Hopelessly Conflicted

There is more from the Royal Commission grilling of National Australia Bank today,  “Hopelessly Conflicted” is one term that I’m hoping will catch on:

The process that saw NAB’s superannuation trustee NULIS advised by the bank’s wealth management arm was hopelessly conflicted, the Hayne royal commission has heard.

Counsel assisting Michael Hodge QC put to former NULIS chairman Nicole Smith that there was an inherent conflict of interest between the trustee, which had the sole duty of acting in the best interests of the super fund members, and the administrator, which was concerned with making profits for the bank.

“It’s hopelessly conflicted isn’t it? How can it advice you as to what’s to be done…when it’s the one that will have to pay the money back?” Mr Hodge said.

There is a thought process in many (many) financial companies around Australia whether it be banks, stock brokers, financial planners or related companies:

This is how we have always made money and so it must be OK.

In other words “It is difficult to get a man to understand something when his salary depends upon his not understanding it”.


The key term to come out of the royal commission is conflicted. Some of the many conflicts in the financial world:

  • A company can charge a retail customer for financial advice that advises the customer to invest in the company’s own investment product. 
  • One part of a company can give investment advice to buy a stock while another part of a company is being paid a fee to raise capital.
  • Financial companies can own trustees to manage their own products. i.e. the trustee that is meant to be acting for the investor is wholly owned by the issuer of the investment product.   
  • There are a host of other conflicts – basically, if a company owns more that one of the following then there is a decent chance of a conflict of interest between the different divisions: financial advice, funds management, responsible entity, superannuation trustee, investor platforms, investment administration, and custody services.

Future of Financial Advice (FOFA)

The Future of Financial Advice reforms were intended to address many of the issues that we are seeing played out at the royal commission.

However, in their strictest interpretation the reforms would have destroyed the business models of many companies and so there was delay, more delay, grandfathering, a transition period and then (over time) a watering down so that the rules are roughly in place but in many cases can be skirted. 

Basically, rather than a transition period to a new, less conflicted, more educated financial advice industry, the transition period was used to lobby politicians to water down the rules and allow legal structures so that many of the conflicted activities could continue as before.  

The way forward

I suspect that the majority of the recommendations to come from the royal commission will not be new.

The answer is separation. In many cases, the conflicts cannot be managed and need to be in separate companies. The banks know this and have already started spinning off various wealth management divisions. 

The legal fictions that have been erected to “manage” conflicts will hopefully be torn down. One of the key questions will be how much separation will be mandated, and which types of businesses can’t be jointly owned. For example, can a bank partially own a fund manager or does it need to be completely separate?

I suspect the royal commission will take a hard line, but I also suspect that politics will water this down – the banks are big donors to both political parties.