Forced separation of product from advice ‘wouldn’t worry us’: Murray

Formally separating product from advice and forcing vertically integrated businesses to divest either their product or advice businesses is “one remedy” to addressing conflicts and tension in the provision of financial advice, according to the chair of the Financial System Inquiry, David Murray.

Murray said that despite the implications for vertically integrated businesses, the inquiry would not shy away from making such a recommendation if it believed it was an appropriate way to address the conflicts.

The FSI interim report, published earlier this week, observed that “there has been a tension between providing financial advice for the benefit of consumers and the product distribution role played by advisers”.

“Shadow shopping studies carried out by ASIC [the Australian Securities and Investments Commission] found a strong relationship between advisers giving non-compliant advice and conflicts of interest in business models,” it said.

In a wide-ranging interview with Professional Planner, Murray said that “from what I’ve seen about it, [separating product from advice] is one remedy”.

Structural implications

“It would have structural implications for the industry, but that has to be weighed up against the outcome for the users of the system,” he said.

Murray said it is “not clear to me that it can’t be gamed, the separation of product and advice”. And he said it is “not clear that you can altogether police that separation – we don’t know yet”.

“But if you came out with a very, very clear view that the whole system would be better off without it [vertical integration], then there has to be a structural adjustment,” he said.

“They’d have to sell their businesses or do something. That wouldn’t worry us.”

Murray said it is clear that disclosure has not worked as a mechanism to raise financial literacy among consumers, and that more emphasis needs to be placed on the quality and competence of advisers.

He said in a system where a clear and significant “asymmetry of information” remains between advisers and product providers on the one hand and consumers on the other, there is also clear potential for self-regulation of advice.

“That’s a great question, because once you go down this path – which we have – on information asymmetry, you can go to self-regulation or some sort of regulatory oversight,” he said.

“You wouldn’t rule it out.”

Professions do a great job

Some professions do a great job. It would be instructive to look across other industries and how, over time, governments that have had to address issues have gone about it.

“You look at the size of the knowledge gap, and the consequences of the knowledge gap. The consequences in the medical profession are high for the individual. The consequences in air safety are low-probability, very high-severity. So by looking at those, you might be able to judge how we deal with this.

“Just thinking about it for a moment, it’s not without its complexities, if you’re going to accredit a professional body. Which one? We have the FPA [Financial Planning Association of Australia], we have the accounting bodies, CFAs [Certified Financial Analysts], actuaries.”

Murray says it is not the intent of the inquiry to remove the focus from ongoing financial literacy improvements.

“But one might question whether ever a large enough group of people in the community will have sufficient knowledge of the powerful effects of compounding, whether it’s for a pension or anything, and the time-value of money, to be able to grasp exactly all the consequences for themselves,” he says.

“And you believe in that, then you believe in a different regime around advice.

“Curiously, in their own way, the Senate inquiries, when they looked at the systemic issues – not the ASIC stuff or the CommBank stuff – they came to some similar conclusions as we did.”

The full version of Professional Planner’s interview with David Murray, in which he discusses financial planning standards, the threat to the financial system of poor advice, self-regulation and a range of other issues, will appear in the magazine’s August edition.