ASIC makes clear what it takes to call yourself ‘independent’

Simon Hoyle


June 28, 2017

The Australian Securities and Investments Commission has declared that the term “independently owned”, and others like it, can be used only by financial planners and planning firms that meet the requirements of Section 923A of the Corporations Act.

The section provides that only planners and businesses that do not receive commissions, volume-based payments or other gifts or benefits, and which have no conflicts of interest or influence from any product issuer, can use the terms “independent”, “impartial” or “unbiased” in describing their services and advice.

ASIC states that, following legal advice “our position is that words such as ‘independently owned’, ‘non-aligned’ and ‘non-institutionally owned’, and other similar words or expressions, can be used only if a financial adviser satisfies the conditions set out in s923A”.

The impact of ASIC’s decision will be that any firm or adviser who does not comply completely with the provisions of s923A must remove or amend references all references to terms such as independently owned, non-aligned and non-institutionally owned from websites and documentation provided to clients within six months from today.

“The facilitative compliance period will not extend to contraventions of s923A where the specified restricted terms ‘independent’, ‘impartial’, and ‘unbiased’ are used,” ASIC stated. “ASIC considers that there has been no uncertainty about how s923A applies to these terms and ASIC will continue to take action against financial service providers for using these terms in breach of s923A.”

ASIC deputy chair Peter Kell says s923A is “an important provision of the Corporations Act, because it addresses the independence of advice”.

“It’s important for consumers because there has long been a concern that consumers won’t necessarily understand the impact of conflicted remuneration on advice, and this is what S923A aims to address,” Kell says. “In the current environment, that’s arguably more important than ever before because there’s a greater focus on the way that conflicts of interest may impact advice and on any links to institutional product manufacturers.”

ASIC’s letter to AIOFP

The Association of Independently Owned Financial Professionals (AIOFP) has been working with ASIC for about eight months on the regulator’s approach to defining terms. The executive director of the association, Peter Johnston, says it is “not entirely happy with the overall approach but our members do get some concessions”.

Johnston says that among them is the ability to continue to use the AIOFP logo, including the term “independently owned”, but alongside a disclaimer stating that:

  • The practice has no institutional ownership.
  • The practice is independently owned by its directors.
  • Whether the practice receive commissions from past products and is therefore not s923A compliant
  • The practice either does or does not receive risk commissions.

In a letter to the AIOFP, ASIC says a disclaimer to the effect that a practice is “a member of the Association of Independently Owned Financial Professionals, which is an association that represents advisers who are not affiliated with banks or insurance companies but who accept commissions” would be appropriate.

“If the financial service provider also receives volume-based payments or other gifts or benefits, or operates under a conflict of interest or influence from a financial product issuer for the purposes of s923A, these would also need to be disclosed in the qualifying statement,” the ASIC letter reads. “The AIOFP itself would not be restricted in using the term ‘independently owned’, assuming it is not providing financial services.”

Before ASIC’s clarification, there was evidence of misunderstanding among advisers over the meaning of independent. Preliminary work by Central Queensland University lecturer and PhD candidate Angelique McInnes found confusion about what the term means to advisers and for consumers.

McInnes found that even though advisers knew they did not meet the requirements of s923A, they would routinely refer to themselves as independent financial advisers (IFAs) and would use the term “independently owned”, but avoid using the specific term “independent”.

Issues such as this arguably undermine the legitimacy of the current financial planning licensing regime, and have led to a growing belief that financial planning must move to a system of individual licensing or certification before it can attain the status of a true profession.

Already a fraught issue

The issue of independence under the Corporations Act was live even before ASIC’s statement. A letter from Johnston published on Monday in the Australian Financial Review stated it is “very difficult” for advice businesses to be profitable while complying with s923A.

Section 923A-compliant practices “must not receive any cross-subsidisation revenue from institutional ownership, or past/current/future product commissions, making it commercially difficult to survive”, he said.

He argued one way to remain profitable was to take advantage of “the FoFA [Future of Financial Advice] conflicts of interest ‘carve out’ for self-managed super funds and sell clients direct property where developers’ incentive payments are outside of ASIC jurisdiction”.

However, members of the Independent Financial Advisers Association of Australia (IFAAA), who operate in strict accordance with s923A, have disputed Johnston’s claims.

Simon Duigan, whose Core Independent Financial Advice business in Hobart has been operating only since the beginning of this year, says the firm is at break-even and is on schedule to be profitable within the year.

Duigan says he estimates it typically costs more to run an independent, s923A-compliant advice business than to be part of an institutionally owned or aligned advice network.

“I would not have made the move without expecting it to be profitable”, he says.

Duigan says he has worked for non-aligned and bank-owned advice businesses in the past, “and I do not think I can go back. This is where I want to be. This is what aligns with my ethics and how I like to work with clients, and I can’t take this stance and then fall back because it’s cheaper to do it another way.”

Matthew Ross, a principal of Roskow Independent Advisory, in Melbourne, says it is “only difficult to commercially survive in the s923A space if you’re unable to explain the value of your advice”.

“We have done it successfully for 10 years and are looking forward to many more decades of success,” Ross says. “Doing it on a massive scale is another conversation; but that’s why I argue that smaller boutiques have a higher chance of delivering high-quality advice at a more competitive price [than] larger organisations.”

Ross said Johnston’s comments reveal a lack of understanding of “the true value of advice – because that’s what is necessary to be able to run a business like ours”.

The principal of Brockton’s Independent Advisory, in the ACT, and president of the IFAAA, Daniel Brammall, says all IFAAA members “practise the 923A-compliant ‘Gold Standard of Independence’ ”.

“I don’t believe Peter’s ever interviewed any of them about their profitability,” Brammall says. “I know Peter personally and he’s never asked me how well I’m doing. Everyone’s entitled to their opinion, but pretending the opinion is a fact doesn’t make it true. It’s not.”

Ross takes issue with the idea that s923A-compliant firms might seek to circumvent FoFA to turn a profit.

“Taking an incentive payment from a property developer makes me feel sick to my stomach and would be considered disgusting and unethical in the minds of every independent financial adviser I know, which is why Peter’s comment makes absolutely no sense to me at all,” he says. “Why would an adviser avoid all these conflicts of interest in financial planning only to then go and expose themselves to a conflict of interest that is potentially dirtier than all the rest?”

TOPICS:   Angelique McInnes,  asic,  Association of Independently Owned Financial Professionals,  Central Queensland University,  Core Independent Financial Advice,  Corporations Act,  Corporations Act Section 923A,  Daniel Brammall,  Independent Financial Advisers Association of Australia,  matthew ross,  Peter Johnston,  rockton’s Independent Advisory,  Roskow Independent Advisory,  s923a,  Simon Duigan