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.
simple fix, get rid of all dealer groups , each advisor has its own licence, just like lawyers & accountants. ASIC donot have the resources!!THEY WE NEVER WILL!!. Rather have professional bodies self regulate & report back to ASIC with any breaches njust like accountats & lawyers the model has been around for a longtime. Yes not perfect but at least the public we get true independent advisor accept from industry based funds of course they are protected species
ASIC are a joke – they make life difficult and come to no real usable end result in true civil servant style. Dealergroups should be abolished and every adviser their own business that reports to a professional body, similar to other professions. That way the choices are owned by the adviser and any disciplinary action is enforced via the professional body. That way each product would have to stand on it’s own merits and true competition would prevail. Similarly I think ASIC still have an “ISN as the only true solution’ mentality still remaining within it’s upper echelon.
Everyone knows how it works and the lobby groups have ensured the status quo remains, until now. ASIC need a big win and real fast. The banks are the biggest scalp of all. The system is failing the consumer. That didn’t seem to matter. Now that the credibility of the regulator has been questioned, the goal posts are moving. Interesting to hear CBA state they have implemented structural changes. Unless they plan on selling out parts of the chain, won’t help them one iota.
The CBA will always have a conflict of interest. They own both CFP & Colonial First State investments, and even when Colonial was performing poorly,advisers were not given many other options. They actually had targets to put money into Colonial First State.
Their executives have targets for getting as much funds into Colonial as possible to help get the big bonuses.
I think to understand how conflicted they actually are, ASIC needs to examine their renumeration model over the last 10 years for their advisers, managers and executives. I think then we’d see that conflict of interest would be a mere prologue to the clandestine drama that seems to be their advice business of late.
How about ASIC start by clearly enforcing the upfront and customer understandable bank / institutional ownership of 85% of all adviser, especially those hidden in the myriad of institutionally owned dealer groups. And make sure that the banks / institutions logo is front and centre of all documents.
Plus have clients sign off that they know the adviser is ultimately working for a big bank or institution.
Not that hard really ASIC ????
Now this article is funny – no hilarious.
A vertically integrated model leading to conflicts of interest ? No way !
Ms Perkovic is of course absolutely correct – Of course vertically integrated business play a role in bringing down the cost of advice. Who else can run their advice businesses at a loss and make it up on the product side !
Hysterical I say !
So, after certain “big 4 members” have greased many palms and bought advisers under their control they want to say we don’t do that anymore or we are different now????? Everyone who is NOT aligned and offers “””independent advice”” ( the term independent needs to be redefined to reflect no bias or other interference in recommendations )can laugh at the above statement. Just watch the rise of real unbiased advisers and let the regulator clean the mess that is left
So to make sure i understand correctly, is Ms Perkovic saying that her vertically integrated business is able to subsidise the cost of advice (& bring down the cost of advice) from the profits made in product sales?
Isn’t that the issue? Client’s not paying for advice, but receiving advice at a ‘nil’ or ‘subsidised’ cost, where an aligned product recommendation will return the cost of providing advice and make a profit for the business at the tail end.
Doesn’t this also then create the issue of advisers who do not manufacture a product, nor receive a commission, need to charge a higher price for giving advice, and therefore unable to compete against the likes of CBA, who would have no issue giving advice for free, and making up the profit on the sale of their own products.
Distribution is king. Distribution is control over advisers, helped along by regulators if possible.
God save the king
Until distribution is seperated from product manufacture and claims things will not change
Eg there is at least one product manufacturer who has an “open APL” with their dealers, but if an adviser with the dealer owned/controlled by that manufacturer writes a risk policy with his parent manufacturer he gets more commission than if I wrote that same product through my AFSL
I understood that ASIC wanted vertical integration (less disparate groups to control); why else would the majority of recent legislation encourage this if it was not the desired outcome?
Ms Perkovic may be correct in saying advice currently needs to be subsidised in order for some customers to buy. However,the revenue and margin pools in the advice value chain are concentrated at the product end. This creates the distortions we see in our industry. If products were cheaper then customers could afford more expensive advice. That’s one of the things the removal of conflicted remuneration is all about.
Nice trap ASIC…create turmoil for IFAs through increased red tape, higher costs and investor compensation fears…effectively herding them into institutional ownership. But now you start talking tough about the conflicts of vertical integration. You clearly lack vision and purpose.
Whatever the reasons for this sudden heightened interest re vertical integration, it will be watched with great interest by many. Ultimately actions though will speak much louder than words. With regards to CBA, if it’s still in the ‘Group’, it’s in the Group and therefore no amount of shuffling around companies within it will change that. Think I might start selling some shares…