The concerns expressed by FOS on the renaming of “general advice” overlook the importance of creating a clear separation between advice and product sales.
The degree to which the Financial Ombudsman Service (FOS) has a view different to that of a wide cross-section of the financial services industry was laid bare by the content of its second submission to the Financial System Inquiry in which it expressed reservations about naming general advice as 'sales’ or 'product information’.
The external dispute resolution (EDR) scheme said its reservations included whether consumers would be able to clearly distinguish between sales, product information and general advice but, perhaps more seriously, suggested this “rebadging” might “facilitate the re-emergence of a commission-driven sales culture of the type that existed in the tied agent arrangements in insurance and financial advice prior to changes in regulation in the mid-1990s”.
In that sense, the FOS submission seemed to entirely miss the point being argued by those calling for a renaming of “general advice”. Their point, of course, is that they want consumers to be fully aware of the difference between objective, independent advice and product sales- something which is more likely to occur if such information is clearly labelled for what it is.
It is hard to say how the activities of the FOS would be impacted by a decision to rename “general advice” as “sales advice” or “product information” but it seems logical that its effect would be to alter the make-up of the issues it deals with and to perhaps place greater responsibility on the shoulders of consumers.
Indeed, a common theme to emerge in many of the submissions made to the Financial System Inquiry is that consumers need to be made to take more responsibility for the decisions they make and not be allowed to utilise the system to extract themselves from poor decisions.
To a large degree, the calls for consumers to take more responsibility for their actions have been based on a perception within some sections of the financial planning industry that the outcomes generated by FOS have tended to unduly favour those consumers making complaints and have not sufficiently acknowledged their own role in the losses they incurred.
Little wonder then, that this was a theme taken up in the submission made by mid-tier accounting and advice firm, Chan and Naylor.
Calling for the better education of investors, the submission argued that there was “also a need to advance the notion that investors must take part of the responsibility within a regulated advisor industry”.
“Consumers must also respect a person’s right to income and as such there is no free advice and a fee for service model should not be shied away from,” the submission added.
What needs to be understood about the Financial Ombudsman Service is that just like every other organisation making submissions to the Financial Systems Inquiry it is seeking to not only justify its existence but argue for the extension of its brief.
It follows that FOS has canvassed issues such as product issuers having adequate compensation arrangements in place to meet any awards made by an EDR scheme, or that it has canvassed the Australian Securities and Investments Commission (ASIC) having the power to appoint “external parties” to undertake independent reviews of firms.
It seems unlikely that the Financial Systems Inquiry will make any specific recommendations with respect to the workings of financial services EDR arrangements, but sound arguments exist for the better separation of product sales from advice and renaming “general advice” represents a good start.
