Formally separating product from advice and forcing vertically integrated businesses to divest either their product or advice businesses is “one remedy” to addressing conflicts and tension in the provision of financial advice, according to the chair of the Financial System Inquiry, David Murray.
Murray said that despite the implications for vertically integrated businesses, the inquiry would not shy away from making such a recommendation if it believed it was an appropriate way to address the conflicts.
The FSI interim report, published earlier this week, observed that “there has been a tension between providing financial advice for the benefit of consumers and the product distribution role played by advisers”.
“Shadow shopping studies carried out by ASIC [the Australian Securities and Investments Commission] found a strong relationship between advisers giving non-compliant advice and conflicts of interest in business models,” it said.
In a wide-ranging interview with Professional Planner, Murray said that “from what I’ve seen about it, [separating product from advice] is one remedy”.
Structural implications
“It would have structural implications for the industry, but that has to be weighed up against the outcome for the users of the system,” he said.
Murray said it is “not clear to me that it can’t be gamed, the separation of product and advice”. And he said it is “not clear that you can altogether police that separation – we don’t know yet”.
“But if you came out with a very, very clear view that the whole system would be better off without it [vertical integration], then there has to be a structural adjustment,” he said.
“They’d have to sell their businesses or do something. That wouldn’t worry us.”
Murray said it is clear that disclosure has not worked as a mechanism to raise financial literacy among consumers, and that more emphasis needs to be placed on the quality and competence of advisers.
He said in a system where a clear and significant “asymmetry of information” remains between advisers and product providers on the one hand and consumers on the other, there is also clear potential for self-regulation of advice.
“That’s a great question, because once you go down this path – which we have – on information asymmetry, you can go to self-regulation or some sort of regulatory oversight,” he said.
“You wouldn’t rule it out.”
Professions do a great job
Some professions do a great job. It would be instructive to look across other industries and how, over time, governments that have had to address issues have gone about it.
“You look at the size of the knowledge gap, and the consequences of the knowledge gap. The consequences in the medical profession are high for the individual. The consequences in air safety are low-probability, very high-severity. So by looking at those, you might be able to judge how we deal with this.
“Just thinking about it for a moment, it’s not without its complexities, if you’re going to accredit a professional body. Which one? We have the FPA [Financial Planning Association of Australia], we have the accounting bodies, CFAs [Certified Financial Analysts], actuaries.”
Murray says it is not the intent of the inquiry to remove the focus from ongoing financial literacy improvements.
“But one might question whether ever a large enough group of people in the community will have sufficient knowledge of the powerful effects of compounding, whether it’s for a pension or anything, and the time-value of money, to be able to grasp exactly all the consequences for themselves,” he says.
“And you believe in that, then you believe in a different regime around advice.
“Curiously, in their own way, the Senate inquiries, when they looked at the systemic issues – not the ASIC stuff or the CommBank stuff – they came to some similar conclusions as we did.”
The full version of Professional Planner’s interview with David Murray, in which he discusses financial planning standards, the threat to the financial system of poor advice, self-regulation and a range of other issues, will appear in the magazine’s August edition.
I have not felt comfortable with Mr Murray being the head of the FSI when it comes to the Financial Advice area. The issues are complex and cannot be solved by more rules and regulation.
I have written and spoken about this many times but would like to point out that the model is broken, insomuch as we have legislation founded on the basis that product would be sold, and product manufacturers wanting their product to be “sold”. In the beginning the ACT was about protecting consumers from salesmen.
Because in the beginning it was about sales we had the development of Dealer Groups skimming part of the commissions, and getting rebates for volumes. Dealer groups had a vested interest in what was sold based on the revenue differences from the product manufacturers. Dealer Group profitability was about sales volume.
We now have an environment where there are no commissions to advisers, still may be rebates to Dealer Groups, and ownership of dealer Groups by product manufacturers .Representatives of Dealer Groups must recommend what the Dealer Group specifies . So we have product manufacturers owning dealer Groups and specifying what representatives can recommend? This surely is conflicted !
Now how about this as easy solution . All Advisers must be licensed directly. Dealer groups may be joined because of the service they provide but cannot have any influence on what is recommended. After all we don’t have commissions so good advisers must recommend what is good for their clients because clients are their bread and butter. All Advisers that qualify for licensing will be independent, the ones that don’t qualify, goodbye good riddance.
ASIC would not be spending all it’s time on CBA , Storm TRIO, these would just not occur . P.I cover would be cheaper, consumers would benefit. Bank products would only be sold on merit . So simple, but will an ex Banker recommend something that would deconstruct 80% of the financial services industry?
I think Not.