps left as advisors leave the market. I am talking my own book here.
Thirdly, in certain areas of the financial system, people must participate; banking, insurance and superannuation are three of the most obvious. These institutions have guaranteed markets, especially superannuation, where every working Australian is a conscript, not a volunteer.
Any institution that compulsorily gets nearly 10% of your weekly wage needs to operate to an ethical standard that’s the polar opposite of a mafia don. There can be no excuses. People who hand over part of their salaries to an industry/retail/public sector/corporate super fund, supposedly to give them some financial security in retirement, should not have to wonder whether that money is being invested in a fiducial manner that considers their best interests. It should be holy writ, and institutions who fail to do should feel the full force of the law. If the Royal Commission at least achieves that end, then it will have been worthwhile.
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