The Australian Securities and Investments Commission (ASIC) is maintaining its close scrutiny of vertically integrated structures in the financial services industry declaring that the Future of Financial Advice (FOFA) changes have helped but not fixed the problem.
In doing so, the regulator has urged the Productivity Commission (PC) to take a careful look at vertical integration in the context of the PC’s inquiry into the state of competition in the Australian financial system.
Discussing vertical integration in the context of the PC inquiry, ASIC deputy chairman, Peter Kell said that while the FOFA changes had helped to raise standards and remove remuneration conflicts, preliminary analysis from ASIC’s current work on vertical integration in financial advice suggested the majority of customers’ funds for vertically integrated institutions were still invested in related-party products.
What is more, Kell said ASIC would later this year be releasing the results of its continuing work on vertical integration and suggested that the PC might “want to consider the broader question of how intermediaries and distribution channels mediate consumer access to financial products – including the role of ownership, remuneration, investment platforms and approved product lists”.
Kell acknowledged that vertically integrated firms could provide economies of scale in the provision of products and services, and that they could provide consumers with integrated product offerings, making them better placed to deal with consumer problems if something went wrong.
“However, there are some clear issues from a competition and consumer outcomes perspective,” he said. “For example, ASIC’s recent work on mortgage brokers, as well as our work on wealth management, indicates vertical integration creates conflicts of interest, including misaligned incentives and conflicted remuneration.”
“For example, in mortgage broking, for the two major banks that own intermediary channels, there is a significant increase in the proportion of loans (including white label loans) being written to those banks through these channels compared to the banks’ general market share,” Kell said. “In this context, multi-brand strategies can disguise the level of consumer choice and market concentration.”
“We have often seen product issuers compete vigorously for distribution channels (e.g. financial advisers) as a way of increasing customers, rather than directly offering better products and prices to customers. This arises through ownership links or paying higher incentives. This has resulted in conflicts of interest and poor consumer outcomes.”