ASIC says advice standards have lifted but has sounded the alarm on what has become a sophisticated practice of telemarketers using high pressure sales tactics to refer potential clients to advisers who will then be put in inappropriate or conflicted advice models.
At the Financial Advice Association’s National Congress in Brisbane this week, ASIC Commissioner Alan Kirkland said the Shield Master Fund was one of many examples the regulator has seen where poor advice has led to “devastating” outcomes.
“We understand that over a two-year period that over $480 million was invested in this fund by thousands of people,” Kirkland said.
ASIC used its product intervention powers in February to prevent Keystone Asset Management, the responsible entity of the fund, from taking on new investments.
The intervention was sparked over concerns – amongst other things – that a large proportion of the funds held have been directed to a fund which made loans to various companies associated with Paul Chiodo, a former director of Keystone, to fund property developments.
The Federal Court froze assets of the fund in June and ordered Chiodo surrender his passport and be restrained from leaving Australia.
Kirkland noted the enforcement work in this matter was in its early stages and involved a broad range of entities, but he was clear that advice appeared to “have played a really crucial role” in advising consumers to invest in the Shield fund.
“Potential investors were called by telemarketers who then referred them to financial advisers,” Kirkland said.
“They were advised to rollover from their existing superannuation funds and to put part or all of their superannuation into the Shield Master Fund and many did so through financial products that were offered by Macquarie and Equity Trustees.”
ASIC sounded the alarm on high-pressure cold calling tactics earlier this year in a May media release, warning consumers to be wary after a review effectively employing these tactics to lure consumers into receiving inappropriate superannuation switching advice.
“I wish I could say this is an isolated example, but it’s sadly similar to a pattern of conduct that we are seeing far too often where telemarketers recruit people and hand them over to advisers,” Kirkland said.
“Those advisers then encourage them to move their super from a relatively well performing fund into a platform product or SMSF with their saving then invested in high-risk property or crypto that are highly unlikely to align with the best interests of the consumers involved.”
While Kirkland acknowledged the level of financial advice has overall lifted significantly in quality, there are still other pockets of the industry where there is “diversity” in terms of conduct.
“We obviously deal with people who are very focused on delivering high-quality services and complying with their obligations but then I’ve been surprised at the scale of some of those bad examples that we see,” Kirkland said.
“Particularly those linked to the cold calling practices and telemarketing, and then risky property investment schemes. From the outside, I hadn’t realised how significant some of that is. Our deputy chair [Sarah Court] described it as occurring at industrial scale, that’s a fair description.”
Wide range of regulatory approaches
“Diversity” was a key theme for Kirkland’s comments at Congress, who noted there was still broad diversity in terms of approaches to other compliance regimes, like the reportable situations regime (otherwise known as breach reporting) and internal dispute reporting. Both “are relatively new but are important obligations,” he said.
“We do see a fair but of variation in practice that raises questions for us. There is diversity in terms of sophistication of compliance practices and we acknowledge that there’s firms of different sizes but…the obligations do apply equally.”
Kirkland commenced as ASIC Commissioner a year ago, after a decade-plus tenure leading consumer advocacy group Choice.
“Through my time at Choice I was involved in a lot of debate about advice reform,” Kirkland said.
“One thing I understand better from the inside is just how detailed a lot of the legislation is and that’s a challenge. I sort of knew that, but I’ve got a better understanding of it now.”
During his time at Choice, Kirkland was also part of the Ramsay Review which recommended the Compensation Scheme of Last Resort.
Asked whether the current CSLR – which has faced heavy criticism from the advice profession over its funding model – matches what he recommended, Kirkland conceded it was “difficult to answer” due to the changes in the industry that happened in the seven years since the report into the review was released.
“The job we did was very a high-level [role] of making a recommendation to the Turnbull government on whether there should be a compensation scheme and a few of the key design principles,” Kirkland said.
“I don’t think we in 2017 would have a pretty clear view around exactly how it would be operating now.”
Better practice
While Kirkland was critical of some of the emerging compliance issues in the sector, he acknowledged there has been an uplift in the quality of advice in recent years.
“I’m also often asked about whether we see any examples of good practice in financial advice and of course the answer is yes,” he said.
Kirkland said there are still several initiatives advisers should keep in mind to maintain a high-quality level of advice, particularly making sure advice is centred around the client’s interests.
“The best interest duty in financial advice is not new but it’s helpful to take a step back and think about what it really means and how to demonstrate that it’s been applied in ASIC’s view,” Kirkland said.
“This involves properly understanding your clients’ circumstances and objectives, and tailoring your advice accordingly, applying your professional judgement to identify appropriate strategies and products, taking those circumstances into account with a focus on improving outcomes for each client and explaining why the recommended strategies and products are appropriate considering your client’s relevant circumstances.”
In addition to making sure why those products meet the needs of clients, Kirkland referenced ASIC Report 779 released in February and the importance for advisers and licensees to maintain an ongoing focus of the performance of products which he will be dissecting at the Professional Planner Researcher Forum on Tuesday.
Report 779 found there was insufficient focus on performance and a lack of evidence over how trustees, advisers and licensees were treating products that had consistently underperformed.
When it comes to proving how advice meets the required standards, Kirkland, said it was important to maintain good records as part of the broader client file outside of the Statement of Advice.
“As you’d all be aware, the government’s committed to replacing the Statement of Advice with a more fit for purpose, principles-based advice record as part of the next stage of the Delivering Better Financial Outcomes reforms,” Kirkland said referring to the government’s anticipated replacement to SOAs.
“As a result of those reforms we’ll see record keeping across the rest of each client’s advice file being as important as ever. It will also no doubt stand advisers in good stead if advice files are scrutinised by licensees, AFCA, ASIC or the courts.”
