The 10 days of the Royal Commission into the Banking and Superannuation Sector hearings began yesterday, with deputy chair of the Australian Securities and Investments Commission (ASIC) Peter Kell noting that the four major banks, joined by AMP, Yellow Brick Road, First State Super, and Bendigo and Adelaide Bank, were under fire for ‘fees for no service’ complaints.
However, as Mr Kell told the commission, ASIC regards inappropriate life insurance switching advice and advice to set up SMSFs as the “most prevalent” types of inappropriate financial advice.
He explained: “Across a number of areas you have advice where consumers are switched out of their current product into a new product without any, it appears, reasonable basis upon which to do so.
“That often involves superannuation: as we've just mentioned, advice to establish an SMSF particularly where a client has, for example, a lower balance, or may not understand the obligations that attach to being a SMSF trustee.
“We've also seen regular advice around life insurance where the switching to the new insurance would substantially erode the superannuation balance if it's paid for out of super, or may result in pre-existing conditions creating problems for the customer.”
Continuing, Mr Kell noted cases of one-size-fits-all advice encouraging SMSF clients to borrow to invest in property.
He claimed the inappropriate advice often came down to improperly managed conflicts of interest, poor auditing processes and inadequate monitoring of advisers by their licensees.
However, he noted that often the damage of switching life insurance products within superannuation can be difficult to reverse.
Further, he acknowledged that change needs to be driven on the supply side as the complexities of the financial services industry can be prohibitive to consumer-led change.
“The nature of financial products and financial advice means that it's often difficult for the consumer to understand the full implications of the advice, and — and thereby to put pressure on themselves.
“This is not an industry where consumers themselves are always best placed to drive widespread higher quality outcomes.”
Responding to questioning around specific instances, Mr Kell said he would provide the “abridged version”.
He related the story of an adviser providing risk insurance and superannuation advice to a couple with a combined income of about $200,000.
Their existing insurance fees were about $3,400 a year but the adviser prompted them to switch to a different product which cost more than $55,000 a year.
With $33,000 to be paid out of their super, Mr Kell said the end result would be superannuation balances so “dramatically eroded” that the wife’s would in fact dip into the negative after a year.
This adviser would have received a “very substantial upfront commission” for the insurance.
Commenting on the role of consumer financial literacy in combatting instances like these, Mr Kell said: “Consumers in one sense go to an adviser because they don't necessarily have the financial literacy or experience or skills to understand the ins and outs of financial products and appropriate financial strategies.
“While our aim at ASIC is to help equip consumers to make better decisions, in this instance it's how they can best choose the right adviser, rather than doing it all themselves.
“The fact that they've gone to an adviser indicates that they need to be able to trust someone to help them navigate their own financial strategy, and in many cases where they're going to be in retirement.”