ASIC Report on Vertical Integration and Conflict

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On 24 January 2018, the Australian Securities and Investments Commission (ASIC) released their report on the vertically integrated business model amongst Australia’s largest banking and financial services institutions, AMP, ANZ, CBA, NAB and Westpac (the Report).

In their Report, ASIC concludes that the vertically integrated business model “gives rise to an inherent conflict of interest”.

ASIC looked at the ratio of ‘in-house products’ to ‘external products’ on the advice licensees’ product lists (APL) and then compared it with the ratio of ‘in-house products’ to ‘external products’ recommended by the advisers. ASIC found that while the APLs comprised mainly external products, the advisers recommended mainly in-house products.

Composition of Product Lists

In-house Products 21%
External Product 79%


Investments Made Upon Receiving Advice

In-house Products 68%
External Product 32%

 

ASIC suggests that this is evidence of the conflicts inherent in vertical integration, and while the behaviour differed across licensees, “in most cases there was a clear weighting in the products recommended by advisers towards in-house products”.

ASIC also investigated the quality of financial advice provided to customers. In 10% of the sample advice files investigated, ASIC identified non-compliant advice on the customer’s financial situation (in relation to the new ‘superannuation platform’ resulting in ‘inferior insurance arrangements and/or a significant increase in ongoing product fees’ and switching to an in-house product in absence of meeting the FoFA best interests obligations).

As a next step, ASIC will now “consult with the financial advice industry” on a proposal to “introduce more transparent public reporting on approved product lists, including where client funds are invested, for advice licensees that are part of a vertically integrated business”.

How these findings will impact the industry, if at all, is not known, however while some argue that there ultimately needs to be a change in the old fully integrated model, it remains to be seen whether the Report will simply bring about change in the form of further regulation.

Click here to access the Report.