Australia Unearths Major Conflicts Of Interest At Advice Arms Of Its Five Biggest Banks

Josh O'Neill

25 January 2018

An Australian regulator has found that financial advisors at the nation’s top-five banks have violated “best interests” policies by investing the majority of clients’ funds in “in-house” products as opposed to external equivalents.

A review by the (ASIC) of products offered by ANZ, Commonwealth Bank of Australia, National Australia Bank, Westpac and AMP found that 79 per cent of financial instruments on the firms’ approved product lists were from external companies, while the remaining 21 per cent were offered internally, or in-house.

However, 68 per cent of clients’ funds were invested through in-house products, the regulator said, despite the number of external offerings being nearly four times higher.

Although “the split between internal and external product sales varied across different licensees and across different types of financial products… in most cases there was a clear weighting in the products recommended by advisors towards in-house products,” ASIC said.

The review, which took place between 2015 and 2017, was part of ASIC’s Wealth Management Project, a wide-reaching probe into Australia’s financial advice sector that began in October 2014 and has since resulted in 40 advisors being banned from the industry for malpractice.

In this investigation, ASIC examined a sample of files to test whether advice to switch to in-house products satisfied its “best interests” requirements. In three-quarters (75 per cent) of the advice files reviewed, “advisors did not demonstrate compliance with the duty to act in the best interests of their clients,” it said. In addition, 10 per cent of the advice reviewed was likely to leave the client in a “significantly worse financial position,” the watchdog said, adding that it will “ensure that appropriate customer remediation takes place”.

ASIC chairman Peter Kell said that the regulator is already working with Australia’s major financial institutions to address the issues identified the issues flagged in the report.

“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,” Kell said.

ASIC will consult with the financial advice sector 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, it said.

The regulator noted, however, that vertical integration, a common business strategy applied by large, universal banks, can provide economies of scale and other benefits to clients and the institution.

“Nonetheless, conflicts of interest are inherent in vertically integrated firms, and these firms still need to properly manage conflicts of interest in their advisory arms and ensure good quality advice,” it continued. “The introduction of reporting requirements would improve transparency around management of the conflicts of interests that are inherent in these businesses.

ASIC stressed that its findings should be “carefully examined” by other vertically integrated companies.

“While this review focused on five major financial services firms, the lessons should be considered by all vertically integrated firms in the financial services sector,” Kell said.