There has been extensive debate in the industry over whether financial product recommendation by vertically integrated businesses can be considered conflicted remuneration, especially given a perceived push towards vertically integrated models as a result of Future of Financial Advice (FOFA) changes.
ASIC chairman Greg Medcraft has previously told InvestorDaily that the regulator is satisfied FOFA’s best interests test will overrule incentives to prioritise in-house products, but ASIC senior executive leader, financial advisers, Louise Macaulay, told the Finsia conference in Sydney last week that the issue is very much on the regulator’s radar.
“Where product manufacturers and dealer groups are integrated and are incentivising for recommendation of a particular product – this can assist in replacing the lost benefits from conflicted remuneration under FOFA in that it gives an avenue for businesses to grow their client base,” Ms Macaulay said.
“We think there is an inherent conflict in those businesses and are interested to see how those businesses are going to be dealing with that conflict going forward,” she added. “It seems to us that advisers are more likely to offer products of their parent company.”
Ms Macaulay said the corporate regulator had concerns about the extent to which advice clients are aware of the relationships between their adviser and product manufacturers, and that simply disclosing the connection in a financial services guide or statement of advice may not be sufficient.
Ms Macaulay signalled ASIC would be conducting surveillance of vertically integrated businesses to ensure conflicts of interest are being effectively managed.
Speaking in the same panel discussion, Commonwealth Bank executive general manager, advice, Marianne Perkovic said the bank – a vertically integrated wealth business – has been preparing for more than 12 months in anticipation of regulatory guidance on the subject.
The bank took the strategic decision in 2012 to structurally separate the wealth businesses from Colonial First State in order to ensure the advice received by customers of CBA licensees is “independent”.
In addition, the bank enforces an “open approved product list” system, whereby in-house product researchers are independent of product manufacturing and report directly the bank’s board, Ms Perkovic said.
However, she also indicated vertically integrated businesses will need to “be careful” now that ASIC has indicated it perceives the structure as potentially conflicted and get on board with a mindset conducive to FOFA’s aims.
“There has been a shift – it is now advice telling product manufacturers what is needed, rather than someone from above instructing advisers to flog a particular product,” Ms Perkovic said.
“Product manufacturers need to understand the new world – it’s no longer just about distribution of sales.”
