The Productivity Commission’s report into super reiterates its conviction that approved product lists should be made public and contain detailed information about the proportion of in-house products both included and recommended.
The 722-page report, titled Superannuation: Assessing Efficiency and Competitiveness and authored by PC deputy chair Karen Chester, suggests that such disclosure is the key to addressing issues with vertical integration and neglect of best-interests duty.
While vertical integration can sometimes benefit consumers, the report states, on the whole it doesn’t.
“Vertical integration is not a problem per se,” it states, “and can deliver benefits when competition and regulators are both fully effective – but neither are in the current super system.”
The report states the government should make all financial services licensees disclose to the regulator their number of superannuation products and the proportion that are in-house, along with the proportion of products recommended that are in-house and how many are not from the APL.
Along with advocating full disclosure from licensees regarding products, the report states that ASIC should publish the information annually and selectively audit the information to ensure best-interests duty is being met.
The superannuation report justifies the push to disclose APLs by referencing findings from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that “trustees in vertically integrated retail groups have preferred the financial interests of related-party shareholders over those of their members”.
The report also suggests financial planners should be obliged to disclose APLs directly to clients.
“Advisers should be required to disclose which products are on their approved product lists, as the PC also recommended in its inquiry into competition in the financial system,” it reads.
Beating the same drum
Both the PC’s recent superannuation report and its August report into competition make the same recommendations regarding APLs, but the earlier inquiry includes much more detail stemming from ASIC’s January 2018 report, Financial Advice: Vertically Integrated Institutions and Conflicts of Interest.
Among the ASIC report’s findings was that at the nation’s five largest banking institutions – which all employ vertically integrated models – in-house products made up just 21 per cent of APLs, yet 68 per cent of clients’ funds were invested with those in-house products. That report also deemed only 25 per cent of advice given to be compliant.
The PC’s August competition report highlights these findings and clearly states that APL disclosure is being proposed to fix problems arising from vertically integrated institutions.
“Non-vertically integrated businesses do not have the same conflicts as vertically integrated models [nor do they] face the potential that APLs can be used to put the parent product manufacturer’s interests ahead of a clients’,” it reads.
While acknowledging the potential benefits of using APLs – including research vigour and decreased costs – the competition report is clear in its conclusion that the use of APLs can be “sketchy” when in-house products are involved because they open the door to advisers’ neglect of best-interests duty.
“One possible reason for these outcomes is inadequate monitoring and supervision practices by licensees, which is symptomatic of a generally poor compliance culture,” the report states.
A ‘reasonable range’ of products
Ian Knox, co-founder and chair of Paragem, says the fundamental flaw with the proposal to mandate APL disclosure is that advisers aren’t obliged to use APLs.
“There is no obligation to have an APL, so why should it even be reported publicly?” Knox asks. “It’s not a regulatory requirement, it’s a prudent way of running a business, from a liability point of view.”
Knox makes the point that the PC is tarring the entire industry with the one brush; if the issue lies only with vertically integrated institutions’ models, he argues, it doesn’t make sense to introduce regulation for non-vertically integrated firms.
“It’s a heavy-handed approach,” he says. “I don’t think they understand the follow-on effect of what they’re saying.”
Some see the proposal as valid. Wendy Colaço, principal consultant at QMV, says, “The knowledge of transparency on product recommendations could be an effective way of promoting behavioural change in advisers.”
Colaço is relieved the report does not prescribe an appropriate level of in-house product recommendations, or how ASIC might measure this. This would only put undue pressure on advisers to “meet certain targets”, she says.
“The reluctance to set any benchmarks or targets is sensible in ensuring that advisers are aware product selection advice is being monitored,” Colaço says.
There is scope, however, for ASIC to deign product recommendations off kilter. The PC’s competition report states that APL disclosure will show whether advisers are recommending a “reasonable range” of in-house and external products, which may indicate “whether or not there is a bias towards in-house products”.
“Greater information transparency can provide ‘sunlight’ to the practices of licensees and advisers,” the report states.
Commissioner Kenneth Hayne indicated in his interim report that the government will probably receive a similar message when his final report is delivered in February. He, too, cited ASIC’s report into vertical integration and lamented that “much more often than not, advisers recommend that clients use products that are manufactured by entities associated with the advice licensee with which the adviser works”.
“It is necessary, then, to consider how approved product lists were and continue to be used in practice,” Hayne concluded.
