Major advisers failing to manage conflicts: ASIC

By Lucy Dean

January 25 2018
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The investment watchdog has blasted Australia’s five biggest financial services firms for failing to adequately manage conflicts of interest, arguing that “improvements are needed”.

The Australian Securities and Investments Commission (ASIC) said on Wednesday that when it comes to ANZ, CBA, NAB, Westpac and AMP, it has “identified areas where improvements are needed to the management of conflicts of interest”.

That conclusion was the result of a review of the products and advice offered by those firms’ financial advice licensees.

That group includes AMP Financial Planning, Charter Financial Planning, Millennium3 Financial Planning, ANZ Financial Planning, Count Financial, Commonwealth Financial Planning, GWM Adviser Services, NAB Financial Planning, Securitor Financial Group and Westpac Financial Planning.

ASIC took a particular interest in customer files where advisers had suggested an in-house superannuation platform to new customers.

The watchdog found that where clients were advised to switch to in-house products, in 75 per cent of files reviewed, the advisers “did not demonstrate compliance with the duty to act in the best interests of their clients”.

“Further, 10 per cent of the advice reviewed was likely to leave the customer in a significantly worse financial position,” ASIC continued, noting that it would ensure remediation occurs,” ASIC said.

ASIC said the non-compliant 75 per cent was the result of advisers failing to “sufficiently” research and consider the client’s existing financial products, and/or they had not based their judgements on the “customer’s relevant circumstances”.

“The fact that 75 per cent of the customer files we reviewed were non-compliant does not mean that these customers were significantly worse off as a result of following the advice,” ASIC conceded.

“We assessed that in 10 per cent of the files reviewed it was readily apparent that customers were likely to be significantly worse off as a result of following the advice. For the balance of the files (i.e. 65 per cent), the fact that customer files reviewed were non-compliant does not mean that the advice, if implemented, would result in negative outcomes.

“However, these files did not demonstrate that the customer would be in a better position following the advice.”

Looking at all products, ASIC found that while external products made up 79 per cent of financial products on the firms’ approved products lists, 68 per cent of clients’ funds were placed in in-house products.

“In most cases there was a clear weighting in the products recommended by advisers towards in-house products,” ASIC said.

Continuing, ASIC acknowledged that as these firms are the five largest vertically integrated firms, customers may be attracted to their “economies of scale”, convenience and access and may seek advice from them for these reasons.

In cases like this, ASIC said advising in-house products “may be appropriate”.

“Nonetheless, conflicts of interest are inherent in vertically integrated firms, and these firms still need to properly manage conflicts of interest in their advisory arms and ensure good quality advice,” ASIC said.

“ASIC will consult with the financial advice industry (and other relevant groups) on a proposal to introduce more transparent public reporting on approved product lists, including where client funds are invested, for advice licensees that are part of a vertically integrated business.”

It said mandatory reporting requirements could be an option to increase transparency around conflicts of interest and management that are “inherent in these businesses”.

Acting chairman Peter Kell said ASIC is already working with those firms to improve the quality of advice and conflict management.

He said, “There is ongoing work focusing on remediation where advice-related failures have led to poor customer outcomes, and the results of this review will feed into that work.”

This work includes boosting the monitoring and supervision processes for advisers, and bettering the recruitment process and adviser checks.

Mr Kell said other firms should “carefully” examine the findings of ASIC’s review, noting, “While this review focused on five major financial services firms, the lessons should be considered by all vertically integrated firms in the financial services sector.”

The Financial Services Council hits back

Responding to ASIC’s findings, the FSC said that while it and its members “welcome regulatory scrutiny”, clients and advisers should be consulted before judging whether the advice was compliant or not.

“In the report, ASIC has adopted its own interpretation of how the best interest duty should be applied,” the FSC said.

“In drawing conclusions regarding ‘non-compliant advice’, ASIC has considered file documentation alone; it has not consulted with individual clients or advisers. It is the FSC’s view that, before drawing definitive conclusions about the appropriateness of advice, the client and the adviser should be consulted.”

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