Advisers have flagged serious concerns over Industry Fund Services’ (IFS) use of the word ‘independent’ in its new licensing model.
Earlier this week, IFS announced it would be launching a trial of its Independent Adviser Licensing Model.
In addition to offering standard licensing services – technology, an approved product list (APL), compliance support and an AFSL to operate under, for example – the new model will also facilitate referral relationships between advisers and industry superannuation funds to help their members access advice.
IFS is an AFSL provider that partners with super funds and is a wholly owned subsidiary of Industry Super Holdings (ISH).
It’s important to note that ISH is owned by several shareholders including Australian Retirement Trust (ART), AustralianSuper, BUSSQ Superannuation, Brighter Super, CBus, CareSuper, Equip, First Super, HESTA, Hostplus, NGS Super, REI Super, Team Super, UniSuper and Vision Super.
It is these industry super fund ties that have proved problematic for many advisers, particularly in relation to the use of the word ‘independent’ for the licensing model.
This has seen a number of advisers take to LinkedIn and reach out directly to IFS arguing that it shouldn’t be describing its offering as independent and even questions over the legality of doing so.
Speaking to Money Management, IFS executive manager, advice services Adrian Gervasoni acknowledged he had received messages from advisers raising concerns over the terminology following the announcement.
“There’s this excitement around the use of the word independent,” Gervasoni said.
Under section 923A of the Corporations Act, use of the terms ‘independent’, ‘impartial’ or ‘unbiased’ in relation to financial advice are tightly restricted.
Subsection 2a states that these terms may only be used for a person that doesn’t receive commissions or any form of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product, or gifts of benefits from a financial product issuer which may be reasonably expected to influence the person.
While noting the very strict legal standard on what can be considered independent advice, Gervasoni explained that IFS used this term as a way of describing the kind of adviser they are looking to attract to their new licensing model.
“What we wanted to have it be clear is, one we’re looking for advisers independent of super funds, not currently employed by product manufacturer. Self-employed advisers is the kind of target market.
“So, there’s independent in terms of the broad use of the word. In terms of whether the advisers themselves could use the term ‘independent adviser’, it will depend on a case-by-case basis.
“The rules are pretty clear around the use of the term ‘independent’ as a starting point. We can’t see why there’s any knockout reason why you couldn’t use it, but it is going to come down to each of each adviser licensed under this arrangement.”
Addressing adviser concerns
The Corporations Act also states in subsection 2d and 2e that these terms may be used for a person carrying on a financial services business or providing financial services so long as they operate free from direct or indirect restrictions relating to the financial products on which they provide financial services, and operates without any conflicts of interest that may arise from their association with issuers of financial products.
Questions have been raised in reference to this regarding IFS’ ability to hold its advice offering separate from its close association with industry super funds and ensure there is no undue influence.
Pointing to these legal requirements, independent financial adviser Nathan Fradley told Money Management that the spirit of the law would seem to argue against IFS’ use of the word.
A self-designated ‘pro-industry fund’ adviser, Fradley noted that his misgivings aren’t linked to a negative perception of industry super funds – something many other advisers appear to hold – but concerns about the legality of an AFSL model that is owned by a product provider while being classified as independent.
“They are talking about getting referrals from the super funds. Part of your arrangement is that you will receive referrals from the clients of your licensee,” Fradley said.
“So, then it comes back to [subsection e]. Is there influence here? Yes. And then on top of that, you have this idea of impartiality. There’s no revenue. There’s no, ‘We’ll pay you more volume-based bonuses’. That doesn’t happen. But there’s this issue of impartiality, and that’s the [subsection d] bit where it says you have to be free from restriction on what products you can recommend.”
Not alone in his concerns, a number of advisers have taken to LinkedIn, with one arguing the model is a vertically aligned distribution solution, and another comparing it to past behaviour of banks.
Gervasoni defended this, stating that IFS is intended to be the “middle” between the super fund and adviser, facilitating a relationship and referral flow between both parties, while maintaining their AFSL legal obligations.
“Our interest is, is the advice compliant and in the member’s best interest? That’s our job, obviously, as a licensee. It’s for the funds individually to work out whether this arrangement works for them long-term or not, but I think there’s been some great track record.”
He added: “We’re just trying to find a way to make it work for the adviser, so that they can derive a decent income out of serving this sort of middle Australia that’s otherwise locked out of advice.”
AFSL obligations above all else
In how this is reflected in its service offering, Gervasoni said IFS has an open APL and operates under a clear stance of providing compliant advice that is in the best interest of clients, even if that may conflict with the interests of any associated industry super funds.
“If the right thing for a member is to roll into a different product, then that’s what we’d expect to see. There isn’t anything in this arrangement where you’re going to have to keep the member in the fund they’re in, or anything like that. I mean, we can’t anyway. The code of ethics and Corps Act doesn’t allow for that.
“I think that’s where, naturally, there might be some scepticism given who we are owned by and assumption that there’s self-serving needs in this.”
Under the proposed licensing model, advisers would not be restricted to maintaining industry super alignment for clients if it is against their best interest and advisers will still be open to working with clients outside of the IFS-provided referrals.
Remaining confident in their use of the word independent, Gervasoni suggested it will be up to external parties – likely the industry regulator – to dictate if they are in breach of the law.
“When it comes down to it, the devil will be in whether the licensee standards, the licensing conditions, all of those things together, that if someone independent of us was looking at that, they’re going to have to make a call on whether we’ve used the term, the adviser’s using the term independent is accurate or not. But as I said, there’s no undue influence, incentives, soft-dollar benefits, conflicted remuneration allowed in this model. Those are the big-ticket items.”
In a statement to Money Management, ASIC said it was unable to comment on the IFS case in particular but flagged details of its regulatory guidance around use of the term.
“In accordance with RG 175.175.51-52, where a financial adviser who is an authorised representative of an Australian financial services licensee and neither they or the AFS licensee receive commissions, volume-based payments or other gifts or benefits, but other authorised representatives of the AFS licensee do, then the first mentioned financial adviser cannot use restricted terms such as ‘independent’.
“RG 175.49 notes that s923A of the Act restricts a person from using the word ‘independent’ (and certain other words and expressions), in relation to a financial services business or in the provision of a financial service unless the following conditions are met:
- the person (including anyone providing a financial service on their behalf or anyone on whose behalf they are providing a financial service) does not receive: commissions (apart from commissions that are rebated in full); forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product; or. other gifts or benefits from product issuers which may reasonably be expected to influence that person;
- the person operates free from direct or indirect restrictions relating to the financial products in respect of which they provide financial services; and
- the person is free from conflicts of interest that might arise from any relationships with product issuers and which might reasonably be expected to influence the person.”
