ASIC denies enforcement failure

The Australian Securities and Investments Commission (ASIC) chairman Jeffrey Lucy has defended the regulator’s enforcement of financial services laws after its shadow shopping report uncovered some serious deficiencies in compliance and conflicts of interest relating to super switching advice.

Despite an overwhelming majority of financial planners providing “reasonable advice” or better, the report found the advice of one in five advisers was unlawful, and that advisers had failed to produce a Statement of Advice when one was required in 46 per cent of the 306 cases reviewed.

Additionally, advisers who had a conflict of interest over remuneration were six times more likely to give bad advice, and those who had a conflict through their association with a product provider were three times more likely to give bad advice.

According to ASIC’s calculations, on average, participants in the shadow shopping exercise who were advised to switch super funds would end up with reduced retirement benefits of 16 per cent, or $37,043.

Despite these shortcomings, Lucy said he thought ASIC was “doing a pretty good job” of enforcing Financial Services Reform (FSR) regulations.

“You never know what the results might be if we hadn’t been out there in the space and enforcing it [FSR].”

He said ASIC had been “very vocal” about some aspects of commission-based advice and the necessity for accurately and reliably disclosing conflicts, and had also been looking at the quality of advice.

“This time last year we didn’t have anywhere near this level of activity in terms of surveillance. Previously, the surveillance, because FSR was in its infancy, was nowhere near where it is today,” he added.

Lucy said the shadow shopper report had “obviously uncovered some compliance issues for ASIC to monitor going forward”.

However, he passed responsibility for ensuring advisers complied with regulatory requirements to licensees.

“The average consumer is not an expert in financial matters. This places a very clear onus on licensed advisers to give advice that reflects the client’s circumstances, that meets their needs, and discloses any conflicts of interest,” he said.

He also made it clear that the shadow shopping survey had been “very much an exercise to gather intelligence” and enforcement action arising from the results would be limited.

ASIC plans to follow up with only 14 licensees to investigate whether problems uncovered were, in the words of the report, “serious or widespread”. Lucy noted that six of these 14 were already under ASIC investigation on separate matters.

He said ASIC also did not intend to publicly name advisers and licensees that had performed poorly, as it did in the previous shadow shopping exercise in 2003, because “it doesn’t necessarily help consumers and it certainly doesn’t help with confidence”.

Lucy said advisers should also “watch this space” for prosecutions of advisers who delivered poor advice, as distinct from negligent advice.

~ Full details of the shadow shopper survey on pages 12 and 13, MM print edition April 13, 2006.