Banks cautioned on vertical integration
The big banking groups operating in the financial advice space have been warned they need to appropriately align product manufacturing, advice and distribution activities to minimise the possibility of future consumer detriment.
The warning is contained in Ernst & Young's Banking Agenda report, which said such responses were not only about complying with advice and product suitability reform recommendations but because the industry is seeking to demonstrate its capacity for self-regulation to avoid the reputation and financial impacts of remediation and regulator intervention.
The report also suggests that while vertical integration can be problematic it will remain a reality in the Australian wealth management industry.
It pointed to the attention being directed at the major banks saying "the conduct and culture of major financial institutions has remained in the spotlight with recent Parliamentary Joint Committee and Senate Inquiries into financial advice, ASIC performance and professional, ethical and education standards".
The report said although the industry was responding to the reviews with transformational initiatives, ongoing scrutiny of wealth management operations was likely.
"In this context, managing conflicts in vertically integrated operations, professional standards and disclosure adequacy will be continuing areas of focus," it said.
"With ASIC due to issue another report in the second half of 2015 and pending Government responses to the FSI and current Senate Inquiries, further reforms are expected."
The Ernst & Young report said that it considered any 'structural' separation of vertically integrated business models was unlikely.
"Such models are used extensively in the Australian financial services market by both aligned and independent banking, asset manager, superannuation, insurance, platform, research house, asset consultant and advice providers," it said.
"Despite this, we believe ongoing interrogation of business model integrity, more transparent disclosure of key business practices and 'restricted labelling' arrangements are distinct possibilities."
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