Instos could bypass FOFA

Smaller platform providers claim large institutions that have financial products, administration services and distribution networks under one umbrella will find ways to pass money between those entities after the introduction of the proposed Future of Financial Advice (FOFA) reforms.

The FOFA reforms package proposes the ban of all conflicted remuneration methods for financial advisers including the banning of volume payments from fund managers and platforms down to dealer groups and advisers.

Managing director of netwealth Michael Heine said it was quite possible for institutions to manipulate those payments such that there is an “incentive that is legal, but still achieves the objective of encouraging the sale of a particular product”.

Furthermore, he said institutions would achieve exactly what the Treasury and FOFA were trying to avoid: product bias.

“They will be able to incentivise on a legal basis, but nonetheless that will result in product sale. They will structure it in such a way that it achieves the objective without breaching the law,” Heine said.

“A bank that owns full components of the chain can pay its advisers a very handsome salary, for example, it doesn’t have to physically transfer it as a rebate,” he added.

However, the Financial Planning Association (FPA) believes product bias could be removed, with the introduction of a conflict management process in respect to platforms and the already proposed statutory fiduciary duty for advisers.

FPA chief Mark Rantall said fully discretional administrative platforms, regardless of their ownership, needed to have a different legal treatment to those platforms and products that are non discretional.

“Fully discretionary administration platforms that are owned by institutions are not necessarily a bad thing,” Rantall said. “You’ve got a large institution sitting behind those extensive administration services and IT systems and investing in them.”

The FPA had called for the Government to provide a clearer definition of discretionary platforms, with Rantall saying the association had already held talks with the Treasury.

But chief executive officer of OneVue Connie

McKaege said large institutions in their current form and structure could not remove conflict because “they pay their distribution to put the money in their products”.

OneVue supports the FPA’s discussion with the Government, but said there needed to be a clearer definition of conflict, rather than platforms.

“If they get the definition of conflict right and what constitutes a conflict, I think the same definition can apply to both [institutionally and non-institutionally owned platform providers],” McKaege said.

“If these changes are forced, it will be equal for the first time in a long time, because they actually have to adjust instead of us continuously having to adjust to their market dominance,” she added.

Colonial First State, Macquarie, BT Financial Group and AXA either declined to comment on the issue or were unavailable.