Alert

Who does this affect?

Financial advisers, financial product manufacturers and distributors.

What do you need to do?

Review ASIC's submission and play a role in the PJC inquiry.

Authors
Jim Boynton  
Partner

Mark McFarlane  
Partner

Michael Mathieson  
Senior Associate

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Jim Boynton  
Partner
T +61 2 9296 2086

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Mark McFarlane  
Partner
T +61 2 9296 2478

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Sydney
John Edstein  
Scott Farrell  
Martin James  
John King  
Michelle Levy  
Damien Richard  

Melbourne
Katherine Forrest  
John Malon  

Perth
Nicholas Creed  

Brisbane
Aaron Bourke  

Canberra
Stephen Jaggers  

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The Australian Securities and Investments Commission has proposed some fundamental reforms to the Australian financial services industry. If adopted, the reforms would reshape the financial advice industry. Some would also have implications for the broader financial services industry and consumers.

ASIC has outlined its proposals for reform in a 184 page submission to the PJC Inquiry into Financial Products and Services in Australia.

1. Financial advice industry

Much has already been reported on ASIC’s submission that the Government should not permit a number of forms of adviser remuneration particularly in relation to personal advice. This would include up-front commissions, trail commissions and fees based on a percentage of funds under advice (“asset based changes”). ASIC believes that commissions and asset based charges can create real and potential conflicts of interests. However, ASIC considers that any ban may not need to extend to execution-only services nor, perhaps, to situations where the label “adviser” is not used.

A ban on asset based charges would seem to go beyond the position advocated in the UK by the FSA, although the FSA expect a genuine link between the adviser’s services and the charges.

ASIC also submits that the Corporations Act could be amended to clarify that advisers must act in good faith in the best interests of their clients and, where there is a conflict between the clients’ interest and their own interest, to give priority to their clients’ interest. The duty could not be excluded by contract. Sensibly drafted, this statutory duty may not significantly alter the duties of financial advisers under the existing general law. However, it will give ASIC the power to enforce compliance. Interestingly, the submission does not specifically mention that the reform will have this effect.

Encouragingly for segments of industry worried that a statutory “best interests” duty may require “best advice”, ASIC has stated that this is not the case and that the adviser would not have to consider every possible option theoretically available to the client. In other words, the adviser need not consider every product available in the market that would offer the same benefits to find the lowest cost option for the client. Instead, the adviser could, for example, consider all products on their approved product list that offered this benefit and select the one that provided the best option for the client. This is less onerous than the approach recommended by ASIC’s UK counterpart, the FSA.

ASIC’s submission contains a number of proposals that seem to be directed at addressing the same essential shortcoming - conflicts of interest. There is a risk that if the Government adopts all of ASIC’s submissions and the other submissions it receives, there will be an increased regulatory burden on industry without commensurate consumer benefit.

2. Other radical reform proposals

ASIC’s submission contains proposals for reforms that are just as radical as banning commissions. If the Government concludes that the FSR regime should be fundamentally changed, ASIC suggests some other options. These include:

• a suitability requirement for advertising financial products - this might mean that some complex high-risk products (eg contracts-for-difference) will not be able to be marketed,

• prohibiting the sale of certain products to retail investors or placing limits on the design of products sold (eg limiting the underlying investments of collective investment schemes),

• requiring product manufacturers and distributors to take some responsibility for ensuring products are sold to the right investors - see our article in The Regulator, and

• licensing of investors.

If these reforms become law, they will be at least as significant for the financial services industry and consumers as banning commissions.

3. ASIC’s current activities

The submission provides some useful insights into ASIC’s current approach and priorities. It describes how it currently operates (eg procedures for dealings with breach reports). It also sets out examples of ASIC’s surveillance activities including:

• conducting a project looking at the sale of complex products to retail investors, including contracts for difference, capital guaranteed and capital protected products and unlisted and unrated debentures,

• surveillances on licensed entities that provide advice on exchange traded products with access to trading through white label brokers,

• surveillance activity of specific managed investment schemes that have been affected or appear to be affected by the downturn in market conditions.