Laying bare an abuse of trust
As the Financial Services Royal Commission unfolds, many of the stories tell of customers whose trust has been abused, even exploited. I will explain why trust is fundamental to financial services, reflect on how we got to this sorry state, and offer thoughts on the way forwards.
Financial service providers – banks, superannuation funds, investment managers, financial advisers, etc – assist people with their financial affairs. The vast majority of people have limited financial knowledge.
Against this background, many people just need help with their finances. A good example is superannuation funds where the majority of members accept the default fund they are offered. Research in which I was recently involved found that defaulting stems from trust in the provider, combined with self-perceived lack of skill. Meanwhile, another paper found that even self-managed superannuation fund members do not have superior financial knowledge, and rely on their financial advisers to guide them.
The reality that most people depend on providers is endemic across the financial services sector. And this is how it will always be. Raising financial literacy to a point where most can confidently look after their own financial affairs is a pipe dream. It is also how it should be. Specialisation is efficient. Just as most people go to mechanics to fix their cars, it is better if most can rely on financial professionals.
Given the need for financial service providers who can be trusted, it has been particularly galling to watch the Royal Commission unfold.
People have gone to their providers for help, and too many have ended up worse off and often exploited in the process. At the forefront are some traditional pillars such as AMP and Commonwealth Bank.
AMP once stood for ‘Australian Mutual Provident’ and Commbank used to be the government-owned ‘peoples’ bank.What went wrong? Most commentators point to a combination of culture, incentives and profits first, no matter the cost. These aspects are related. The banks, for instance, reoriented their businesses towards maximising profitability in response to deregulation during the 1980s and the scars left by poorly controlled commercial property lending that materialised in early 1990s recession. The change in focus laid the foundation for a strong banking sector, to the benefit of the country. Somehow, the sector also lost sight of its social role and obligations.