In brief
While the media has focused on the more sensational recommendations of last week's Senate report on the Australian Securities and Investments Commission, there are a number of other interesting comments and themes that provide some clues about future regulation by the Federal Government, surveillance by the commission and enforcement action. It also poses real questions about whether the Future of Financial Advice laws can have any real impact on vertically integrated businesses. The Allens Financial Services Regulation team considers some of the report's findings.
Future regulation – Suitability or 'merits' regulation
Despite recommending that ASIC increase its focus on educating consumers, the Senate Economics References Committee (the committee) questions repeatedly the effectiveness of a disclosure and conduct regime for regulating the financial services industry. The Future of Financial Advice regime (FOFA) is intended to provide consumers with access to financial advice that is in their best interests and the committee suggests that more regulation of financial products themselves may also be needed to ensure that is case. The same philosophy underpinned the introduction of MySuper products for default superannuation – since consumers could not be relied on to act in their own interests, product terms were mandated.
The committee recommends that the Federal Government expand ASIC's powers to enable it to 'protect unsophisticated investors from unsafe products'. Options might include the review of products by ASIC during their development, providing ASIC with the power to prevent the marketing of 'unsafe products' to retail investors, and banning or mandating particular product features. While the committee is careful not to specifically support a move towards product suitability, or 'merits' based regulation, it recommends that ASIC and the Financial System Inquiry (FSI) consider it.
ASIC's submission to the FSI and its report Regulating Complex Products indicate ASIC has already thought about this and is ready to sign up. We expect the Government will be guided by the findings of the FSI. So, the rest is up to Mr Murray and his team. For more on the possible move towards suitability regulation, see our article on this topic in our first edition of Unravelled.
Surveillance – more intrusive and less trusting
Although the report specifically focuses on the Commonwealth Bank and Commonwealth Financial Planning, the committee expresses very real concern about the standards of compliance in the financial services industry more broadly. It says that ASIC should 'ensure that its surveillance of companies for compliance is far more intrusive and less trusting' and recommends that 'ASIC undertakes intensive surveillance of other financial advice businesses that have recently been a source of concern'. It concludes that ASIC should make its surveillance findings public.
Enforcement – more teeth for ASIC
The committee repeatedly expresses its concerns about the strength or 'efficacy' of enforceable undertakings and recommends that ASIC require that enforceable undertakings include stronger terms that are capable of being enforced by a court, clearer acknowledgement of the misconduct, and the appointment of an independent expert to supervise the implementation of the undertaking. Compliance with an undertaking should also be monitored more vigilantly, and made public, where possible.
Even so, the committee is sceptical about the benefits of an enforceable undertaking, querying ASIC's 'penchant ... for negotiating settlements with enforceable undertakings'. The committee considers that 'the public interest would be better served if ASIC was more willing to litigate complex matters involving large entities'.
But it recognises many impediments for ASIC in doing this and so the committee recommends giving it some 'teeth' by increasing funding for enforcement litigation.
And finally, financial advisers and FOFA
While the industry waits for the release of more changes to FOFA today, the committee's majority report must raise a question about whether FOFA will make any real difference to the financial advice industry. The committee says that there is a further need to improve standards in the financial advice sector and makes several recommendations intended to achieve this. These include introducing minimum educational requirements for advisers (such as a national exam, having a tertiary qualification and continuing professional development obligations), mandatory reference checking and requiring membership of a regulator-prescribed professional association for financial advisers.
But these recommendations have been made before – and it is difficult to see that new education requirements will add much to the quality of advice available to most consumers. The whistleblower in the Commonwealth Financial Planning investigation, Mr Morris, said that advisers pushed customers into products 'both to earn bonuses and "avoid getting the sack"'. There is no suggestion that either would change with more education.
The more significant question is whether FOFA will in fact lead to changes in the remuneration of advisers and improve advice. Mr Morris's evidence raises the very real possibility that it will not.
If an employee recommends a financial product because that is what they are employed to do (and they would otherwise 'get the sack') it is unlikely that the prospect of a bonus will change that advice. At best, it might increase the enthusiasm with which the employee makes the recommendation. But that is not what FOFA tests. Instead it requires the benefit provider, ASIC and a court to look at when they ask whether a benefit could influence the content of advice when they ask whether it is conflicted remuneration. If the answer is no, then the benefit can still be given to the adviser.
While the report does not question the value of FOFA, the effects of vertical integration in the financial services industry underpins much of the discussion and many of the recommendations. It is likely to be a matter the FSI considers more directly.