Separation the only answer

While ASIC continues to press for more powers with respect to bank management staff and product design, Mike Taylor writes that the real answer lies in successfully separating product sales from advice. 

On the face of it, the Australian Securities and Investments Commission (ASIC) appears to have been using the media to do some discreet lobbying around the sorts of regulatory powers it would like to hold in the aftermath of the Commonwealth Bank and Macquarie Bank financial planning enforceable undertakings. 

While, like everyone else, the regulator has the right to put submissions before the current Financial System Inquiry (FSI), ASIC has been gaining some extra mileage via newspaper reports about the type of legislative environment its most senior executives would like to see with, most recently, the suggestion that it would like to put bank managers and financial product design more firmly within its reach. 

While those financial planners who have experienced or witnessed ASIC’s efforts with respect to shadow shopping will undoubtedly be suspicious of the regulator’s intentions, there is much to be said for creating an environment within which the impact of corporate strategy on financial planning can be much more readily identified. 

Equally, there is also much to be said for the regulator having scope to identify and order the correction of financial products which are clearly flawed. 

It may not suit the narrative of the entrenched critics of the financial planning industry, but it is arguable that close to 50 per cent of the problems which have impacted the reputation of the financial services industry have been owed more to product design or managerial ethos than bad advice. 

This was arguably the case with Westpoint and a large number of the collapsed agricultural Managed Investment Schemes. Where the problems which beset the Commonwealth Bank were concerned, the evidence presented to the Senate Committee of Inquiry suggested that managerial ethos and sales targets were a major contributor. 

That is why the lobbying efforts of ASIC aimed at extending some of its powers may be worthy but not nearly so worthy as the Government legislating to effectively separate product sales from the provision of advice. 

Despite the best efforts of those who drafted the Future of Financial Advice (FOFA) bills, the legislation did not succeed in definitively separating product sales from advice. Rather, it sought to achieve outcomes via the use of client best interests and the elimination of commercial devices such as volume rebates. 

However client best interest requirements and the removal of volume rebates were never likely to be sufficient to remove the perception that financial planners employed by the major banks would be delivering bank-originated products in line with bank-determined sales targets. 

When even the former chief executive of the Commonwealth Bank and now chairman of the FSI, David Murray, questions the impact of vertical integration within the major banks, then you know the issue has become serious. 

Murray is quoted as expressing concern about the “vertically integrated” banking model under which customers are sold financial advice. 

Murray, of course, did not seem to see the vertically-integrated model as a problem when he was the CEO of the Commonwealth Bank between 1999 and 2005 - a period which might be counted as the heyday of the major financial institutions developing and marketing financial products via their planning networks. 

Indeed, time-lines suggest that the planners who became the central focus of the Commonwealth Financial Planning enforceable undertaking began their climb up the ranks of the organisation in the latter years of Murray’s stewardship. Further, the senior executives who were running the bank’s financial planning arms at that time also worked under Murray. 

The major planning organisations, the Financial Planning Association (FPA) and the Association of Financial Advisers, have made clear their views on the need to separate product sales from advice with the FPA even pushing for strict limits upon who can use the term “financial planner/adviser”. 

If the industry is to move beyond its current problems, then Murray should, indeed, use the FSI process to recommend a mechanism via which product sales and advice can be appropriately separated.