The Australian Securities and Investments Commission (ASIC) has an outdated view of what represent conflicts of interest which must be corrected if the new post-Royal Commission advice regime is to work, according to the Profession of Independent Financial Advisers (PIFA).
The organisation’s president, Canberra-based planner, Daniel Brammall, said there was a risk of consumers being misled if the situation was not corrected and proposed legislation went ahead as drafted.
The PIFA submission responding to Treasury’s Adviser Independence Disclosure legislation, argues that the draft legislation is not what the Royal Commission recommended or intended around adviser independence and conflicts of interest.
The submission argues that key disclosures around independence and conflicts of interest are being hidden in the fine print of the legislation has warned of the risk that consumers will be misled if proposed legislation goes ahead as drafted.
"But an even bigger problem is ASIC’s outdated view on conflicts of interest [which] means consumers will be misled by the disclosure," the PIFA submission said. “Independence disclosure must not be hidden in the fine print.”
Brammall pointed out that the Royal Commissioner, Ken Hayne had stated that an adviser who does not meet the test of independence "should be required to bring that fact to the client’s attention, and to explain, prominently, clearly and concisely, why that is so."
“However the drafted legislation proposes to insert the disclosure into an existing, already lengthy document, the Financial Services Guide,” he said.
“We already know from the research published by the Royal Commission that disclosure may not be a very effective tool in overcoming conflicts of interest. So, burying this important fact about an adviser in an already ineffective disclosure document is not only pointless, it’s the complete opposite of what the Royal Commission recommended.
“The test of independence requires, among other things, that an adviser not be conflicted, particularly where remuneration is concerned. A common form of adviser remuneration is to charge a fee which is a proportion of the volume of funds invested, known as an ‘asset fee’. Whereas the conflicted nature of asset fees is recognised variously throughout the legislation, ASIC’s stated interpretation of the independence law doesn’t reflect that.”
The PIFA submission said financial services legislation recognised the conflicted nature of asset fees by calling them "conflicted remuneration" and banning them – “except to the extent that an industry-negotiated exclusion softened the ban. The result was asset fees were permissible where they were not derived from borrowed capital. Although removing the borrowings removes the ban, it does not remove the conflict”.
"PIFA is concerned that advisers who charge in this conflicted way will, under ASIC’s outdated interpretation, be able to call themselves independent," Brammall said. "For those advisers declaring themselves independent is very misleading to consumers."