ASIC to watch vertical integration ‘like a hawk’

The Australian Securities and Investments Commission will be cracking down on service providers seeking to offer incentives for product recommendation post-FOFA, says the Financial Planning Association.

Despite claims that ASIC had overlooked ‘vertical integration’ in its conflicted remuneration guidance, FPA general manager policy & standards Dante De Gori told ifa he expects the regulator to be watching the issue “like a hawk”.

“This idea of an indirect incentive through a discount is fairly standard in the industry but is actually conflicted under the terms of RG246 if it is related to any product recommendation,” he said.

“ASIC will be looking at this closely and asking whether there is any ulterior motive around the discount; if it is a discount in response to loyalty or the amount of revenue an adviser brings to the business or something like that, it is probably OK but not if its directly related to a ‘client funds held in a particular financial product’ – which are ASIC’s words.”

While admitting that the practice of licensees issuing discounts is difficult to police, De Gori said the regulator will be interested in intention and the key question of whether the incentivised or cross-subsidised arrangement has influenced the nature or quality of advice.

More broadly, the FPA expects the related issue of bonus payments to also be on ASIC’s agenda.

“ASIC will be looking at all arrangements and business models, they know some sections of the market, with help from their lawyers, will be looking to circumvent the new rules and will be watching closely,” he said.

The comments follow a range of concerns raised from various corners of the industry that the regulator had overlooked the issue in its guidance and that it was emerging as a loophole by which vertically integrated service providers could gain a post-FOFA advantage.

Brisbane-based adviser Jason Bragger of Dolfinwise told ifa that vertical integration was the ‘elephant in the room’ and that the issue was going to allow conflicted remuneration to continue, while Synchron director Don Trapnell said the practice was “absolutely wrong” and called for ASIC to take a stand.

Meanwhile, financial services lawyer Bill Fuggle, a partner at Baker & McKenzie, told InvestorDaily that the issue was not only overlooked but was deliberately omitted by ASIC to advantage the larger financial service providers.

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