ASIC points to inherent conflicts in vertical integration
The Australian Securities and Investments Commission (ASIC) has again pointed to the inherent conflicts which result from vertical integration in the financial services industry.
In a new report released today on how large financial institutions manage conflicts of interest in financial advice, the regulator said that it had noted that while vertical integration could provide economies of scale and other benefits to both customers and the financial institution itself, conflicts nonetheless continued to exist.
What is more the review also pointed to the manner in which while vertically integrated businesses included plenty of external products on their approved product lists (APLs), a majority of their clients’ money continued to be directed towards in-house products.
It found that, overall, 79 per cent of the financial products on the firms' APLS were external products and 21 per cent were internal or 'in-house' products but that 68 per cent of clients’ funds were invested in in-house products.
The ASIC report said that the split between internal and external product sales varied across different licensees and across different types of financial products.
“For example, it was more pronounced for platforms compared to direct investments. However, in most cases there was a clear weighting in the products recommended by advisers towards in-house products,” it said.
On the question of vertical integration, the report said that while regulator had noted that vertical integration could provide economies of scale and other benefits to both the customer and the financial institution and although consumers might choose to use large vertically integration firms, “nonetheless, conflicts of interest are inherent in vertically integrated firms, and these firms still need to properly manage conflicts of interest in their advisory arms and ensure good quality advice”.
ASIC said it would be consulting with the financial advice industry (and other relevant groups) on a proposal to introduce more transparent public reporting on APLS, including where client funds are invested, for advice licensees that are part of a vertically integrated business.
It said the introduction of reporting requirements would improve transparency around management of the conflicts of interests that are inherent in these businesses.
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