The definition of “independent” under the Corporations Act is confusing to financial planners and its misuse or misinterpretation can be misleading to consumers, new research suggests.
At the 2016 Personal Finance and Investment Symposium (PFIS) last month, Angelique McInnes, a PhD student at RMIT, said her preliminary research has uncovered confusion and uncertainty among advisers themselves about who can and cannot use the term, and about what the term actually means.
“Section 923A of the Corporations Act makes it pretty clear, but ‘independent’ and ‘independently owned’ are terms that are commonly misused by financial planning businesses to describe both themselves and their services,” McInnes said.
“And preliminary research has found that advisers themselves are uncertain as to what the terms mean.
“Section 923A defines the term ‘independent’ to protect the public from being misled, but my preliminary finding is suggesting that not all Australian financial advisers understand or interpret or correctly apply in practice this definition.
“It’s confusing to everyone – I started getting confused in the interviews – and it’s misleading the public. This is only preliminary, and we need further compelling, extensive research.”
Naming those who misuse
McInnes said her interest in the issue was piqued when ASIC announced it would start to examine the use of the term “independent” by financial planners and financial planning businesses, and that it would name those who are misusing the term.
“Why I looked at this matter while I was doing a pilot study was I realised ASIC was going to do increased surveillance from March this year to find those advisers who are referring to their services as ‘independent’ when in fact they do not meet the requirements of section 923A,” McInnes says.
“Section 923A really is all about the definition of ‘independent’, the word ‘independent’. Not advice – the act doesn’t refer to the word ‘advice’, it just refers to the use of the word ‘independent’. But they are starting to publicly name and shame those who are [incorrectly] referring to their services in that way.
“Also, in 2013, Roy Morgan Research found that clients were incorrectly claiming or perceiving that the likes of Godfrey Pembroke, Financial Wisdom and RetireInvest are independent advisers.”
McInnes says that in the course of her research she found advisers struggled to answer her questions about independence.
“Not that the questions were difficult, but the meaning of the word ‘independent’ as defined by the act, and the interpretation and context in which those words were being used,” McInnes said.
ASIC surveillance
In 2012 an ASIC surveillance program found “21 instances of insurance brokers and financial planners making statements about the independence of the licensee or the services they provide in breach of the Corporations Act”.
At the time, ASIC commissioner Peter Kell said the regulator conducted its surveillance “following a single complaint, in order to assess the extent of the problem of inappropriate usage of the term ‘independent’”.
“This action puts the broad financial services industry clearly on notice about ASIC’s expectations. Going forward, where we find incorrect information about independence we will be taking stronger action including publicly naming the licensees involved,” Kell said.
In March this year, ASIC said that “under the Corporations Act, a person who carries on a financial services business or provides a financial service is prohibited from using the restricted terms ‘independent’, ‘impartial’ or ‘unbiased’ in relation to the business or service except where the person does not receive commissions, volume-based payments or other gifts or benefits, and operates without any conflicts of interest.”
McInnes says section 923A of the Corporations Act “specifies that anybody or any organisation that provides financial advice cannot be linked to any product, be it by affiliation, association, ownership”.
“It prohibits commissions and some – not all – asset-based fees, volume-based payments and bonuses,” she said.
“Industry Super Australia and the Accounting Professional and Ethical Standards Board views are that any remuneration that’s in the form of a percentage payment is technically a commission, and leads to conflicts of interest.
“However, FPA has the view that asset-based fees are advice fees that are charge by products or platforms, but are authorised by clients, or [made] under the direction of clients, for information about their portfolio. They are getting something for [that fee].”
Dividing planners into two types
McInnes says the aim of Section 923A is to restrict the use of the term ‘independent’ ‘impartial’ and unbiased’ and thereby dividing financial planners into two types: those who are independent, and those who are not independent.
But in practice, financial planning firms and financial planners use a range of terms to describe themselves, McInnes says.
“All of them that are independent, based on section 923A, can call themselves independent or unbiased or impartial advisers,” she says.
“Typically aligned [advisers], though, don’t meet section 923A; it’s evident they recognise they don’t meet 923A because the licensees are usually affiliated to product. They cannot use the term independent, and it seems that they do not use the term independent.
“But they refer to themselves as ‘independently owned’, or as IFAs; and often, when they refer to themselves as IFAs they do not use the ‘independent’ word, if they can’t use the independent word.
“There are unsubstantiated claims which ASIC is investigating, where some mid-sized, non-aligned independently owned [advisers] believe they follow the principle of independent advice while selling white- or private-label products, while allegedly receiving volume-based rebates, while allegedly having their APLs controlled by the licensee, and allowing commission via the product to be positioned as advice fees.”
