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.
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