Conflicts of interest within AMP’s financial planning business, uncovered during the Hayne royal commission, are being used by critics of vertical integration in wealth management to renew calls for the separation of product and advice.
“It’s a terrific conflict of interest and it runs right through the heart of the financial advice system in Australia and it needs to change,” corporate governance professor Thomas Clarke, from the University of Technology Sydney, told ABC’s Four Corners on Monday.
“It is very dangerous when the institution that manufacturers the financial products is also in a direct relationship with the financial advisers who are selling these products but need to be objective and respect the interests of the client and not the interests of the financial institutions that are paying them,” Clarke summarised on the program.
The renewed focus on conflicts in the institutionally owned advice industry comes at a time when the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry deliberates over its reports. The first draft report is expected in September with the final version expected in February next year.
In January, the Australian Securities and Investments Commission released a report highlighting the conflicts of interest synonymous with the vertically integrated model, but concluded that the model also had benefits, which it listed as follows: economies of scale, which potentially improve cost efficiencies in provision of services and produce savings that may be passed on to the customer, and improve access to advice; convenience of dealing with a single financial institution; perceived safety of dealing with a large institution.
ASIC’s questioning
In its subsequent submission to the royal commission, following the second round of hearings when AMP group executive, advice and New Zealand, Jack Regan, gave testimony relating to the company’s alleged ‘fee for no service’ practice, ASIC highlighted that it may be worth the royal commission examining whether benefits of vertical integration are being passed through to consumers.
ASIC also used its submission to question whether arrangements within vertically integrated financial institutions are sufficiently transparent to permit clients to make a fully informed choice to prefer convenience over countervailing considerations and whether large financial institutions are acting in a manner that vindicates the trust and reliance that clients may place in them.
ASIC went on to emphasise the inherent conflict of interest in vertically integrated models, “which needs to be carefully managed by a licensee to ensure that advice given to the client complies with the best-interests duty and related obligations and is not tainted by that conflict”.
Still going vertical
Meanwhile, businesses continue to move forward with plans to put these models in play.
Commonwealth Bank’s announcement in June of its demerger of Colonial First State, alongside group financial advice units Count Financial and Financial Wisdom, will result in the listing of a top ASX 100 company that combines product manufacture and advice.
A subsequent announcement by rival National Australia Bank of a spin off its wealth business, MLC, is expected to combine dealer groups including Apogee, Garvan, Godfrey Pembroke and Meritum Financial with the bank’s financial product manufacturing business.
And AMP, the largest wealth manager in the country, looks certain to continue to defend its business model in the face of continued criticism stemming from the royal commission hearings.
‘Whatever it takes’
Former Commonwealth Bank chief executive, now AMP chairman, David Murray, threw his weight behind the vertically integrated models, describing the consumer benefits derived from scale and access to capital as “substantial” in a speech in June at an American Chamber of Commerce in Australia lunch.
“They [vertically integrated institutions] have resources that can fund the investments needed to support large-scale product and advice platforms, can support systematic and comprehensive customer remediation in the event of misconduct, and can develop compliance systems that will evolve with regulation,” Murray outlined during his speech.
In a statement following the airing of the Four Corners program, AMP said it was committed to cultural changes across AMP under Murray’s leadership.
In the same statement, the company acknowledged and apologised “unreservedly” for past misconduct and failures in regulatory disclosures in its advice business and stated it would do “whatever it takes” to earn back the trust of its customers, employees, advisers, shareholders and the broader community.
