Yesterday it was announced that Lloyds Banking Group was given a fine of £28m for systemic practices of mis-selling. Or more plainly it was discovered that it’s employee financial advisers, that were incentivised to achieve targets in selling the products of the business, had not been giving their clients truly independent advice. In the words of Homer Simpson “dohh”.
It’s a regular occurrence so I won’t belabor the point but of course incentives will sway the judgement and decisions of the majority of mere mortals. Conversely those employee individuals that are not swayed in this manner will most likely fail to achieve their corporate goals and thus will cease to distort the average outcome.
Thus every form of product distribution is effected, which is completely reasonable when it is a paid employee, except when that employee is also presenting themselves as either representing the client or has an advisory capacity with fiduciary obligations to a client. The most obvious examples are financial planning and mortgage brokering groups that are owned partially or completely by the product manufacturers (in both cases banks).
In Australia we are so used to this structure that we give it little thought in those areas of advice but if I were to give a fictitious example whereby accounting groups were owned by the ATO how easy would you feel about seeking your tax minimisation advice there?
We often don’t think of it in the same way but the case is more extreme with regard to SME finance where up to 90% of businesses will go back to the employees of their existing lender when seeking new finance and, it appears, either expect to get the best outcome for their business or know that the chances are they aren’t but they will just accept it. In this case the employees are not under any conflict of interest, but SMEs need to be doing more to protect their own interests.
But we all know this is the case and apart from regularly applied fines or ‘enforceable undertakings’ we permit the structure to exist. What is another activity we know has bad outcomes but society permits on the basis of ‘freedom of individual choice’? Gun control in the U.S., no that is too bizarre for an Australian to comment on. Smoking is an interesting parallel.
Australia leads the world in its stand on permitting individuals to choose to inhale tobacco but restricting the practices whereby persons susceptible to influence through advertising may adopt the habit not entirely of their own free will. As such advertising was banned, then rather nasty warnings and photos were included on cigarette packs, and now all cigarettes are sold in plain packets.
At the significant risk of expanding already existing over-regulation in Australia I propose that, on a progressive basis to allow the industry time to adjust, the same measures be applied to advisory networks owned by product suppliers:
1: No advertising – commence immediately;
2: Warnings and photos of people who received bad financial outcomes as a result of biased advice (crying kids, sheriff’s evicting people from their houses, etc, etc) – as of 2016; then
3: No branded advice; all financial planners and mortgage brokers under a group owned by a bank are not permitted to brand their services in any way – as of 2018.
To cotton-ball the SMEs all bank lending staff have to provide them with a Statement of Biased Advice at the beginning of a discussion, which must be signed by a board member of the business, and this must be renewed every 12 months, just in case the SME owners suddenly forget.