Govt accused of failure on vertical integration

The Federal Parliament has been told it needs to act against vertical integration within the financial services industry in circumstances where recent Government legislation, including that underpinning the Life Insurance Framework (LIF), had failed to do so.

The Australian Lawyers Alliance (ALA) has used a submission to the Senate Economics Committee inquiry into consumer protection in the banking, insurance and financial sector to point to what it described as “recent controversies” including those related to CommInsure and claims handling.

“It is apparent that action is needed now to deal with the vertically-integrated sales model, which remains rife in the advice industry. Yet the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 which finally passed both houses in February 2017 does not provide any substantive reform on this issue,” the submission said. “The Minister for Revenue and Financial Services, Kelly O’Dwyer, instead previously entrusted the industry with ‘responsibility for widening approved product lists (APLs) through the development of a new industry standard.”

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“Given the advice industry’s poor track record of self-regulation, and its manifest commercial interest in continuing to sell ‘in-house’ products, such an approach is troubling and it is unsurprising that no significant change has occurred to date,” it said.

The submission said O'Dwyer’s October 2016 announcement in relation to adviser remuneration “fails to address significant concerns regarding APLs”.

“The practice of providing vertically-integrated advice whereby advisers recommend financial products (including life risk insurance) of entities to which they are associated, to the exclusion of more suitable non-affiliated products, is widespread in the industry,” it said.

The ALA said legislative reform was needed now to require financial advisers to demonstrate that they consider and recommend both affiliated and non-affiliated products.

“Specifically, that could be achieved by making the following improvements:

  • Requiring that APLs include a balance of affiliated and non-affiliated products, and/or a minimum proportion of non-affiliated products from a reputable provider; and
  • Requiring that, if a statement of advice (SOA) produced for a customer recommends an affiliated product, that should be disclosed and the SOA should show a comparison with one or more non-affiliated products to demonstrate that the affiliated product is more appropriate.”

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Maybe we should just do away with Dealer Groups. What do they do anyway? At least get rid of vertically aligned dealer groups as a start.

Just expanding APL's to include more products is not sufficient, when present BOLR arrangements in the industry provide for far greater multiples to be paid on inhouse products than non-affiliated products.
Just having access to more products does not reduce the incentive at all

There is no question that Vertical Integration is the source of much evil in the Advice Industry, but this whole question of APL's misses a much bigger problem. You can make an APL as big as you want, but advisers will still be reluctant to change from what they currently do, because their current approach is the "safe for clients" approach. In the pharmaceutical world, a new drug cannot be released to the public without first having been approved by the FDA in the US, or the TGA in Australia. However, in the funds management industry in Australia, there are no similar safeguards, because ASIC has squibbed its opportunity to undertake this role, and the courts have declared that the ratings agencies classifications of products are meaningless and cannot be relied upon. The sole responsibility for the use of a new product falls on the shoulders of licensed financial advisers. As such, every adviser needs to undertake their own FDA type research on every product released to the financial community - a massive inefficiency, and frankly an analysis task better suited to financial analysts, not financial planners. So, when some products end up being more hype than substance, it is the adviser in the firing line for all the clients they have "experimented with" in that new product. As such, broadening APLs probably won't change much. If you really want to change adviser behavior, either make the ratings agencies evaluations mean something at law, or task ASIC with certifying new products as true to label and approved for use.

"...the SOA should show a comparison with one or more non-affiliated products to demonstrate that the affiliated product is more appropriate". Already done I thought, in the two alternate products research working papers, but I gather they now want that included in the SOA if not already. As if the SOA is not loaded with material the normal person can't understand already. Seriously, we're not headed anywhere fast. If it's a quality product and compares well with it's peers, let's leave it at that otherwise we'll be headed back to 100 page SOAs and that's good for no-one.

Good comment Long Term Cynic, totally agree. Another factor that this article misses is that Australia still has essentially the foremost financial services industry in the world. This would never have come about if it were not for 'commercial interests' - after all we do live in a capitalist society. Aiming a gun at vertical integration is not just inept thinking, it is potentially damaging in the future, as every commercial enterprise needs volume. While some institutional products may not be as 'good' as others, this is called market place reality and consumers are free to go where they choose - the Ford salesman doesn't send the family down the road to Holden, the solicitor who isn't an estate planning specialist doesn't send them off to another firm when a client wants a Will done, the accounting firm takes on all clients regardless of their own level of expertise in all the various aspects of taxation, the doctor who is comfortable with Drug A doesn't typically look through the entire range of available pharmaceuticals for every patient.

Before the purist start shouting me down, we're a successful self licensed IFA business across multiple disciplines, so I have no allegiance of self interest in writing this except it is evident and commercially nonsensical to expect that trying to eke out the big end of town from this space is ludicrous and would be disastrous for the entire industry if it were to pass. Likewise, it serves no purpose except to hand more power and wealth on a platter to the ISA. If the institutions, who are the only ones with any clout, financial and political, were to exit this space then the planning industry will go the same path as the Australian car manufacturing industry, a slow strangled death.

and half the lawyers making the complaints here are now all SMSF/1.6M super reform specialists anyway, all advising clients on best strategies etc

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