Banking Royal Commission: what about vulnerable, elderly customers?

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was delivered by Commissioner Hayne on 1 February 2019. The recommendations focus on financial advice (fee arrangements, conflicted remuneration and quality of advice) as well as the banking industry – in particular, consumer lending. 

While the financial services industry, mortgage brokers and the banking sector are abuzz about the scope of the recommendations, elderly bank customers garnered no specific mention in the final report. This is despite evidence having been given by elderly bank customers in relation to inappropriate lending, inappropriate financial advice and (to some extent) the targeting of these consumers by product hawkers. 

Financial Advice Reforms – where did we get to with FOFA?

Post-GFC FOFA reforms resulted in the legislating of a “best interests” duty, grandfathering of commission arrangements and giving of renewal notices/fee disclosure obligations.  While these reforms have imposed a compliance burden on financial services businesses, they went a long way to protecting consumers’ rights – inappropriate advice given to clients pre-FOFA which may have been motivated by commissions no longer necessarily complies with the “best interests” duty.  Nevertheless, the banking royal commission heard evidence of post-FOFA advice that arguably did not meet the “best interests” requirement. 

Future Reforms and Consumer Protection

The Hayne recommendations will result in further reform and the end to grandfathered commission arrangements. While this change will have a significant impact on a number of businesses, an end to these arrangements is an important step for consumer protection and perhaps one that ought to have been included in the FOFA reforms.

A major development will be the creation of a compensation scheme of last resort. The legal profession has the “Fidelity Fund” which is a compensation scheme of last resort, the National Guarantee Fund operates in respect of the Australian Securities Exchange. A financial advice sector compensation scheme would protect consumers with a meritorious claim who are otherwise unable to recover losses because the licensee no longer exists, has insufficient insurance coverage or if their insurance will not respond (due to e.g. the timing of when a claim is made). 

It is worth noting that AFCA will have an extended jurisdiction to consider financial advice compensation claims. The time period for claims that AFCA can deal with will be extended beyond the current 6 year limitation period to 10 years. That means those with potential claims against financial advisors for losses during or immediately post-GFC can lodge an application (if they did not raise their complaint within the existing statutory time limit).

What about Banks?

Do the recommendations go far enough to protect consumers from inappropriate financial advice, or from advice that is not in their best interests? We will see. What the recommendations do not deal with is whether and if so, how, banking practices can or should be amended to protect vulnerable elderly customers. Various jurisdictions in the United States have implemented banking reforms to allow banks to suspend suspicious transactions and to report concerns around vulnerable customers (and eg, intra family loans). 

When dealing with your clients, it is important to bear in mind that:

  1. The time limit for financial advice compensation claims has been extended – consider whether your new clients’ existing portfolio might be the result of actionable inappropriate advice.
  2. Older clients who seek assistance with intra-family loan arrangements (whether funded by a bank or funded by family) or substantial gifts to family members should be referred for legal advice to ensure their interests are documented and protected.
  3. When you are retained by new clients, consider whether their existing estate planning and structuring is appropriate and whether their investment portfolio is appropriate. If you have concerns, raise those concerns with your client, your licensee or refer your client for independent advice.

For more information, please do not hesitate to contact us.

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