FOFA report calls for product providers to accept responsibility for their failures

Mike Taylor writes that the Government’s FOFA process has finally produced a genuinely positive outcome in the St John Report’s clear analysis of the need for financial planning product providers to accept greater responsibility for their failures.

A few months ago the chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, issued a throwaway line in an address to a Self-Managed Super Fund Professionals' Association conference which highlighted the importance of the St John Review released last week.

In his throwaway line, Medcraft attributed the legislative challenges confronting financial planners to events such as the collapse of Storm Financial, Westpoint and agricultural managed investment schemes.

The importance of the initial recommendations of the St John Review is that, unlike Medcraft, they have discerned the important difference between products and advice, and the disproportionate responsibility often shouldered by planners.

In his letter to the Minister for Financial Services, Bill Shorten, outlining the content of his inquiry report, Richard St John went to some length to reinforce the importance of recognising the relative responsibilities of product providers and advisers.

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“I point out…that as a practical matter there is some disparity between the obligations towards retail clients borne by issuers of financial products and by financial advisers, with consequential limits to the protection offered and recourse open to those clients who acquire products direct from issuers,” his letter said.

“As a matter of strategic approach, it would be timely to review the current, relatively light-handed regulatory regime for the issue of certain financial products into the market, in particular managed investment schemes, and the possible need for some tightening of that regime.”

It says something about St John’s understanding of the issue that his report dedicates an entire chapter to discussing “an apparent imbalance in the responsibilities of issuers of financial products on the one hand and financial advisers on the other”.

The chapter says this imbalance stands out in any consideration of the current arrangements.

Indeed, the chapter points clearly to the circumstances common to a number of collapses which have occurred in the past half decade, citing substantial claims for compensation by retail clients arising in the context of the failure of a managed investment scheme.

“Where retail clients suffer losses in such circumstances, those clients who invested on the basis of advice may be able to claim compensation from their adviser on the basis of the inappropriateness of that advice,” it said.

“Other clients who purchased the product direct from the issuer, as is often the case, are unlikely to have an avenue for compensation.”

The report said this was in part because of difficulties in attributing loss to shortcomings in the kind of disclosure issuers make to the market in general; but also, when product issuers failed, consumers often saw little point in pursuing a claim due the low probability of recovering their money.

“It is noteworthy also how few complaints are brought against product issuers, as compared with financial advisers, under EDR schemes,” the report chapter said.

St John said that, as a matter of strategic approach, “it would be timely to review the current light-handed regulatory regime for the issue of certain financial products into the market, in particular managed investment schemes, and the possible need for some tightening of that regime”.

He said that while his report did make specific recommendations, “possible first steps in any such review would include the imposition on product issuers of more positive obligations in regard to the suitability of their products for retail clients, as well as the introduction of standardised key product labeling”.

“Such an approach would be consistent with attention being given at the international level, following recent financial market turmoil, to the need for product issuers to assure the appropriateness of their product to retail consumers,” St John said.

His analysis said that the case for giving more attention to the responsibilities of product issuers was underlined by the prominence of direct consumer investment into products such as managed investment schemes.

“This would be with a view both to providing better protection for clients, and reducing the instances of consumer loss, as well as paving the way for possible compensation claims where those obligations are breached,” St John said.

He said consideration should also be given to related matters including the ability of EDR schemes to apportion responsibility for misconduct amongst relevant licensees, including product issuers.

Medcraft and his team would do well to read and digest St John’s report, and note the fact that the Minister’s discussion of the report’s recommendations specifically referenced the responsibility of product providers.

For their part, the major financial planning organisations need to reinforce the need for equal responsibility to be borne between planners and product providers.