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Vertical integration crackdown imminent

The corporate regulator has indicated vertically integrated advice businesses are on its radar, with at least one major financial institution already preparing for a crackdown by the Australian Securities and Investments Commission (ASIC).

The Commonwealth Bank of Australia has said it has implemented structural changes to ensure it is ready for any regulatory surveillance of vertically integrated businesses, as ASIC gives indications it is broadening its investigation into conflicts of interest in the financial advice sector.

Addressing last week’s Finsia conference in Sydney, ASIC senior executive, financial advisers, Louise Macaulay said the issue was firmly in the regulator’s sights, flying in the face of suggestions the issue has been completely overlooked under the Future of Financial Advice reforms.

“Where product manufacturers and dealer groups are integrated and are incentivising for recommendation of a particular product, this can assist in replacing the lost benefits from conflicted remuneration under FOFA in that it gives an avenue for businesses to grow their client base,” said ASIC senior executive leader, financial advisers, Louise Macaulay.

“We think there is an inherent conflict in those businesses and are interested to see how those businesses are going to be dealing with that conflict,” she added. “It seems to us that advisers are more likely to offer products of their parent company.”

Ms Macaulay said the industry should expect regulatory surveillance of vertically integrated models and that ASIC has concerns about client awareness of perceived conflicts.

In response to the comments, CBA executive general manager, advice, Marianne Perkovic said the bank has been implementing changes to avoid structural conflicts of interest, including separating wealth management from product manufacturing, and introducing an “open APL”.

However, Ms Perkovic also said that vertically integrated businesses do play a role in bringing down the cost of advice, thereby making it more accessible to consumers.

“Advice now does really have to be subsidised and we need consumers to see the value of advice,” Ms Perkovic said. “The value needs to be borne by a large organisation – in a large business it is simply easier to absorb the costs [of providing advice] than in a small one”.

At the same time, the bank executive said product manufacturers need to realise that the game has changed and that they will need to prove their worth to appear on APLs, regardless of licence ownership.

“Product manufacturers need to understand the new world – it’s no longer just about distribution and sales,” Ms Perkovic said.