Former Australian Securities and Investments Commission staffer Bruce Keenan, now an independent risk and compliance consultant, has penned a submission to the Senate inquiry into the performance of the corporate regulator, calling for a new regulatory system governing research houses, ratings and analysis of financial products.
“ASIC does not have the resources to properly ‘supervise’ the 15,000 investment products, but rather, should better utilise industry ‘gate keepers’ already available,” Mr Keenan said, adding that research houses have the ability to significantly influence adviser decisions.
However, Mr Keenan argued there is an imbalance in the current system whereby advisers are held accountable for product recommendation, but product manufacturers are not.
“There appears to be a clear regulatory imbalance between AFS Licensees (financial planners) and licensed research house providers under the existing ASIC RG 79 in terms of the imposition,” the submission stated.
“Unfortunately, financial planners have now become the ‘cannon fodder’ for the entire intermediary industry and have been targeted for claims involving [collapsed entity] Basis Capital via the industry EDR scheme [under] the guise of ‘inappropriate advice’, which is quite contrary to other wider industries where the ‘manufacturer’ of the ‘product’ is held totally accountable for rectification of any faults.”
ASIC does provide guidance for research houses in RG 79, but Mr Keenan was critical of the lack of any industry basic or consistent system, allowing each research house to instead decide what it considers to be the best method of rating products.
This resulted in there being “no way for investors or consumers to compare ‘apples’ with ‘apples’ between research house providers”, he said.
The submission recommended that all research houses be advised to “adopt, as a minimum standard, more common or identifiable methodologies for assessing or rating products and investor profiles/categories.”
The former regulator highlighted community concern over company and product failures and that much of the criticism had “been wrongly directed towards the financial planning industry”.
If these suggestions were to be adopted, Mr Keenan believes ASIC will receive fewer complaints relating to financial loss, and will be able to better inform investors and target the ‘riskier’ zones.
He considered the most important benefit of the recommended changes is that they were likely to move the volume and spread of investment towards less risky investment zones.
Gerry, I normally agree with you but on the US regulatory front I don’t this time.
We have 2300 pages of legislation that has been watered down, with escape clauses everywhere (cheat options).
If they just reinstated Glass-Stegell (excuse my spelling pls) that was instituted after the depression in the 30’s and only repealed by Bush (dumb W) we would not have had anything like the magnitude of the problems this last 6 years.
The US reg’s are a shadow of their former selves and stood guard for about 80 years!
BTW I think G-S reg’s were only 30-50 pages too!
The risks are never obvious until an investment fails….I don’t know that banks pulling the rug out from under various companies and the economy in general was a risk we ought to have forecast, or the fact that Wall st was flogging off sick deals to foreign banks and investors.
It’s good to see that the US regulators are having some major wins over there against the investment banks. Pity our regulators sat back and did nothing except blame advisers as being the ultimate gatekeeper of all evil.
Russell, I am assuming you not in the finance sector for employment?
There is no way a PDS adequately explains and details all the risks, especially in the ones that blew up.
It may mention risks but it would have identical paragraphs to almost every other PDS.
I would strongly caution you against relying solely on PDS information if you are making your own investment decisions.
Hear, Hear! Well said, at long last the truth is surfacing from a player with credibility.
We keep hearing that the regulator is far too busy to review financial products however they and the manufacturers need to be far more accountable for product failures.
They do not have to review 1500 products. What they should do is commit to thoroughly reviewing any products with liquidity, leverage and tax issues – probably loss than 200 in the retail space.
The manufacturers will complain that this will reduce their ability to innovate, but lets face it, our industry does not need any more Lift, Basis or Absolute Capitals, marketing overcomplicated products to an unsophisticated market.
Toss in unlisted property funds, and Agri business with liquidity issues and with more appropriate due diligence our regulator would have saved retail investors $millions.
If an Advisor recommended a product to me I would expect that Advisor to have at-the very-least read-and-assessed the product and only recommend it if s/he would purchase it him/herself…otherwise I would be very ANGRY.
The comments about only manufacturers of consumer goods being liable for product failures are incorrect. Resellers are also bound by Australian Consumer Laws which impose warranty conditions on resellers down each link of the supply chain. There are risks at each level in the value chain in financial services too. Issuers of financial products are bound by Corps Act & regulatory requirements re PDS disclosure – including explaining the risks of investing. The fact is, all financial products have risks. There are good reasons why issuers spend a lot of money with lawyers writing PDS risk sections! You need to pay particular attention to it. Advisers must read the PDS, understand the product and the risks before recommending it to a client, then properly document their advice, including the risks. Another way of reducing risk for advisers is diversification, transparency and low cost products. Perhaps exchange traded funds (ETFs) offer the answer?
I strongly agree with your article and would enjoy having a discussion with yourself. You never know between us we could change financial services for the better. The public would be better for the changes.
Hear hear – Well done Bruce – it needed to be said.
Great points by Bruce. The Planner is always the one in the firing line & consumers are encouraged to take aim at them & their Licencees respective PI Insurer by ASIC/FOS. More accountability is needed at the Research & Product Manufacturer end. This will become even more important if a separate financial scheme is enabled to cover people in the event of massive product failures in future.
If I buy any other product in any other industry and it fails. I do not go back to the salesperson. The corporate watch dog will look at and go after the manufacturer.If a product provider has a product recall to sort out issues they do this at their cost. In Financial Services it seems the adviser is the one with the target on him. Where is the consistence in fundamental concept of consumer protection
This is what I wrote and sent to ASIC in 2007. NO response. NO surprise
The fact is the research industry still relies on payment from the manager being rated. These ratings and awards are then stuck on PDSs and marketing material like wine bottles. Probably all too late now anyway, pretty sure most advisers in Australia are all using the same 5 or 6 mainstream funds now, not game to use anything else. know your product and inappropriate advice will get you all the time when a fund manager screws up…this does need to change.