Lawyers Astrid Raetze and Lucy Edman tackle the question of whether vertically integrated organisations are in breach of the conflicted remuneration provisions under the Future of Financial Advice reforms.
Within vertically integrated distribution networks, advisers often give financial advice to retail clients for free or a very low cost. These clients pay a fee to the product issuer, but pay little or nothing to advisers for the financial advice.
The advisers are employees or authorised representatives of the product issuer (or a related body corporate). Such advisers are often limited to recommending products on an “approved product list” (APL), which has traditionally included only products issued by the related issuer.
The advisers are cross-subsidised by the product issuer, who contributes to the salaries and bonuses paid to advisers and the operating costs of the entity or the individual advisers.
Vertically integrated structures are not exempt from the FoFA provisions and any benefit given to these advisers by the product issuer that could reasonably be expected to influence the choice of product recommended, or the financial product advice given by the adviser to retail clients, will be conflicted remuneration. Under FoFA, it would be an offence for the product issuer to pay such conflicted remuneration and for the adviser to receive it.
While ASIC guidance indicates that volume-based benefits from a product issuer that are not passed on to individual advisers giving advice to retail clients and are used to pay operating expenses may not be conflicted remuneration, this will only be the case if the benefit does not influence the advice given by the advisers.
In circumstances where the financial viability of the advisers (that is, their salaries, bonuses, livelihoods) depends on the contributions provided by the product issuer, the conclusion that these benefits could not reasonably be expected to influence the choice of product recommended or the advice given to clients is difficult to reach.
To ensure cross-subsidies are not conflicted remuneration, the product issuer would need to:
(a) open APL to products from a number of different issuers;
(b) actively require advisers to advise on and recommend products from other issuers, as well as their own; and
(c) put procedures in place to check that advisers in fact recommend products from other issuers at least equally.
Without these steps, it is difficult to see why cross-subsidisation is not conflicted remuneration. If such steps are put in place, it is difficult to see what the economic benefit is to the product issuer to keep the vertically integrated advisers.
Astrid Raetze is a partner at Baker & McKenzie. She was assisted by co-author Lucy Edman.
If my memory serves me right, Bill Shorten and Wayne Swan both stated that it was too hard to stop confilicted remuneration in vertically integrated organisations (read – union controlled industry super funds) and therefore the conflicted remuneration rules would not apply to them. It would be great for the consumer if the above article is correct and ASIC actually applies the rules to everyone!
Beautiful…love it!