Super Consumers Australia's Xavier O'Halloran

Advocacy group Super Consumers Australia has urged the government to commission an urgent independent review into the quality of financial advice and work to remove “persistent inherent conflicts” in business models rather than easing regulation to making advice more affordable.

In a submission to ASIC’s consultation on access to affordable advice (CP 332), SCA said a solution to the advice gap “does not lie in tinkering with the existing regime to make it more commercially viable for industry participants”.

It warns ASIC against stakeholder feedback that suggests the key to making advice more accessible was weakening existing consumer protections. Consumers would be better served, the group argued, if conflicts in advice are eliminated.

“We have seen report after report from ASIC demonstrating a deep and ongoing issue with the quality of financial advice in Australia,” the submission states. “This can be traced back to conflicts, with advisers prioritising their own financial gain through conflicted payments or acting on pressure from the company that owns their business.”

“Unless and until the fundamental problem of conflicted advice is addressed, the case for regulatory ‘relief’ is extremely weak,” the submission continues, before advocating Hayne’s royal commission recommendation for a review into the quality of advice no later than December 2022. “The review should focus on removing persistent inherent conflicts in financial advice business models and regulatory steps to encourage new, conflict free, affordable business models.”

Asset-based fees represent the most egregious conflict according to SCA, as they “bear no relationship” with the work done by the adviser. “Once established, asset-based fees also do not provide an incentive to provide quality ongoing services to the client, or update advice based on changed circumstances, because the financial adviser is paid regardless.”

While stopping short of denouncing vertical integration, the submission also notes “big banks placing pressure in their networks” and “advisers in business relationships or ownership by large institutions with an interest in pushing products” as a major source of conflicts, as well as approved product lists.

According to SCA director Xavier O’Halloran the issue of conflicts can’t be alleviated with disclosure.

“I think all sides agree a whole bunch of disclosure is no consumer protection,” O’Halloran tells Professional Planner. “At the moment we’ve got this halfway house of costly disclosure regimes and ongoing conflicts of interest. So addressing those is key.”

O’Halloran says the group isn’t looking to undermine ASIC’s effort to promote affordable advice by putting the issue of conflicts at the forefront. On the contrary, he says, eradicating conflicts will lead to better outcomes for good advisers as well as consumers.

“[Reviewing conflicts] actually would lead to increased access to advice insofar as people will be more willing to take up advice as long as it’s conflict free and in their best interests,” he argued. “I think that’s what sits at the heart of the problems with advice at the moment, you need to take that consumer sensitive approach.”

Super not spared

The financial advice provided by superannuation funds is just as conflicted as that outside of super, SCA says, and should be included in any review of the issue.

“The superannuation fund business model is built on growing the size of the fund, and for some, extracting profit from charging percentage based fees on invested capital,” the submissions states. “Therefore, there is a strong disincentive to give advice which sees this capital move elsewhere, for example to a better performing fund or what might be a more suitable investment option outside of superannuation.”

The group offers three recommendations in total; commence a review into the quality advice with a focus on conflicts, ensure that ASIC is fully resourced to cope with its new requirements as FASEA’s replacement and examine the potential benefits of establishing an accessible financial advice model similar to the UK Money and Pensions Service.

The UK Money and Pensions Service is a “free and impartial” debt advice, money guidance and pension guidance service offered by the UK government

“Options for alternative models for the delivery of conflict free, affordable financial advice (including but not limited to the UK Money and Pensions Service) should be thoroughly examined as part of the independent review of financial advice that we are calling on the government to commission,” the submission states.

One set of recommendations the group did not advocate was those contained in the 2020 Future of Financial Advice report published by actuary Rice Warner, which was commissioned by the Financial Services Council.

The Rice Warner paper argued for the splitting of advice into ‘simple’ and ‘complex’ categories, and a watering down of best interest duties to make advice easier to provide and thus more affordable.

“We view the recommendation to exempt some advice from the best interests duty as only benefiting industry. It will harm customers,” SCM states. “These views are reasonable given the advice industry’s overall track record of prioritising their own interests and causing extreme customer harm.”

Originally called the Superannuation Consumers’ Centre, Super Consumers Australia mission is to advance and protects the interests of low and middle income people in Australia’s superannuation system via policy advocation, research and journalism.

Its board members include founder Jenni Mack, long-time public servant Rod Stowe and ex-ASIC commissioner Shane Tregillis.

 

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
3 comments on “Fix conflicts before making advice more accessible: Consumer group”
  1. Avatar Michael O'Hara

    The idea of removing bias is at best, foolish. I do wish that those wishing to comment on financial services would step up a level in terms of understanding bias and its application.

    Every financial service has its bias. This is inherent in structural bias – the AFSL regime (conflict between AFSL obligations and FASEA/Corps Act “best interest”); Approved Product Lists (research house dependencies, legacy holdings, in-house products et al).

    It is also inherent in the individual adviser’s/commentator’s experience, knowledge and training.

    These biases cannot be eradicated. They can be disclosed but studies show us that even full and complete disclosure does not always help clients correctly identify relevant bias outcomes.

    To remove bias completely would require:
    1. Dismantling the AFSL system. It causes an inherent dichotomy of obligations.
    2. Re-imagining APL’s. These have become little more than a gatekeeper process to justify in-house assets or to protect conflicted processes.
    3. Removing the ability of advisers to recommend in-house assets of any kind.
    4. Detailed study and management of business models vs profit generation and ensuring legislation keeps pace with the ability of individual agencies to avoid those obligations.

    None of this is going to happen or happen quickly.

    The key level is affordability. The suggestion is a “free” government-funded resource. How on earth is this considered “free”? Who pays for it? What level does it apply to? What market-disruption is caused by a free service competing with for-profit business models struggling to find capital to maintain their operations?

    How about starting with real-world evidence-based legislation?

    What cost is the average person prepared to pay for advice, and at what nuanced levels of funds under management/sophistication are the public prepared to pay more?

    Start there. Then have regulators identify how they could provide that service at a profitable level. In other words, work from real-world examples. Do NOT work from only entrenched legacy models that do not require capital to fund operations. Do NOT work from ideal positions. Just act on what is possible. If any of this seems foolish, Google “Alex Malley’s $5.7m dud CPA financial advice venture.

  2. Avatar Daniel Budreika

    While he makes some good general points about wanting advice to be unconfilicted, his argument for how this will somehow make advice more affordable is uninformed and flimsy at best. I’m not arguing against unconflicted advice models – but whether a client pays a fixed or asset based fee has nothing to do with why the cost of providing advice has risen sharply and made it less accessible for those who need it most.

    I flatly disagree with his comment that bridging the advice gap “does not lie in tinkering with the existing regime to make it more commercially viable for industry participants”. If the industry is not commercially viable, has less participants, and less competition – how is this a good thing for everyone?

    I’m always curious as to who these groups are, who funds them and what their agenda is. And to think they took the time to write a formal submission to ASIC based on a few hunches is staggering.

    I have a general rule in life – only weigh in on things that you actually know about and have some authority on. And if it’s just an uninformed opinion, always make that clear at the end.

    It would only compound the current disaster if solutions from well intentioned but uninformed groups like this are implemented.

  3. Avatar Jeremy Wright

    Let me give you just one example of misguided policy with the intent to “improve” Australians lives.
    A young family in their thirties, living in Sydney with a very large mortgage, a young baby and a toddler.
    The wife has been diagnosed with Pancreatic Cancer which has spread and is terminal.
    She has a Superannuation Policy with $400,000 Life and TPD with $50,000 cash value.
    Due to the fact she was looking after the children, there was no contribution over the 2 years and to make sure she was not being charged a premium for her Insurances which would reduce her end benefit, the Super fund cancelled her Insurances as per the Government, protect your Super, improvements.

    This young family will now lose their home while also watching this brave mum fight a losing battle.

    There are always unintended consequences for all actions and the one thing I have learned over 34 years as an Adviser and Business owner that employs people, is that most Consumer Action groups have little concept of the real world, though that does not stop them pushing their agenda’s.
    My purpose in life, is to highlight the dangers of virtual, theoretical assumption, purported to be fact.
    The Government listened to many of these theorists and we ended up with the Life Insurance Framework and FASEA, a set of Regulations and false ideals, that will be the destruction of the advised Life Insurance Industry, for NIL GAIN for ALL Australians, unless sections of these ill thought out Utopian fantasies are removed.

    At the end of the day, it does not matter what I say, or anyone says, if what we are promoting, creates what has occurred to this hard working young family, who now must bear the full brunt of misguided idealism.
    The Government needs to start listening to people who have real experience and the way to stop vested interest groups from causing untold damage, is to make them as responsible for their actions, as Advisers are.
    This would eradicate 90 percent of the noisy, theory based minority and Big end of town vested interest groups, which would free up Government Ministers to be able to listen to clear and articulate arguments, knowing that there will be a big stick to punish those who choose mis-truth over fact and real world practicality.

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