ASIC: FOFA did not defeat vertical integration

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.

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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.”

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Seriously, is ASIC run by the guys from Dumb and Dumber. They thought FoFa would somehow improve or reduce vertical integration?...Come on.. it's was always going to be win for the banks, a win for Union super funds and totally smashed small independent advisory firms unaligned to any product firms.

And yet, that most vertically integrated of all organisations, the Industry Superannuation Australia (ISA) remains sacrosanct and untouched, untroubled and beyond reproach by ASIC... politically biased, incompetent, blind or all three?

If it has improved professionalism, why does ASIC seem to be banning more advisers now than ever before??? FOFA has been in since 2012. The numbers of bannings should be falling if it was working..... Does anyone ever question ASIC on what it means by Professionalism? Perhaps "charging a fee by the hour" is the definition. The guy who cuts my lawn must be really professional because he is not vertically integrated, does not accept commissions, and charges a fee by the hour.

According to the government FOFA was to "to reduce compliance costs and regulatory burden" and "aimed to ensure the integrity of the financial advice" " whilst delivering a system that offered affordable and accessible financial advice to the Australian community". Sorry but it seems to have failed to reduce complaince cost, It seems to have failed to reduce regulatory burden, Advice is more expensive, and less accdessible to the community. I have no idea how what KPI to use to measure integrity, but maybe ASIC as saying this has failed as well. So I would give the legislation a 0 out of 10. I wonder if Mr Kell would care to comment on the outcome of FOFA compared to the published and well documented goals.....

Recently noted a major bank's WM arm advertising that it was "completely vertically integrated" to deliver "savings" to the customer.

Haha really? How good is that, I love it.

On another note, you only need to talk to a handful of people from licensees to realise that there is no money in charging a fixed fee for taking on the responsibility of a Financial Adviser. It's very unprofitable, which is why so many are going down the product path to at least get some take there.

Felix you cant talk to a handful of people and take out the fixed fee for service is unprofitable. It depends on how much you charge, how many clients you have and the overheads for the business. I see a lot of advisers now that charge a mix, it is profitable if you have a good SLA and can control costs and charge what you are actually worth. you can actually make more money charging a fixed fee for mid range clients instead of taking on these smaller clients at 1.10% as you fix your income its not based on what the market does. Its way too much work with FDS and opt in etc, if clients pay a fixed fee outside of product it takes the Opt in obligation away, and a lot of paperwork, so there is a mix out there of what people are offering and there are benefits to both ways of charging fees for both the clients and the advisers.

Hi TJ, I was under the impression ANY ongoing fee arrangment greater than 12 months (other than grandfathered comms) requires Opt in even if from their own Bank account???

Hi Dank, yes you are right in the legal sense if you leave it every 2 years to contact the clients, if its classed as ongoing which can be interpreted in different ways depending on how you structure the advice and payment. Appreciate the comment old bob apologies to felix if i misunderstood, yes licencees not many of them offering a fee for service.

Some advisers just get individuals to enter into an ongoing service agreement lasting 11 month and 29 days. Thus avoiding Opt In requirements. They see the client during the 11 months, provide a FDS but then renew the agreement for another 11 months. Can't really see how this is a time saver myself, as the person is still signing something annually and the adviser is still producing paperwork.

He's talking about the dealer group TJ. not how the actual adviser charges their clients. There are not many dealer groups charging fixed fees, it's all a percentage of the advisers income because they're more interested in the FUM and the kickback from the Manager. Hence more money ultimately ending up with the big banks. Good to read your story anyway.,

I recently changed from a fixed fee dealer group, as a result of it being merged with another group that I didn't want to stay with, to another fixed fee dealer group. When I looked around at options there was plenty of them around and they provide the same level of service as the one's charging a revenue split. Why on earth would you want to pay a dealer group more just because you're business is growing, you still get the same level of service from them.

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