ASIC’s concerns on vertical integration and best interests
The Australian Securities and Investments Commission has left Federal Parliamentarians in no doubt that it has concerns about the compatibility of vertical integration with the delivery of client best interests.
Is vertical integration compatible with delivering on client best interest?
The Australian Securities and Investments Commission (ASIC) has made very clear to Federal Parliamentarians that it harbours serious concerns about whether financial planners operating within vertically-integrated structures can ultimately be seen to meet the best interests test.
What is more, ASIC has signalled that those concerns about vertical integration may be manifested in an analysis to be issued later this year.
But the signs for vertically-integrated institutions such as the major banks are not good. The regulator has this year used a submission to the Parliamentary Joint Committee reviewing the Life Insurance Industry to query conflicts inherent in vertically-integrated models after late last year, delivering a similar message under questioning during a Committee hearing.
Under questioning before the Parliamentary Joint Committee on Corporations and Financial Services, ASIC deputy chairman, Peter Kell said a major test for vertically integrated organisations would be whether they would be able to put client's best interests first.
"In terms of vertical integration, the key issue is that, under the law you have to act in the best interests of clients. You have to put the clients' interests first. You have to avoid conflicts of interest," he said.
Kell said the challenge for those vertically integrated businesses is: "Can they do that? Can they achieve that within that model?"
The ASIC deputy chairman said that while he was not sure that the regulator should be dictating what business model an individual bank should follow, it was a question that needed to be put to them — "Are you going to be able to run a model that provides high-quality, impartial advice to your customers within that vertical integration?"
Kell told the Parliamentary committee that ASIC was currently looking at the question of vertical integration and best interests and that the results would start to be seen.
In early February, ASIC then filed a new submission with the Parliamentary Joint Committee reviewing the Life Insurance Industry in which it queried whether open approved product lists (APLs) could deliver competitive benefits to planners operating within a vertically-integrated environment.
ASIC suggested that while open approved product lists (APLs) might lead to more competition and better consumer outcomes, problems would still remain.
Further it claimed that even if ASIC had the power to mandate an expansion of APLs, this would not necessarily deliver an answer.
ASIC said that over-reliance on APLs might lead to poor advice if advisers did not conduct proper research on the client's existing non-APL products before providing ‘switching advice'.
"In ASIC's view, an expansion of APLs can contribute to greater competition and better consumer outcomes," it said. "However, a mandated expansion of APLs will not, of itself, address the risks identified."
"This is because:
(a) Our regulatory experience suggests that advice providers operating within a vertically integrated group tend to recommend in-house products over non-related products even where their APL includes a wide range of non-related products; and
(b) Even in circumstances where an advice provider does not operate within a vertically integrated group, a wider APL may not protect consumers from the poor outcomes that can result where the adviser has a conflict of interest."
ASIC cited the example of an advice provider receiving remuneration to recommend one product on their APL over others, stating that this "might provide an incentive that is not aligned with the adviser's obligation to the client, i.e. the best interests duty".
The regulator said that its Report 413 had concluded that the drivers of poor quality retail life insurance advice were adviser incentives and failure to consider the relationship between life insurance and superannuation.
"Therefore, while ASIC supports the recommendation for broader APLs, we note that this move on its own is unlikely to improve the quality of advice," it said.
It will not be lost on anyone in the financial planning industry that ASIC's concerns about vertical integration coincide with ANZ flagging its intention to exit much of its wealth business and speculation that other of the major banking groups may follow suit.
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