A senior finance-industry solicitor says the new era of fee-for-service will not automatically end the rorts offered by some commission-based schemes of the past.
Principal of Townsends Business & Corporate Lawyers, Peter Townsend, claims Trio, Storm and Westpoint-type disasters could happen again despite the introduction of financial reforms.
While he welcomed the full report of the Parliamentary Joint Committee on its Trio inquiry, Townsend does not believe that regulators or government fully understand the potential for another fraudulent managed-investment scheme offering in the future.
“There has been no real change to rules making early detection and preemptive enforcement easier against flawed schemes or fraudulent management,” he says.
“Awareness and action after the fact are swifter than earlier times but I can’t see evidence that early enforcement is materially tighter or more effective.”
The crux of Townsend’s argument is that a more powerful regulator with a greater array of retrospective measures at its disposal still does little to prevent the initial fraud.
“Ripoll’s reviews of Storm and advice processes has built better investor protection around making class actions easier to mount after the event has happened,” he says.
“This is laudable but truly having legislation that would stop it happening again by malicious advisers is not yet a reality.”
Townsend adds that Storm clients had full documentation outlining all the risks associated with growth assets/gearing, but this did not ultimately protect them.
“Advisers were involved in recommending Storm services but there was no protection for their clients from regulators,” he says.
“Please don’t think that fee-for-service will automatically end the rorts offered by some commission-based schemes of the past.
‘Unreasonably large fees for the service provided are still possible.”
FPA puts clients first
The Financial Planning Association (FPA) said the key findings are a blunt prompt to financial regulators and product manufacturers to demonstrably lift protection and disclosure standards.
“The findings from the PJC review of the collapse of Trio Capital remind us that the client-first principle must apply as an ironclad undertaking by all industry participants and those who oversee the sector,” said FPA chief executive Mark Rantall.
The assoication acknowledged the PJC recognition of FPA’s position calling on higher standards for related gatekeepers including regulators, auditors, custodians and research houses.
The association further supports recommendations related to Self Managed Super Funds, increased disclosure, improved checks and balances to better detect signals and greater powers and emphasis on superannuation fraud by the regulators and the Australian Federal Police.
If licensed AFSL holders are unable to prevent fraud from rogue advisers, then I suggest the ASIC would need an army of auditors to police the legislation. How many advisers are banned under the existing model and how would licensing advisers change that outcome.
It is far more important to ensure that Dealer Groups adequately supervise their representatives and if they fail to meet this duty, then they must compensate any losses incurred by their clients.
Nothing forces change better than making someone to take responsibility and meet the cost.
Totally agree, this has been something I have wanted to see for 10 years. We charge a fee for service and have no problems justifying to the client or to any authority how we derived the fee. Problem is that the current AFSL system only looks at product, which is quite wrong when you seriously think about it. It should be about advice first – strategy – asset holding structures – protection structures then lastly product, sadly the politicians got this very wrong and now we have this mess to deal with.
Love the comment “Unreasonably large fees for the service provided are still possible”. Half the Fee for Service arrangement we run accross now just seem to be replacements on commission. Some advisers seem to think because the commission was X then the fee should be X. This surely assumes that the initial service provided under commission was of good value , my experience is a lot of it was poor value.
There is a lot of issues that can be simply solved by one action, license all advisers directly: no representatives. Lose your license, lose your income, I think we’d see a vastly different industry.
Pioneer thinking Ian.