If anyone had any doubt about how conflicts of interest, whether real or perceived, are impacting on the image of financial planners, then they only had to listen to a speech given by the Australian Securities and Investments Commission’s (ASIC) Sharman Grant last month.
Grant, the corporate watchdog’s assistant-director of compliance/intermediaries, said she did not have an adviser “because I just don’t trust them”.
“The main bugbear at the moment seems to be vertical integration and the commission-based advice model, and there are movements afoot to try to do something about this,” Grant continued.
“ASIC had a meeting … to talk about how we can deal with this vertical integration, and whether it’s worth saying to Treasury that it’s just not working.
“While product providers own financial planners it’s just product pushing really, and you’re never going to have an advice industry that people can trust.”
The logical interpretation of Grant declaring that vertical integration is unworkable is that ASIC is moving towards a position where it believes ownership by product manufacturers of dealer groups is irreconcilable with best-practice conflicts policy.
If this is the case, then it is a dramatic escalation in what the financial planning industry believes is the regulator’s current approach to conflicts — that is, that conflicts should be managed and disclosed but not necessarily abandoned.
It would also call into question a core tenet in ASIC’s PS 181 Licensing: Managing Conflicts of Interest regulations, at least as far as they are being interpreted by the financial planning industry.
ASIC’s conflict regulations
As it stands, PS 181 does not expressly prohibit all conflicts of interests, or provide that licensees can never provide financial services if conflicts of interest exists.
It officially imposes an obligation on all licensees to only “disclose, manage and [in serious cases] avoid” conflicts of interest to clients upfront.
In some cases, however, it says conflicts of interest will have such a serious potential impact on a licensee or their clients that the only way to adequately manage those conflicts is to avoid them.
Licensees are required to develop written conflict management arrangements under PS 181, enabling them to “identify, assess and evaluate the conflicts, and decide upon an appropriate response”.
An appropriate response under PS 181, which came into effect on January 1, this year, could be to “disclose a conflict to a client, allocate another representative to provide the service to the client, or decline to provide services”.
It describes disclosure, specifically, as an “integral part of managing conflicts of interest”, but cautions that “this alone will often not be enough to satisfy compliance”.
“Determining the adequate level of disclosure necessary for a particular client will depend on the facts and circumstances of each client.”
PS 181 therefore effectively leaves licensees to determine what constitutes a conflict of interest, and also whether it is so serious to warrant avoidance, or merely requires disclosure.
When the Financial Planning Association (FPA) released its own draft principles on how members should manage conflicts of interest, they were predicated on the understanding that compliance with PS 181 requires its members to only disclose their institutional alignment to clients.
The FPA principles were released in April for a six-month industry consultation period.
Super switching
Conflicts of interest in financial planning became headline news once again last month following the release by ASIC of a report detailing serious concerns with the superannuation switching recommendations of advisers.
The report, the veracity of which was slammed by the FPA, found advisers were overwhelmingly recommending clients move into funds associated with the adviser or a related party.
ASIC said this included instances where planners recommended clients move into higher-cost funds, which did not have any additional benefits.
According to FPA super committee chair Louise Biti, however, under PS 181 there is “nothing illegal in recommending the product of a company you’re associated with”.
Also head of technical services at Asteron, Biti said the “conflict arises only if you’re making a recommendation based on what’s best for you as an adviser, and not what’s appropriate for the client”.
She said the advice process should involve “full disclosure of any association, full disclosure of any conflict, full disclosure of any benefits, knowing the client, and making sure all your advice is reasonable and appropriate”.
“As long as a client is fully aware of any connections of the adviser, and whether there might be any incentives for the adviser to provide on that, then an adviser will have met his or her obligations under conflict of interest,” she said.
FPA conflict principles
The FPA’s principles on conflicts of interest were the third in a series of reforms introduced by the association to try and clean up the profession.
They followed a code of practice on soft dollar payments and guidelines on rebates and commissions, which came into effect on January 1 this year.
The draft rules are based around a set of broad, principle-based statements, such as “financial planning advice should be independent”, “FPA members should only offer products which suits the needs of the client”, and “FPA members shall not receive or reward any remuneration or benefits which are biased”.
Examples supplied on how the principles might be interpreted make it clear that conflicts, such as remuneration structures that encourage advisers to sell in-house products, will not be tolerated under the rules.
However, the principles do not go into specifics about the types of practices that would or would not be acceptable.
FPA manager of policy and government relations John Anning said industry feedback received so far “generally endorses the thrust of the principles, although it may be that the final version goes further and actually sets out conflict situations that should be avoided”.
However, he said there is also an “incentive to stick with principles rather that detailed rules, in that if you go into detail — black letter rules — then you invite inventive minds to start thinking up ways around them”.
“On the other hand, a general principle gives wider scope to achieve your objectives by simply stating ‘remuneration should be avoided that could influence advice’.”
Anning added that the practise of ‘buyer of last resort’ has been “flagged for possible prohibition under the principle of whether remuneration could bias advice”.
But again, he said this decision “goes to the issue of whether the task force wants to go for greater prescription in the final draft of the principles”.
A number of principles that are tougher than what is required under ASIC regulations are also being considered by the FPA task force that has been set up to examine feedback on the draft principles, Anning said, including that which requires the disclosure of financial interest in absolute terms.
“This means disclosure of all financial interests without a materiality test — whereas the Corporations Act requirement actually has a qualification that all materially significant financial interests need to be disclosed,” Anning said.
“Consequently, the task force will need to take a decision whether the principle should mirror the actual requirement, or whether we should aim to set a higher standard.”
Managing conflicts
MLC regional general manager of financial planning and third party Matt Lawler predicts the final FPA principles will “document practises to be avoided, and those that need to be better managed and disclosed”.
Lawler said this documentation “may mean that some practises that currently exist need to be abolished by the task force, and some practices that exist need to be revised”.
There are “quite a few examples of existing practices that are being put up by industry for debate by the FPA task force over whether they should exist in the future”, he said.
“Some of these relate to whether the revenue for the advice to the adviser, or commissions, should be implicit within the product, or whether we start to make it explicit.
“There’s a lot of work being done on that by certain advisers to make the advice separate from the product, and I think any moves in that direction are a step in the right direction.”
Another example relates to the “structural arrangements around equity and licensees having different structures around rewarding advisers”, Lawler says.
“A lot of these are so convoluted it doesn’t create any trust around the client, and therefore anything industry can do to make it easier for clients to compare one adviser’s advice with another’s is to be welcomed.
“I’m thinking here of standardising industry terms that will help a client to be able to say ‘I’m being charged this fee and that fee’, and then they can add up all fees.”
Lawler said MLC had elected to “eliminate a number of practises where we could have just elected to disclose them, on the basis it actually makes it easier to understand for clients”.
He said that among these are differentials in licensee splits, as well as exit penalty products, and any shelf space fees for fund managers.
Count Financial Planning has also proactively removed conflicts of interest, according to chief executive Barry Lambert, adding that these were “only minor compared to what the institutionally-aligned industry is facing”.
Lambert said that Count had anticipated the emergence of PS 181, and therefore had no trouble interpreting it or adhering to it.
Among the conflicts removed by Count in accordance with PS 181, according to Lambert, are “adviser incentives for attendance at its annual conference based on certain products and platforms”.
“We’ve also removed our practise of paying rebates to advisers if they placed money on one of our fixed platforms as opposed to direct shares or retail.
“We still pay them a rebate, but this is based on the overall level of business to Count, and not on the sale of any product at all, whether it be a loan, insurance policy, or investment.”
Conflict of interest is also “under control” at Matrix Planning Solutions, according to chief executive Alison Dummett, although the “nuances of it are still being implemented — such as registers [to record soft dollar payments]”.
She said the dealer group was guided by a “common sense principle, which is do the best thing for the client”, in its management approach to conflicts of interest.
“I think that most advisers would know when something has the potential to influence a recommendation to a client, and it’s just a matter of acting on this to achieve compliance.”
Dummett added she had approached the FPA task force to argue that “one or two aspects” of the conflict principles needed some attention.
“We have a view that simply because an adviser receives more or less remuneration from a product, does not mean their advice is inappropriate or more appropriate.”
Dummett rejected a recent call by the FPA for practices to appoint a ‘conflicts of interest officer’ in order to comply with new regulations.
“Most advice practices have five people or fewer, so it’s simply nonsense to say you can have an officer for every aspect of the law.
“Generally speaking, nobody prescribes ways of adapting to new legislation or whatever, at most your are given some scope to apply this in your business.”
