The Interim Report of the Murray Inquiry has found that the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice.
The Inquiry is seeking input into several aspects of financial advice including the establishment of an enhanced public register of financial advisers, increasing ASIC’s powers to ban individuals from managing a financial services business, raising minimum education and competency standards for personal advice (with a national examination), and the renaming of general advice as ‘sales’ or ‘product information’, with the term ‘advice’ being restricted for use in relation to personal advice.
While the majority of these possible directions can only be to the benefit of both the industry and consumers, it is the last point that is most contentious.
Reading between the lines it would appear that the Murray Inquiry panel is of the view that all is not well in the financial advice industry, despite the implementation of the Future of Financial Advice Reforms (FOFA), which came into effect in July 2013 and subsequent recent amendments which are currently before parliament.
As the Interim Report points out, there are around 54,000 financial advisers in Australia. Only around 15 percent of these advisers are independent, over half are owned by large vertically integrated financial institutions such as banks, and the remainder belong to dealer groups which have varying minority holdings by the large institutions. One of the major issues for the industry then is the potential for conflicts of interest where advice is given by the same entities, or related entities, that supply the products.
While recent publicity concerning the Commonwealth Financial Planning cases has elevated the conversation about potential conflicts of interest, it is not entirely clear whether consumers are able to distinguish between independent advice and advice which is aligned with a product manufacturer.
The sales culture of vertically integrated organizations, wishing to cross-sell as much product as possible to their wealth management clients, is well entrenched.
As a consequence there has been an on-going campaign to water down the FOFA legislation, removing the ‘opt-in’ requirement where clients of financial advisers must indicate annually that they wish to continue the service, removing the need for an annual fee disclosure for clients engaging before 1st July 2013, and a watering down of the “best interest” duty and provisions directed at removing conflicted remuneration, that is the payment of commissions, on general advice.
Indeed, it was lobbying by the banks that led to the amendment of the FOFA legislation regarding “general” as opposed to “personal” advice, that is, advice relating to products as opposed to advice which is tailored for individual needs.
The suggestion in the Interim Report is that there should be even greater clarification of advice, with the renaming of general advice as ‘sales’ or ‘product information’, with the term ‘advice’ being restricted for use in relation to personal advice. The Inquiry seems to reject the suggestion that such sales oriented activity should be exempt from licensing and coverage of FOFA requirements.
There may well be merit in such a direction as it would be advantageous to ensure that consumers are aware that the process of “sales” is different to “advice”. However, if the individual performing this task is acting under the FOFA legislation anyway, where is the gain?
This opinion piece has been written by Professor Deborah Ralston, Executive Director at the Australian Centre for Financial Studies, and Professor of Finance at Monash University.