Vertical integration creates ‘inherent conflicts’: PC
Just weeks after ASIC released a damning report on institutional product bias, the Productivity Commission has cautioned that vertical integration in financial advice leads to built-in conflicts of interest.
In its draft report into competition in the Australian financial system released on Wednesday, the Productivity Commission (PC) said vertically integrated businesses could not avoid conflicts of interest, but that these were tempered by regulation.
“A vertically integrated financial advice business, where the business engages in both the delivery of financial advice services as well as providing (or manufacturing) the financial products, creates an inherent conflict of interest,” the PC said.
“The law allows such a conflict to exist but requires vertically integrated financial advice businesses to manage this conflict through a range of obligations (including a best interest duty to prioritise the interest of the client over those of the advisers or other related parties).”
The PC said, however, that it is not clear whether vertical integration restricts clients’ access to information, noting that while advisers recommend products from an APL, they are not restricted to the products listed on it.
“Furthermore, to manage the conflict of interest, a thorough approval process for selecting products would ensure greater objectivity of products on the APL,” the report said.
The PC said more information about the products listed on advisers’ APLs would “highlight whether advisers are able to provide advice on a reasonable range” of both in-house and external products, but that this information was not presently available to consumers.
Despite this, the report said it is unclear whether vertical integration restricts clients’ access to information in practice.
“Whether or not the vertical integration of financial advisers reduces the information available to consumers, in practice as observed by the behaviour of advisers, and results in poorer outcomes, is an open question,” it said.
“Forthcoming ASIC research, which is to be released around the same time as this draft report, will shed light on this issue. The results will be incorporated into the final report.”
The PC’s report also proposed changing credit licensing arrangements to allow advisers to offer some credit services, however representatives for the mortgage broking industry questioned the PC’s understanding of brokers’ role in the provision of such services.
The report comes roughly two weeks after the release of an ASIC report into vertical integration in the advice arms of the big four banks and AMP which found that almost 70 per cent of all client funds were invested in in-house products, however the FSC has questioned the methodology used by the regulator in its investigation.
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