January 26, 2018
ASIC has recommended that vertically integrated advice licensees conduct regular reviews of their use of in-house products and has reiterated its concern that conflicts of interest in this area are not being addressed.
The regulator made the comments as part of its recently released report into how vertically integrated advice business were using in-house products (see: ASIC Confirms In-house Product Bias from Aligned Advisers).
In the report, the regulator stated that it has been concerned about conflicts of interest in the area of financial advice for some time and found these concerns were repeatedly reinforced through monitoring and surveillance work, market intelligence and ‘shadow shopping’ surveillance activities in 1998, 2003, 2006 and 2011.
“…the vertically integrated business model gives rise to a particular type of conflict of interest… because of the ownership structure of large institutions and…because of institutions’ links with product manufacturers”.
“Our concerns were not limited to a few non-compliant advisers, or even a few non-compliant firms. Instead, they reflect broader systemic issues within the financial advice industry, driven by conflicts of interest relating to ownership and remuneration, and unacceptable levels of competence, compounded by weaknesses in the regulatory framework,” ASIC stated.
The report added that while conflicts of interest were not limited to vertically integrated advice models, “…the vertically integrated business model gives rise to a particular type of conflict of interest—at times, because of the ownership structure of large institutions and, at other times, because of institutions’ links with product manufacturers”.
ASIC recommended that to identify potential conflicts of interest, advice licensees in vertically integrated businesses should analyse which products from their approved product lists were being used most frequently by advisers.
This analysis should also extend to products recommended by each individual adviser so that licensees could determine which advisers may require more frequent auditing.
The regulator also called on vertically integrated advice licensees to avoid using APLs to prevent advisers choosing products that may be in the best interests of clients stating product approval processes should not be unduly onerous or difficult for advisers and “…should not be used as a barrier to advisers considering, or advising on, a customer’s existing products, particularly in circumstances where the existing products are equivalent to the in-house products”.