The Australian Securities and Investments Commission (ASIC) delivered another clear message about the perils of vertical integration when it earlier this month accepted enforceable undertakings from the Commonwealth Bank and ANZ over the distribution of superannuation products to bank customers.
The enforceable undertakings need to be viewed at a number of levels – the banks’ status as product manufacturers, the role of their tellers and bank staff as distributors of those products and the key differences between “general” and “personal advice”.
As the boards of at least three of the major banking groups contemplate their exit from wealth management, the circumstances which gave rise to the enforceable undertakings speak to the perilous nature of strategies involving the distribution of complex financial services products via bank tellers rather than via appropriately qualified and authorised financial planners.
Both banking groups manufactured retail superannuation products – CBA’s Essential Super and ANZ’s Smart Choice Super – with a view to distributing them through their banking networks – a strategy which would have seemed simple and legitimate enough when it was being considered by the marketers.
And while the strategies around Smart Choice and Essential Super were undoubtedly scrutinised by the regulatory compliance teams within the banks, it seems that not enough account was taken of the marketing and administrative processes which turned general product advice into complex personal advice.
As part of the so-called Wealth Management Project it has been running since late 2014, ASIC first identified the problematic nature of the marketing approach underpinning the two superannuation products and then zeroed in on the regulatory detail.
ASIC explained that it had investigated CBA’s distribution of its Essential Super product and ANZ’s distribution of its Smart Choice Super and Pension product (Smart Choice Super) through bank branches and had identified “a common practice of offering those products to customers at the conclusion of a fact-finding process about customers’ overall banking arrangements”.
It said that CBA’s fact-finding process was called a “Financial Health Check”, which involved the banks also sometimes helping customers roll over their other superannuation into the Essential Super account at the time of distribution.
ASIC said ANZ’s fact-finding process was called an “A-Z Review”.
The regulator said it was concerned that the proximity between the fact-finding process and the discussion about Essential Super or Smart Choice Super was leading CBA staff and ANZ staff to provide personal advice to customers about their superannuation when branch staff for both CBA and ANZ were only authorised to provide general advice.
“ASIC was concerned that customers may have thought, due to the proximity of the fact-finding process to the offer of Essential Super or Smart Choice Super, that the CBA branch staff or the ANZ branch staff were considering risks specific to the customer when this was not the case,” the regulator said.
In other words, what amounted to a front-of-bank superannuation product marketing exercise crossed a regulatory boundary and two of the major banks have been made to pay a price in the form of the court enforceable undertakings and each of them making $1.25 million community benefit payments.
The EUs entered into by CBA and ANZ have significant implications for the broader financial services industry because they reinforce the limitations which apply to the distribution of complex financial products and that those limitations cannot be circumvented via the use of general advice.
The EUs also reinforce the importance of the Government acting far more quickly to relabel “general advice” to prevent ongoing misuse.