January 26, 2018
Large vertically integrated advice businesses have been directing more than two-thirds of their clients’ funds into in-house products, despite those products making up only around a fifth of approved product lists, a new report from ASIC has revealed.
The report, titled Financial advice: Vertically integrated institutions and conflicts of interest, found this applied to life insurance products as well as to superannuation and pension products, and to a lesser extent to investment products.
The release of the report follows a two-stage review conducted by ASIC covering advice provided in 2015 and in 2017 by two advice licensees owned by AMP (AMP Financial Planning and Charter Financial Planning), ANZ (Millennium 3 Financial Planning and ANZ Financial Planning), CBA (Count Financial and Commonwealth Financial Planning), NAB (GWM Adviser Services and NAB Financial Planning), and Westpac (Securitor Financial Group and Westpac Financial Planning).
“…the high proportion of funds invested in in-house products, suggests that the advice licensees…may not be appropriately managing the conflict of interest…”
Collectively, ASIC found that while 79 per cent of the products on the licensee’s Approved Products Lists (APL) were external products, and 21 per cent were in-house products, 68 per cent of clients’ funds were placed into in-house products.
ASIC stated the placement of funds covered all aspects of advice including life insurance as well as investments, platforms, pensions and superannuation, and varied across different licensees and financial products but, in most cases, there was a clear weighting by advisers towards in-house products.
Interestingly, ASIC found the bias to inhouse life insurance products declined when new business was being written. The report stated that 65 per cent of all funds directed towards life insurance products went into in-house products, but only 31 per cent of funds directed towards life insurance products from new customers went into in-house products.
The regulator stated “…we do not expect the proportion of customer funds invested in in-house products to be the same as the proportion of in-house products on an approved product list.”
“Despite this, the high level of non-compliant advice, combined with the high proportion of funds invested in in-house products, suggests that the advice licensees we reviewed may not be appropriately managing the conflict of interest associated with a vertically integrated business model,” ASIC stated.
The regulator also added that while it had listed the licensees involved in the review, it had not released specific details as ASIC was required to maintain confidentiality in its data gathering, and that it may use the data to seek an enforcement outcome against a licensee or adviser.
Acting ASIC Chair, Peter Kell said the regulator had already begun work with the licensees to address the management of conflicts of interest adding, “There is ongoing work focusing on remediation where advice-related failures have led to poor customer outcomes, and the results of this review will feed into that work”.