Vertical integration has been left out of the Quality of Advice Review terms of reference, leaving in limbo the application and appropriateness of vertical business models in the industry.
William Buck director Michael Rees-Evans tells Professional Planner the omission is a “big oversight”.
“Part of the issues that have left us in the position we are now finding ourselves, is the vertical integration with the banks selling products but also purporting to be giving advice.”
However, he noted that review lead Michelle Levy acknowledged the current regulation had no distinction between financial product advice and financial advice.
In the foreward on the advice review issues paper, Levy wrote the regulatory framework introduced by the Corporations Act and subsequent reforms have not acknowledged the difference.
“They all proceed on the basis that the regulated activity is the provision of financial product advice,” she wrote. “While financial advice is often used as shorthand for financial product advice, they are not necessarily the same.”
Rees-Evans says it is important she noted this distinction as there is no law that covers what holistic advisers would regard as advice.
“It’s great she’s picked that up because it strikes to the core of the problem that we’re facing – there is a mixture between flogging a product and advising clients on their life goals.”
Rules of engagement
Encore Advisory managing director Tom Reddacliff says it’s hard to say whether the omission of vertical integration in the terms of reference is an oversight but believes it should have been included to address the “rules of engagement” for different business models.
“If someone’s operating a vertically integrated model like AMP, Insignia and others out there that are privately owned we’re better off knowing exactly what those business models are or aren’t.
“They’re not independent models so let’s make that clear. That would help in turn with advice affordability but also clarity.”
AMP’s advice arm is confident it has a compliant vertical business model that has nothing to do with vertical integration.
But Reddacliff says using the one-size-fits-all approach for regulating all business models is confusing, and pointed to the UK as an example of better regulating different market sectors.
“In the UK they’ve clearly labelled or segmented their advice segments and that’s what we should do here. A classic example is risk specialist advisers; that’s a clear segment of advice but it’s operating under the same set of rules and education standards as a stockbroker giving advice.
“By not addressing business models it’s going to be difficult to address advice market segmentation and therefore advice affordability.”
In its submission to the advice review terms of reference The Fold Legal noted there is “little, if any, guidance for… entities with avowedly vertically integrated advice models”.
“If they are transparent about the fact that they provide an inhouse or preferred solution, much of ASIC’s guidance on quality financial advice and compliance with the best interests duty is unsuitable for their business model,” the submission stated.
Conexus Institute executive director David Bell called for a nuanced review of vertical integration and says any deferral only serves to extend business model uncertainty.
He also flagged concern around consumers’ ability to interpret disclosure around vertical integration.
“Vertical integration can take many forms. How well consumers understand the risks of varying vertical integration models via existing disclosures should be explored.”
What Hayne said
Recommendation 2.3 in the Hayne Royal Commission final report called for the advice review “to improve the quality of advice” which had to be completed by the end of 2022, but didn’t specify that the ‘quality’ review should include vertical integration.
Separately, however, Hayne recommended that a review into vertical integration should be undertaken by the Australian Competition and Consumer Commission.
“I observe, however, that the Productivity Commission recommended, and I agree, that commencing in 2019, the ACCC ‘should undertake five yearly market studies on the effect of vertical and horizontal integration in the financial system’.”
Accompanying this recommendation was Hayne’s recommendation that the enforced separation of product and advice would be a “very large step” to take, one that would be both “costly and disruptive”.
“I cannot say that the benefits of requiring separation would outweigh the costs,” he continued.
In the Government’s response to the royal commission report Treasurer Josh Frydenberg also agreed with the PC’s recommendation.
“The Government agrees that understanding the longer-term market implications of [vertical] integration is an important component of promoting competition in the financial system,” he stated.
When contacted by Professional Planner the ACCC said it has currently no structural plans in place for how it will undertake any review of vertical integration.
“The ACCC has not been specifically directed by government to undertake a market study on the effect of vertical and horizontal integration in the financial system, of the kind recommended by the Productivity Commission (and endorsed by Commissioner Hayne when examining financial advice),” a spokesperson said.
“However, competition issues relating to vertical and horizontal integration are considered in the course of a range of other work conducted by the ACCC, such as other more specific market studies, investigations work, and merger assessments.”