Tempers flare over soft dollar disclosure

By Craig Phillips

The recent terse exchange between the Financial Planning Association (FPA) and the Australian Investors Association (AIA) revealed some of the deeper held suspicions relating to soft dollar disclosure in the industry.

Hot on the heels of the Australian Securities and Investments Commission’s (ASIC) report on the subject, the AIA launched a scathing attack on the FPA by suggesting its code of ethics in relation to soft dollar disclosure is neither stringently adhered to or policed — an accusation that was fiercely defended by the FPA executive.

“Anyone with even the slightest knowledge of the financial planning industry knows that the FPA has never policed compliance with their much touted code of ethics and yet use the code as a selling point for their members. This is false and misleading and if ASIC will not take action then the Australian Competition and Consumer Commission (ACCC) should,” AIA president Bob Andrews says.

However, the FPA says since January 2000 it has received about 600 complaints, with non-disclosure being given as the reason in less than 10 per cent of cases. This figure is supported by the Financial Industry Complaints Service (FICS), which cites consumer complaints relating to non-disclosure of fees at less than 10 per cent of cases.

Then last week, the AIA removed itself from the stoush, while at the same time upping the ante and bypassing the need for disclosure altogether, when it called on the industry to self regulate itself by outlawing all forms of soft dollar payments in a move that would negate the ongoing disclosure work of ASIC, the FPA and the Investment and Financial Services Association (IFSA).

“We are disappointed the financial services industry continues to indulge in the unsavoury practice of extra commissions and incentives designed solely for the purpose of selling particular investments to consumers and do not feel that the industry’s proposed guidelines for disclosure of ‘soft dollar’ payments and benefits is consumer friendly at all,” Andrews says.

The AIA proposals closely followed ASIC’s, which identified 11 different types of soft dollar arrangements offered to advisers and dealer groups in its report, which strongly criticised some firms for leaving clients ‘in the dark’ with disclosure that is vague or, in extreme cases, non-existent.

However, the AIA’s suggestions, while unlikely to be adopted overnight given the existing structure of the industry, would remove the issues surrounding disclosure altogether.

“If the industry refuses to regulate itself, continues to defend the indefensible and attempts to justify such practices by disclosure only, then it is time for the consumer to show them what is an acceptable form of disclosure,” Andrews says.

The strong criticism levelled at the industry and particularly the FPA was staunchly defended by the latter’s chief executive Kerrie Kelly, who says the “implication that all financial planners are behaving inappropriately is wrong and fails to recognise the good work the FPA and its members, together with ASIC, are doing to raise standards of professional conduct and practices in the financial planning sector”.

“If David Child [AIA honorary treasurer] is serious about ethical behaviour and transparency, he should perhaps disclose his own conflict of interest and acknowledge his business interest in criticising financial planners to promote his own rating business,” Kelly adds.

However, Child rejects Kelly’s statement, claiming he has always been open about his association with the AIA and its relationship with his business, Adviser Ratings, saying they have a commonality of interest.

Child also stresses he has been a long-term advocate of disclosure and cites articles published as far back as 1992 in Money Management arguing that case.

Late last year the FPA and IFSA released joint recommendations on the matter of soft dollar disclosure. The recommendations included the banning of practices such as product sale linked gifts and conferences, the establishment and maintenance of a public register for payments and receipts of appropriate transactions with a value greater than $300, and comprehensive disclosure in appropriate regulatory documents.