ASIC serves disclosure notice to tied advice groups

TheAustralian Securities and Investments Commission(ASIC) has put institutions with aligned advisers on notice after a recent surveillance project found that commission disclosure was either lacking or poorly documented when in-house products were recommended.

The project into payments of preferential remuneration also found deficiencies in what clients were being told about the advice they were receiving and found these failings were quite common across the financial services industry.

In releasing its report on the project ASIC stated there were three key findings with, firstly, advisers recommending master trusts without adequate explanations and secondly, preferential remuneration was disclosed in most cases but details of the disclosure was poorly documented.

Finally, ASIC also found the poor documentation made it difficult to be sure the advisers’ recommendations of in-house products was not motivated by the higher remuneration on offer.

Further details in the report state that master trusts were recommended as the principal investment to just under 75 per cent of the 405 client files reviewd in the project but less than 10 per cent had specific documentation covering the reason for the recommendation.

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The report also found files were advisers did not make it clear to clients how much they were receiving in commission or that these commissions were higher when they recommended in-house products.

ASIC says it has based its findings on a review of 405 client files sourced from 70 advisers across three institutions including a large and small institution and regional group, who sold in-house and external products to clients and had preferential remuneration arrangements when advisers recommended inhouse products.

The surveillance project was undertaken during the 2002/03 financial year, before the introduction of the Financial Services Reform regime, however ASIC executive director of financial services regulation Ian Johnston says this will not change the regulator’s focus in examining this area during compliance checks.

“Financial institutions are on notice that ASIC will be paying particular attention to the selling of their ‘in-house’ products and the use of their ‘in-house’ master trusts or wrap accounts,” Johnston says.

“ASIC expects that any payment of preferential remuneration will specifically be disclosed to the investor, and that licensees maintain clear records of how they and they advisers are complying with their legal obligations.”

However the Financial Planning Association (FPA) has latched onto the age of the project and says it that having being undertaken nearly two years ago it was not reflective of current industry practice.

The FPA claims the surveillance visits were undertaken in 2002 and covered advice given to clients in 2001 and would not reflect the changes to the industry in the lead up to the beginning of the FSR regime.

FPA chief executive Kerrie Kelly says the industry and FPA members have moved forward since the project began and ASIC had noted the change in the market as well as the historical aspects of the survey and expected differing results from future surveys.

"I have no doubt that if ASIC today conducted research and surveillance into the quality of advice available to consumers the results would be markedly different, as will be shown when ASIC carries out further surveys.